-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SnUriy3WDZZYfG+ScxuTcnqsxszkkIxHFlqffnW6ehmjBkdgocnXNE02yFjDqNNl NpVf+sZytCUy4CxtS4RMGA== 0000950123-03-006390.txt : 20030521 0000950123-03-006390.hdr.sgml : 20030521 20030521164551 ACCESSION NUMBER: 0000950123-03-006390 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20030521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TP ELM ACQUISITION SUBSIDIARY INC CENTRAL INDEX KEY: 0001182092 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-01 FILM NUMBER: 03714834 MAIL ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMERVILE STATE: NJ ZIP: 08876 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REI DISTRIBUTORS INC CENTRAL INDEX KEY: 0001174575 IRS NUMBER: 222418824 STATE OF INCORPORATION: NJ FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-07 FILM NUMBER: 03714828 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURE TECH RECYCLING OF CALIFORNIA CENTRAL INDEX KEY: 0001174576 IRS NUMBER: 770356589 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-06 FILM NUMBER: 03714829 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALUMET SMELTING CORP CENTRAL INDEX KEY: 0001174577 IRS NUMBER: 222054447 STATE OF INCORPORATION: NJ FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-05 FILM NUMBER: 03714830 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATVAR HOLDINGS INC CENTRAL INDEX KEY: 0001174578 IRS NUMBER: 223703725 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-04 FILM NUMBER: 03714831 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRI SEAL HOLDINGS INC CENTRAL INDEX KEY: 0001174579 IRS NUMBER: 522141575 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-03 FILM NUMBER: 03714832 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TPI ACQUISITION SUBSIDIARY INC CENTRAL INDEX KEY: 0001174580 IRS NUMBER: 522340472 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-02 FILM NUMBER: 03714833 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DISTRIBUTORS RECYCLING INC CENTRAL INDEX KEY: 0001174574 IRS NUMBER: 222466975 STATE OF INCORPORATION: NJ FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-08 FILM NUMBER: 03714827 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLASTIC SPECIALTIES & TECHNOLOGIES INVESTMENTS INC CENTRAL INDEX KEY: 0001174570 IRS NUMBER: 222663552 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-12 FILM NUMBER: 03714823 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURLINGTON RESINS INC CENTRAL INDEX KEY: 0001174571 IRS NUMBER: 223334106 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-11 FILM NUMBER: 03714824 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURE TECH APR INC CENTRAL INDEX KEY: 0001174572 IRS NUMBER: 113065942 STATE OF INCORPORATION: NY FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-10 FILM NUMBER: 03714825 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COAST RECYCLING NORTH INC CENTRAL INDEX KEY: 0001174573 IRS NUMBER: 680200870 STATE OF INCORPORATION: CA FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-09 FILM NUMBER: 03714826 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PARKWAY CITY: SOMMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLASTIC SPECIALTIES & TECHNOLOGIES INC CENTRAL INDEX KEY: 0000810628 STANDARD INDUSTRIAL CLASSIFICATION: TIRES AND INNER TUBES [3011] IRS NUMBER: 222515864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-13 FILM NUMBER: 03714822 BUSINESS ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 BUSINESS PHONE: 2019412900 MAIL ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURETEC CORP CENTRAL INDEX KEY: 0000928451 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 223376449 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561-14 FILM NUMBER: 03714835 BUSINESS ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGFIELD STATE: NJ ZIP: 07657 BUSINESS PHONE: 2019416550 MAIL ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKNI PLEX INC CENTRAL INDEX KEY: 0001039542 STANDARD INDUSTRIAL CLASSIFICATION: GASKETS, PACKAGING AND SEALING DEVICES & RUBBER & PLASTIC HOSE [3050] IRS NUMBER: 223286312 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-98561 FILM NUMBER: 03714821 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PKWY CITY: SOMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 MAIL ADDRESS: STREET 1: 201 INDUSTRIAL PKWY CITY: SOMERVILLE STATE: NJ ZIP: 08876 S-4/A 1 y61170a2sv4za.txt AMENDMENT NO. 2 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 2003 REGISTRATION NO. 333-98561 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- TEKNI-PLEX, INC.* (Exact name of Registrant as specified in its charter) DELAWARE 3086, 3052 22-3286312 (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
260 NORTH DENTON TAP ROAD COPPELL, TEXAS 75019 TELEPHONE: (972) 304-5077 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- DR. F. PATRICK SMITH CHIEF EXECUTIVE OFFICER TEKNI-PLEX, INC. 260 NORTH DENTON TAP ROAD COPPELL, TEXAS 75019 TELEPHONE: (972) 304-5077 FACSIMILE: (972) 304-6297 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: FRANCIS J. MORISON DAVIS POLK & WARDWELL 450 LEXINGTON AVENUE NEW YORK, NEW YORK 10017 TELEPHONE: (212) 450-4044 FACSIMILE: (212) 450-6892 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------------- If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- *TABLE OF ADDITIONAL REGISTRANTS
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER INCORPORATION OR IDENTIFICATION NAME, ADDRESS AND TELEPHONE NUMBER ORGANIZATION NUMBER - ---------------------------------- ---------------- --------------- PureTec Corporation(1)...................................... Delaware 22-3376449 Plastic Specialties and Technologies, Inc.(1)............... Delaware 22-2743384 Plastic Specialties and Technologies Investments, Inc.(1)... Delaware 22-2663552 Burlington Resins, Inc.(1).................................. Delaware 22-3334106 Pure Tech APR, Inc.(1)...................................... New York 11-3065942 Coast Recycling North, Inc.(1).............................. California 68-0200870 Distributors Recycling, Inc.(1)............................. New Jersey 22-2466975 REI Distributors, Inc.(1)................................... New Jersey 22-2418824 Pure Tech Recycling of California(1)........................ California 77-0356589 Alumet Smelting Corp.(1).................................... New Jersey 22-2054447 Tri-Seal Holdings, Inc(1)................................... Delaware 52-2141575 Natvar Holdings, Inc(1)..................................... Delaware 22-3703725 TPI Acquisition Subsidiary, Inc.(1)......................... Delaware 52-2340472 TP/Elm Acquisition Subsidiary, Inc.(1)...................... Delaware 71-0891561
- --------------- (1) The address of each of these additional registrants is: 201 Industrial Parkway, Somerville, New Jersey 08876. The telephone number of each is (908) 722-4800. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY 21, 2003 PROSPECTUS TEKNI-PLEX, INC. OFFER TO EXCHANGE 12 3/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2010 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OF OUR OUTSTANDING 12 3/4% SENIOR SUBORDINATED NOTES DUE 2010 --------------------- We are offering to exchange up to $40,000,000 of our 12 3/4% Series B Senior Subordinated Notes due 2010, which will be registered under the Securities Act of 1933, as amended, for up to $40,000,000 of our existing 12 3/4% Senior Subordinated Notes due 2010. We have $275,000,000 principal amount of our existing 12 3/4% Senior Notes due 2010 issued and outstanding that have identical terms to the notes offered by this prospectus. We are offering to issue the new notes to satisfy our obligations contained in the registration rights agreement entered into when the old notes were sold in transactions permitted by Rule 144A and Regulation S under the Securities Act. The terms of the new notes are identical in all material respects to the terms of the old notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the old notes do not apply to the new notes. --------------------- To exchange your old notes for new notes: - You must complete and send the letter of transmittal that accompanies this prospectus to the exchange agent by 5:00 p.m., New York time, on , 2003. - If your old notes are held in book-entry form at The Depository Trust Company, you must instruct DTC, through your signed letter of transmittal, that you wish to exchange your old notes for new notes. When the exchange offer closes, your DTC account will be changed to reflect your exchange of old notes for new notes. - You should read the section called "The Exchange Offer" for additional information on how to exchange your old notes for new notes. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DESCRIPTION OF RISK FACTORS THAT YOU SHOULD CONSIDER BEFORE TENDERING YOUR OLD NOTES IN THE EXCHANGE OFFER. THIS PROSPECTUS IS ACCOMPANIED BY A COPY OF THE FOLLOWING: OUR ANNUAL REPORTS ON FORM 10-K AND 10-K/A FOR THE FISCAL YEAR ENDED JUNE 29, 2002 AND OUR QUARTERLY REPORTS ON FORM 10-Q AND 10-Q/A FOR THE QUARTERS ENDED SEPTEMBER 27, 2002, DECEMBER 27, 2002 AND MARCH 28, 2003. --------------------- THE OLD NOTES HAVE NOT BEEN, AND THE NEW NOTES WILL NOT BE, LISTED ON AN EXCHANGE OR QUOTED ON AN AUTOMATED QUOTATION MEDIUM. THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. --------------------- The date of this prospectus is , 2003. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 The Exchange Offer.......................................... 3 Risk Factors................................................ 8 Use of Proceeds............................................. 14 Capitalization.............................................. 15 The Exchange Offer.......................................... 16 Description of the New Notes................................ 24 United States Federal Income Tax Considerations............. 54 Plan of Distribution........................................ 55 Legal Matters............................................... 56 Experts..................................................... 56 Where You Can Find More Information......................... 56
i PROSPECTUS SUMMARY The following summary contains information about Tekni-Plex and the exchange offer. It presents a summary of the material information appearing elsewhere in the prospectus and filings incorporated by reference. For a more complete understanding of Tekni-Plex and the exchange offer, we urge you to read this entire prospectus carefully, including the "Risk Factors" section and our financial statements and the notes to those statements. Our fiscal year ends on the Friday closest to June 30 of each calendar year. For example, fiscal year 2002 refers to the year ended June 28, 2002. COMPANY OVERVIEW We are a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. We primarily serve the healthcare, food and consumer markets. We have built leadership positions in our core markets and focus on vertically integrated production of highly specialized products. We have operations in the United States, Europe and Canada. We believe that our end market and product line diversity has the effect of reducing risk related to any single product or customer. Our operations are aligned under two business segments: Packaging and Tubing Products. Representative product lines in each of our business segments are listed below: BUSINESS SEGMENT
PACKAGING TUBING PRODUCTS --------- --------------- - - Foam egg cartons - Garden and irrigation hose - - Pharmaceutical blister films - Medical tubing - - Poultry and meat processor trays - Pool and vacuum hose - - Closure Liners - - Aerosol and pump packaging components - - Foam plates
COMPETITIVE STRENGTHS We believe that our competitive strengths include: - Strong customer relationships. We have long-standing relationships with many of our customers. We attribute our long-term customer relationships to our ability consistently to manufacture high quality products and provide a superior level of customer service. We routinely win customer awards for our superior products and customer service and have recently been recognized for supplier excellence by 3M Pharmaceuticals, Pfizer, Eli Lilly, Boston Scientific and Kraft Foods, among others. - Strong market positions in core businesses. We have a strong market presence in our product lines. The following table shows what we believe to be our market position in the U.S. in each core product line:
MARKET PRODUCT POSITION - ------- -------- Vinyl medical device materials.............................. 1 Vinyl medical tubing........................................ 1 Laminated, clear, high barrier pharmaceutical blister packaging................................................. 1 Multi-layered co-extruded and laminated closure liners...... 1 Garden and irrigation hose.................................. 1 Precision tubing and gaskets for aerosol packaging.......... 1 Egg cartons................................................. 1 Foam processor trays........................................ 2
- Experienced management team. Our management team has been successful in selecting and integrating strategic acquisitions as well as improving underlying business fundamentals. After significantly improving the business of Tekni-Plex following our 1994 acquisition, management successfully integrated both the Flemington and Dolco operations during 1996, the latter being a public company then nearly twice our size. During the same period, the Brooklyn and Flemington operations 1 were also successfully merged. In 1997, we acquired and integrated the PurePlast operations. In 1998, we acquired PureTec, a public company then more than twice our size. In 1999, we acquired and integrated the assets and business of Tri-Seal and Natvar. In 2000, we acquired and integrated all the assets of the Super Plastics division of RCR International, Inc. In 2001, we acquired and integrated the Swan Hose garden hose business of Mark IV Industries, Inc. In July 2002, we acquired the assets and business of Elm Packaging. Management has substantially improved the operating margins of each of these acquisitions. Members of our management team have integrated acquisitions, effected turnarounds, provided strategic direction and leadership, increased sales and market share, improved manufacturing efficiencies and productivity, and developed new technologies to enhance the competitive strengths of the companies they have managed. - Producer of high quality, technically sophisticated products. We believe, based upon our knowledge and experience in the industry, that we have a long-standing reputation as a manufacturer of high quality, high performance products, materials and primary packaging material (where the packaging material comes into direct contact with the end product). Our emphasis on quality is evidenced by our product lines which address the more technically sophisticated areas of their respective markets. - Strong equity sponsorship. We have obtained a strong equity commitment from co-investors in conjunction with the recapitalization in June 2000. New investors agreed to contribute $269.6 million in aggregate equity commitments to Tekni-Plex Partners, of which $167.0 million was contributed to consummate the recapitalization in June 2000. Of the remaining $102.6 million, $5.0 million was contributed in conjunction with our acquisition of Super Plastics in October 2000, and $30.0 million was contributed in June 2001 in anticipation of our announced acquisition of Mark IV's Swan Hose Division. In October 2001, an additional $50.0 million was contributed to consummate the Swan Hose acquisition and in anticipation of our Elm acquisition. The remaining $17.6 million is available at least through June 2005 to be used for our general corporate purposes, including acquisitions. We believe that these equity commitments will provide us with significant flexibility to take advantage of business opportunities as they arise. In connection with the recapitalization, all members of our current management maintained their entire equity investment, which had an implied aggregate value, as of June 2000, of approximately $96.0 million. BUSINESS STRATEGY We seek to maximize our profitability and growth and take advantage of our competitive strengths by pursuing the following business strategy: - Ongoing cost reduction through technical process improvement. We have an ongoing program to improve manufacturing and other processes in order to drive down costs. Examples of cost improvement programs include: - material and energy conservation through enhanced process controls and advanced product design; - reduction in machine set-up time through the use of proprietary technology; - continual product line rationalization; and - development of backward and forward integration opportunities. - Internal growth through product line extension and improvement. We continually seek to improve and extend our product lines and leverage our existing technological capabilities in order to increase market share in existing markets, effectively penetrate new markets and improve profitability. Our strategy is to emphasize our expertise in providing packaging, products and materials with specific high performance characteristics through the development of various unique proprietary materials and proprietary manufacturing process techniques. - Growth through acquisitions. We will continue to pursue acquisitions selectively when the opportunity arises. Our objective is to pursue acquisitions that provide us with the opportunity to gain economies of scale and reduce costs through, among other things, technology sharing and synergistic cost reduction. 2 - Growth through international expansion. We believe that there is significant opportunity to expand our international sales, which currently represent approximately 11% of our total revenues. At present we have manufacturing or conversion operations with attached sales offices in Argentina, Canada, The United Kingdom, Belgium and Italy. We have a regional sales office in Singapore covering the southeast Asia region, including the People's Republic of China. In addition, we have manufacturing liaisons and strategic supplier agreements in Japan, Germany and Italy and a manufacturing licensee in Japan. We have recently added sales representatives for Jordan, Saudi Arabia and the United Arab Emirates, as well as in the Philippines and India to our existing representatives in Australia/New Zealand, South Africa, Central America, Brazil, Mexico, China (including Hong Kong) and Taiwan. We believe that our growing international presence, which is a combination of our own regional manufacturing and sales forces and independent sales representatives, will continue to generate increases in sales. RECENT DEVELOPMENTS On July 10, 2002 Tekni-Plex acquired Elm Packaging Company ("Elm") for approximately $16.4 million, including acquisition costs. The acquisition was structured as an acquisition of substantially all of the assets and assumption of certain liabilities of Elm by a wholly-owned subsidiary of Tekni-Plex. Elm produces polystyrene foam packaging products such as plates, bowls, trays and hinged-lid containers for the food packaging and food service industries. Elm will become part of Tekni-Plex's packaging business segment. The allocation of purchase price resulted in current assets of $8.4 million, fixed assets of $12.5 million, accrued liabilities and integration reserve of $13.7 million and goodwill of $9.6 million. The amounts allocated to inventory, accrued expenses and integration reserve are based on preliminary estimates. Management is evaluating the fair value of the inventory acquired. The amounts of accrued liabilities assumed and the integration reserve are also estimated based on the information currently available. Management expects to finalize these estimates within the next six to nine months. THE EXCHANGE OFFER All capitalized terms used without definition within this section shall have the respective meanings set forth under "Description of the New Notes" below. New Notes..................... $40,000,000 principal amount of 12 3/4% Series B Senior Subordinated Notes due 2010. The terms of the new notes are identical in all material respects to the terms of the old notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the old notes do not apply to the new notes. Old Notes..................... The old notes were sold on May 6, 2002 to Lehman Brothers Inc. (the initial purchaser) pursuant to a Purchase Agreement dated May 1, 2002 between Tekni-Plex and the initial purchaser. The initial purchaser subsequently resold the old notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Exchange Offer............ We are offering to exchange $1,000 principal amount of new notes for each $1,000 principal amount of old notes. As of the date hereof, $40,000,000 aggregate principal amount of old notes are outstanding. We are offering to issue the new notes to satisfy our obligations contained in the registration rights agreement we entered into when we sold the old notes in transactions pursuant to Rule 144A, Rule 501 and Regulation S under the Securities Act. Based on interpretations by the SEC's staff in no-action letters issued to third parties, we believe that new notes issued in exchange for old notes in the exchange offer may be offered for resale, resold or otherwise transferred by you without registering 3 the new notes under the Securities Act or delivering a prospectus, unless you are a broker-dealer receiving notes for your own account, so long as: - you are not one of our "affiliates," which is defined in Rule 405 of the Securities Act; - you acquire the new notes in the ordinary course of your business; - you do not have any arrangement or understanding with any person to participate in the distribution of the new notes; and - you are not engaged in, and do not intend to engage in, a distribution of the new notes. If you are an affiliate of Tekni-Plex, or you are engaged in, intend to engage in or have any arrangement or understanding with respect to, the distribution of new notes acquired in the exchange offer, you (1) should not rely on our interpretations of the position of the SEC's staff and (2) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. If you are a broker-dealer and receive new notes for your own account in the exchange offer: - you must represent that you do not have any arrangement with us or any of our affiliates to distribute the new notes; - you must acknowledge that you will deliver a prospectus in connection with any resale of the new notes you receive from us in the exchange offer. The letter of transmittal states that by so acknowledging and by delivering a prospectus, you will not be deemed to admit that you are an "underwriter" within the meaning of the Securities Act; and - you may use this prospectus, as it may be amended or supplemented from time to time, in connection with the resale of new notes received in exchange for old notes acquired by you as a result of market-making or other trading activities. For a period of 180 days after the expiration of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any resale described above. Expiration Date, Tenders, Withdrawal.................... 5:00 p.m., New York City time, on , 2003 unless we choose to extend the exchange offer in our sole discretion, in which case the term "expiration date" means the latest date and time to which we extend the exchange offer. To tender your old notes you must follow the detailed procedures described under the heading "The Exchange Offer -- Procedures for Tendering" including special procedures for certain beneficial owners and broker-dealers. If you decide to exchange your old notes for new notes, you must acknowledge that you do not intend to engage in and have no arrangement with any person to participate in a distribution of the new notes. If you decide to tender your 4 old notes pursuant to the exchange offer, you may withdraw them at any time prior to 5:00 p.m., New York City time, on the expiration date. Maturity Date................. June 15, 2010. Interest...................... Interest on new notes will accrue from the last interest payment date on which interest was paid on the old notes surrendered for them, or, if no interest has been paid on such old notes, from May 6, 2002. We will not pay interest on the old notes accepted for exchange. Interest will be paid on June 15 and December 15 of each year. Denominations and Issuance of New Notes..................... The new notes will be issued only in registered form without coupons, in minimum denominations of $1,000 and multiples of $1,000. Consequences of Failure to Exchange...................... If you fail to exchange your old notes for new notes in the exchange offer, your old notes will continue to be subject to transfer restrictions and you will not have any further rights under the registration rights agreement, including any right to require us to register your old notes or to pay any additional interest. Trading Market................ To the extent that old notes are tendered and accepted in the exchange offer, your ability to sell untendered, and tendered but unaccepted, old notes could be adversely affected. There may be no trading market for the old notes. The new notes will be fungible with our currently outstanding $275,000,000 principal amount of 12 3/4% Senior Notes due 2010. Shelf Registration Statement..................... If any holder of the old notes (other than any such holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) is not eligible under applicable securities laws to participate in the exchange offer, and such holder has provided information regarding such holder and the distribution of such holder's old notes to us for use therein, we have agreed to register the old notes on a shelf registration statement and to use our best efforts to cause it to be declared effective by the SEC as promptly as reasonably practical on or after the consummation of the exchange offer. We have agreed to maintain the effectiveness of the shelf registration Statement, under certain circumstances, until the date on which the old notes are no longer "restricted securities" (within the meaning of Rule 144 under the Securities Act). Use of Proceeds............... We will not receive any cash proceeds from the issuance of the new notes in the exchange offer. Exchange Agent................ HSBC Bank USA is the exchange agent for the exchange offer. Federal Income Tax Consequences.................. Your exchange of old notes for new notes pursuant to the exchange offer will not result in a gain or loss to you. Ranking....................... The new notes and the guarantees will be unsecured senior subordinated obligations. The new notes will rank: 5 - subordinate in right of payment to all of our and our guarantors' existing and future senior indebtedness (including our and our guarantors' obligations under our senior credit facility); - equal in right of payment to our and our guarantors' existing and future senior subordinated indebtedness (including our existing 12 3/4% Senior Subordinated Notes due 2010); and - senior in right of payment to our and our guarantors' future subordinated indebtedness. At March 28, 2003, the amount of our outstanding debt senior to the new notes was 416.3 million, and the amount of our outstanding debt ranked equally to the new notes was 272.3 million. We have no debt that is ranked junior to the new notes. Payment Blockage Provisions... We will make no payment on the new notes for a period of 180 days if, at the time payment is due, there exists a default in the payment of all or any portion of the obligations on any designated senior debt. See "Description of the Notes -- Ranking" on page 27. Exchange Guarantee............ The new notes will be fully and unconditionally guaranteed on a senior subordinated basis by our domestic subsidiaries. The form and terms of the new guarantees will be substantially identical to the form and terms of the old guarantees. The guarantees will be general unsecured obligations of the guarantors and will rank subordinate in right of payment to all existing and future senior debt of such guarantors, including the guarantors' guarantee of indebtedness under the new credit facility. The guarantees will rank equal in right of payment with any other senior subordinated indebtedness of the guarantors. Our foreign subsidiaries will not be guarantors. Optional Redemption........... We may redeem the new notes in whole or in part, at any time on or after June 15, 2005 at the redemption prices set forth in the "Description of the New Notes" section under the heading "Optional Redemption" (plus accrued and unpaid interest to the redemption date). Prior to June 15, 2003 we may redeem up to 35% of the principal amount of the new notes with the cash proceeds we have received from one or more public offerings of our capital stock (other than disqualified stock) at a redemption price of 112.75% of the principal amount thereof, plus accrued and unpaid interest to the redemption date; provided, however, that at least 65% of the aggregate principal amount of the old notes originally issued pursuant to the initial private placement (including any new notes exchanged therefor) remains outstanding immediately after any such redemption. Change of Control............. Upon a change of control of Tekni-Plex, you may require us to repurchase your new notes, in whole or in part, at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the purchase date. See "Description of New Notes -- Change of Control." Our new credit facility prohibits us from purchasing outstanding new notes prior to repaying borrowings under the new credit facility. It is possible that upon a change 6 of control we may not have sufficient funds to repurchase any of the new notes. See "Description of Certain Indebtedness." Certain Covenants............. The indenture governing the new notes contains covenants, which are the same as the covenants applicable to the old notes, that, among other things, limit our and certain of our subsidiaries' ability to: - incur liens upon properties or assets; - incur additional indebtedness; - merge or consolidate with another company; - transfer substantially all of our assets; - enter into transactions with affiliates; - make certain restricted payments or investments; or - permit dividend or other payment restrictions to apply to subsidiaries. For more details, see the section under the heading "Description of the New Notes -- Covenants" in the prospectus. In addition, in certain circumstances, we will be required to offer to purchase new notes at 100% of the principal amount thereof with the net proceeds of certain asset sales. These covenants are subject to a number of significant exceptions and qualifications. For additional information regarding the new notes, see "Description of the New Notes." RISK FACTORS You should carefully consider the specific matters set forth under "Risk Factors" as well as the other information and data included in this prospectus in evaluating the exchange offer and deciding whether to exchange your old notes. RATIO OF EARNINGS TO FIXED CHARGES
NINE MONTHS YEARS ENDED ENDED -------------------------------------------------- --------------------- JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28, 1998 1999 2000 2001 2002 2002 2003 ------- ------- -------- -------- -------- --------- --------- Ratio of earnings to fixed charges....... 1.9x 1.7x 1.8x -- 1.1x -- 1.2x
For the purposes of the ratio of earnings to fixed charges, (i) earnings are calculated as our earnings before income taxes, extraordinary item and fixed charges and (ii) fixed charges include interest on all indebtedness and amortization of deferred financing costs. For the year ended June 29, 2001 and for the nine months ended March 29, 2002, fixed charges exceeded earnings before fixed charges by $12.2 million and $7.2 million, respectively. 7 RISK FACTORS You should carefully consider the following risk factors as well as the other information and data included in this prospectus before investing in the notes. We have summarized below the material risks that face us and this offering. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such case, you may lose all or part of your original investment. RISKS RELATING TO OUR DEBT OUR SUBSTANTIAL INDEBTEDNESS COULD PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES AND OTHERWISE RESTRICT OUR ACTIVITIES. We currently have a significant amount of indebtedness. Our total debt and stockholders' deficit were $729.1 million and $(84.3) million, respectively, as of March 28, 2003. Our substantial debt may have important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations with respect to these notes; - require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - put us at a competitive disadvantage compared to our competitors that have less debt; - increase our vulnerability to general adverse economic and industry conditions; - increase our vulnerability to interest rate increases to the extent our variable-rate debt is not effectively hedged; and - limit our ability to make investments or take other actions or borrow additional funds. In addition, the indenture relating to the notes and our credit facility contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in acceleration of all of our debts. Our level of debt is reflected in our ratio of earnings to fixed charges, which was 1.1 for the fiscal year ended June 28, 2002 and 1.2 for the nine months ended March 28, 2003. DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL INDEBTEDNESS. Despite our high leverage, we may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not prohibit us or our subsidiaries from incurring indebtedness, although the indenture does contain limitations on additional indebtedness. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify. THE OPERATING AND FINANCIAL RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS, INCLUDING OUR CREDIT FACILITY AND THE INDENTURE RELATING TO THE NOTES, COULD NEGATIVELY AFFECT OUR ABILITY TO FINANCE OPERATIONS AND CAPITAL NEEDS OR TO ENGAGE IN OTHER BUSINESS ACTIVITIES. Covenants contained in the indenture and our credit facility limit our operating flexibility with respect to certain business matters. Among other things, these covenants limit our ability and our subsidiaries' ability to: - incur additional indebtedness; - incur liens upon properties or assets; - make acquisitions; 8 - merge or consolidate with third parties; - make investments; - pay dividends and make distributions; - repurchase or redeem capital stock; - dispose of assets; and - engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities. In addition, our credit facility contains financial covenants, including: - a minimum consolidated EBITDA test; - a minimum fixed coverage ratio; and - a maximum leverage ratio. These covenants may adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that may be in our interest. Our ability to meet these covenants and requirements in the future may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our breach of or failure to comply with any of these covenants could result in a default under our credit facility or the indenture even if we are able to make the required payments thereunder. If we default under our credit facility, our lenders could cease to make further extensions of credit, cause all of our outstanding debt obligations under the new credit facility to become due and payable, require us to apply all of our available cash to repay the indebtedness under our credit facility or prevent us from making debt service payments on any other indebtedness we owe. If a default under the indenture occurs, the holders of the notes could elect to declare the notes due and payable. If the indebtedness under the new credit facility or the notes is accelerated, we may not have sufficient assets to repay amounts due under these existing debt agreements or on other debt securities then outstanding. We may amend the provisions and limitations of the new credit facility from time to time without the consent of the holders of the notes. For a more complete description of the terms of our outstanding debt and the covenants contained in the notes, see "Description of Certain Indebtedness" and "Description of the Notes -- Covenants." WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to repay or refinance our indebtedness will depend on our financial and operating performance. which, in turn, is subject to prevailing economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. These factors could include operating difficulties, increased operating costs or raw material or product prices, the response of competitors, regulatory developments and delays in implementing strategic projects. Our ability to meet our debt service and other obligations may depend in significant part on the extent to which we can successfully implement our business strategy. We may not be able to implement our business strategy or the anticipated results of our strategy may not be realized. At March 28, 2003, our annual debt service payment obligation was approximately $74.9 million. As of March 28, 2003, subject to certain restrictions, we could have borrowed up to $12 million of additional senior indebtedness under our revolving credit facility. If the entire $100 million under the revolving credit facility had been outstanding for the nine months ended March 28, 2003, our debt service (all interest) for this period would have increased by approximately $1.7 million based on an average interest rate of 4.8%. Our business may be unable to generate sufficient cash flows from operations and future borrowings may not be available to us under our credit facility in an amount sufficient to enable us to pay our indebtedness, including these notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including these notes, on or before maturity. We may not be able to refinance any of our indebtedness including our credit facility, our existing 12 3/4% Senior Subordinated Notes due 2010 and these notes, on commercially reasonable terms or at all. 9 YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES IS JUNIOR TO OUR SENIOR DEBT AND POSSIBLY ALL OF OUR FUTURE BORROWINGS. THE GUARANTEES WILL BE JUNIOR TO GUARANTOR SENIOR DEBT, AND THESE OBLIGATIONS WILL BE EFFECTIVELY JUNIOR TO THE LIABILITIES OF OUR NONGUARANTOR SUBSIDIARIES AND POSSIBLY TO ALL OF THEIR FUTURE BORROWINGS, WHICH MAY BE SIGNIFICANT. The notes will be unsecured senior subordinated obligations and will be junior to all our existing and future senior indebtedness, including our credit facility. Each of our currently existing domestic subsidiaries will guarantee the notes. These guarantees will be unsecured senior subordinated obligations and will be junior to all existing and future senior debt of the guarantors. The notes will be effectively junior to all existing and future debt and other liabilities of our subsidiaries that are not guarantors, which include our foreign subsidiaries. As of March 28, 2003, we had outstanding $416.3 million of senior debt, the guarantors had no senior debt outstanding (other than their guarantees of our debt) and the nonguarantor subsidiaries had outstanding $5.4 million of total debt to third parties including trade payables. We also may incur significant additional senior indebtedness under the terms of our revolving credit facility. For example, as of March 28, 2003, we had $12 million available under our revolving credit facility which, if borrowed, would be senior indebtedness. If we become bankrupt, liquidate or dissolve, our assets would be available to pay obligations on the notes only after our senior indebtedness has been paid. Similarly, if one of our guarantor subsidiaries becomes bankrupt, liquidates or dissolves, that subsidiary's assets would be available to pay obligations on its guarantee only after payments have been made on its senior indebtedness. If we fail to pay any of our senior indebtedness, we may make payments on the notes only if either we first pay our senior debt or the holders of our senior indebtedness waive the payment default. Moreover, if any non-payment default exists under our senior indebtedness, we may not make any cash payments on the notes for a period of up to 179 days in any 360-day period, unless we cure the non-payment default, the holders of the senior indebtedness waive the default or rescind acceleration of the indebtedness or we repay the indebtedness in full. In the event of a non-payment default we may not have sufficient assets to pay amounts due on the notes. In addition, various events of default under the new credit facility would prohibit us from making any payments on the notes. THE NOTES WILL NOT BE SECURED BY ANY OF OUR ASSETS. HOWEVER, OUR CREDIT FACILITY IS SECURED BY SUBSTANTIALLY ALL OF OUR ASSETS. In addition to being subordinated to all our senior indebtedness, the notes will not be secured by any of our assets. However, our credit facility is secured by substantially all of our assets and the assets of our domestic subsidiaries. Additionally, the terms of the indenture and our credit facility permit us to incur additional secured debt. If we become insolvent or are liquidated, or if payment under any of the instruments governing our secured debt is accelerated, the lenders under these instruments will be entitled to exercise the remedies available to a secured lender under applicable law and pursuant to instruments governing such debt. Accordingly, the lenders will have a prior claim on our assets. In that event, because the notes will not be secured by any of our assets, it is possible that there will be no assets remaining from which claims of the holders of the notes can be satisfied or, if any assets remain, the remaining assets might be insufficient to satisfy those claims in full. WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE. Upon the occurrence of a change of control, you will have the right to require us to purchase all or a portion of your notes. Nevertheless, if a change of control were to occur, we might not have sufficient financial resources, or might not be able to arrange financing, to pay the purchase price for all notes that you tender. 10 In addition, the terms of our credit facility limit our ability to purchase any notes and to identify certain events that would constitute a change of control or an event of default under our credit facility. The terms of our existing notes contain change of control provisions substantially identical in the notes issued pursuant to this offering. Any future credit agreements or other agreements relating to other indebtedness to which we become a party may contain similar restrictions and provisions. In the event a change of control occurs at a time when we are prohibited from purchasing notes, we could seek the consent of our lenders to purchase notes or could attempt to refinance the borrowings that contain such prohibition. If we do not obtain this consent or repay the borrowing, however, we would remain prohibited from purchasing the notes. Our failure to purchase tendered notes would constitute an event of default under the indenture, that would, in turn, constitute a further default under certain of our existing debt agreements and may constitute a default under the terms of other indebtedness that we may enter into from time to time. Further, the provisions of the indenture may not protect you in the event of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction that might adversely affect holders of notes, if the transaction did not result in a change of control. For a more complete description of the change of control provisions contained in the notes, see "Description of the Notes -- Change of Control." FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO LIMIT YOUR RIGHTS AS A NOTEHOLDER OR VOID GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM GUARANTORS. Federal and state fraudulent transfer laws permit a court, if it makes certain findings, to: - avoid all or a portion of our obligations to you; - subordinate our obligations to you to our other existing and future indebtedness, entitling other creditors to be paid in full before any payment is made on the notes; and - take other action detrimental to you, including invalidating the notes. In that event, you may never be repaid. Under federal and state fraudulent transfer laws, in order to take any of those actions, a court typically would need to find that, at the time the notes were issued, we: - issued the notes with the intent of hindering, delaying or defrauding current or future creditors; or - received less than fair consideration or reasonably equivalent value for incurring the indebtedness represented by the notes; and (a) were insolvent or were rendered insolvent by reason of the issuance of the notes; (b) were engaged, or about to engage, in a business or transaction for which our assets were unreasonably small; or (c) intended to incur, or believed or should have believed we would incur, debts beyond our ability to pay as such debts mature. Many of the foregoing terms are defined in or interpreted under those fraudulent transfer statutes. A court could apply different standards in order to determine whether we were "insolvent" as of the date the notes were issued, and, regardless of the method of valuation, a court could determine that we were insolvent on that date. A court could also determine, regardless of whether we were insolvent on the date the notes were issued, that the payments constituted fraudulent transfers on another ground. Different jurisdictions define "insolvency" differently. However, we generally would be considered insolvent at the time we incurred the indebtedness constituting the notes if our liabilities exceeded our assets (at a fair valuation) or if the present saleable value of our assets is less than amount required to pay our total existing debts and liabilities (including the probable liability related to contingent liabilities) as they become absolute or matured. 11 Our obligations under the notes are guaranteed on a senior subordinated basis by our restricted domestic subsidiaries, and the guarantees may also be subject to review under various laws for the protection of creditors. It is possible that creditors of the guarantors may challenge the guarantees as a fraudulent transfer or conveyance. The analysis set forth above would generally apply, except that the guarantees could also be subject to the claim that, since the guarantees were incurred for our benefit, and only indirectly for the benefit of the guarantors, the obligations of the guarantors thereunder were incurred for less than reasonably equivalent value or fair consideration. A court could void a guarantor's obligation under its guarantee, subordinate the guarantee to the other indebtedness of a guarantor, direct that holders of the notes return any amounts paid under a guarantee to the relevant guarantor or to a fund for the benefit of its creditors, or take other action detrimental to the holders of the notes. In addition, the liability of each guarantor under the indenture will be limited to the amount that will result in its guarantee not constituting a fraudulent conveyance or improper corporate distribution, and a court could apply different standards in making a determination as to what would be the maximum liability of each guarantor. RISKS RELATING TO OUR BUSINESS OUR PROFITS MAY BE ADVERSELY AFFECTED BY PRICE VOLATILITY AND AVAILABILITY OF RAW MATERIALS IF WE ARE UNABLE TO PASS PRICE INCREASES ON TO CUSTOMERS OR TO OBTAIN NECESSARY RAW MATERIALS. Our profitability may be adversely affected if raw material prices increase and we are unable to pass these price increases on to our customers, employ successful hedging strategies, enter into supply contracts at favorable prices or buy on the spot market at favorable prices. Our products are manufactured from commodity petrochemicals that are readily available in bulk quantities from numerous large, vertically integrated chemical companies. Except for PCTFE film, a raw material used in manufacturing our clear, laminated blister packaging materials, we currently purchase each principal raw material from several of the top suppliers. Prices for our raw materials have fluctuated in the past and likely will continue to do so in the future. Historically, we have been able to pass on substantially all of the price increases in raw materials to our customers on a timely basis, although in the case of our garden hose products we are usually not able to do so until the following season because prices are set annually. We may, however, be unable to pass on price increases in the future. WE OPERATE IN DISCRETE MARKET SEGMENTS OF OUR INDUSTRY, SOME OF WHICH ARE HIGHLY COMPETITIVE AND INCLUDE PARTICIPANTS WITH GREATER RESOURCES THAN OURS. We compete with a wide variety of manufacturers because we operate in discrete market segments. Some of our competitors are larger, have greater financial resources and are less leveraged than we are. As a result, these competitors may be better able to withstand a change in market conditions within the industry and throughout the economy as a whole. These competitors may also be able to maintain significantly greater operating and financial flexibility than we can. Additionally, a number of our niche product applications are customized or sold for highly specialized uses. Competitors with greater financial, technological, manufacturing and marketing resources than ours and that do not currently market similar applications for these uses could choose to do so in the future. Increased competition could have a material adverse effect on our business, financial condition or results of operations. THE SUCCESS OF OUR ACQUISITION STRATEGY COULD BE ADVERSELY AFFECTED BY THE UNAVAILABILITY OF SUITABLE ACQUISITION CANDIDATES OR OUR INABILITY TO FINANCE FUTURE ACQUISITIONS OR SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES. Acquiring suitable businesses is a key component of our business strategy. Nonetheless, we may not identify suitable acquisitions or acquisitions that can be made at an acceptable price. In the event we are able to acquire additional businesses, we may require substantial capital to do so. Although we will be able to borrow under our revolving credit facility under certain circumstances to fund acquisitions, it is possible that such borrowings will not be available in sufficient amounts or that other financing will not be available in amounts and on terms that we deem acceptable. In addition, growth by acquisition involves risks such as - diversion of our management's attention from ongoing business concerns; 12 - difficulties in integrating the operations and personnel of acquired companies; - difficulty in assessing the value, strengths and weaknesses of acquisition candidates; - failure to discover liabilities of the acquired company for which we will be responsible following the acquisition; - the potential loss of key employees and customers of acquired companies; - diversion of other corporate resources from our existing operations; and - failure to achieve the expected benefits of the acquisition. If the execution of our acquisition strategy is unsuccessful, our ability to compete successfully or repay our indebtedness may be reduced. RISKS RELATING TO FOREIGN INVESTMENT AND OPERATIONS MAY HARM OUR RESULTS. We have operations and other investments in a number of countries outside of the United States. Our foreign operations and investments are subject to the risks normally associated with conducting business in foreign countries, including: - limitations on ownership and on repatriation of earnings; - import and export restrictions and tariffs; - additional expenses relating to the difficulties and costs of staffing and managing international operations; - labor disputes and uncertain political and economic environments, including risks of war and civil disturbances and the impact of foreign business cycles; - change in laws or policies of a foreign country; - delays in obtaining or the inability to obtain necessary governmental permits; - potentially adverse consequences resulting from the applicability of foreign tax laws; - cultural differences; and - increased expenses due to inflation. Our foreign operations and investments may also be adversely affected by laws and policies of the United States and the other countries in which we operate affecting foreign trade, investment and taxation. THE GARDEN AND IRRIGATION HOSE PRODUCTS BUSINESS IS HIGHLY SEASONAL, WHICH RESULTS IN SIGNIFICANT FLUCTUATION OF OUR FINANCIAL RESULTS OVER THE COURSE OF THE FISCAL YEAR. The market for our garden and irrigation hose products is highly seasonal, with approximately 75% of the sales occurring in spring and early summer. As a result of the need to build up inventories in anticipation of such sales, our working capital requirements peak in the spring. In addition, this seasonality has a significant impact on our net income from quarter to quarter. To the extent such sales peak later in any fiscal year compared to other fiscal years, as a result of weather or other factors, cash flows may not be comparable on an interim period basis. WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND COULD BE ADVERSELY AFFECTED BY LOSS OF THEIR SERVICES. We are dependent on the management experience and continued services of our executive officers, including Dr. F. Patrick Smith and Mr. Kenneth W.R. Baker. We maintain a key person life insurance policy on Dr. Smith. The loss of the services of these officers could have a material adverse effect on our business. In addition, our continued growth depends on our ability to attract and retain experienced key employees. 13 WE MAY BE ADVERSELY AFFECTED BY ENVIRONMENTAL AND SAFETY LAWS AND REGULATIONS. We could incur significant fines, penalties, capital costs or other liabilities associated with any noncompliance, remediation of contamination or natural resource damage or toxic tort liability at or related to any of our current or former facilities. Changes in laws or the interpretation thereof, the development of new facts or the failure of third parties to perform remediation at current or former facilities could also cause us to incur additional costs. Any of these foregoing fines, penalties, capital costs, liabilities or costs could have a material adverse effect on our businesses, financial condition or results of operations. Our facilities, operations, and properties are subject to foreign, federal, provincial, state and local environmental laws and regulations. As a result, we are involved from time to time in administrative or legal proceedings relating to environmental matters and have in the past and will continue to incur capital costs and other expenditures relating to environmental matters. Current and prior owners and operators of property or businesses may be liable under environmental laws without regard to fault or to knowledge about the condition or action causing the liability. We are currently, and may in the future be, required to incur costs relating to the remediation of property, including property where we dispose of our waste, and environmental conditions could lead to claims for personal injury, property damage or damages to natural resources. We are aware of environmental conditions at certain properties that we now or previously owned or leased that are undergoing remediation by us or by third parties. Although based on current information we have no reason to believe otherwise, these third parties may not complete the required remediation. WE ARE CONTROLLED BY SHAREHOLDERS WHO WILL BE ABLE TO MAKE IMPORTANT DECISIONS ABOUT OUR BUSINESS AND CAPITAL STRUCTURE; THE CONTROLLING SHAREHOLDERS' INTERESTS MAY DIFFER FROM YOUR INTERESTS AS A NOTEHOLDER. Circumstances may occur in which the interests of the controlling shareholders of Tekni-Plex could be in conflict with your interests as a noteholder. The common shareholders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance the value of their individual equity investments, even though these transactions might involve risks to the holders of the notes. Tekni-Plex Partners holds approximately 96.3% of our outstanding common stock (approximately 93.6% on a fully diluted basis) and MST/TP Partners holds the remaining common stock. Tekni-Plex Management, as sole managing member of Tekni-Plex Partners and MST/TP Partners, controls both these entities. Tekni-Plex Management is controlled by Dr. Smith, our Chairman of the Board and Chief Executive Officer. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes "forward-looking statements" including, in particular, the statements about our plans, strategies and prospects under the headings "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," and in the Pro Forma Unaudited Condensed Financial Information and the related notes thereto. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, it is possible that such plans, intentions or expectations may not be achieved. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus, including under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." All forward-looking statements attributable to Tekni-Plex or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements and risk factors contained throughout this prospectus. USE OF PROCEEDS We will not receive any cash proceeds from the issuance of the new notes. The new notes will be exchanged for old notes as described in this prospectus upon our receipt of old notes. We will cancel all of the old notes surrendered in exchange for the new notes. Our net proceeds from the sale of the old notes were approximately $40.4 million, after deduction of the initial purchasers' discounts and commissions and other expenses of the offering. We used those net proceeds to repay borrowings under our revolving credit facility and for related fees and expenses. 14 CAPITALIZATION The following table sets forth our actual capitalization as of March 28, 2003. You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Form l0-K for the period ended June 28, 2002 and our Form 10-Q for the nine months ended March 28, 2003. As well as the related financial statements and the notes to these statements incorporated by reference in this prospectus.
AS OF MARCH 28, 2003 ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 16,842 ========= Long term debt: Senior credit facility: Revolving credit facility(1)........................... $ 88,000 Term loans............................................. 322,900 12 3/4% senior subordinated notes outstanding............. 312,800 Other..................................................... 5,396 --------- Total debt.................................................. 729,096 Stockholders' deficit: Common stock.............................................. -- Additional paid in capital................................ 170,568 Accumulated other comprehensive loss...................... (4,745) Accumulated deficit....................................... (29,595) Treasury stock............................................ (220,522) --------- Total stockholders' deficit................................. (84,294) --------- Total capitalization........................................ $ 644,802 =========
- --------------- (1) At March 28, 2003, $12 million was available under our revolving credit facility. 15 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The old notes were sold by us to the initial purchaser on May 6, 2002 pursuant to a purchase agreement, dated May 1, 2002, between us and the initial purchaser. The initial purchaser subsequently sold the old notes to "qualified institutional buyers," as defined in Rule 144A under the Securities Act in reliance on Rule 144A, to a limited number of institutional "accredited investors," as defined in Rule 501 under the Securities Act, and outside the United States in accordance with Regulation S under the Securities Act. As a condition to the initial sale of the old notes, we and the initial purchaser entered into the registration rights agreement. Pursuant to the registration rights agreement, we agreed that we would: - use our reasonable best efforts to file with the SEC within 120 days after the closing date, which is the date we delivered the old notes to the initial purchaser, a registration statement under the Securities Act with respect to the new notes; and - cause such registration statement to become effective under the Securities Act within 210 days after the closing date and to remain open for at least 20 business days. We agreed to issue and exchange new notes for all old notes validly tendered and not withdrawn before the expiration of the exchange offer. A copy of the registration rights agreement has been filed as an exhibit to the registration statement of which this prospectus is a part. The registration statement is intended to satisfy certain of our obligations under the registration rights agreement and the purchase agreement. In the event that due to a change in current interpretations by the SEC, we are not permitted to effect such exchange offer, or if for any other reason the exchange offer is not consummated within 250 days after the original issue date of the old notes, or if any holder of the old notes (other than an "affiliate" of Tekni-Plex or the initial purchaser) is not eligible to participate in the exchange offer, or upon the request of the initial purchaser under certain circumstances, it is contemplated that we will instead file a shelf registration statement covering resales by the holders of the old notes and will use our reasonable best efforts to cause such shelf registration statement to become effective and to keep such shelf registration statement effective for a maximum of two years from the closing date. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time on the expiration date. We will issue $1,000 principal amount of new notes in exchange for each respective $1,000 principal amount of outstanding old notes validly tendered and not withdrawn pursuant to the exchange offer. Old notes may be tendered in the principal amount of $1,000 and integral multiples of $1,000 in excess thereof, provided that if fewer than all of the old notes of a holder are tendered for exchange, the untendered principal amount of the holder's remaining old notes must be $100,000 or any integral multiple of $1,000 in excess thereof. The form and terms of the new notes are substantially the same as the form and terms of the old notes except that: - the new notes bear a Series B designation and a different CUSIP number from the old notes; - the exchange will be registered under the Securities Act and, therefore, the new notes will not bear legends restricting the transfer thereof; and - holders of the new notes will not be entitled to any of the registration rights of holders of old notes under the registration rights agreement, which rights will terminate upon the consummation of the exchange offer. The new notes will evidence the same indebtedness as the old notes (which they replace) and will be issued under, and be entitled to the benefits of, the indenture, which also authorized the issuance of the old notes, such that the new notes and the old notes will be treated as a single class of securities under the indenture. The 16 new notes will be fully and unconditionally guaranteed on a senior subordinated basis by the guarantors. The form and terms of the exchange guarantees will be substantially identical to the form and terms of the old guarantees. As of the date of this prospectus, $40,000,000 principal amount of old notes are outstanding, all of which are registered in the name of Cede & Co., as nominee for DTC. Solely for reasons of administration, we have fixed the close of business on , 2003 as the record date for the exchange offer for purposes of determining the persons to whom this prospectus and the letter of transmittal will be mailed initially. There will be no fixed record date for determining holders of the old notes entitled to participate in the exchange offer. Holders of the old notes do not have any appraisal or dissenters' rights under the General Corporation Law of the State of Delaware or the indenture in connection with the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement and the applicable requirements of the Securities Act and the rules and regulations of the SEC thereunder. We shall be deemed to have accepted validly tendered old notes when, and if, we have given oral or written notice thereof to HSBC Bank USA, the exchange agent. The exchange agent will act as agent for the tendering holders of old notes for the purpose of receiving the new notes from us. Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes pursuant to the exchange offer. We will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. See "The Exchange Offer -- Fees and Expenses." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "expiration date" shall mean 5:00 p.m., New York City time, on , 2003, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" shall mean the latest date and time to which the exchange offer is extended. If we determine to extend the exchange offer, we will, prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date: - notify the exchange agent of any extension by oral or written notice; and - mail to registered holders an announcement of the extension. We reserve the right, in our sole discretion: - to delay accepting any old notes; - to extend the exchange offer; or - if, in the opinion of our counsel, the consummation of the exchange offer would violate any applicable law, rule or regulation or any applicable interpretation of the staff of the SEC, to terminate or amend the exchange offer by giving oral or written notice of such delay, extension, termination or amendment to the exchange agent. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by a press release or other public announcement thereof. INTEREST ON THE NEW NOTES Interest on new notes will accrue from the last interest payment date on which interest was paid on the old notes surrendered for them, or, if no interest has been paid on such old notes, from May 6, 2002. We will not pay interest on the old notes accepted for exchange. Interest on the new notes will be paid on June 15 and December 15 of each year commencing June 15, 2003. 17 RESALE OF THE NEW NOTES With respect to the new notes, based upon interpretations by the staff of the SEC set forth in certain no-action letters issued to third parties, we believe that a holder who exchanges old notes for new notes in the ordinary course of business, who is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in a distribution of the new notes, and who is not an "affiliate" of ours within the meaning of Rule 405 of the Securities Act, will be allowed to resell new notes to the public without further registration under the Securities Act and without delivering to the purchasers of the new notes a prospectus that satisfies the requirements of Section 10 of the Securities Act. If any holder is an affiliate of ours or acquires new notes in the exchange offer for the purpose of distributing or participating in the distribution of the new notes, such holder: - cannot rely on the position of the staff of the SEC enumerated in such no-action letters issued to third parties; and - must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives new notes for its own account in exchange for old notes acquired by such broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of any new notes received in exchange for old notes acquired by such broker-dealer as a result of market-making or other trading activities. We will make this prospectus, as it may be amended or supplemented from time to time, available to any such broker-dealer that requests copies of such prospectus in the letter of transmittal for use in connection with any such resale for a period of up to 180 days after the expiration date. See "Plan of Distribution." PROCEDURES FOR TENDERING To tender in the exchange offer, a holder of old notes must either: - complete, sign and date the letter of transmittal or facsimile thereof, have the signatures thereon guaranteed if required by the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile to the exchange agent; or - if such old notes are tendered pursuant to the procedures for book-entry transfer set forth below, a holder tendering old notes may transmit an agent's message (as defined below) to the exchange agent in lieu of the letter of transmittal, in either case for receipt on or prior to the expiration date. In addition, either: - certificates for such old notes must be received by the exchange agent along with the letter of transmittal; - a timely confirmation of a book-entry transfer of such old notes into the exchange agent's account at DTC pursuant to the procedure for book-entry transfer described below, along with the letter of transmittal or an agent's message, as the case may be, must be received by the exchange agent prior to the expiration date; or - the holder must comply with the guaranteed delivery procedures described below. The term "agent's message" means a message, transmitted to the exchange agent's account at DTC and received by the exchange agent and forming a part of the book-entry confirmation, which states that such account has received an express acknowledgment from the tendering participant that such participant has 18 received and agrees to be bound by the letter of transmittal and that we may enforce the letter of transmittal against such participant. To be tendered effectively, the letter of transmittal and other required documents, or an agent's message in lieu thereof, must be received by the exchange agent at the address set forth below under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date. The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal. THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY OLD NOTES TO US. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Any beneficial owner(s) of the old notes whose old notes are held through a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such intermediary promptly and instruct such intermediary to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on its own behalf, such owner must, prior to completing and executing the letter of transmittal and delivering such owner's old notes: - make appropriate arrangements to register ownership of the old notes in such owner's name; or - obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal described below (see "-- Withdrawal of Tenders"), as the case may be, must be guaranteed by an eligible institution unless the old notes tendered pursuant thereto are tendered: - by a registered holder who has not completed the box titled "Special Delivery Instruction" on the letter of transmittal; or - for the account of an eligible institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be made by an "eligible guarantor institution" (within the meaning of Rule 17Ad-15 under the Exchange Act) which is a member of one of the recognized signature guarantee programs identified in the letter of transmittal. If the letter of transmittal is signed by a person other than the registered holder of any old notes listed therein, such old notes must be endorsed or accompanied by a properly completed bond power, signed by such registered holder exactly as such registered holder's name appears on such old notes with the signature thereon guaranteed by an eligible guarantor institution. In connection with any tender of old notes in definitive certified form, if the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by us, evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program to tender old notes. Accordingly, DTC participants may electronically transmit their acceptance of the exchange offer by causing DTC to transfer old notes to the exchange agent in accordance with DTC's ATOP procedures for transfer. DTC will then send an agent's message to the exchange agent. 19 All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered old notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right: - to reject any and all old notes not properly tendered and any old notes our acceptance of which would, in the opinion of our counsel, be unlawful; and - to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities in connection with tenders of old notes, neither we, the exchange agent nor any other person shall incur any liability for failure to give such notification. Tenders of old notes will not be deemed to have been made until such defects or irregularities have been cured or waived. While we have no present plan to acquire any old notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any old notes that are not tendered pursuant to the exchange offer, we reserve the right in our sole discretion to purchase or make offers for any old notes that remain outstanding subsequent to the expiration date and, to the extent permitted by applicable law, purchase old notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the exchange offer. By tendering old notes pursuant to the exchange offer, each holder of old notes will represent to us that, among other things, that: - the new notes to be acquired by such holder of old notes in connection with the exchange offer are being acquired by such holder in the ordinary course of business of such holder; - such holder is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the new notes; - such holder acknowledges and agrees that any person who is participating in the exchange offer for the purpose of distributing the new notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale of the new notes acquired by such person and cannot rely on the position of the staff of the SEC set forth in certain no-action letters; - such holder understands that a secondary resale transaction, described above, and any resales of new notes obtained by such holder in exchange for old notes acquired by such holder directly from us should be covered by an effective registration statement containing the selling security holder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the SEC; and - such holder is not an "affiliate", as defined in Rule 405 under the Securities Act, of ours. If the holder is a broker-dealer that will receive new notes for such holder's own account in exchange for old notes that were acquired as a result of market-making activities or other trading activities, such holder will be required to acknowledge in the letter of transmittal that such holder will deliver a prospectus in connection with any resale of such new notes; however, by so acknowledging and by delivering a prospectus, such holder will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. RETURN OF OLD NOTES In all cases, issuance of new notes for old notes that are accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of: - old notes or a timely book-entry confirmation of such old notes into the exchange agent's account at DTC; and 20 - a properly completed and duly executed letter of transmittal and all other required documents, or an agent's message in lieu thereof. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are withdrawn or are submitted for a greater principal amount than the holders desire to exchange, such unaccepted, withdrawn or otherwise non-exchanged old notes will be returned without expense to the tendering holder thereof (or, in the case of old notes tendered by book-entry transfer into the exchange agent's account at DTC pursuant to the book-entry transfer procedures described below, such old notes will be credited to an account maintained with DTC) as promptly as practicable. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the old securities at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution that is a participant in DTC's systems may make book-entry delivery of old securities by causing DTC to transfer old securities into the exchange agent's account in accordance with DTC's Automated Tender Offer Program procedures for transfer. However, the exchange for the old securities so tendered will only be made after timely confirmation of book-entry transfer of old securities into the exchange agent's account, and timely receipt by the exchange agent of an agent's message, transmitted by DTC and received by the exchange agent and forming a part of a book-entry confirmation. The agent's message must state that DTC has received an express acknowledgment from the participant tendering old securities that are the subject of that book-entry confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce the agreement against that participant. Although delivery of old securities may be effected through book-entry transfer into the exchange agent's account at DTC, the letter of transmittal, or a facsimile copy, properly completed and duly executed, with any required signature guarantees, must in any case be delivered to and received by the exchange agent at its address listed under "-- Exchange Agent" on or prior to the expiration date. If your old securities are held through DTC, you must complete a form called "instructions to registered holder and/or book-entry participant," which will instruct the DTC participant through whom you hold your securities of your intention to tender your old securities or not tender your old securities. Please note that delivery of documents to DTC in accordance with its procedures does not constitute delivery to the exchange agent and we will not be able to accept your tender of securities until the exchange agent receives a letter of transmittal and a book-entry confirmation from DTC with respect to your securities. A copy of that form is available from the exchange agent. GUARANTEED DELIVERY PROCEDURES If a holder of the old notes desires to tender such old notes and the old notes are not immediately available or the holder cannot deliver its old notes (or complete the procedures for book-entry transfer), the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, a holder may effect a tender if: - the tender is made through an eligible institution; - prior to the expiration date, the exchange agent receives from such eligible institution (by facsimile transmission, mail or hand delivery) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by us setting forth the name and address of the holder, the certificate number(s) of such old notes (if applicable) and the principal amount of old notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the expiration date: (i) the letter of transmittal (or a facsimile thereof), or an agent's message in lieu thereof, (ii) the certificate(s) representing the old notes in proper form for transfer or a book-entry confirmation, as the case may be, and 21 (iii) any other documents required by the letter of transmittal, will be deposited by the eligible institution with the exchange agent; and - such properly executed letter of transmittal (or facsimile thereof), or an agent's message in lieu thereof, as well as the certificate(s) representing all tendered old notes in proper form for transfer or a book-entry confirmation, as the case may be, and all other documents required by the letter of transmittal, are received by the exchange agent within three New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a form of Notice of Guaranteed Delivery will be sent to holders who wish to tender their old notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. To withdraw a tender of old notes in the exchange offer, a written or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth herein prior to the expiration date. Any such notice of withdrawal must: - specify the name of the person having deposited the old notes to be withdrawn; - identify the old notes to be withdrawn (including the certificate number or numbers, if applicable, and principal amount of such old notes); and - be signed by the holder in the same manner as the original signature on the letter of transmittal by which such old notes were tendered (including any required signature guarantees). If old notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of DTC. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by us, in our sole discretion, which determination shall be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer, and no new notes will be issued with respect thereto, unless the old notes so withdrawn are validly re-tendered. Properly withdrawn old notes may be re-tendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the expiration date. TERMINATION OF CERTAIN RIGHTS All registration rights under the registration rights agreement accorded to holders of the old notes (and all rights to receive additional interest in the event of a Registration Default as defined therein) will terminate upon consummation of the exchange offer. However, for a period of up to 180 days after the registration statement is declared effective, we will keep the registration statement effective and provide copies of the latest version of the prospectus to any broker-dealer that requests copies of such prospectus in the letter of transmittal for use in connection with any resale by such broker-dealer of new notes received for its own account pursuant to the exchange offer in exchange for old notes acquired for its own account as a result of market-making or other trading activities. 22 EXCHANGE AGENT HSBC Bank USA has been appointed as exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for notice of guaranteed delivery should be directed to the exchange agent addressed as follows:
By Registered or Certified Mail, Overnight Courier or Hand: By Facsimile: HSBC Bank USA HSBC Bank USA One Hanson Place Attention: Paulette Shaw Brooklyn, New York 11243 (718) 488-4488 Attention: Paulette Shaw Tel: (718) 488-4475
Originals of all documents submitted by facsimile should be sent promptly by registered or certified mail, overnight courier or hand. Delivery to an address other than as set forth above will not constitute a valid delivery. HSBC Bank USA also serves as trustee under the indenture. FEES AND EXPENSES We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, facsimile transmission, telephone or in person by our officers and regular employees or those of our affiliates. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The expenses to be incurred in connection with the exchange offer, including registration fees, fees and expenses of the exchange agent and the trustee, accounting and legal fees, and printing costs, will be paid by us. We will pay all transfer taxes, if any, applicable to the exchange of old notes pursuant to the exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the old notes pursuant to the exchange offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. CONSEQUENCE OF FAILURE TO EXCHANGE Participation in the exchange offer is voluntary. Holders of the old notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. Old notes that are not exchanged for the new notes pursuant to the exchange offer will remain "restricted securities" within the meaning of Rule 144(a)(3)(iv) under the Securities Act. Accordingly, such old notes may not be offered, sold, pledged or otherwise transferred except: - to us (upon redemption thereof or otherwise); - to a person whom the seller reasonably believes is a "qualified institutional buyer" within the meaning of Rule 144A purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; - in an offshore transaction complying with Rule 903 or Rule 904 of Regulation S under the Securities Act; 23 - pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available); - pursuant to an effective registration statement under the Securities Act; or - pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with all other applicable securities laws. ACCOUNTING TREATMENT For accounting purposes, we will recognize no gain or loss as a result of the exchange offer. The expenses of the exchange offer will be amortized over the term of the new notes. CONDITIONS Notwithstanding any other term of the exchange offer, we shall not be required to accept for exchange, or exchange new notes for, any old notes, and may terminate or amend the exchange offer as provided herein if: (a) as of the expiration date of the offer, any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer (or other similar exchange offers) which, in our reasonable judgment, might materially impair our ability to proceed with the exchange offer or any material adverse development has occurred in any existing action or proceeding with respect to us or any of our subsidiaries; (b) as of the expiration date of the offer, any law, statute, rule, regulation or interpretation by the staff of the SEC is proposed, adopted or enacted, which, in our reasonable judgment, might materially impair our ability to proceed with the exchange offer or materially impair the contemplated benefits of the exchange offer to us; or (c) any governmental approval has not been obtained, which approval we shall, in our reasonable discretion, deem necessary for the consummation of the exchange offer as contemplated hereby. If we determine in our reasonable discretion that any of the conditions is not satisfied, we may (i) refuse to accept any old notes and return all tendered old notes to the tendering holders, (ii) extend the exchange offer and retain all old notes tendered prior to the expiration of the exchange offer, subject, however, to the rights of holders to withdraw such old notes (see "-- Withdrawal of Tenders") or (iii) waive such unsatisfied condition(s) with respect to the exchange offer and accept all properly tendered old notes that have not been withdrawn. In the event we waive a condition to the exchange offer we will provide notice of the waiver and extend the offer. DESCRIPTION OF THE NEW NOTES As used below in this "Description of the New Notes" section, the "Company," "we," "us," "our" and "ours" means Tekni-Plex, Inc. but not any of its subsidiaries. We issued the old notes, and the new notes are to be issued under an indenture, dated as of June 21, 2000 and amended as of May 6, 2002 and August 22, 2002, among us, the guarantors and HSBC Bank USA, as trustee. The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939, as amended. The notes are subject to all such terms, and holders of the notes are referred to the indenture and the Trust Indenture Act for a statement thereof. A copy of the indenture, the registration rights agreement and our senior debt credit agreement described below will be made available to prospective investors upon request. The statements made under this caption relating to the notes, the indenture, the registration rights agreement and our senior debt credit agreement are intended to be summaries of all material elements of such documents and, as such, do not purport to be complete and where reference is made to particular provisions of the indenture, the registration rights agreement and our senior debt credit agreement, such provisions, including the definitions of certain terms appearing at the end of this section and under the caption "Senior Debt", are qualified in their entirety by such reference. 24 The terms of the new notes are identical in all material respects to the terms of the old notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the old notes do not apply to the new notes. The old notes and the new notes will be considered collectively to be a single class for all purposes under the indenture, including, without limitation, waivers and amendments. The notes will be our general unsecured obligations. The notes constitute a further issuance of and, following their registration under the Act, will be consolidated and form a single series with our outstanding 12 3/4% Senior Subordinated Notes. The indenture is not limited in amount, and additional amounts may be issued in one or more series from time to time under the indenture subject to the limitations on the incurrence of additional indebtedness set forth under "Covenants -- Limitation on Indebtedness" and restrictions contained in the credit agreement. The notes will be our senior subordinated obligations, subordinated in right of payment to all our senior debt. The notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple thereof. No service charge will be made for any registration of transfer or exchange of notes, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Initially, the trustee will act as paying agent and registrar for the notes. PRINCIPAL, MATURITY AND INTEREST The notes will mature on June 15, 2010 and will bear interest at the rate per annum shown on the cover page hereof, except as noted under "-- Registration Rights," from the Issue Date or from the most recent interest payment date to which interest has been paid or provided for. Interest on the new notes will be payable semiannually on June 15 and December 15 of each year, commencing June 15, 2003, to the person in whose name a note is registered at the close of business on the preceding June 1 or December 1 (each, a "record date"), as the case may be. Interest on the notes will be computed on the basis of a 360-day year of twelve 30-day months. Holders must surrender the notes to the paying agent for the notes to collect principal payments. We will pay principal and interest by check and may mail interest checks to a holder's registered address. OPTIONAL REDEMPTION The notes will be subject to redemption, at our option, in whole or in part, at any time on or after June 15, 2005 and prior to maturity, upon not less than 30 nor more than 60 days' notice mailed to each holder of notes to be redeemed at his address appearing in the register for the notes, in amounts of $1,000 or an integral multiple of $1,000, at the following redemption prices (expressed as percentages of principal amount) plus accrued interest to but excluding the date fixed for redemption (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date that is on or prior to the date fixed for redemption), if redeemed during the 12-month period beginning June 15 of the years indicated:
YEAR PERCENTAGE - ---- ---------- 2005........................................................ 106.375% 2006........................................................ 104.250% 2007........................................................ 102.135% 2008 and thereafter......................................... 100.000%
In addition, prior to June 15, 2003, we may redeem up to 35% of the principal amount of the notes with the net cash proceeds received by us from one or more public offerings of our capital stock (other than disqualified stock), at a redemption price (expressed as a percentage of the principal amount) of 112.75% of the principal amount thereof, plus accrued and unpaid interest to the date fixed for redemption; provided however, that at least 65% of the aggregate principal amount of the notes originally issued pursuant to this offering remains outstanding immediately after any such redemption (excluding any notes owned by us or any of our affiliates). Notice of redemption pursuant to this paragraph must be mailed to holders of notes not later than 60 days following the consummation of such public offering. 25 Selection of notes for any partial redemption shall be made by the trustee, in accordance with the rules of any national securities exchange on which the notes may be listed or, if the notes are not so listed, pro rata or by lot or in such other manner as the trustee shall deem appropriate and fair. Notes in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. Notice of redemption will be mailed before the date fixed for redemption to each holder of notes to be redeemed at his or her registered address. On and after the date fixed for redemption, interest will cease to accrue on notes or portions thereof called for redemption. The notes will not have the benefit of any sinking fund. RANKING The payment of principal, premium, if any, and interest on the notes and any claims arising out of or with respect to the indenture is subordinated and subject in right of payment, to the extent and in the manner provided in the indenture, to the prior payment in full of all our senior debt. Upon any payment or distribution of our assets or securities of any kind or character, whether in cash, property or securities, upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due with respect to our senior debt (including any interest accruing on or after, or which would accrue but for, an event of bankruptcy, regardless of whether such interest is an allowed claim enforceable against the debtor under the Bankruptcy Code) shall first be paid in full, or payment provided for, in either case in cash or cash equivalents or otherwise in a form satisfactory to the holders of senior debt, before the holders of the notes or the trustee on behalf of such holders shall be entitled to receive any payment by us of the principal of premium, if any, or interest on the notes, or any payment to acquire any of the notes for cash, property or securities, or any distribution with respect to the notes of any kind or character, whether in cash, property or securities, by set-off or otherwise (all such payments and distributions referred to individually and collectively, as a "securities payment"). Before any payment may be made by us, or on our behalf, of the principal of, premium, if any, or interest on the notes upon any such dissolution or winding up or liquidation or reorganization, any payment or distribution of our assets or securities of any kind or character, whether in cash, property or securities, to which the holders of the notes or the trustee on their behalf would be entitled, but for the subordination provisions of the indenture, shall be made by us or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, directly to the holders of our senior debt (pro rata to such holders on the basis of the respective amounts of senior debt held by such holders) or their representatives or to the trustee or trustees under any indenture pursuant to which any such senior debt may have been issued as their respective interests may appear, to the extent necessary to pay all such senior debt in full in cash or cash equivalents or otherwise in a form satisfactory to the holders of such senior debt after giving effect to any concurrent payment, distribution or provision therefor to or for the holders of such senior debt. No securities payment by us or on our behalf, whether pursuant to the terms of the notes or upon acceleration or otherwise, will be made if, at the time of such payment, there exists a default in the payment of all or any portion of the obligations on any designated senior debt, whether at maturity, on account of mandatory redemption or prepayment, acceleration or otherwise, and such default shall not have been cured or waived or the benefits of this sentence waived by or on behalf of the holders of such designated senior debt. In addition, during the continuance of any non-payment default or non-payment event of default with respect to any designated senior debt pursuant to which the maturity thereof may be accelerated, and upon receipt by the Trustee of notice (a "payment blockage notice") from a holder or holders of such designated senior debt or the trustee or agent acting on behalf of such designated senior debt, then, unless and until such default or event of default has been cured or waived or has ceased to exist or such designated senior debt has been discharged or repaid in full in cash or cash equivalents or otherwise in a form satisfactory to the holders of such designated senior debt, no securities payment will be made by us or on our behalf, except from those funds held in trust for purposes of defeasance for the benefit of the holders of any notes to such holders, during a period (a "payment blockage period") commencing on the date of receipt of such payment blockage notice by the trustee and ending 179 days thereafter. Notwithstanding anything herein to the contrary, (1) in no 26 event will a payment blockage period extend beyond 179 days from the date of the payment blockage notice in respect thereof was given and (2) there must be 180 days in any 365 day period during which no payment blockage period is in effect. Not more than one payment blockage period may be commenced with respect to the notes during any period of 365 consecutive days. No default or event of default that existed or was continuing on the date of commencement of any payment blockage period with respect to the designated senior debt initiating such payment blockage period may be, or be made, the basis for the commencement of any other payment blockage period by the holder or holders of such designated senior debt or the trustee or agent acting on behalf of such designated senior debt, whether or not within a period of 365 consecutive days, unless such default or event of default has been cured or waived for a period of not less than 90 consecutive days (it being acknowledged that any subsequent action or any breach of any financial covenants for a period commencing after the date of commencement of such payment blockage period that, in either case, would give rise to an event of default pursuant to any provision under which an event of default previously existed or was continuing, shall constitute a new event of default for this purpose). The failure to make any payment or distribution for or on account of the notes by reason of the provisions of the indenture described under this section will not be construed as preventing the occurrence of an event of default described in clause (1), (2) or (3) of the first paragraph under "-- Events of Default." By reason of the subordination provisions described above, in the event we become insolvent, funds which would otherwise be payable to holders of the notes will be paid to the holders of our senior debt to the extent necessary to repay such senior debt in full, and we may be unable to fully meet our obligations with respect to the notes. Subject to the restrictions set forth in the indenture, in the future we may incur additional senior debt. SENIOR DEBT At March 28, 2003 we had $416.3 million of senior debt outstanding. We could also have borrowed up to an additional $12 million of indebtedness under our revolving credit facility, all of which would have constituted senior debt. Our senior debt contains covenants, including a minimum Fixed Charge Coverage Ratio, a minimum Leverage Ratio and a minimum Consolidated EBITDA, all of which are defined in our senior debt credit agreement and described in greater detail below. As of March 28, 2003 we were in compliance with all of our covenants. Fixed Charge Coverage Ratio. Our credit agreement requires that we meet a minimum Fixed Charge Coverage Ratio. The minimum Fixed Charge Coverage Ratio ranges from a ratio of 1.20:1 for our third quarter of the current fiscal year to 1.40:1 for the quarter ending in December 2007 and any subsequent periods. Increases in the ratio take effect in accordance with the following table:
FISCAL QUARTER ENDING CLOSEST TO RATIO - -------------------------------- ------ March through December 2003................................. 1.20:1 March 2004.................................................. 1.25:1 June through December 2004.................................. 1.30:1 March 2005.................................................. 1.35:1 June 2005 through December 2007 and thereafter.............. 1.40:1
Leverage Ratio. Our credit agreement further requires that we meet a minimum Leverage Ratio. The minimum Leverage Ratio ranges from a ratio of 5.75:1 for the third quarter of the current fiscal year to 4.5:1 27 for the quarter ending in December 2007 and any subsequent periods. Decreases in the ratio take effect in accordance with the following table:
FISCAL QUARTER ENDING CLOSEST TO RATIO - -------------------------------- ------ December 2002 through March 2003............................ 5.75:1 June through December 2003.................................. 5.50:1 March 2004.................................................. 5.25:1 June through December 2004.................................. 5.00:1 March 2005.................................................. 4.75:1 June 2005 through December 2007 and thereafter.............. 4.50:1
Minimum Consolidated EBITDA. Our credit agreement also requires that we meet a minimum Consolidated EBITDA. The minimum Consolidated EBITDA ranges from $120,000,000 for the third quarter of the current fiscal year to $125,000,000 for the quarter ending December 2007 and any subsequent periods. Increases in minimum Consolidated EBITDA take effect in accordance with the following table:
FISCAL QUARTER ENDING CLOSEST TO AMOUNT - -------------------------------- ------------ March 2003.................................................. $120,000,000 June through December 2003.................................. $122,500,000 March 2004 through December 2007 and thereafter............. $125,000,000
THE GUARANTEES The indenture provides that the guarantors will fully and unconditionally guarantee, jointly and severally, on a senior subordinated basis all of our obligations under the indenture, including our obligation to pay principal, premium, if any, and interest with respect to the notes. The obligation of each guarantor is limited to the maximum amount which, after giving effect to all other contingent and fixed liabilities of such guarantor, including, without limitation, such guarantor's guarantee of outstanding obligations under the credit agreement, will result in the obligations of such guarantor under the guarantee not constituting a fraudulent conveyance or fraudulent transfer under federal or state law. Except as provided in "-- Covenants" below, we are not restricted from selling or otherwise disposing of a guarantor. The indenture provides that if the notes are defeased in accordance with the terms of the indenture, or if all or substantially all of the assets of a guarantor or all of the capital stock of a guarantor is sold (including by issuance or otherwise) by us or any of our restricted subsidiaries in a transaction constituting an asset disposition, and if (1) the net available proceeds from such asset dispositions are used in accordance with the covenant described under "-- Covenants -- Limitation on Certain Asset Dispositions" or (2) we deliver to the trustee an officers' certificate to the effect that the net available proceeds from such asset disposition shall be used in accordance with the covenant described under "-- Covenants -- Limitation on Certain Asset Dispositions" and within the time limits specified by such covenant, then such guarantor (in the event of a sale or other disposition of all or substantially all of its assets) shall be released and discharged from its guarantee obligations. The obligations of each guarantor under the guarantee are subordinated to the prior payment in full of all senior debt of such guarantor on the same basis as our obligations on the notes are subordinated to our senior debt. The guarantee will be pari passu in right of payment with any other senior subordinated indebtedness of each guarantor and senior to any future subordinated indebtedness of each guarantor. 28 COVENANTS The indenture contains, among others, the following covenants: LIMITATION ON INDEBTEDNESS The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, directly or indirectly, incur any indebtedness (including acquired indebtedness), except: (1) indebtedness of ours or of any of our restricted subsidiaries, if immediately after giving effect to the incurrence of such indebtedness and the receipt and application of the net proceeds thereof, our consolidated cash flow ratio for a year consisting of the four full fiscal quarters for which quarterly or annual financial statements are available next preceding the incurrence of such indebtedness (calculated on a pro forma basis in accordance with Article 11 of Regulation S-X under the Securities Act or any successor provision as if such indebtedness had been incurred on the first day of such year) would be greater than 2.0 to 1.0; (2) indebtedness of ours and of our restricted subsidiaries incurred under the credit agreement in an amount not to exceed $125.0 million in aggregate principal amount at any time outstanding less the amount of any such indebtedness that is permanently repaid or, without duplication, the amount by which commitments thereunder are permanently reduced, in either case, from the proceeds of asset dispositions; (3) indebtedness owed by us to any of our direct or indirect wholly owned subsidiaries or indebtedness owed by any of our direct or indirect restricted subsidiaries to us or any other of our direct or indirect wholly owned subsidiaries; provided, however, upon either (a) the transfer or other disposition by such direct or indirect wholly owned subsidiary of any indebtedness so permitted under this clause (3) to a Person other than us or another of our direct or indirect wholly owned subsidiaries or (b) the issuance (other than directors' qualifying shares), sale, transfer or other disposition of shares of capital stock or other ownership interests (including by consolidation or merger) of such direct or indirect wholly owned subsidiary to a person other than us or another such wholly owned subsidiary, the provisions of this clause (3) shall no longer be applicable to such indebtedness and such indebtedness shall be deemed to have been incurred at the time of any such issuance, sale, transfer or other disposition, as the case may be; (4) indebtedness of ours or of any of our restricted subsidiaries under any interest rate or foreign currency hedge or exchange or other similar agreement to the extent entered into to hedge any other indebtedness permitted under the indenture (including the notes); (5) indebtedness incurred to defer, renew, extend, replace, refinance or refund, whether under any amendment, supplement or otherwise (collectively for purposes of this clause (5) to "refund"), any indebtedness described in clause (8) below, any indebtedness incurred under clause (1) above, the notes issued on June 21, 2000 and the guarantee of the notes; provided, however, that (a) such indebtedness does not exceed the principal amount (or accrued amount, if less) of indebtedness so refunded plus the amount of any premium required to be paid in connection with such refunding pursuant to the terms of the indebtedness refunded or the amount of any premium reasonably determined by the issuer of such indebtedness as necessary to accomplish such refunding by means of a tender offer, exchange offer, or privately negotiated repurchase, plus the expenses of such issuer reasonably incurred in connection therewith, and (b) (i) in the case of any refunding of indebtedness that is pari passu with the notes, such refunding indebtedness is made pari passu with or subordinate in right of payment to the notes, and, in the case of any refunding of indebtedness that is subordinate in right of payment to the notes, such refunding indebtedness is subordinate in right of payment to the notes on terms no less favorable to the holders of the notes than those contained in the indebtedness being refunded, (ii) in either case, the refunding indebtedness by its terms, or by the terms of any agreement or instrument pursuant to which such indebtedness is issued, does not have an average life that is less than the remaining average life of the indebtedness being refunded and does not permit redemption or other retirement 29 (including pursuant to any required offer to purchase to be made by us or any of our restricted subsidiaries) of such indebtedness at the option of the holder thereof prior to the final stated maturity of the indebtedness being refunded, other than a redemption or other retirement at the option of the holder of such indebtedness (including pursuant to a required offer to purchase made by us or any of our restricted subsidiaries) which is conditioned upon a change of control of us pursuant to provisions substantially similar to those contained in the indenture described under "-- Change of Control" below and (iii) any indebtedness incurred to refund any indebtedness is incurred by the obligor on the indebtedness being refunded or by us; provided, further, that clause (b) of the immediately preceding proviso shall not apply to any indebtedness incurred to refinance term loans under the credit agreement outstanding on June 21, 2000 or to subsequent refinancings of any such refinancing indebtedness; (6) commodity agreements of ours or of any of our restricted subsidiaries to the extent entered into to protect us and our restricted subsidiaries from fluctuations in the prices of raw materials used in their businesses; (7) indebtedness of ours under the exchange notes and indebtedness of the guarantors under the guarantees incurred in accordance with the indenture; (8) indebtedness issued or outstanding on June 21, 2000 (including (a) indebtedness under clause (13) below and (b) indebtedness consisting of term loans under the credit agreement outstanding on June 21, 2000 and excluding indebtedness consisting of revolving loans under the credit agreement outstanding on June 21, 2000; (9) guarantees by us or our restricted subsidiaries of indebtedness otherwise permitted to be incurred hereunder; (10) indebtedness the net proceeds of which are applied to defease the notes in their entirety; (11) indebtedness of ours or of any of our subsidiaries that is an endorsement of bank drafts and similar negotiable instruments for collection or deposit in the ordinary course of business; (12) indebtedness incurred by us or by any of our restricted subsidiaries constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business, including, without limitation, letters of credit in respect of workers' compensation claims or self-insurance, or other indebtedness with respect to reimbursement-type obligations regarding workers' compensation claims or self-insurance and obligations in respect of performance and surety bonds and completion guarantees provided by us or any of our restricted subsidiaries in the ordinary course of business not in excess of $10.0 million at any time outstanding; and (13) indebtedness of ours or of our restricted subsidiaries not otherwise permitted to be incurred pursuant to clauses (1) through (12) above which, together with any other outstanding indebtedness incurred pursuant to this clause (13), has an aggregate principal amount not in excess of $40.0 million at any time outstanding, which indebtedness may be incurred under the credit agreement or otherwise. For purposes of determining compliance with this covenant, in the event than an item of indebtedness meets the criteria of more than one of the categories of indebtedness described in clauses (1) through (14) above, we shall, in our sole discretion, classify such item of indebtedness in any manner that complies with this covenant and such item of indebtedness will be treated as having been incurred pursuant to only one of such clauses. In addition, we may, at any time, change the classification of an item of indebtedness (or any portion thereof) to any other clause; provided that we would be permitted to incur such item of indebtedness (or such portion thereof) pursuant to such other clause at such time of reclassification. Accrual of interest, accretion or amortization of original issue discount will not be deemed to be an incurrence of indebtedness for purposes of this covenant. 30 LIMITATION ON RESTRICTED PAYMENTS The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, directly or indirectly, (1) declare or pay any dividend, or make any distribution of any kind or character (whether in cash, property or securities), on or in respect of any class of our capital stock or that of any of our restricted subsidiaries excluding any (a) dividends or distributions payable solely in shares of our capital stock (other than disqualified stock) or in options, warrants or other rights to acquire our capital stock (other than disqualified stock), or (b) in the case of any of our restricted subsidiaries, dividends or distributions payable to us or to any of our restricted subsidiaries or to the extent payable on a pro rata basis to all holders of capital stock of such restricted subsidiary, (2) purchase, redeem, or otherwise acquire or retire for value shares of our capital stock or that of any of our restricted subsidiaries, any options, warrants or rights to purchase or acquire shares of our capital stock or that of any of our restricted subsidiaries or any securities convertible or exchangeable into shares of our capital stock or that of any of our restricted subsidiaries, excluding any such shares of capital stock, options, warrants, rights or securities which are owned by us or any of our restricted subsidiaries, (3) make any investment in (other than a permitted investment), or make any payment on a guarantee of any obligation of, any person, other than us or any of our direct or indirect wholly owned subsidiaries, or (4) redeem, defease, repurchase, retire or otherwise acquire or retire for value, prior to any scheduled maturity, repayment or sinking fund payment, subordinated indebtedness (each of the transactions described in clauses (1) through (4) (other than any exception to any such clause) being a "restricted payment"), if at the time thereof: (1) a default or an event of default shall have occurred and be continuing, or (2) upon giving effect to such restricted payment, we could not incur at least $1.00 of additional indebtedness pursuant to the terms of the indenture described in clause (1) of "-- Limitation on Indebtedness" above, or (3) upon giving effect to such restricted payment, the aggregate of all restricted payments made on or after the issue date exceeds the sum of: (a) 50% of our cumulative consolidated net income (or, in the case our cumulative consolidated net income shall be negative, less 100% of such deficit) since June 21, 2000, plus (b) 100% of the aggregate net proceeds received after June 21, 2000, including the fair market value of property other than cash (determined in good faith by our board of directors as evidenced by a resolution of such board of directors filed with the trustee) from the issuance of, or equity contribution with respect to, our capital stock (other than disqualified stock) and warrants, rights or options on our capital stock (other than disqualified stock) (other than in respect of any such issuance to any of our restricted subsidiaries) and the principal amount of indebtedness of ours or of any of our restricted subsidiaries that has been converted into or exchanged for our capital stock which indebtedness was incurred after June 21, 2000, plus (c) 100% of the aggregate after-tax net cash proceeds of the sale or other disposition of any investment constituting a restricted payment made after June 21, 2000; provided that any gain on the sale or disposition to the extent included in this clause (c) shall not be included in determining consolidated net income for purposes of clause (a) above; provided, further, that amounts included in this clause (c) shall not exceed the net investment by us in the asset so sold or disposed. 31 The foregoing provision will not be violated by: (1) any dividend on any class of our capital stock or that of any of our restricted subsidiaries paid within 60 days after the declaration thereof if, on the date when the dividend was declared, we or such restricted subsidiary, as the case may be, could have paid such dividend in accordance with the provisions of the indenture; (2) the renewal, extension, refunding or refinancing of any indebtedness otherwise permitted pursuant to the terms of the indenture described in clause (5) of "-- Limitation on Indebtedness" above; (3) the exchange or conversion of any indebtedness of ours or of any of our restricted subsidiaries for or into our capital stock (other than disqualified stock): (4) so long as no default or event of default has occurred and is continuing, any investment made with the proceeds of a substantially concurrent sale (other than in respect of any issuance to any of our restricted subsidiaries) for cash of our capital stock (other than disqualified stock); provided, however, that the proceeds of such sale of capital stock, to the extent used in any such investment, shall not be (and have not been) included in subclause (b) of clause (3) of the preceding paragraph; (5) the redemption, repurchase, retirement or other acquisition of any our capital stock in exchange for or out of the net cash proceeds of a substantially concurrent sale (other than to any of our restricted subsidiaries) of our capital stock (other than disqualified stock); provided, however, that the proceeds of such sale of capital stock, to the extent used for such redemption, repurchase, retirement or other acquisition or retirement, shall not be (and have not been) included in subclause (b) of clause (3) of the preceding paragraph; (6) payments made by us in an aggregate amount not to exceed $237.0 million to acquire shares of our capital stock as part of our 2000 recapitalization; (7) payments made to purchase, redeem or otherwise acquire or retire for value shares of our capital stock or that of any of our restricted subsidiaries at no more than fair market value (determined in good faith by our board of directors as evidenced by a resolution of such board of directors filed with the trustee) from our present and former employees and directors or those of any such restricted subsidiary in an amount not in excess of up to $5.0 million for each fiscal year and $15.0 million in the aggregate, in each case net of the aggregate net cash proceeds received from such persons after June 21, 2000 from the issuance of, or equity contributions with respect to, our capital stock (other than disqualified stock) and warrants, rights or options on our capital stock (other than disqualified stock); (8) so long as no default or event of default has occurred and is continuing, the redemption, repurchase or retirement of our subordinated indebtedness in exchange for, by conversion into, or out of the net proceeds of, a substantially concurrent sale or incurrence of subordinated indebtedness (other than any indebtedness owed to a subsidiary) of ours that is contractually subordinated in right of payment to the notes to at least the same extent, and which has an average life at least as long, in each case, as the subordinated indebtedness being redeemed, repurchased or retired; (9) so long as no default or event of default has occurred and is continuing, investments not otherwise permitted pursuant to this covenant up to $15.0 million in the aggregate; (10) so long as no default or event of default has occurred and is continuing, restricted payments not otherwise permitted pursuant to this covenant up to $10.0 million in the aggregate; (11) any permitted investment; and (12) so long as no default or event of default has occurred and is continuing, investments in any person the primary business of which is located outside the United States and is related, ancillary or complementary to our business or that of our restricted subsidiaries, provided that the aggregate amount of investments pursuant to this clause does not exceed $25.0 million. 32 Each restricted payment described in clauses (1) (to the extent not already taken into account for purposes of computing the aggregate amount of all restricted payments pursuant to clause (3) of the preceding paragraph), (4), (7), (9), (10) and (12) of this paragraph shall be taken into account for purposes of computing the aggregate amount of all restricted payments pursuant to clause (3) of the preceding paragraph. The indenture provides that for purposes of this covenant: (1) an "investment" shall be deemed to have been made at the time any restricted subsidiary is designated as an unrestricted subsidiary in an amount (proportionate to our equity interest in such subsidiary) equal to the net worth of such restricted subsidiary at the time that such restricted subsidiary is designated as an unrestricted subsidiary ("net worth" to be calculated based upon the fair market value of the assets of such subsidiary as of any such date of designation); (2) at any date the aggregate of all restricted payments made as investments since June 21, 2000 shall exclude and be reduced by an amount (proportionate to our equity interest in such subsidiary) equal to the net worth of an unrestricted subsidiary at the time that such unrestricted subsidiary is designated a restricted subsidiary, not to exceed, in the case of any such redesignation of an unrestricted subsidiary as a restricted subsidiary, the amount of investments previously made by us and the restricted subsidiaries in such unrestricted subsidiary ("net worth" to be calculated based upon the fair market value of the assets of such subsidiary as of any such date of designation); and (3) any property transferred to or from an unrestricted subsidiary shall be valued at its fair market value at the time of such transfer. LIMITATIONS CONCERNING DISTRIBUTIONS AND TRANSFERS BY RESTRICTED SUBSIDIARIES The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist any consensual encumbrance or restriction on the ability of any of our restricted subsidiaries to: (a) pay, directly or indirectly, dividends or make any other distributions in respect of its capital stock or pay any indebtedness or other obligation owed to us or any of our restricted subsidiaries; (b) make loans or advances to us or any of our restricted subsidiaries; or (c) transfer any of its property or assets to us or any of our restricted subsidiaries, except for such encumbrances or restrictions existing under or by reason of: (1) any agreement in effect on June 21, 2000 as any such agreement is in effect on such date; (2) the credit agreement; (3) any agreement relating to any indebtedness incurred by such restricted subsidiary prior to the date on which such restricted subsidiary was acquired by us and outstanding on such date and not incurred in anticipation or contemplation of becoming a restricted subsidiary and provided such encumbrance or restriction shall not apply to any of our assets or assets of our restricted subsidiaries other than such restricted subsidiary; (4) customary provisions contained in an agreement which has been entered into for the sale or disposition of all or substantially all of the capital stock or assets of a restricted subsidiary; provided, however, that such encumbrance or restriction is applicable only to such restricted subsidiary or assets; (5) an agreement effecting a renewal, exchange, refunding, amendment or extension of indebtedness incurred pursuant to an agreement referred to in clause (1) or (3) above; provided, however, that the provisions contained in such renewal, exchange, refunding, amendment or extension agreement relating to such encumbrance or restriction are no more restrictive in any material respect than the provisions contained in the agreement that is the subject thereof in the 33 reasonable judgment of our board of directors as evidenced by a resolution of such board of directors filed with the trustee; (6) the indenture; (7) applicable law; (8) customary provisions restricting subletting or assignment of any lease governing any leasehold interest of any of our restricted subsidiaries; (9) restrictions contained in indebtedness permitted to be incurred subsequent to June 21, 2000 pursuant to the provisions of the covenant described under "-- Limitation on Indebtedness"; provided that any such restrictions are ordinary and customary with respect to the type of indebtedness incurred; (10) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the type referred to in clause (c) of this covenant; or (11) restrictions of the type referred to in clause (c) of this covenant contained in security agreements securing indebtedness of any of our restricted subsidiaries to the extent that such liens were otherwise incurred in accordance with "-- Limitation on Liens" below and restrict the transfer of property subject to such agreements. LIMITATION ON LIENS The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, incur any lien on or with respect to any property or assets of ours or such restricted subsidiary owned on June 21, 2000 or thereafter acquired or on the income or profits thereof to secure indebtedness, without making, or causing any such restricted subsidiary to make, effective provision for securing the notes and all other amounts due under the indenture (and, if we shall so determine, any other indebtedness of ours or such restricted subsidiary, including subordinated indebtedness; provided, however, that liens securing the notes and any indebtedness pari passu with the notes are senior to such liens securing such subordinated indebtedness) equally and ratably with such indebtedness or, in the event such indebtedness is subordinate in right of payment to the notes or the guarantee, prior to such indebtedness, as to such property or assets for so long as such indebtedness shall be so secured. The foregoing restrictions do not apply to: (1) liens existing on June 21, 2000 securing indebtedness existing on June 21, 2000; (2) liens securing senior debt (including liens securing indebtedness outstanding under the credit agreement) and any guarantees thereof or indebtedness under any interest rate hedge or exchange or other similar agreement to the extent entered into to hedge any floating rate indebtedness permitted under the indenture, in each case to the extent that the indebtedness secured thereby is permitted to be incurred under the covenant described under "-- Limitation on Indebtedness" above; provided, however, that indebtedness under the credit agreement shall be deemed not to have been incurred in violation of such provisions for purposes of this clause (2) if the holder(s) of such indebtedness or their agent or representative shall have received a representation from us to the effect that the incurrence of such indebtedness does not violate such provision; (3) liens securing only the notes and the guarantees; (4) liens in favor of us or a guarantor; (5) liens to secure indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of the property (or any other capital expenditure financing) subject to such liens; provided, however, that (a) the aggregate principal amount of any indebtedness secured by such a lien does not exceed 100% of such purchase price or cost, (b) such lien does not extend to or cover any other property other than such item of property and any improvements on 34 such item, (c) the indebtedness secured by such lien is incurred by us within 180 days of the acquisition, construction or improvement of such property and (d) the incurrence of such indebtedness is permitted by the provisions of the indenture described under "-- Limitation on Indebtedness" above; (6) liens on property existing immediately prior to the time of acquisition thereof (and not created in anticipation or contemplation of the financing of such acquisition); (7) liens on property of a person existing at the time such person is acquired or merged with or into or consolidated with us or any such restricted subsidiary (and not created in anticipation or contemplation thereof); (8) liens to secure indebtedness incurred to extend, renew, refinance or refund (or successive extensions, renewals, refinancings or refundings), in whole or in part, any indebtedness secured by liens referred to in clauses (1) through (7), (9) through (12) and (14) of this paragraph so long as such liens do not extend to any other property and the principal amount of indebtedness so secured is not increased except for the amount of any premium required to be paid in connection with such renewal, refinancing or refunding pursuant to the terms of the indebtedness renewed, refinanced or refunded or the amount of any premium reasonably determined by us as necessary to accomplish such renewal, refinancing or refunding by means of a tender offer, exchange offer or privately negotiated repurchase, plus the expenses of the issuer of such indebtedness reasonably incurred in connection with such renewal, refinancing or refunding; (9) liens in favor of the trustee as provided for in the indenture on money or property held or collected by the trustee in its capacity as trustee; (10) liens securing a tax, assessment or other governmental charge or levy or the claim of a materialman, mechanic, carrier, warehouseman or landlord for labor, materials, supplies or rentals incurred in the ordinary course or business; (11) liens consisting of a deposit or pledge made in the ordinary course of business in connection with, or to secure payment of, obligations under workers compensation, unemployment insurance or similar legislation; (12) liens arising pursuant to an order of attachment, distraint or similar legal process arising in connection with legal proceedings; and (13) liens incurred in the ordinary course of business securing assets not having a fair market value in excess of $5.0 million. LIMITATION ON CERTAIN ASSET DISPOSITIONS The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, directly or indirectly, make one or more asset dispositions unless: (1) we or such restricted subsidiary, as the case may be, receive consideration for such asset disposition at least equal to the fair market value of the assets sold or disposed of as determined by our board of directors in good faith amid evidenced by a resolution of such board of directors filed with the trustee; (2) not less than 75% of the consideration for the disposition consists of (a) cash or readily marketable securities or the assumption of indebtedness (other than non-recourse indebtedness or any subordinated indebtedness) of ours or such restricted subsidiary or other obligations relating to such assets (and release of us or of such restricted subsidiary from all liability on the indebtedness or other obligations assumed) or (b) assets which constitute or are part of businesses which are related to our business or that of our restricted subsidiaries as of June 21, 2000 or which assets consist of the issued and outstanding capital stock of a person (which becomes a restricted subsidiary as a result of the transaction) the assets of which are principally comprised of such assets; and 35 (3) all net available proceeds, less any amounts invested within 360 days of such asset disposition in assets related to our business or that of our restricted subsidiaries (including in the capital stock of another person (other than any person that is our restricted subsidiary immediately prior to such investment); provided, however, that immediately after giving effect to any such investment in capital stock (and not prior thereto) such person shall be our restricted subsidiary), (a) are applied, on or prior to the 360th day after such asset disposition, unless and to the extent that we shall determine to make an offer to purchase, to the permanent reduction and prepayment of any senior debt of ours or of any of our subsidiaries then outstanding (including a permanent reduction of commitments in respect thereof) or (b) are committed to the repayment, on a date no later than substantially concurrently with the consummation of an offer to purchase, of any indebtedness which is pari passu in right of payment with the notes on a pro rata basis with the notes. Any net available proceeds from any asset disposition which is subject to the preceding paragraph that are not applied or committed as provided in the preceding paragraph shall be used promptly after the expiration of the 360th day after such asset disposition, or promptly after we shall have earlier determined to not apply any net available proceeds therefrom as provided in clause (3) of the preceding paragraph, to make an offer to purchase outstanding notes at a purchase price in cash equal to 100% of their principal amount plus accrued interest to the purchase date. Notwithstanding the foregoing, we may defer making any offer to purchase outstanding notes until there are aggregate unutilized net available proceeds from asset dispositions otherwise subject to the two immediately preceding sentences equal to or in excess of $15.0 million (at which time, the entire unutilized net available proceeds from asset dispositions otherwise subject to the two preceding paragraphs, and not just the amount in excess of $15.0 million, shall be applied as required pursuant to this covenant). Any remaining net available proceeds following the completion of the required offer to purchase (and any concurrent offer to repurchase pari passu indebtedness) may be used by us for any other purpose (subject to the other provisions of the indenture) and the amount of net available proceeds then required to be otherwise applied in accordance with this covenant shall be reset to zero, subject to any subsequent asset disposition. These provisions will not apply to a transaction consummated in compliance with the provisions of the indenture described under "-- Mergers, Consolidations and Certain Sales of Assets" below. In the event that we make an offer to purchase the notes, we shall comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. LIMITATION ON SENIOR SUBORDINATED INDEBTEDNESS The indenture provides that we will not: (1) directly or indirectly incur any indebtedness that by its terms would expressly rank senior in right of payment to the notes and expressly rank subordinate in right of payment to any senior debt and (2) permit a guarantor to, and no guarantor will, directly or indirectly incur any indebtedness that by its terms would expressly rank senior in right of payment to the guarantee of such guarantor and expressly rank subordinate in right of payment to any senior debt of such guarantor. LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES The indenture provides that we will not, and will not permit any of our restricted subsidiaries to transfer, convey, sell or otherwise dispose of any shares of capital stock of any of our restricted subsidiaries, except: (1) to us or to a wholly owned subsidiary; (2) issuances of director's qualifying shares or sales to foreign nationals of shares of capital stock of foreign restricted subsidiaries, to the extent required by applicable law; 36 (3) if immediately after giving effect to such issuance or sale, such restricted subsidiary would no longer constitute a restricted subsidiary and any investment in such person remaining after giving effect to such issuance or sale would have been permitted to be made under the "Limitation on Restricted Payments" covenant if made on the date of such issuance or sale; or (4) issuances or sales of common stock of a restricted subsidiary, provided that we apply or such restricted subsidiary applies the net available proceeds, if any, of any such sale in accordance with the provisions of the "Limitation on Certain Asset Dispositions" covenant described above. LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS The indenture provides that we will not, and will not permit any of our restricted subsidiaries to, enter into directly or indirectly any transaction with any of our respective affiliates or related persons (other than us or any of our restricted subsidiaries), including, without limitation, the purchase, sale, lease or exchange of property, the rendering of any service, or the making of any guarantee, loan, advance or investment, either directly or indirectly, involving aggregate consideration in excess of $2.0 million unless a majority of the disinterested directors of our board of directors determines, in its good faith judgment evidenced by a resolution of such board of directors filed with the trustee, that the terms of such transaction are at least as favorable as the terms that could be obtained by us or such restricted subsidiary, as the case may be, in a comparable transaction made on an arm's-length basis between unaffiliated parties; provided, however, that if the aggregate consideration is in excess of $20.0 million we shall also obtain, prior to the consummation of the transaction, the favorable opinion as to the fairness of the transaction to us or such restricted subsidiary, from a financial point of view from an independent financial advisor. The provisions of this covenant shall not apply to: (1) transactions permitted by the provisions of the indenture described above under the caption "-- Limitation on Restricted Payments" above; and (2) reasonable fees and compensation paid to, and indemnity provided on behalf of our officers, directors and employees and those of our restricted subsidiaries as determined in good faith by our board of directors or our authorized executive officers, as the case may be. CHANGE OF CONTROL Within 30 days following the date of the consummation of a transaction resulting in a change of control, we will commence an offer to purchase all outstanding notes at a purchase price in cash equal to 101% of their principal amount plus accrued interest to the purchase date. Such offer to purchase will be consummated not earlier than 30 days and not later than 60 days after the commencement thereof. Each holder shall be entitled to tender all or any portion of the notes owned by such holder pursuant to the offer to purchase, subject to the requirement that any portion of a note tendered must bear an integral multiple of $1,000 principal amount. A "change of control" will be deemed to have occurred in the event that (whether or not otherwise permitted by the indenture), after June 21, 2000: (1) any person or any persons acting together that would constitute a group (for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto) (a "group"), together with any affiliates or related persons thereof, other than any such person, persons. affiliates or related person who are permitted holders, shall "beneficially own" (as defined in Rule l3d-3 under the Exchange Act, or any successor provision thereto), directly or indirectly, at least (a) 50% of the voting power of our outstanding voting stock or (b) 40% of the voting power of our outstanding voting stock and in the case of clause (b) the permitted holders own less than such person or group (in doing the "own less than" comparison in this clause (b), the holdings of the permitted holders who are members of the new group shall not be counted in the shares held in the aggregate by permitted holders); provided that in no event shall a "governance change", within the meaning of the amended and restated limited liability company agreement of Tekni-Plex Partners and the limited liability company agreement of MST/TP Partners, in each case as in effect on June 21, 2000, be deemed to be a change of control under the indenture; 37 (2) any sale, lease or other transfer (in one transaction or a series of related transactions) is made by us or any of our restricted subsidiaries of all or substantially all of the consolidated assets of us and our restricted subsidiaries to any person; (3) we consolidate with or merge with or into another person or any person consolidates with, or merges with or into, us, in any such event pursuant to a transaction in which immediately after the consummation thereof persons owning a majority of our voting stock immediately prior to such consummation shall cease to own a majority of our voting stock, or, if we are not the surviving entity, a majority of the voting stock of such surviving entity; (4) continuing directors cease to constitute at least a majority of our board of directors; or (5) our stockholders approve any plan or proposal for our liquidation or dissolution. In no event would the sale of our common stock to an underwriter or a group of underwriters in privity of contract with us (or anybody in privity of contract with such underwriters) be deemed to be a change of control or be deemed the acquisition of more than 40% of the voting power of our outstanding voting stock by a person or any group unless such common stock is not held in an investment account in which case the investment account would be treated without giving effect to the foregoing part of this sentence. The indenture will acknowledge that, prior to the mailing of a notice to each holder regarding the offer to purchase, but in any event within 30 days following the date on which a change of control occurs, we will be obligated under the credit agreement as in effect on June 21, 2000 to: (1) repay in full all indebtedness under the credit agreement (and terminate all such commitments) or offer to repay in full all such indebtedness (and terminate all such commitments) and to repay the indebtedness owed to (and terminate the commitments of) each lender which has accepted such offer; or (2) obtain the requisite consents under the credit agreement to permit the repurchase of the notes as provided below. We will first comply with our obligations described in the preceding sentence before it will be required to offer to repurchase notes pursuant to the provisions described below, provided that nothing in the preceding paragraph or this paragraph shall eliminate our obligation to consummate an offer to purchase the notes within 90 days of the consummation of a transaction resulting in a change of control. In the event that we make an offer to purchase the notes, we shall comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. With respect to the sale of assets referred to in the definition of "change of control," the phrase "all or substantially all" of our assets will likely be interpreted under applicable law and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer of "all or substantially all" of our assets has occurred. In addition, no assurances can be given that we will be able to acquire notes tendered upon the occurrence of a change of control. Our ability to pay cash to the holders of notes upon a change of control may be limited by its then existing financial resources. The credit agreement will contain certain covenants prohibiting, or requiring waiver or consent of the lenders thereunder prior to, the repurchase of the notes upon a change of control and our future debt agreements may provide the same. If we do not obtain such waiver or consent to repay such indebtedness, we will remain prohibited from repurchasing the notes. In such event, our failure to purchase tendered notes would constitute an event of default under the indenture (without any further grace period) which would in turn constitute a default under the credit agreement and possibly other indebtedness. If such a cross-default leads to an acceleration of the obligations under the credit agreement or any other senior debt, the payment on the notes would be effectively subordinated to any such senior debt. None of the provisions relating to a repurchase upon a change of control are waivable by our board of directors or the trustee. The foregoing provisions will not prevent us from entering into transactions of the types described above with management or their affiliates. In addition, such provisions may not necessarily afford the holders of the 38 notes protection in the event of a highly leveraged transaction, including a reorganization, restructuring, merger or similar transaction involving us that may adversely affect the holders because such transactions may not involve a shift in voting power or beneficial ownership, or even if they do, may not involve a shift of the magnitude required under the definition of change of control to trigger the provisions. Nonetheless, such provisions may have the effect of deterring certain mergers, tender offers, takeover attempts or similar transactions by increasing the cost of such a transaction and may limit our ability to obtain additional equity financing in the future. FUTURE GUARANTORS The indenture provides that we shall not create or acquire, nor permit any of its domestic restricted subsidiaries to create or acquire, any domestic restricted subsidiary after June 21, 2000 unless, at the time such domestic restricted subsidiary has either assets or stockholder's equity in excess of $25,000, such domestic restricted subsidiary: (1) executes and delivers to the trustee a supplemental indenture in form reasonably satisfactory to the trustee pursuant to which such domestic restricted subsidiary shall unconditionally guarantee all of our obligations under the notes and the indenture on the terms set forth in the indenture; and (2) delivers to the trustee an opinion of counsel that such supplemental indenture has been duly authorized, executed and delivered by such domestic restricted subsidiary and constitutes a legal, valid, binding and enforceable obligation of such domestic restricted subsidiary. PROVISION OF FINANCIAL INFORMATION Whether or not we are subject to Section 13(a) or 15(d) of the Exchange Act, or any successor provision thereto, we shall file with the SEC the annual reports, quarterly reports and other documents which we would have been required to file with the SEC pursuant to such Section 13(a) or 15(d) or any successor provision thereto if we were so required, such documents to be filed with the SEC on or prior to the respective dates (the "required filing dates") by which we would have been required so to file such documents if we were so required. We shall also in any event: (1) within 15 days of each required filing date (a) transmit or cause to be transmitted by mail to all holders of notes, as their names and addresses appear in the note register, without cost to such holders, and (b) file with the trustee, copies of the annual reports, quarterly reports and other documents which we are required to file with the SEC pursuant to the preceding sentence; and (2) if, notwithstanding the preceding sentence, filing such documents by us with the SEC is not permitted under the Exchange Act, promptly upon written request supply copies of such documents to any prospective holder of notes. MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS We will not consolidate or merge with or into any person, or sell, assign, lease, convey or otherwise dispose of (or cause or permit any of our restricted subsidiaries to consolidate or merge with or into any person or sell, assign, lease, convey or otherwise dispose of) all or substantially all of our assets (determined on a consolidated basis for us and our restricted subsidiaries), whether as an entirety or substantially an entirety in one transaction or a series of related transactions, including by way of liquidation or dissolution, to any person unless, in each such case: (1) the entity formed by or surviving any such consolidation or merger (if other than us or such restricted subsidiary, as the case may be), or to which such sale, assignment, lease, conveyance or other disposition shall have been made (the "surviving entity"), is a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia; 39 (2) if there is a surviving entity, the surviving entity assumes by supplemental indenture all of our obligations (or in the case a restricted subsidiary is the surviving entity, the obligations of such restricted subsidiary) on the notes and under the indenture; (3) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, we or the surviving entity, as the case may be: (a) shall have a consolidated net worth equal to or greater than our consolidated net worth immediately prior to such transaction; and (b) could incur at least $1.00 of indebtedness pursuant to clause (1) of the provisions of the indenture described under "-- Limitation on Indebtedness" above. (4) immediately before and after giving effect to such transaction and treating any indebtedness which becomes an obligation of ours or of any of such restricted subsidiaries as a result of such transaction as having been incurred by us or such restricted subsidiary, as the case may be, at the time of the transaction, no default or event of default shall have occurred and be continuing; and (5) if, as a result of any such transaction, our property or assets or those of any of our restricted subsidiaries would become subject to a lien not excepted from the provisions of the indenture described under "-- Limitation on Liens" above, we, such Restricted Subsidiary or the Surviving Entity, as the case may be, shall have secured the notes as required by said covenant. The provisions of the foregoing paragraph shall not apply to any merger of any of our restricted subsidiaries with or into us or any of our wholly owned subsidiaries or any transaction pursuant to which a guarantor, is to be released in accordance with the terms of the guarantee and the indenture in connection with any transaction complying with the provisions of the indenture described under "-- Limitation on Certain Asset Dispositions" above. EVENTS OF DEFAULT The following are events of default under the indenture: (1) failure to pay principal of (or premium, if any, on) any note when due (whether or not prohibited by the provisions of the indenture described under "-- Ranking" above); (2) failure to pay any interest on any note when due, and the default continues for 30 days (whether or not prohibited by the provisions of the indenture described under "-- Ranking" above); (3) default in the payment of principal of and interest on notes required to be purchased pursuant to an offer to purchase as described under "-- Covenants -- Change of Control" and "-- Covenants -- Limitation on Certain Asset Dispositions" above when due and payable (whether or not prohibited by the provisions of the indenture described under "-- Ranking" above); (4) failure to perform or comply with any of the provisions described under "-- Covenants -- Mergers, Consolidations and Certain Sales of Assets" above; (5) failure to perform any other covenant or agreement of ours under the indenture or the notes and the default continues for 60 days after written notice to us by the trustee or holders of at least 25% in aggregate principal amount of outstanding notes; (6) default under the terms of one or more instruments evidencing or securing indebtedness of ours or of any of our restricted subsidiaries having an outstanding principal amount of $20 million or more individually or in the aggregate that has resulted in the acceleration of the payment of such indebtedness or failure to pay principal when due at the stated maturity of any such indebtedness; (7) the rendering of a final judgment or judgments (not subject to appeal) against us or any of our restricted subsidiaries in an amount of $10 million or more which remains undischarged or unstayed for a period of 60 days after the date on which the right to appeal has expired; 40 (8) certain events of bankruptcy, insolvency or reorganization affecting us or any of our material subsidiaries; and (9) any guarantee ceases to be in full force and effect or is declared null and void and unenforceable or is found to be invalid or a guarantor denies its liability under the guarantee (other than by reason of a release of such guarantor from the guarantee in accordance with the terms of the indenture and the guarantee). If an event of default (other than an event of default with respect to us described in clause (8) of the preceding paragraph) shall occur and be continuing, either the trustee or the holders of at least 25% in aggregate principal amount of the outstanding notes may accelerate the maturity of all notes; provided, however, that after such acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate principal amount of outstanding notes may, under certain circumstances, rescind and annul such acceleration if all events of default, other than the non-payment of accelerated principal, have been cured or waived as provided in the indenture; and provided, further, that so long as the credit agreement shall be in full force and effect, if an event of default shall have occurred and be continuing (other than as specified under clause (8) above), the notes shall not become due and payable until the earlier to occur of (x) five business days following delivery of a written notice of such acceleration of the notes to the agent under the credit agreement, if such event of default has not been cured prior to such fifth business day, and (y) the acceleration of any indebtedness under the credit agreement. If an event of default specified in clause (8) of the preceding paragraph with respect to us occurs, the outstanding notes will ipso facto become immediately due and payable without any declaration or other act on the part of the trustee or any holder. For information as to waiver of defaults, see "-- Modification and Waiver." The indenture provides that the trustee shall, within 30 days after the occurrence of any default or event of default with respect to the notes, give the holders thereof notice of all uncured defaults or events of default known to it; provided, however, that, except in the case of an event of default or a default in payment with respect to the notes or a default or event of default in complying with "-- Covenants -- Mergers, Consolidations and Certain Sales of Assets," the trustee shall be protected in withholding such notice if and so long as the board of directors or responsible officers of the trustee in good faith determine that the withholding of such notice is in the interest of the holders of the notes. No holder of any note will have any right to institute any proceeding with respect to the indenture or for any remedy thereunder, unless such holder shall have previously given to the trustee written notice of a continuing event of default and unless the holders of at least 25% in aggregate principal amount of the outstanding notes shall have made written request, and offered reasonable indemnity, to the trustee to institute such proceeding as trustee, and the trustee shall not have received from the holders of a majority in aggregate principal amount of the outstanding notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a holder of a note for enforcement of payment of the principal of and premium, if any, or interest on such note on or after the respective due dates expressed in such note. We are required to furnish to the trustee annually a statement as to its performance of certain of its obligations under the indenture and as to any default in such performance. SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE We may terminate our substantive obligations and the substantive obligations of the guarantors in respect of the notes and the guarantees by delivering all outstanding notes to the trustee for cancellation and paying all sums payable by us on account of principal of, premium, if any, and interest on all notes or otherwise. In addition to the foregoing, we may, provided that no default or event of default has occurred and is continuing or would arise therefrom (or, with respect to a default or event of default specified in clause (8) of "-- Events of Default" above, any time on or prior to the 91st calendar day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 91st day)) and provided that no default under any senior debt would result therefrom, terminate our substantive obligations and the substantive obligations of the guarantors in respect of the notes and the guarantees (except for our obligation 41 to pay the principal of (and premium, if any, on) and the interest on the notes and such guarantors's guarantee thereof) by: (1) depositing with the trustee, under the terms of an irrevocable trust agreement, money or United States government obligations sufficient (without reinvestment) to pay all remaining indebtedness on the notes; (2) delivering to the trustee either an opinion of counsel or a ruling directed to the trustee from the Internal Revenue Service to the effect that the holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and termination of obligations; (3) delivering to the trustee an opinion of counsel to the effect that our exercise of our option under this paragraph will not result in us, the trustee or the trust created by our deposit of funds pursuant to this provision becoming or being deemed to be an "investment company" under the Investment Company Act of 1940, as amended; and (4) complying with certain other requirements set forth in the indenture. In addition, we may, provided that no default or event of default has occurred, and is continuing or would arise therefrom (or, with respect to a default or event of default specified in clause (8) of "-- Events of Default" above, any time on or prior to the 91st calendar day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 91st day)) and provided that no default under any senior debt would result therefrom, terminate all of our substantive obligations and all of the substantive obligations of the guarantors in respect of the notes and the guarantees (including our obligation to pay the principal of (and premium, if any, on) and interest on the notes and such guarantor's guarantee thereof by: (1) depositing with the trustee, under the terms of an irrevocable trust agreement, money or United States Government obligations sufficient (without reinvestment) to pay all remaining indebtedness on the notes; (2) delivering to the trustee either a ruling directed to the trustee from the Internal Revenue Service to the effect that the holders of the notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and termination of obligations or an opinion of counsel based upon such a ruling addressed to the trustee or a change in the applicable federal tax law since the date of the indenture, to such effect; (3) delivering to the trustee an officers' certificate and an opinion of counsel to the effect that our exercise of our option under this paragraph will not result in us, the trustee or the trust created by our deposit of funds pursuant to this provision becoming or being deemed to be an "investment company" under the Investment Company Act of 1940, as amended; and (4) complying with certain other requirements set forth in the indenture. We may make an irrevocable deposit pursuant to this provision only if at such time it is not prohibited from doing so under the subordination provisions of the indenture or certain covenants in the instruments governing senior debt and we have delivered to the trustee and any paying agent an officers's certificate to that effect, GOVERNING LAW The indenture, the notes and the guarantees are governed by the laws of the State of New York without regard to principles of conflicts of laws. 42 MODIFICATION AND WAIVER Modifications and amendments of the indenture may be made by us and the trustee with the consent of the holders of a majority in aggregate principal amount of the outstanding notes; provided, however, that no such modification or amendment may, without the consent of the holder of each note affected thereby: (1) change the stated maturity of the principal of or any installment of interest on any note or alter the optional redemption or repurchase provisions of any note or the indenture in a manner adverse to the holders of the notes; (2) reduce the principal amount of (or the premium) of any note; (3) reduce the rate of or extend the time for payment of interest on any note; (4) change the place or currency of payment of principal of (or premium) or interest on any note; (5) modify any provisions of the indenture relating to the waiver of past defaults (other than to add sections of the indenture subject thereto) or the right of the holders to institute suit for the enforcement of any payment on or with respect to any note or the guarantee, or the modification and amendment of the indenture and the notes (other than to add sections of the indenture or the notes which may not be amended, supplemented or waived without the consent of each holder affected); (6) reduce the percentage of the principal amount of outstanding notes necessary for amendment to or waiver of compliance with any provision of the indenture or the notes or for waiver of any default; (7) waive a default in the payment of principal of, interest on, or redemption payment with respect to, any note (except a rescission of acceleration of the notes by the holders as provided in the indenture and a waiver of the payment default that resulted from such acceleration); (8) modify the ranking or priority of the notes or the guarantee, or modify the definition of senior debt or designated senior debt or amend or modify the subordination provisions of the indenture in any manner adverse to the holders; (9) release the guarantors from any of their respective obligations under the guarantee or the indenture otherwise than in accordance with the indenture; or (10) modify the provisions relating to any offer to purchase required under the covenants described under "-- Covenants -- Limitation on Certain Asset Dispositions" or "-- Covenants -- Change of Control" in a manner materially adverse to the holders of notes with respect to any asset disposition that has been consummated or change of control that has occurred. The holders of a majority in aggregate principal amount of the outstanding notes, on behalf of all holders of notes, may waive compliance by us with certain restrictive provisions of the indenture. Subject to certain rights of the trustee, as provided in the indenture, the holders of a majority in aggregate principal amount of the outstanding notes, on behalf of all holders of notes, may waive any past default under the indenture, except a default in the payment of principal, premium or interest or a default arising from failure to purchase any note tendered pursuant to an offer to purchase, or a default in respect of a provision that under the indenture cannot be modified or amended without the consent of the holder of each outstanding note affected. THE TRUSTEE The indenture provides that, except during the continuance of a default, the trustee will perform only such duties as are specifically set forth in the indenture. During the existence of a default, the trustee will exercise such rights and powers vested in it under the indenture and use the same degree of care and skill in their exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The indenture and provisions of the Trust Indenture Act incorporated by reference therein contain limitations on the rights of the trustee, should it become our creditor, the guarantors, or any other obligor upon the notes, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claim as security or otherwise. The trustee is permitted to engage in other transactions with us or 43 an affiliate of ours; provided, however, that if it acquires any conflicting interest (as defined in the indenture or in the Trust Indenture Act), it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the indenture or the registration rights agreement. Reference is made to the indenture or the registration rights agreement for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired indebtedness" means, with respect to any person, indebtedness of such person (1) existing at the time such person becomes a restricted subsidiary; (2) assumed in connection with the acquisition of assets from another person; or (3) incurred in connection with, or in contemplation of, such person becoming a restricted subsidiary or such acquisition, as the case may be. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with any specified person. For purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset disposition" means any sale, transfer or other disposition (including, without limitation, by merger, consolidation or sale-and-leaseback transaction) of: (1) shares of capital stock of any of our restricted subsidiaries (other than directors' qualifying shares); or (2) our property or assets or the property or assets of any of our restricted subsidiaries other than in the ordinary course of business; provided, however, that an asset disposition shall not include: (a) any sale, transfer or other disposition of shares of capital stock, property or assets by any of our restricted subsidiaries to us or to any of our wholly owned subsidiaries; (b) any sale, transfer or other disposition of defaulted receivables for collection or any sale, transfer or other disposition of property or assets in the ordinary course of business; (c) any isolated sale, transfer or other disposition that does not involve aggregate consideration in excess of $5 million individually; (d) the grant in the ordinary course of business of any non-exclusive license of patents, trademarks, registrations therefor and other similar intellectual property; (e) any lien (or foreclosure thereon) securing indebtedness to the extent that such lien is granted in compliance with "-- Covenants -- Limitation on Liens" above; (f) any restricted payment permitted by "-- Covenants -- Limitation on Restricted Payments" above; (g) any disposition of assets or property in the ordinary course of business to the extent such property or assets are obsolete, worn-out or no longer useful in our business or that of any of our restricted subsidiaries; (h) the sale, lease, conveyance or disposition or other transfer of all or substantially all of our assets as permitted under "-- Covenants -- Mergers, Consolidations and Certain Sales of Assets" above; provided, that the assets not so sold, leased, conveyed, disposed of or otherwise transferred shall be deemed an asset disposition; or (i) any disposition that constitutes a change of control. 44 "Average life" means, as of the date of determination, with respect to any indebtedness for borrowed money or preferred stock, the quotient obtained by dividing (1) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal or liquidation value payments of such indebtedness or preferred stock, respectively, and the amount of such principal or liquidation value payments, by (2) the sum of all such principal or liquidation value payments. "Bankruptcy Code" means Title 11 of United States Code. "Capital lease obligations" of any person means the obligations to pay rent or other amounts under a lease of (or other indebtedness arrangements conveying the right to use) real or personal property of such Person which are required to be classified and accounted for as a capital lease or liability on the face of a balance sheet of such Person in accordance with GAAP. The amount of such obligations shall be the capitalized amount thereof in accordance with GAAP and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Capital stock" of any person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock of such person. "Common stock" of any person means capital stock of such person that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such person, to shares of capital stock of any other class of such person. "Consolidated cash flow available for fixed charges" of any person means for any period the consolidated net income of such person for such period increased (to the extent consolidated net income for such period has been reduced thereby) by the sum of (without duplication): (1) consolidated interest expense of such person for such period, plus (2) consolidated income tax expense of such person for such period, plus (3) the consolidated depreciation and amortization expense included in the income statement of such person prepared in accordance with GAAP for such period, plus (4) any other non-cash charges to the extent deducted from or reflected in consolidated net income except for any non-cash charges that represent accruals of, or reserves for, cash disbursements to be made in any future accounting period. "Consolidated cash flow ratio" of any person means for any period the ratio of: (1) consolidated cash flow available for fixed charges of such person for such period, to (2) the sum of: (a) consolidated interest expense of such person for such period, plus (b) the annual interest expense with respect to any indebtedness proposed to be incurred by such person or our restricted subsidiaries, minus (c) consolidated interest expense of such person to the extent included in clause (2)(a) with respect to any indebtedness that will no longer be outstanding as a result of the incurrence of the indebtedness proposed to be incurred, plus (d) the annual interest expense with respect to any other indebtedness incurred by such person or our restricted subsidiaries since the end of such period to the extent not included in clause (2)(a), minus (e) consolidated interest expense of such person to the extent included in clause (2)(a) with respect to any indebtedness that no longer is outstanding as a result of the incurrence of the indebtedness referred to in clause (2)(d). 45 In making such computation, the consolidated interest expense of such person attributable to interest on any indebtedness bearing a floating interest rate shall be computed on a pro forma basis as if the rate in effect on the date of computation (after giving effect to any hedge in respect of such indebtedness that will, by its terms, remain in effect until the earlier of the maturity of such indebtedness or the date one year after the date of such determination) had been the applicable rate for the entire period. In the event such person or any of its restricted subsidiaries has made any asset dispositions or acquisitions of assets not in the ordinary course of business (including acquisitions of other persons by merger, consolidation or purchase of capital stock) during or after such period and on or prior to the date of measurement, such computation shall be made on a pro forma basis as if the asset dispositions or acquisitions had taken place on the first day of such period. Calculations of pro forma amounts in accordance with this definition shall be done in accordance with Article 11 of Regulation S-X under the Securities Act or any successor provision and may include reasonably ascertainable cost savings. "Consolidated income tax expense" of any person means for any period the consolidated provision for income taxes of such person and its restricted subsidiaries for such period calculated on a consolidated basis in accordance with GAAP. "Consolidated interest expense" for any person means for any period, without duplication: (1) the consolidated interest expense included in a consolidated income statement (without deduction of interest or finance charge income) of such person and its restricted subsidiaries for such period calculated on a consolidated basis in accordance with GAAP and (2) dividend requirements of such person and its restricted subsidiaries with respect to disqualified stock and with respect to all other preferred stock of restricted subsidiaries of such person (in each case whether in cash or otherwise (except dividends payable solely in shares of capital stock of such person or such restricted subsidiary)) paid, accrued or accumulated during such period times a fraction the numerator of which is one and the denominator of which is one minus the then effective consolidated federal, state and local tax rate of such person, expressed as a decimal. "Consolidated net income" of any person means for any period the consolidated net income (or loss) of such person and its restricted subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided, however, that there shall be excluded therefrom: (1) the net income (or loss) of any person acquired by such person or a restricted subsidiary of such person in a pooling-of-interests transaction for any period prior to the date of such transaction; (2) the net income (but not net loss) of any restricted subsidiary of such person which is subject to restrictions which prevent or limit the payment of dividends or the making of distributions to such person to the extent of such restrictions (regardless of any waiver thereof); (3) non-cash gains and losses due solely to fluctuations in currency values; (4) the net income of any person that is not a restricted subsidiary of such person, except to the extent of the amount of dividends or other distributions representing such person's proportionate share of such other person's net income for such period actually paid in cash to such person by such other person during such period; (5) gains but not losses on asset dispositions by such person or its restricted subsidiaries; (6) all extraordinary gains and losses determined in accordance with GAAP; and (7) in the case of a successor to the referent person by consolidation or merger or as a transferee of the referent person's assets, any earnings (or losses) of the successor corporation prior to such consolidation, merger or transfer of assets. 46 "Consolidated net worth" of any person means the consolidated stockholders' equity of such person, determined on a consolidated basis in accordance with GAAP, less (without duplication) amounts attributable to disqualified capital stock of such person. "Continuing director" means a director who either was a member of our board of directors on June 21, 2000 or who became one of our directors subsequent to the issue date and whose election, or nomination for election by our stockholders, was duly approved by a majority of the continuing directors then on our board of directors in accordance with the investors' agreement or otherwise, either by a specific vote or by approval of the proxy statement issued by us on behalf of our entire board of directors in which such individual is named as nominee for director. "Credit agreement" means the amended and restated credit agreement, to be dated as of June 21, 2000, among us, as borrower thereunder, and Morgan Guaranty Trust Company of New York, as agent on behalf of itself and the others named therein, and any deferrals, renewals, extensions, replacements, refinancings or refundings thereof, or amendments, modifications or supplements thereto or replacements thereof (including, without limitation, any amendment increasing the amount borrowed thereunder) and any agreement providing therefor whether by or with the same or any other lender, creditors, or group of creditors and including related notes, guarantee agreements, security agreements and other instruments and agreements executed in connection therewith. "Default" means any event that is, or after notice or lapse of time or both would become, an event of default. "Designated senior debt" means (1) so long as the credit agreement is in effect, the senior debt incurred thereunder and (2) thereafter, any other senior debt which has at the time of initial issuance an aggregate outstanding principal amount in excess of $25.0 million which has been so designated as designated senior debt by our board of directors at the time of initial issuance in a resolution delivered to the trustee. "Disqualified stock" of any person means any capital stock of such person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity of the notes (other than pursuant to change of control provisions similar to those applicable to the notes, provided that such provisions expressly provide that no payment can be made on such stock until any offer to purchase required pursuant to the provisions described under "-- Change of Control" above shall have been consummated and paid in full). "Domestic restricted subsidiary" means any of our restricted subsidiaries organized and existing under the laws of the United States, any state thereof or the District of Columbia. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the Commission thereunder. "GAAP" means generally accepted accounting principles, consistently applied, as in effect on June 21, 2000 in the United States of America, as set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as is approved by a significant segment of the accounting profession in the United States. "Guarantee" means the guarantee of the senior subordinated notes by each guarantor under the indenture. "Guarantor" means (1) each domestic restricted subsidiary on June 21, 2000 with assets or stockholder's equity in excess of $25,000 and (2) each domestic restricted subsidiary, if any, of ours formed or acquired after the issue date, which pursuant to the terms of the indenture executes a supplement to the indenture as a guarantor. 47 "Incur" means, with respect to any indebtedness or other obligation of any person, to create, issue, incur (including by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such indebtedness or other obligation on the balance sheet of such person (and "incurrence," "incurred" and "incurring" shall have meanings correlative to the foregoing). Indebtedness of any person or any of its restricted subsidiaries existing at the time such person becomes our restricted subsidiary (or is merged into or consolidates with us or any of our restricted subsidiaries), whether or not such indebtedness was incurred in connection with, or in contemplation of, such person becoming our restricted subsidiary (or being merged into or consolidated with us or any of our restricted subsidiaries), shall be deemed incurred at the time any such person becomes our restricted subsidiary or merges into or consolidates with us or any of our restricted subsidiaries. "Indebtedness" means (without duplication), with respect to any person, whether recourse is to all or a portion of the assets of such person and whether or not contingent: (1) every obligation of such person for money borrowed; (2) every obligation of such person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (3) every reimbursement obligation of such person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such person outstanding for more than 15 days; (4) every obligation of such person issued or assumed as the deferred purchase price of property or services outstanding for more than 15 days (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith); (5) every capital lease obligation of such person; (6) every net obligation under interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements of such person; and (7) every obligation of the type referred to in clauses (1) through (6) of another person and all dividends of another person the payment of which, in either case, such person has guaranteed or is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise. Indebtedness shall include the liquidation preference and any mandatory redemption payment obligations in respect of any of our disqualified stock owned by any person other than us or any of our restricted subsidiaries, and any preferred stock of any of our restricted subsidiaries. Indebtedness shall never be calculated taking into account any cash and cash equivalents held by such person. Indebtedness shall not include obligations arising from agreements of ours or of any of our restricted subsidiaries to provide for indemnification, adjustment of purchase price, earn-out, or other similar obligations, in each case, incurred or assumed in connection with the disposition of any business or assets of any of our restricted subsidiaries. The amount outstanding at any time of any indebtedness issued with original issue discount is the face amount of such indebtedness less the remaining unamortized portion of the original issue discount of such indebtedness at such time as determined in accordance with GAAP. "Investment" by any person means any direct or indirect loan, advance, guarantee or other extension of credit (excluding credit balances in bank accounts or similar accounts with other financial institutions) or capital contribution to (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise), or purchase or acquisition of capital stock, bonds, notes, debentures or other securities or evidence of indebtedness issued by any other person. "Investors' agreement" means the investors' agreement be dated as of June 21, 2000 among Tekni-Plex, Tekni-Plex Partners, MST/TP Partners, Dr. Smith, Michael F. Cronin and Tekni-Plex Management as in effect on June 21, 2000. 48 "Issue date" means the original issue date of the notes offered by this offering memorandum. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Material subsidiary" means, at any date of determination, any subsidiary that, together with its subsidiaries, (1) for our most recent fiscal year accounted for more than 5% of our consolidated revenues or (2) as of the end of such fiscal year, was the owner of more than 5% of our consolidated assets, all as set forth on our most recently available consolidated financial statements for such fiscal year prepared in conformity with GAAP. "Moody's" means Moody's Investors Service, Inc. or any successor to its debt rating business. "Net available proceeds" from any asset disposition by any person means cash or readily marketable securities received (including by way of sale or discounting of a note, installment receivable or other receivable, but excluding any other consideration received in the form of assumption by the acquiror of indebtedness or other obligations relating to such properties or assets or received in any other non-cash form) therefrom by such person, including any cash received by way of deferred payment or upon the monetization or other disposition of any non-cash consideration (including notes or other securities) received in connection with such asset disposition, net of: (1) all legal, title and recording tax expenses, commissions and other fees and expenses incurred and all federal, state, foreign and local taxes required to be accrued as a liability as a consequence of such asset disposition; (2) all payments made by such person or its restricted subsidiaries on any indebtedness which is secured by such assets in accordance with the terms of any lien upon or with respect to such assets or which must by the terms of such lien, or in order to obtain a necessary consent to such asset disposition or by applicable law, be repaid out of the proceeds from such asset disposition; (3) all payments made with respect to liabilities associated with the assets which are the subject of the asset disposition, including, without limitation, trade payables and other accrued liabilities; (4) appropriate amounts to be provided by such person or any restricted subsidiary thereof, as the case may be, as a reserve in accordance with GAAP against any liabilities associated with such assets and retained by such person or any restricted subsidiary thereof, as the case may be, after such asset disposition, including, without limitation, liabilities under any indemnification obligations and severance and other employee termination costs associated with such asset disposition, until such time as such amounts are no longer reserved or such reserve is no longer necessary (at which time any remaining amounts will become net available proceeds to be allocated in accordance with the provisions of clause (3) of the covenant of the indenture described under "-- Covenants -- Limitation on Certain Asset Dispositions"); and (5) all distributions and other payments made to minority interest holders in restricted subsidiaries of such person or joint ventures as a result of such asset disposition. "Net investment" means the excess of: (1) the aggregate amount of all Investments in unrestricted subsidiaries or joint ventures made by us or any restricted subsidiary on or after June 21, 2000 (in the case of an investment made other than in cash, the amount shall be the fair market value of such investment as determined in good faith by our board of directors or such restricted subsidiary); over (2) the aggregate amount returned in cash on or with respect to such investments whether through interest payments, principal payments, dividends or other distributions or payments; 49 provided, however, that such payments or distributions shall not be (and have not been) included in subclause (b) of clause (3) of the first paragraph described under "-- Covenants Limitation on Restricted Payments", provided, further that with respect to all Investments made in any unrestricted subsidiary or joint venture the amounts referred to in clause (2) above with respect to such investments shall not exceed the aggregate amount of all such investments made in such unrestricted subsidiary or joint venture. "Offer to purchase" means a written offer (the "offer") sent by us by first class mail, postage prepaid, to each holder at his address appearing in the register for the notes on the date of the offer offering to purchase up to the principal amount of notes specified in such offer at the purchase price specified in such offer (as determined pursuant to the indenture). Unless otherwise required by applicable law, the offer shall specify an expiration date (the "expiration date") of the offer to purchase which shall be not less than 30 days nor more than 60 days after the date of such offer and a settlement date (the "purchase date") for purchase of notes within five business days after the expiration date. We shall notify the trustee at least 15 business days (or such shorter period as is acceptable to the trustee) prior to the mailing of the offer of our obligation to make an offer to purchase, and the offer shall be mailed by us or, at our request, by the trustee in the name and at our expense. The offer shall contain all the information required by applicable law to be included therein. The offer shall contain all instructions and materials necessary to enable such holders to tender notes pursuant to the offer to purchase. The offer shall also state: (1) the section of the indenture pursuant to which the offer to purchase is being made; (2) the expiration date and the purchase date; (3) the aggregate principal amount of the outstanding notes offered to be purchased by us pursuant to the offer to purchase (including, if less than 100%, the manner by which such amount has been determined pursuant to the section of the indenture requiring the offer to purchase) (the "purchase amount"); (4) the purchase price to be paid by us for each $1,000 aggregate principal amount of notes accepted for payment (as specified pursuant to the indenture) (the "purchase price"); (5) that the holder may tender all or any portion of the notes registered in the name of such holder and that any portion of a note tendered must be tendered in an integral multiple of $1,000 principal amount; (6) the place or places where notes are to be surrendered for tender pursuant to the offer to purchase; (7) that interest on any note not tendered or tendered but not purchased by us pursuant to the offer to purchase will continue to accrue; (8) that on the purchase date the purchase price will become due and payable upon each note being accepted for payment pursuant to the offer to purchase and that interest thereon shall cease to accrue on and after the purchase date; (9) that each holder electing to tender all or any portion of a note pursuant to the offer to purchase will be required to surrender such note at the place or places specified in the offer prior to the close of business on the expiration date (such note being, if we or the trustee so require, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to us and the trustee duly executed by, the holder thereof or his attorney duly authorized in writing); (10) that holders will be entitled to withdraw all or any portion of notes tendered if we (or our paying agent) receive, not later than the close of business on the fifth business day next preceding the expiration date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of the note the holder tendered, the certificate number of the note the holder tendered and a statement that such holder is withdrawing all or a portion of his tender; 50 (11) that (a) if notes in an aggregate principal amount less than or equal to the purchase amount are duly tendered and not withdrawn pursuant to the offer to purchase, we shall purchase all such notes and (b) if notes in an aggregate principal amount in excess of the purchase amount are tendered and not withdrawn pursuant to the offer to purchase, we shall purchase notes having an aggregate principal amount equal to the purchase amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only notes in denominations of $1,000 or integral multiples thereof shall be purchased); and (12) that in the case of any holder whose note is purchased only in part, we shall execute and the trustee shall authenticate and deliver to the holder of such note without service charge, a new note or notes, of any authorized denomination as requested by such holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the note so tendered. An offer to purchase shall be governed by and effected in accordance with the provisions above pertaining to any offer. "Permitted holder" means: (1) Dr. F. Patrick Smith, Kenneth W.R. Baker and (a) entities controlled by such persons, (b) trusts for the benefit of such individual persons or the spouses, issue. parents or other relatives of such individual persons and (c) in the event of the death of any such individual person, heirs or testamentary legatees of such Person; and (2) Tekni-Plex Partners and entities controlled by such person. For purposes of this definition, "control," as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Permitted investments" means: (1) investments in marketable, direct obligations issued or guaranteed by the United States of America, or any governmental entity or agency or political subdivision thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), maturing within one year of the date of purchase; (2) investments in commercial paper issued by corporations or financial institutions maturing within 180 days from the date of the original issue thereof, and rated "P-1" or better by Moody's or "A-1" or better by S&P or an equivalent rating or better by any other nationally recognized securities rating agency; (3) investments in certificates of deposit issued or acceptances accepted by or guaranteed by any bank or trust company organized under the laws of the United States of America, any state thereof, the District of Columbia, Canada or any province thereof, in each case having a combined capital, surplus and undivided profits totaling more than $500,000,000, maturing within one year of the date of purchase; (4) investments representing capital stock or obligations issued or otherwise transferred to us or any of our restricted subsidiaries in the course of the good faith settlement of claims against any other Person or by reason of a composition or readjustment of debt or a reorganization of any of our debtors or those of any of our restricted subsidiaries; (5) deposits, including interest-bearing deposits, maintained in the ordinary course of business in banks; (6) any investment in any person; provided, however, that (a) after giving effect to any such investment such person shall become our restricted subsidiary or (b) such person is merged with or into, or substantially all of such person's assets are transferred to, us or any of our restricted subsidiaries; 51 (7) receivables and prepaid expenses, in each ease arising in the ordinary course of business; provided, however, that such receivables and prepaid expenses would be recorded as assets of such person in accordance with GAAP; (8) endorsements for collection or deposit in the ordinary course of business by such person of bank drafts and similar negotiable instruments of such other Person received as payment for ordinary course of business trade receivables; (9) any interest swap or hedging obligation with an unaffiliated person otherwise permitted by the indenture; (10) investments received as consideration for an asset disposition in compliance with the provisions of the indenture described under "-- Covenants -- Limitation on Certain Asset Dispositions" above; (11) investments in restricted subsidiaries or by virtue of which a person becomes a restricted subsidiary (including under circumstances in which equity interests in a restricted subsidiary are acquired from third parties subsequent to such person becoming a restricted subsidiary pursuant to the terms of any merger or acquisition or similar agreement in existence at the time such person became a restricted subsidiary); and (12) loans and advances to our employees or those of any of our restricted subsidiaries in the ordinary course of business. "Person" means any individual, corporation, limited or general partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred stock", as applied to the capital stock of any person, means capital stock of such person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such person, to shares of capital stock of any other class of such person. "Purchase date" has the meaning set forth in the definition of "offer to purchase" above. "Recapitalization" means the transactions contemplated to occur prior to, on and immediately after June 21, 2000 by the recapitalization agreement dated as of April 12, 2000 among us, Tekni-Plex Partners LLC, MST/TP Partners, L.P. and the other parties thereto (including the exhibits thereto). "Related person" of any person means any other person directly or indirectly owning (1) 5% or more of the outstanding common stock of such person (or, in the case of a person that is not a corporation, 5% or more of the equity interest in such person) or (2) 5% or more of the combined voting power of the Voting Stock of such person. "Restricted subsidiary" means any of our subsidiaries other than an unrestricted subsidiary. "S&P" means Standard & Poor's Ratings Group or any successor to its debt rating business. "Senior debt" means, with respect to any person at any date: (1) in the case of us or a guarantor, all indebtedness and other obligations under the credit agreement, including, without limitation, principal, premium, if any, and interest on such indebtedness and all other amounts due on or in connection with such indebtedness including all charges, fees and expenses; (2) all other indebtedness of such person for money borrowed, including principal, premium, if any, and interest on such indebtedness, unless the instrument under which such indebtedness for money borrowed is created, incurred, assumed or guaranteed expressly provides that such indebtedness for money borrowed is not senior or superior in right of payment to the notes, and all renewals, extensions, modifications, amendments, refinancing or replacements thereof and all other indebtedness of such 52 person of the types referred to in clauses (3), (4) (not including obligations issued or assumed as the deferred purchase price of services) and (6) of the definition of indebtedness; and (3) all interest on any indebtedness referred to in clauses (1) and (2) accruing during, or which would accrue but for, the pendency of any bankruptcy or insolvency proceeding, whether or not allowed thereunder. Notwithstanding the foregoing, senior debt shall not include: (1) indebtedness which is pursuant to its terms or any agreement relating thereto or by operation of law subordinated or junior in right of payment or otherwise to any other indebtedness of such person; provided, however, that no indebtedness shall be deemed to be subordinate or junior in right of payment or otherwise to any other indebtedness of a person solely by reason of such other indebtedness being secured and such indebtedness not being secured; (2) the notes; (3) any indebtedness of such person to any of its subsidiaries; (4) indebtedness incurred in violation of the provisions of the indenture described under "-- Covenants -- Limitation on Indebtedness"; provided, however, that indebtedness under the credit agreement shall be deemed not to have been incurred in violation of such provisions for purposes of this clause (4) if the holder(s) of such indebtedness or their agent or representative shall have received a representation from us to the effect that the incurrence of such indebtedness does not violate such provision; and (5) any indebtedness which, when incurred and without respect to any election under Section 1111(b) of the Bankruptcy Code, is without recourse to us. "Subordinated indebtedness" means any indebtedness (whether outstanding on the date hereof or hereafter incurred) which is by its terms expressly subordinate or junior in right of payment to the notes. "Subsidiary" of any person means: (1) a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by such person or by one or more other subsidiaries of such person or by such person and one or more other subsidiaries thereof; or (2) any other person (other than a corporation) in which such person, or one or more other subsidiaries of such person or such person and one or more other subsidiaries thereof, directly or indirectly, have at least a majority ownership and voting power relating to the policies, management and affairs thereof. "Unrestricted subsidiary" means: (1) any subsidiary of ours formed or acquired after June 21, 2000 that at the time of determination is designated an unrestricted subsidiary by the board of directors in the manner provided below; and (2) any subsidiary of an unrestricted subsidiary. Any such designation by the board of directors will be evidenced to the trustee by promptly filing with the trustee a copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing provisions. Our board of directors may not designate any subsidiary of ours to be an unrestricted subsidiary if, after such designation: (1) we or any other restricted subsidiary (a) provides credit support for, or a guarantee of, any indebtedness of such subsidiary (including any undertaking, agreement or instrument evidencing such indebtedness) or (b) is directly or indirectly liable for any indebtedness of such subsidiary; (2) a default with respect to any indebtedness of such subsidiary (including any right which the holders thereof may have to take enforcement action against such subsidiary) would permit (upon notice, 53 lapse of time or both) any holder of any other indebtedness of ours or of any restricted subsidiary to declare a default on such other indebtedness or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity; or (3) such subsidiary owns any capital stock of, or owns or holds any lien on any property of, any restricted subsidiary which is not a subsidiary of the subsidiary to be so designated. "Voting stock" of any person means the capital stock of such person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES In the opinion of Davis Polk & Wardwell, the following are the material United States federal income tax consequences of ownership and disposition of the notes. This discussion only applies to: - notes purchased by those initial holders who exchange old notes for new notes pursuant to the exchange offer and purchased the old notes at the "issue price", which was the first price to the public (not including bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers) at which a substantial amount of the old notes was sold for money; - notes held as capital assets for United States federal income tax purposes; and - notes held by holders that are for United States federal income tax purposes: - citizens or residents of the United States; - corporations, or other entities taxable as corporations for United States federal income tax purposes, created or organized in or under the laws of the United States or of any political subdivision thereof; or - estates or trusts whose income is subject to United States federal income taxation regardless of its source. This discussion does not describe all of the tax consequences that may be relevant to a holder's particular circumstances or to holders subject to special rules, such as: - certain financial institutions; - insurance companies; - tax-exempt organizations; - dealers in securities or foreign currencies; - persons holding notes as part of a hedge; - holders whose functional currency is not the U.S. dollar; - United States expatriates; - partnerships or other entities classified as partnerships for U.S. federal income tax purposes; or - persons subject to the alternative minimum tax. This discussion is based on the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein, possibly on a retroactive basis. 54 HOLDERS OF NOTES ARE URGED TO CONSULT THEIR TAX ADVISERS WITH REGARD TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. EXCHANGE OF NOTES The exchange of old notes for new notes pursuant to the exchange offer will not result in any United States federal income tax consequences to holders. When a holder exchanges an old note for a new note pursuant to the exchange offer, the holder will have the same adjusted basis and holding period in the new note as in the old note immediately before the exchange. HOLDERS CONSIDERING THIS EXCHANGE OFFER ARE URGED TO CONSULT THEIR TAX ADVISERS WITH REGARD TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. INTEREST INCOME The notes were not issued with "original issue discount" within the meaning of Section 1273 of the Code. A holder will recognize interest paid on a note as ordinary income at the time it accrues or is received in accordance with the holder's method of accounting for United States federal income tax purposes. DISPOSITION OF NOTES Upon the sale, exchange (other than the exchange of an old note for a new note) or retirement of a note, a holder will recognize taxable gain or loss equal to the difference between the amount realized on the disposition of the note (excluding any amount attributable to accrued but unpaid interest, which is treated as interest income as described in the previous paragraph) and the holder's adjusted tax basis in the note. A holder's adjusted tax basis in a note will generally equal the cost of the note to the holder, reduced by any principal payments received by the holder. Gain or loss realized on the sale, exchange or retirement of a note will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange or retirement the note has been held for more than one year. Holders should consult their tax advisors regarding the treatment of capital gains and losses. BACKUP WITHHOLDING AND INFORMATION REPORTING Information returns may be filed with the Internal Revenue Service in connection with payments on the notes and the proceeds from a sale or other disposition of the notes. A holder may be subject to backup withholding on these payments if the holder fails to provide its taxpayer identification number and comply with certain certification procedures, or fails to establish an exemption from backup withholding otherwise. The amount of any backup withholding will be allowed as a credit against the holder's United Sates federal income tax liability and may entitle the holder to a refund, provided that the required information is furnished to the Internal Revenue Service. PLAN OF DISTRIBUTION Prior to the exchange offer, there has been no market for any of the new notes. The old notes are eligible for trading in the Private Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market. There can be no assurance that an active trading market will develop for, or as to the liquidity of, any of the old notes or the new notes. Each participating broker-dealer that receives new notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a participating broker-dealer in connection with resales of new notes received in exchange for old notes where such old notes were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 55 180 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any participating broker-dealer for use in connection with any such resale. We will not receive any proceeds from any sales of the new notes by participating broker-dealers. New notes received by participating broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchaser or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such participating broker-dealer and/or the purchasers of any such new notes. Any participating broker-dealer that resells the new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a participating broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. LEGAL MATTERS The validity of the notes offered hereby will be passed upon for Tekni-Plex by Davis Polk & Wardwell, New York, New York. EXPERTS The consolidated financial statements and schedules of Tekni-Plex incorporated by reference in this prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their report incorporated by reference, and are incorporated herein in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Exchange Act, and we file periodic reports and other information with the SEC. Our obligation to file periodic reports and other information with the SEC will be suspended if the notes are held of record by fewer than 300 holders as of the beginning of any fiscal year of Tekni-Plex. We have also agreed that, whether or not we are required to do so by the rules and regulations of the SEC, for so long as any of the notes remain outstanding, we will furnish to the noteholders and following the consummation of the exchange offer file with the SEC (unless the SEC will not accept such a filing); - all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if we were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" and, with respect to the annual information only, a report thereon by our certified independent accountants and - all reports that would be required to be filed with the SEC on Form 8-K if we were required to file such reports. In addition, for so long as any of the notes remain outstanding, we will make available to any prospective purchaser of the notes or beneficial owner of the notes in connection with any sale thereof the information required by Rule 144(d)(4) under the Securities Act. Under the indenture, we will file with the trustee annual, quarterly and other reports within 15 days after we file such reports with the SEC. Further, to the extent that we furnish annual, quarterly or other financial reports to stockholders generally, we will mail such reports to holders of notes. We will furnish annual and quarterly financial reports to our stockholders and will mail such reports to holders of notes pursuant to the indenture. Annual reports delivered to the trustee and the noteholders will contain financial information that has been examined and reported upon, with an opinion 56 expressed by an independent public or certified public accountant. We will also furnish such other reports as may be required by law. WE WILL PROMPTLY PROVIDE WITHOUT CHARGE TO YOU, UPON ORAL OR WRITTEN REQUEST, A COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS. TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO LATER THAN , 2003, OR FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE, IF THE EXCHANGE OFFER IS EXTENDED. REQUESTS SHOULD BE DIRECTED TO: TEKNI-PLEX, INC. 260 NORTH DENTON TAP ROAD COPPELL, TEXAS 75019 TELEPHONE: (972) 304-5077 FACSIMILE: (972) 304-6297 Our SEC filings are available over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities: Public Reference Room Office 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 You may also obtain copies of the documents at prescribed rates by writing to the Public Reference section of the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the operations of the public reference facilities. The SEC allows us to "incorporate by reference" into this prospectus the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference or deemed incorporated by reference is considered to be part of this prospectus. Information that we file with the SEC after the date of this prospectus will update and supersede this information. We incorporate by reference the documents listed below: - Our Annual Report on Form 10-K for the year ended June 28, 2002. - Our Annual Report on Form 10-K/A for the year ended June 28, 2002. - Our Quarterly Report on Form 10-Q for the quarter ended September 27, 2002. - Our Quarterly Report on Form 10-Q/A for the quarter ended September 27, 2002. - Our Quarterly Report on Form 10-Q for the quarter ended December 27, 2002. - Our Quarterly Report on Form 10-Q/A for the quarter ended December 27, 2002. - Our Quarterly Report on Form 10-Q for the quarter ended March 28, 2003. A copy of our most recent annual report on Form 10-K and 10-K/A and quarterly reports on Form 10-Q accompany this prospectus as well as being incorporated into this prospectus by reference. 57 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $40,000,000 TEKNI-PLEX, INC. OFFER TO EXCHANGE ALL OUTSTANDING 12 3/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2010 FOR 12 3/4% SENIOR SUBORDINATED NOTES DUE 2010 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms that are sufficiently broad to permit indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. Tekni-Plex's certificate of incorporation contains a provision eliminating the personal liability of its directors to the company or its shareowners for breach of fiduciary duty as a director to the fullest extent permitted by applicable law. Tekni-Plex's bylaws provide for the mandatory indemnification of our directors and officers to the maximum extent permitted by Delaware law. Tekni-Plex's bylaws also provide (i) that we may expand the scope of the indemnification by individual contracts with our directors and officers, and (ii) that we shall not be required by law, if the proceeding in which indemnification is sought was brought by a director or officer, it was authorized in advance by our board of directors, the indemnification is provided by us, in our sole discretion pursuant to powers vested in us under the Delaware law, or the indemnification is required by individual contract. In addition, our bylaws give us the power to indemnify our employees and agents to the maximum extent permitted by Delaware law. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc.* 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.* 3.3 Certificate of Incorporation of PureTec Corporation.* 3.4 By-laws of PureTec Corporation* 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.* 3.6 By-laws of Tri-Seal Holding, Inc.* 3.7 Certificate of Incorporation of Natvar Holdings, Inc.* 3.8 By-laws of Natvar Holdings.* 3.9 Certificate of Incorporation of Plastic Specialities and Technologies, Inc.* 3.10 By-laws of Plastic Specialities and Technologies, Inc.* 3.11 Certificate of Incorporation of Plastic Specialities and Technologies Investments, Inc.* 3.12 By-laws of Plastic Specialities and Technologies Investments, Inc.* 3.13 Certificate of Incorporation of Burlington Resins, Inc.* 3.14 By-laws of Burlington Resins, Inc.* 3.15 Certificate of Incorporation of Pure Tech APR, Inc.* 3.16 By-laws of Pure Tech APR, Inc.* 3.17 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.** 3.18 By-laws of TPI Acquisition Subsidiary, Inc.** 3.19 Certificate of Incorporation of Coast Recycling North, Inc.* 3.20 By-laws of Coast Recycling North, Inc.* 3.21 Certificate of Incorporation of Distributors Recycling, Inc.* 3.22 By-laws of Distributors Recycling, Inc.* 3.23 Certificate of Incorporation of REI Distributors, Inc.* 3.24 By-laws of REI Distributors, Inc.* 3.25 Certificate of Incorporation of Pure Tech Recycling of California.* 3.26 By-laws of Pure Tech Recycling of California.*
II-1
3.27 Certificate of Incorporation of Alumet Smelting Corp.* 3.28 By-laws of Alumet Smelting Corp.* 3.29 Certificate of Incorporation of TP/Elm Acquisition Subsidiary, Inc.** 3.30 By-laws of TP/Elm Acquisition Subsidiary, Inc.** 4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee.* 4.2 First Supplemental Indenture, dated as of May 6, 2002 among Tekni-Plex, Inc., TPI Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee** 4.3 Second Supplemental Indenture, dated as of August 22, 2002 among Tekni-Plex, Inc., TP/Elm Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee** 4.4 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1). 4.5 Purchase Agreement, dated as of May 1, 2002 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc.** 4.6 Registration Right Agreement, dated as of May 6, 2002 among Tekni-Plex, Inc., the Guarantors listed therein and Lehman Brothers Inc.** 5 Opinion of Davis Polk & Wardwell.**** 8 Opinion of Davis Polk & Wardwell as to tax matters.**** 10.1 Credit Agreement, dated as of June 21, 2000, 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.* 12.1 Statement regarding Computation of Ratios.**** 13.1 Annual Report on Form 10-K for the year ended June 28, 2002*** 13.2 Annual Report on Form 10-K/A for the year ended June 28, 2002.**** 13.3 Quarterly Report on Form 10-Q for the quarter ended September 27, 2002.**** 13.4 Quarterly Report on Form 10-Q/A for the quarter ended September 27, 2002.**** 13.5 Quarterly Report on Form 10-Q for the quarter ended December 27, 2002**** 13.6 Quarterly Report on Form 10-Q/A for the quarter ended December 27, 2002.**** 13.7 Quarterly Report on Form 10-Q for the quarter ended March 28, 2003,**** 23.1 Consent of BDO Seidman LLP.**** 23.2 Consents of Davis Polk & Wardwell (included in Exhibits 5 and 8). 24.1 Power of Attorney (included on page II-4). 25.1 Statement of Eligibility of Trustee, HSBC Bank USA, on Form T-1.**** 99.1 Form of Letter of Transmittal.** 99.2 Form of Notice of Guaranteed Delivery.** 99.3 Form of Tender Instructions.** 99.4 Form of Exchange Agent Agreement.** 99.5 Instruction to Registered Holders and/or Book-Entry Transfer Facility Participants.** 99.6 Broker's Letter to Clients.** 99.7 Exchange Offer Cover Letter.**
- --------------- * Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-43800) filed on August 15, 2000. ** Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-98561) filed on August 22, 2002. *** Filed previously as an Exhibit to Amendment No. 1 of our Registration Statement on Form S-4 (File No. 333-98561) filed on October 25, 2002. **** Filed herewith. II-2 ITEM 22. UNDERTAKINGS (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act or 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (d) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Tekni-Plex, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. TEKNI-PLEX, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer ------------------------------------------------ F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating Officer ------------------------------------------------ (principal financial and accounting officer) Kenneth W.R. Baker ARTHUR P. WITT* Director and Corporate Secretary ------------------------------------------------ Arthur P. Witt J. ANDREW MCWETHY* Director ------------------------------------------------ J. Andrew McWethy MICHAEL F. CRONIN* Director ------------------------------------------------ Michael F. Cronin JOHN S. GEER* Director ------------------------------------------------ John S. Geer *By: /s/ F. PATRICK SMITH ------------------------------------------ F. Patrick Smith Attorney-in-fact
II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, PureTec Corporation, a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. PURETEC CORPORATION By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer ------------------------------------------------ F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating Officer ------------------------------------------------ (principal financial and accounting officer) Kenneth W.R. Baker
II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Tri-Seal Holdings, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. TRI-SEAL HOLDINGS, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer ------------------------------------------------ F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating Officer ------------------------------------------------ (principal financial and accounting officer) Kenneth W.R. Baker
II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Natvar Holdings, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. NATVAR HOLDINGS, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Plastics Specialties and Technologies, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. PLASTICS SPECIALTIES AND TECHNOLOGIES, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Plastics Specialties and Technologies Investments, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. PLASTICS SPECIALTIES AND TECHNOLOGIES INVESTMENTS, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Burlington Resins, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. BURLINGTON RESINS, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Pure Tech APR, Inc., a New York corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. PURE TECH APR, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, TPI Acquisition Subsidiary, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. TPI ACQUISITION SUBSIDIARY, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-12 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Coast Recycling North, Inc., a California corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. COAST RECYCLING NORTH, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Distributors Recycling, Inc., a New Jersey corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. DISTRIBUTORS RECYCLING, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - --------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, REI Distributors, Inc., a New Jersey corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. REI DISTRIBUTORS, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - ----------------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-15 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, PureTech Recycling of California, a California corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. PURE TECH RECYCLING OF CALIFORNIA By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - ----------------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-16 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Alumet Smelting Corp., a New Jersey corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. ALUMET SMELTING CORP. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER Director, President and Chief Operating - ----------------------------------------------------- Officer (principal financial and accounting Kenneth W.R. Baker officer)
II-17 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, TP/Elm Acquisition Subsidiary, Inc., a Delaware corporation, has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Coppell, Texas on May 21, 2003. TP/ELM ACQUISITION SUBSIDIARY, INC. By: /s/ F. PATRICK SMITH ------------------------------------ Name: F. Patrick Smith Title: Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, Amendment No. 2 to this Registration Statement has been signed below on the 21st day of May, 2003 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - ----------------------------------------------------- Officer F. Patrick Smith /s/ KENNETH W. R. BAKER Director, President and Chief Operating - ----------------------------------------------------- Officer (principal financial and accounting Kenneth W. R. Baker officer)
II-18 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc.* 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.* 3.3 Certificate of Incorporation of PureTec Corporation.* 3.4 By-laws of PureTec Corporation.* 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.* 3.6 By-laws of Tri Seal Holdings, Inc.* 3.7 Certificate of Incorporation of Natvar Holdings, Inc.* 3.8 By-laws of Natvar Holdings.* 3.9 Certificate of Incorporation of Plastic Specialities and Technologies, Inc.* 3.10 By-laws of Plastic Specialities and Technologies, Inc.* 3.11 Certificate of Incorporation of Plastic Specialities and Technologies Investments, Inc.* 3.12 By-laws of Plastic Specialities and Technologies Investments, Inc.* 3.13 Certificate of Incorporation of Burlington Resins, Inc.* 3.14 By-laws of Burlington Resins, Inc.* 3.15 Certificate of Incorporation of Pure Tech APR, Inc.* 3.16 By-laws of Pure Tech APR, Inc.* 3.17 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.** 3.18 By-laws of TPI Acquisition Subsidiary, Inc.** 3.19 Certificate of Incorporation of Coast Recycling North, Inc.* 3.20 By-laws of Coast Recycling North, Inc.* 3.21 Certificate of Incorporation of Distributors Recycling, Inc.* 3.22 By-laws of Distributors Recycling, Inc.* 3.23 Certificate of Incorporation of REI Distributors, Inc.* 3.24 By-laws of REI Distributors, Inc.* 3.25 Certificate of Incorporation of Pure Tech Recycling of California.* 3.26 By-laws of Pure Tech Recycling of California.* 3.27 Certificate of Incorporation of Alumet Smelting Corp.* 3.28 By-laws of Alumet Smelting Corp.* 3.29 Certificate of Incorporation of TP/Elm Acquisition Subsidiary, Inc.** 3.30 By-laws of TP/Elm Acquisition Subsidiary, Inc.** 4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee.* 4.2 First Supplemental Indenture, dated as of May 6, 2002 among Tekni-Plex, Inc., TPI Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee** 4.3 Second Supplemental Indenture, dated as of August 22, 2002 among Tekni-Plex, Inc., TP/Elm Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee** 4.4 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1). 4.5 Purchase Agreement, dated as of May 1, 2002 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc.** 4.6 Registration Right Agreement, dated as of May 6, 2002 among Tekni-Plex, Inc., the Guarantors listed therein and Lehman Brothers Inc.** 5 Opinion of Davis Polk & Wardwell.**** 8 Opinion of Davis Polk & Wardwell as to tax matters.**** 10.1 Credit Agreement, dated as of June 21, 2000, 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.*
EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 12.1 Statement regarding Computation of Ratios.**** 13.1 Annual Report on Form 10-K for the year ended June 28, 2002.*** 13.2 Annual Report on Form 10-K/A for the year ended June 28, 2002.**** 13.3 Quarterly Report on Form 10-Q for the quarter ended September 27, 2002.**** 13.4 Quarterly Report on Form 10-Q/A for the quarter ended September 27, 2002.**** 13.5 Quarterly Report on Form 10-Q for the quarter ended December 27, 2002.**** 13.6 Quarterly Report on Form 10-Q/A for the quarter ended December 27, 2002.**** 13.7 Quarterly Report on Form 10-Q for the quarter ended March 28, 2003.**** 23.1 Consent of BDO Seidman LLP.**** 23.2 Consents of Davis Polk & Wardwell (included in Exhibits 5 and 8). 24.1 Power of Attorney (included on page II-4). 25.1 Statement of Eligibility of Trustee, HSBC Bank USA, on Form T-1.**** 99.1 Form of Letter of Transmittal.** 99.2 Form of Notice of Guaranteed Delivery.** 99.3 Form of Tender Instructions.** 99.4 Form of Exchange Agent Agreement.** 99.5 Instruction to Registered Holders and/or Book-Entry Transfer Facility Participants.** 99.6 Broker's Letter to Clients.** 99.7 Exchange Offer Cover Letter.**
- --------------- * Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-43800) filed on August 15, 2000. ** Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-98561) filed on August 22, 2002. *** Filed previously as an Exhibit to Amendment No. 1 to our Registration Statement on Form S-4 (File No. 333-98561) filed on October 25, 2002. **** Filed herewith. EX-5 3 y61170a2exv5.txt OPINION OF DAVIS POLK & WARDWELL EXHIBIT 5 [DPW Letterhead] May 21, 2002 Tekni-Plex, Inc. 260 Denton Tap Road Coppell, TX 75019 Ladies and Gentlemen: We have acted as special counsel to Tekni-Plex, Inc., a Delaware corporation (the "Company"), in connection with the Company's offer (the "Exchange Offer") to exchange its 12.75% Series B Senior Subordinated Notes Due 2010 (the "New Securities") for any and all of its outstanding 12.75% Senior Subordinated Notes Due 2010 (the "Old Securities"). We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion. Upon the basis of the foregoing, we are of the opinion that the New Securities, when duly executed, authenticated and delivered in exchange for the Old Securities in accordance with the terms of the Indenture and the Exchange Offer, will be valid and binding obligations of the Company enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the General Corporation Law of the State of Delaware (including the statutory provisions, all applicable provisions of the Delaware Constitution and reported judicial decisions interpreting the foregoing), the laws of the State of New York and the federal laws of the United States of America. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement relating to the Exchange Offer. We also consent to the 1 reference to us under the caption "Legal Matters" in the Prospectus contained in such Registration Statement. Very truly yours, /s/Davis Polk & Wardwell 2 EX-8 4 y61170a2exv8.txt OPINION OF DAVIS POLK & WARDWELL Exhibit 8 [DAVIS POLK & WARDWELL LETTERHEAD] May 21, 2002 Tekni-Plex, Inc. 260 Denton Tap Road Coppell TX 75019 Ladies and Gentlemen: We have acted as special tax counsel to Tekni-Plex, Inc., a corporation incorporated under the laws of the State of Delaware (the "COMPANY"), in connection with the preparation and filing of the prospectus (the "PROSPECTUS") contained in amendment no. 2 to the registration statement of the Company on Form S-4 dated November 20, 2002 (File No. 333-98561) (the "REGISTRATION STATEMENT"). This opinion is being furnished in accordance with the requirements of Item 601(b)(8) of Regulation S-K of the Securities Act of 1933, as amended (the "ACT"). We have reviewed the discussion contained under the heading "United States Federal Income Tax Consequences" in the Prospectus. In our opinion, subject to the conditions and limitations set forth therein, this discussion accurately describes the United States federal income tax consequences of ownership and disposition of the notes offered pursuant to the Prospectus. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. We also consent to the reference to us under the caption "United States Federal Income Tax Consequences" in the Prospectus contained in such Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Davis Polk & Wardwell EX-12.1 5 y61170a2exv12w1.txt STATEMENT RE COMPUTATION OF RATIOS Exhibit 12.1 Tekni-Plex, Inc. and Subsidiary Computation of Ratios Ratio of Earnings to Fixed Charges
For the Years Ended For the Nine Months Ended ----------------------------------------------------- ------------------------- July 3, July 2, June 30, June 29, June 28, March 29, March 28, 1998 1999 2000 2001 2002 2002 2003 Net income (loss)................. $ 8,669 $14,997 $(20,968) $(18,994) $(6,587) $ (7,081) $ 4,364 Income tax provision (benefit).... 9,112 14,150 14,436 (7,069) 5,677 (3,820) 2,680 Interest.......................... 20,182 40,769 38,447 76,569 70,934 53,971 53,389 Unrealized loss on derivative contracts....................... -- -- -- 13,891 7,830 3,675 1,303 Extraordinary item................ -- -- 35,374 -- -- -- -- Earnings before fixed charges..... 37,963 69,916 67,289 64,397 77,854 46,745 61,736 Fixed charges..................... 20,182 40,769 38,447 76,569 70,934 53,971 53,389 Ratio of earnings to fixed charges......................... 1.9 1.7 1.8 -- 1.1 -- 1.2 Amount fixed charges exceeds earnings before fixed charges... -- -- -- 12,172 -- 7,226
EX-13.2 6 y61170a2exv13w2.txt ANNUAL REPORT ON FORM 10-K/A 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 JUNE 28, 2002 [ ] 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.)
260 NORTH DENTON TAP ROAD, COPPELL, TEXAS 75019 (Address of principal executive offices and zip code) (972) 304-5077 (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. ITEM 1. BUSINESS INTRODUCTION We were founded as a Delaware corporation in 1967 to acquire the General Felt Products division of Standard Packaging Corporation. At that time, we were located in Brooklyn, NY, where we produced laminated closure (cap) liners primarily for the pharmaceutical and food industries. Over the years, we have built a reputation for solving difficult packaging problems and providing customers with high quality, advanced packaging materials. In 1970, we built an additional manufacturing facility in Somerville, New Jersey, diversifying into the business of producing polystyrene foam trays for the poultry processing industry. In March 1994, Tekni-Plex was acquired by Dr. F. Patrick Smith and other investors. Dr. Smith was elected Chief Executive Officer. In April 1994, Mr. Kenneth W.R. Baker was appointed Chief Operating Officer. At that time, the principal product lines consisted of clear, high-barrier laminations for pharmaceutical blister packaging (which we refer to as clear blister packaging); closure liners, primarily for pharmaceutical end-uses; and foam processor trays primarily for the poultry industry. In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and business of Hargro Flexible Packaging Corporation. The Flemington plant utilized lamination and coating technology to produce packaging materials primarily for pharmaceutical products such as transdermal patches, sutures, iodine and alcohol swabs, aspirin and other physician samples. We relocated the Brooklyn equipment and business into the Flemington facility during 1996. The synergistic result of having complementary technologies in one location created a combined operation with considerably higher efficiencies and lower costs than the sum of the stand-alone operations. In February 1996, we expanded our food packaging business by completing our acquisition of Dolco Packaging Corp., a publicly-traded $81 million foam products company that 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. The Dolco acquisition also solidified our position as a leading supplier of foam processor trays. In August 1997, Dolco, which had been a wholly owned subsidiary of Tekni-Plex, was merged into Tekni-Plex. In July 1997, we acquired the business and operating facility of PurePlast Inc. of Cambridge, Ontario, Canada. PurePlast produced calendered polyvinyl chloride (vinyl) sheet primarily for food and electronics packaging applications. Following the acquisition, we diversified the end markets served by this location by developing proprietary formulations of vinyl sheet for vertical integration into our clear blister packaging business and for sale directly to our global pharmaceutical customers. In March 1998, Tekni-Plex acquired PureTec Corporation, a publicly-traded company with annual sales of $315 million. PureTec was a leading manufacturer of plastic packaging, products, and materials primarily for the healthcare and consumer markets. PureTec enjoyed leading market positions in its core products, including garden and irrigation hose, precision tubing and gaskets primarily for the aerosol packaging industry, vinyl medical tubing, and vinyl compounds for the production of medical devices. PureTec is a wholly-owned subsidiary of Tekni-Plex. In January 1999, we 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 and into our closure liner business. In April 1999, we acquired substantially all the assets of Natvar, a producer of disposable medical tubing and electric sheathing. As with Tri-Seal, the Natvar acquisition was intended to strengthen our existing core business and expand product offerings. The Natvar operation has been integrated into our medical tubing and industrial extrusions businesses. 2 In June 2000, we completed a recapitalization of Tekni-Plex. As part of the recapitalization, existing investors other than management sold most of their interests, and a group of new investors contributed an aggregate of $167 million in new equity and agreed to contribute up to $103 million in additional equity over the next five years. All members of management maintained 100% of their interests in the Company. Also, Tekni-Plex entered into a new credit agreement, issued $275 million in new senior subordinated notes, and repaid the debt that existed prior to the recapitalization. In October 2000, we acquired substantially all the assets of the Super Plastics division of RCR International Inc. Super Plastics is primarily a manufacturer of garden hose and has a manufacturing facility in Mississauga, Ontario Canada. The Super Plastics operations have been integrated with and into our garden hose business. In October 2001, we acquired substantially all of the assets of the garden hose business of Mark IV Industries, Inc. which operates under the name Swan Hose. Swan, which has one manufacturing facility located in Bucyrus, Ohio, enhanced Tekni-Plex's geographic coverage of the North American garden hose market. The Swan operations have been integrated with and into our garden hose business. In July 2002 we acquired substantially all of the assets of Elm Packaging Company. Elm produces polystyrene foam plates, bowls, and meat and bakery trays. The Elm acquisition significantly increases our capacity to produce foamed polystyrene products primarily for customers in the food packaging and foodservice markets. DESCRIPTION OF BUSINESS We are a global, diversified manufacturer of packaging, products, and materials, primarily for the food, healthcare and consumer markets. We have built leadership positions in our core markets, and focus on vertically integrated production of highly specialized products. Our operations are aligned under two business segments: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. Both segments have operations in the United States, Europe and Canada. We believe that our end market and product line diversity has the effect of reducing overall risk related to any single product or customer. Representative product lines in each of our business segments are listed below:
BUSINESS SEGMENT - ------------------------------------------------------------------------------------- INDUSTRIAL CONSUMER PACKAGING, PRODUCTS AND MATERIALS PACKAGING AND PRODUCTS --------------------------------- ---------------------- - - Laminated, clear high barrier blister packaging - Garden and irrigation hose - - Agricultural foam packaging - Precision tubing and gaskets - - Foamed egg cartons - Air hose - - Poultry and meat processor trays - - Foamed plates - - Closure liners - - Medical tubing - - Medical grade compounds - - Specialty PVC resins - - General purpose PVC compounds
3 COMPETITIVE STRENGTHS We believe that our competitive strengths include: - Strong customer relationships. We have long-standing relationships with many of our customers. We attribute our long-term customer relationships to our ability to consistently manufacture high quality products and provide a superior level of customer service. We routinely win customer awards for our superior products and customer service and have recently been recognized for supplier excellence by 3M Pharmaceuticals, Pfizer, Eli Lilly, Boston Scientific, Kraft Foods and Perdue Farms, among others. - Strong market positions in core businesses. We have a strong market presence in our core product lines. The following table shows what we believe to be our market position in the U.S. in our primary product lines:
PRODUCT MARKET POSITION ----------------------- Vinyl medical device materials................................................. 1 Vinyl medical tubing........................................................... 1 Laminated, clear, high barrier pharmaceutical blister packaging................ 1 Multi-layered co-extruded and laminated closure liners......................... 1 Garden and irrigation hose..................................................... 1 Precision tubing and gaskets for aerosol packaging............................. 1 Egg cartons.................................................................... 1 Foam processor trays........................................................... 2
- Experienced management team. Our management team has been successful in selecting and integrating strategic acquisitions as well as improving underlying business fundamentals. After significantly improving the business of Tekni-Plex following our 1994 acquisition, management successfully integrated both the Flemington and Dolco operations during 1996, the latter being a public company then nearly twice our size. During the same period, our Brooklyn operation was successfully merged into our Flemington plant. In 1997, we acquired and integrated the PurePlast operations. In 1998, we acquired PureTec, a public company then more than twice our size. In 1999, we acquired and integrated the assets and business of Tri-Seal and Natvar. In 2000 we acquired and integrated all of the assets of the Super Plastics division of RCR International, Inc. In 2001, we acquired and integrated the Swan Hose business of Mark IV Industries, Inc. Management has substantially improved the operating margins of each of these acquisitions. Members of our management team have integrated acquisitions, effected turnarounds, provided strategic direction and leadership, increased sales and market share, improved manufacturing efficiencies and productivity, and developed new technologies to enhance the competitive strengths of the companies they have managed. - Cost efficient producer. We continually focus on improving underlying operations and reducing costs. Since the 1994 acquisition, current management has improved our cost structure from an EBITDA margin of 8.5% with EBITDA of $3.8 million on sales of $44.9 million for the 12 months ended December 31, 1993 to an EBITDA margin of 20.0% with EBITDA of $115.6 million on sales of $577.7 million for the fiscal year ended June 28, 2002. Our acquisitions since 1995 have provided significant opportunities to realize cost savings and synergies in the combined businesses through the sharing of complementary technologies and manufacturing techniques, as well as economies of scale, including the purchase of raw materials. 4 - Producer of high quality, technically sophisticated products. We believe, based upon our knowledge and experience in the industry, we have a long-standing reputation as a manufacturer of high quality, high performance products, materials and primary packaging (where the packaging material comes into direct contact with the end product). Our emphasis on quality is evidenced by our product lines which address the more technically sophisticated areas of their respective markets. - Strong equity sponsorship. We have obtained a strong equity commitment from co-investors in conjunction with the recapitalization in June 2000. New investors agreed to $269.6 million in aggregate equity commitments to Tekni-Plex Partners, of which $167.0 million was contributed to consummate the recapitalization in June 2000. Of the remaining $102.6 million, $5.0 million was contributed in conjunction with our acquisition of Super Plastics in October 2000, and $30.0 million was contributed in June 2001 in anticipation of our announced acquisition of Mark IV's Swan Division. In October 2001, an additional $50.0 million was contributed to consummate the Swan Hose acquisition and in anticipation of our Elm acquisition. The remaining $17.6 million is available at least through June 2005 to be used for our general corporate purposes, including acquisitions. We believe that these equity commitments will provide us with significant flexibility to take advantage of business opportunities as they arise. In connection with the recapitalization, all members of our current management maintained their entire equity investment, which had an implied aggregate value, as of June 2000, of approximately $96.0 million. BUSINESS STRATEGY We seek to maximize our profitability and growth and take advantage of our competitive strengths by pursuing the following business strategy: - Ongoing cost reduction through technical process improvement. We have an ongoing program to improve manufacturing and other processes in order to drive down costs. Examples of cost improvement programs include: - material and energy conservation through enhanced process controls and advanced product design. - reduction in machine set-up time through the use of proprietary technology. - continual product line rationalization; and - development of backward and forward integration opportunities. - Internal growth through product line extension and improvement. We continually seek to improve and extend our product lines and leverage our existing technological capabilities in order to increase market share in existing markets, effectively penetrate new markets and improve profitability. Our strategy is to emphasize our expertise in providing packaging, products and materials with specific high performance characteristics through the development of various unique proprietary materials and proprietary manufacturing process techniques. - Growth through acquisitions. We will continue to pursue acquisitions selectively when the opportunity arises. Our objective is to pursue acquisitions that provide us with the opportunity to gain economies of scale and reduce costs through, among other things, technology sharing and synergistic cost reduction. 5 - Growth through international expansion. We believe that there is significant opportunity to expand our international sales, which currently represent approximately 10.5% of our total revenues. At present, we have manufacturing operations with attached sales offices in Belgium, Italy, The United Kingdom, Canada and Argentina. We have a regional sales office in Singapore covering southeast Asia, including the People's Republic of China. In addition, we have manufacturing liaisons and strategic supplier agreements in Japan, Germany and Italy and a manufacturing licensee in Japan. We have recently added sales representatives for Jordan, Saudi Arabia and the United Arab Emirate as well as in the Philippines and India to our existing representatives in Australia/New Zealand, South Africa, Central America, Brazil, Mexico, China (including Hong Kong) and Taiwan. We believe that our growing international presence, which is a combination of our own regional manufacturing and sales forces and independent sales representatives, will continue to generate opportunities to increase our sales. RECENT DEVELOPMENTS On July 10, 2002 Tekni-Plex acquired Elm Packaging Company for approximately $16.4 million in cash. The acquisition was structured as an acquisition of substantially all of the assets of Elm by a wholly-owned subsidiary of Tekni-Plex. Elm produces polystyrene foam packaging products such as plates, bowls, trays and hinged-lid containers for the food packaging and foodservice industries. Elm will become part of Tekni-Plex's Industrial Packaging, Products and Materials business segment. INDUSTRIAL PACKAGING, PRODUCTS AND MATERIALS SEGEMENT The Industrial Packaging, Products and Materials segment of our business had revenues of $317.7 million (55.0% total revenues) for the year ended June 28, 2002. Further details of the major markets served by this segment are given below: PHARMACEUTICAL BLISTER PACKAGING We believe that we are 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. We believe 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. Our high-barrier blister packaging is sold to major pharmaceutical companies (or their designated contract packagers). We market our full pharmaceutical product line directly on a worldwide basis, and have assembled a global network of sales and marketing personnel on six continents. In the clear blister packaging market, we have two principal competitors worldwide with resources equal to or greater than ours. However, we believe that neither of these competitors has the breadth of product offering to match ours, 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 pharmaceutical companies. Since approval requires that the drug be tested while packaged in the same packaging 6 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. FOAMED EGG CARTONS We believe that we are the leading manufacturer of egg cartons in the United States. Thermoformed foam polystyrene packaging has been the material of choice for food packaging cartons 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 into automated package filling operations. We sell these products through our direct sales force. In the egg packaging market, our primary competitor manufactures pulp-based egg cartons. We believe that we compete effectively based on product quality, performance and prompt delivery. Our customer base includes most of the domestic egg packagers (including those owned by egg retailers). POULTRY AND MEAT PROCESSOR TRAYS Our processor tray operations produce thermoformed foam polystyrene poultry and meat processor trays. We are a leading supplier of processor trays to the poultry industry. As with egg cartons, thermoformed foam polystyrene has been the material of choice for processor trays for the same reasons noted above. Within the polystyrene foam processor tray market, we compete principally with one large competitor, which has significantly greater financial resources than ours and who controls the largest share of this market. CLOSURE LINERS Tekni-Plex is also the leading producer of sophisticated extruded, co-extruded and laminated cap-liners and seals, known as closure liners, for glass and plastic bottles. Closure liners perfect the seal between a container and its closure, for example, between a bottle and its cap. The liner material has become an integral part of the container/closure package. Without the gasketing effect of the liner, most container/closure packages would not be secure enough to protect the contents from contamination or loss of product efficacy. We sell these products through our direct sales force primarily to packagers of pharmaceutical, healthcare and food products. We have two principal competitors in North America but also compete with several smaller companies having substantially smaller market shares. However, as a result of the Tri-Seal acquisition, we believe that we offer the widest range of liner materials in the industry. We remain competitive by focusing on product quality, performance and prompt delivery. MEDICAL TUBING We believe we are the leading non-captive supplier of vinyl medical tubing in North America and Europe. We manufacture medical tubing using proprietary plastic extrusion processes. The primary raw materials are proprietary compounds, which we produce. We specialize 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. New medical tubing products we have developed 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 7 use of microbore tubing will help eliminate critical dosage errors on the part of the non-professional caregiver or the patient. Medical tubing is sold primarily to manufacturers of medical devices that are packaged specifically for such procedures and applications. These products are sold through direct salespeople. We remain competitive by focusing on product quality, performance and prompt delivery. MEDICAL GRADE COMPOUNDS We believe that we are the leading non-captive producer of high quality vinyl compounds for use in the medical industry. Our chemists work closely with customers to develop compounds that address their specific requirements. Through this custom work, we have introduced a number of breakthroughs to the medical device industry by developing formulations with unique physical characteristics. For example, we recently developed a new family of flexible vinyl compounds designed to replace silicone rubber in a variety of medical tubing and commercial applications. 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. We sell these compounds in worldwide markets directly through our salespeople. The market for medical-grade vinyl compounds is highly specialized, and we have one smaller, but significant competitor. For more than 30 years, we have been supplying these specialized vinyl compounds for FDA-regulated applications. We believe that we compete effectively based on product quality, performance and prompt delivery. SPECIALTY VINYL RESINS Tekni-Plex manufactures specialty vinyl resins, with an annual production capacity of 100 million pounds. We employ specialized technology to produce dispersion, blending, and copolymer suspension resins for use by suppliers to a variety of industries, including floor covering, automotive sealants and adhesives, coil coatings, medical device materials, plastisol compounding and vinyl packaging. We sell these products through our direct sales force as well as through independent sales representatives. We compete with a number of large chemical companies offering greater breadth of products. However, we believe that we are building a relatively unique position in the specialty resins market by offering customized products for niche markets that the larger producers do not serve. We provide individual customer service and the highest standards of quality. CONSUMER PACKAGING AND PRODUCTS The Consumer Packaging and Products segment of our business had revenues of $260.1 million (45.0% of total revenues) for the year ended June 28, 2002. Further details of the major markets served by this segment are given below: GARDEN AND IRRIGATION HOSE PRODUCTS We believe that we are the leading producer of garden hose in North America. We have produced garden hose products for over fifty years, and produce its primary components internally, including proprietary material formulations and brass couplings. Innovations have included the patented Colorite(R) Evenflow(R) design and ultra high quality product lines that utilize medical-grade plastics. We also manufacture specialty hose products such as air hose and irrigator "soaker hose". 8 We sell these products primarily through our direct salespeople and also through independent representatives. Both private label and brand-name products are sold to the retail market, primarily to home centers, hardware cooperatives, food, automotive, drug and mass merchandising chains and catalog companies throughout the United States and Canada. Our customers include some of the fastest growing and the most widely respected retail chains in North America. Our market strategy is to provide a complete line of innovative, high-quality products along with superior customer service. 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. PRECISION TUBING AND GASKETS Our 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 us. The precision rubber gasket products, which we have 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, we have 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. Our precision tubing and gaskets product line is sold primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments. Sales to the aerosol valve and dispenser pump industries consist primarily of dip tubes, which transmit the contents of the container 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. These products are sold throughout the United States and Europe, as well as selected worldwide markets. Sales are made through our direct sales force. We believe that we are the leading precision tubing extruder in North America, and the leading supplier of aerosol valve and dispenser pump gaskets worldwide. We are 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. 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. 9 SALES, MARKETING AND CUSTOMERS Excluding customer service representatives, as of June 28, 2002, we had a total of 44 direct sales and marketing personnel covering both our domestic and international businesses. There were also commissioned independent sales representatives (not direct employees of Tekni-Plex) providing additional coverage. Overall customer concentration is low with no customer accounting for more than 10% of total sales and the top ten customers generating less than 32.3% of sales for the year ended June 28, 2002. MANUFACTURING As of June 28, 2002 we had strategically located manufacturing facilities throughout North America and Europe, totaling over 5.1 million square feet of floor space. We utilize many proprietary material formulations throughout our operations. These formulations provide superior processing and end-product performance characteristics, giving us a competitive edge across many of our businesses. Typically, these proprietary material formulations are protected by trade secret, as opposed to patents which, we believe, would be a less effective approach to maintaining our competitive edge. We utilize many proprietary, highly efficient manufacturing processes, developed by our own engineering staffs throughout our operations. We believe these processes allow us to make products with superior dimensional tolerances at higher speeds with lower waste factors than our competitors. Our various business units routinely share technological information regarding process and material formulation improvements, and actively seek new synergistic applications for newly developed technologies throughout our company. RAW MATERIALS We purchase raw materials from several sources that differ for each product line. We use commodity petrochemicals, primarily polyvinyl chloride, polystyrene, vinyl chloride monomer, polypropylene and polyethylene. All of these materials are widely available from numerous sources and we currently purchase them from multiple suppliers. This diversity of raw material suppliers, as well as the availability of alternative suppliers, has the effect of reducing our overall risk related to any one supplier. In the past we have generally been able to pass on raw materials cost increases to customers on a relatively timely basis. The exception has been garden hose products, the prices for which are typically set annually in advance of each season. To the extent that raw material costs increase more than anticipated, these additional costs generally cannot be passed on during that season. Conversely, we benefit from any decrease in raw material costs after garden hose prices have been set for the upcoming selling season. INTELLECTUAL PROPERTY We primarily rely on confidentiality agreements contained in our employment applications and the restriction of access to our plants and confidential information to safeguard our proprietary technology. Although we also file and register patents and trademarks, we do not believe that any of our patents or trademarks is material to our operations. EMPLOYEES As of June 28, 2002, the Company employed approximately 3,090 full-time employees. Approximately 33% of all employees are represented by various collective bargaining agreements that expire between August 2003 and March 2006. 10 ITEM 2. FACILITIES The Company believes that its facilities are suitable for their purposes 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 PRIMARY FUNCTION SQUARE FEET - -------- ---------------- ----------- Alliance, Ohio (5) Sales Offices 1,300 Auburn, Maine (4) Manufacturing 24,000 Belfast, Northern Ireland Manufacturing 47,580 Blauvelt, New York (8) Manufacturing 56,400 Burlington, New Jersey Manufacturing 124,000 Bucyrus, Ohio Manufacturing 587,649 Bucyrus, Ohio (3) Warehouse 150,000 Buenos Aires, Argentina (3) Manufacturing and warehouse 15,500 Cambridge, Ontario, Canada Manufacturing 25,000 City of Industry, California (4) Manufacturing 110,000 Clayton, North Carolina Manufacturing 76,000 Clinton, Illinois Manufacturing 69,000 Columbus, Ohio (5) Sales Offices 5,830 Coppell, Texas (6) Executive Offices 3,125 Dallas, Texas Manufacturing 139,000 Dalton, Georgia Manufacturing 40,000 Decatur, Indiana Manufacturing 187,000 East Farmingdale, New York (2) Manufacturing 56,556 Erembodegem (Aalst), Belgium Manufacturing 125,667 Flemington, New Jersey Manufacturing 145,000 Fullerton, California (3) Manufacturing and warehouse 109,750 Harrison, New Jersey (7) Warehouse 135,501 Lawrenceville, Georgia Manufacturing 150,000 Lawrenceville, Georgia (3) Warehouse 39,195 Livonia, Michigan (3) Manufacturing 60,000 McKenzie, Tennessee Manufacturing and warehouse 60,000 Memphis, Tennessee (8) Manufacturing and warehouse 149,800 Memphis, Tennessee (4) Warehouse 50,000 Milan (Gaggiano), Italy (6) Warehouse 12,920 Milan (Gaggiano), Italy (6) Manufacturing 14,900 Milan (Gaggiano), Italy Manufacturing 25,800 Milan (Rosate), Italy (2) Manufacturing 24,000 Mississauga, Ontario, Canada (10) Manufacturing 111,570 Mississauga, Ontario, Canada (4) Manufacturing 126,650 Piscataway, New Jersey (2) Manufacturing 155,000 Ridgefield, New Jersey Manufacturing 330,000 Rockaway, New Jersey Manufacturing 90,550 Schaumburg, Illinois (12) Manufacturing 59,100 Schiller Park, Illinois Manufacturing 15,232 Shelby, Ohio (3) Warehouse 350,000 Singapore (3) Sales Office 550 Somerville, New Jersey Manufacturing 172,000 Sparks, Nevada (9) Manufacturing 448,000 Tonawanda, New York (3) Manufacturing 32,000
11
APPROXIMATE LOCATION PRIMARY FUNCTION SQUARE FEET - -------- ---------------- ----------- Troy, Ohio (8) Manufacturing and warehouse 200,000 Waco, Texas Manufacturing 104,600 Wenatchee, Washington Manufacturing 97,000 Wenatchee, Washington (3) Warehouse 26,200 Wenatchee, Washington (1) Warehouse 8,000
- ---------- (Years relate to calendar years) (1) Leased on a month-to-month basis. (2) Lease expires in 2002. (3) Lease expires in 2003. (4) Lease expires in 2004. (5) Lease expires in 2005. (6) Lease expires in 2006. (7) Lease expires in 2007. (8) Lease expires in 2008. (9) Lease expires in 2012. (10) Lease expires in 2015. (11) Lease expires in 2019. (12) Lease expires in 2020. ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS We are regularly involved in legal proceedings arising in the ordinary course of business, none of which are currently expected to have a material adverse effect on our businesses, financial condition or results of operation. Like similar companies, our facilities, operations and properties are subject to foreign, federal, state, provincial and local laws and regulations relating to, among other things, emissions to air, discharges to water, the generation, handling, storage, transportation and disposal of hazardous and non-hazardous materials and wastes and the health and safety of employees. We maintain a primary commitment to employee health and safety, and environmental responsibility. Our intention and policy are to be at all times a responsible corporate citizen. Our management includes a Director of Environmental Affairs who is responsible for compliance with all foreign, federal, state and local laws and regulations relating to the environment, and health and safety. This director performs internal auditing procedures and provides direction to all local facility managers in the compliance areas. The Director of Environmental Affairs and our President direct outside environmental counsel and outside environmental consulting firms to ensure that regulations are properly interpreted and reporting requirements are met. We are also subject to environmental laws requiring the investigation and cleanup of environmental contamination. Currently, we are remediating contamination resulting from past industrial activity at three of our New Jersey facilities which we acquired from PureTec in 1998. This remediation is being conducted pursuant to the requirements of New Jersey's Industrial Site Recovery Act which were triggered by the 1998 PureTec transaction. We believe that any costs ultimately borne by us in connection with this remediation would not be material. Although we believe that, based on historical experience, the costs of achieving and maintaining compliance with environmental laws and regulations are unlikely to have a material adverse effect on our business, financial condition or results of operations, it is possible that we could incur significant fines, penalties, capital costs or other liabilities associated with any confirmed noncompliance or remediation of contamination or natural resource damage liability at or related to any of our current or former facilities, the precise nature of which we cannot now predict. 12 Furthermore, we cannot assure you that future environmental laws or regulations will not require substantial expenditures by us or significant modifications of our operations. 13 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, which appear elsewhere herein.
YEARS ENDED ----------- JULY 3, JULY 2, JUNE 30, JUNE 29, JUNE 28, 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- INCOME STATEMENT DATA: Net sales $ 316,332 $ 507,314 $ 524,817 $ 525,837 $ 577,749 Cost of goods sold 239,234 376,370 394,480 399,836 430,457 Gross profit 77,098 130,944 130,337 126,001 147,292 Selling, general and administrative expenses 39,220 62,534 58,343 60,999 69,444 Income from operations 37,878 68,410 71,994 65,002 77,848 Interest expense, net 19,682 38,977 38,447 76,569 70,934 Unrealized loss on derivative contracts -- -- -- 13,891 7,830 Other expense (income) 415 286 4,705 605 (6) Pre-tax income (loss) before extraordinary item 17,781 29,147 28,842 (26,063) (910) Income tax provision (benefit) 9,112 14,150 14,436 (7,069) 5,677 Income before extraordinary item 8,669 14,997 14,406 (18,994) (6,587) Extraordinary item (loss)(b) -- -- (35,374) -- -- Net income (loss) $ 8,669 $ 14,997 $ (20,968) $ (18,994) $ (6,587) BALANCE SHEET DATA (at period end): Working capital $ 84,897 $ 101,445 $ 145,879 $ 199,129 $ 216,919 Total Assets 539,279 559,436 574,789 621,494 700,153 Total debt (including current portion) 401,905 416,394 651,593 678,150 692,821 Stockholders' equity (deficit) 38,673 52,297 (149,150) (134,697) (91,111) OTHER FINANCIAL DATA: Depreciation and amortization $ 17,249 $ 35,343 $ 34,748 $ 37,670 $ 39,863 Capital expenditures 7,283 12,950 16,258 17,116 24,653 Cash flows: From operations 29,009 38,794 9,485 (3,266) 7,922 From investing (310,672) (58,089) (16,905) (26,777) (88,446) From financing 299,926 12,057 (1,687) 62,180 64,092 NON-GAAP FINANCIAL DATA: Adjusted EBITDA(a) $ 54,479 $ 101,681 $ 100,527 $ 100,064 $ 115,556 Adjusted EBITDA margin(a) 17.2% 20.0% 19.2% 19.0% 20.0%
14 (a) Adjusted EBITDA is defined as earnings before interest, unrealized loss on derivative contracts, income taxes, depreciation and amortization. Adjusted EBITDA is presented because it is a widely accepted financial indicator of the Company's ability to incur and service debt. However, Adjusted 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 Adjusted EBITDA may not be comparable to similar measures reported by other companies. Adjusted EBITDA margin is calculated as the ratio of Adjusted EBITDA to net sales for the period. (b) Net loss for the year ended June 30, 2000 includes an extraordinary loss of approximately $35,374. The extraordinary loss is comprised of prepayment penalties and other interest costs of $39,303, the write-off of deferred financing costs of $16,696 and other fees of $1,325, net of a tax benefit of $21,950. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with the "Selected Historical Financial Information" and the Financial Statements included elsewhere in this Annual Report. The table below sets forth, for the periods indicated, selected operating data as a percentage of net sales. SELECTED FINANCIAL INFORMATION (PERCENTAGE OF NET SALES)
YEAR ENDED JUNE 30, 2000 JUNE 29, 2001 JUNE 28, 2002 ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% Cost of sales 75.2 76.0 74.5 Gross profit 24.8 24.0 25.5 Selling, general and administrative expenses 11.1 11.6 12.0 Income from operations 13.7 12.4 13.5 Interest expense 7.3 14.6 12.3 Provision (Benefit) for income taxes 2.8 (1.3) 1.0 Income (loss) before extraordinary item 2.7 (3.6) (1.1) Extraordinary item (loss) (6.7) -- -- Net income (loss) (4.0) (3.6) (1.1) Depreciation and amortization 6.6 7.2 6.9
YEAR ENDED JUNE 28, 2002 COMPARED TO THE YEAR ENDED JUNE 29, 2001 Net Sales, increased to $577.7 million for the year ended June 28, 2002 from $525.8 million for the year ended June 29, 2001, representing an increase of $51.9 million or 9.9% due to the inclusion of sales generated by our Swan acquisition which closed in October 2001. Our increased sales were tempered somewhat by disappointing revenue in our garden hose business due to unusually adverse weather conditions in the June quarter, particularly along the East Coast, as well as continued softness in demand for our pharmaceutical blister packaging products due to a slowdown in new drug introductions in the United States. Our Industrial Segment reported a 1.9% decline in Net Sales to $317.7 million in the fiscal year ended June 28, 2002 compared to $323.8 million in the fiscal year ended June 29, 2001. The decline was the result of continued softness in sales to healthcare customers due to the general slowdown in new drug introductions by our pharmaceutical customers compared to recent historical norms. Our Consumer Segment's Net Sales increased by $58.1 million or 28.7%, to $260.1 million from $202.0 million last year, primarily due to our Swan acquisition. Cost of Goods Sold, increased to $430.5 million for the year ended June 28, 2002 from $399.8 million for the year ended June 29, 2001. Expressed as a percentage of Net Sales, Cost of Goods Sold decreased to 74.5% for the year ended June 28, 2002 compared to 76.0% for the year ended June 29, 2001. The decrease in Cost of Goods Sold as a percentage of Net Sales was due primarily to lower raw material costs. Gross Profit, as a result, increased to $147.3 million for the year ended June 28, 2002 from $126.0 million for the year ended June 29, 2001. The ratio of Gross Profit to Net Sales increased to 25.5% for the year ended June 28, 2002 from 24.0% for the year ended June 29, 2001. Our Industrial Segment Gross Profit increased by $3.8 million to $74.3 million from $70.6 million in the fiscal year ending June 28, 2002 primarily due to lower raw material costs and improved operating efficiencies. Measured as a percentage of Net Sales our Industrial Segment Gross Profit increased to 23.4% for the year ended June 28, 2002 from 21.8% for the year ended June 29, 2001. Our Consumer Segment Gross Profit increased by $17.5 million to $73.0 million from $55.4 million in the fiscal year ending June 28, 2002 primarily due to our Swan acquisition. Measured as a percentage of Net Sales our Consumer Segment Gross Profit increased to 28.1% for the year ended June 28, 2002 from 27.5% for the year ended June 29, 2001. 16 Selling, General and Administrative Expenses increased to $69.4 million for the year ended June 28, 2002 from $61.0 million for the year ended June 29, 2001 primarily due to the inclusion of expenses associated with our Swan acquisition. The resultant ratio to Net Sales increased to 12.0% for the year ended June 28, 2002 from 11.6% for the year ended June 29, 2001. Operating Profit, as a result of the above, increased to $77.8 million or 13.5% of Net Sales for the year ended June 28, 2002 from $65.0 million or 12.4% of Net Sales for the year ended June 29, 2001. Our Industrial Segment Operating Profit increased by $4.9 million or 12.0% to $45.6 million from $40.7 million last year, primarily due to lower raw material costs and improved operating efficiencies. Measured as a percentage of Net Sales, Industrial Segment Operating Profit improved to 14.4% in the year ended June 28, 2002 compared to 12.6% in the previous year. Our Consumer Segment Operating Profit increased by $12.2 million or 33.0% to $49.1 million from $36.9 million in the year ended June 28, 2002, primarily due to our Swan acquisition. Measured as a percentage of Net Sales, Consumer Segment Operating Profit improved to 18.9% from 18.3% last year. Interest Expense, decreased to $70.9 million for the fiscal year ending June 28, 2002 from $76.6 million for the fiscal year ending June 29, 2001 primarily due to lower average interest rates on our floating rate debt. The unrealized loss on derivative obligations decreased to $7.8 million in the current fiscal year compared to a loss of $13.9 million in the previous fiscal year. The provision (benefit) for income taxes increased to $5.7 million from a benefit of ($7.1) due to improved earnings. The provision for the year ended June 28, 2002 differs from the amount computed by applying the Federal statutory rate, primarily due to non-deductible goodwill, $3.6 million and the effect of state income taxes $1.4 million. Net Income (loss), as a result, was a loss of ($6.6) million or (1.1%) of net sales for the fiscal year ending June 28, 2002 compared to a loss of ($19.0) million or (3.6%) of net sales for the year ending June 29, 2001. Depreciation and Amortization Expense, increased to 39.9 million or 6.9% of net sales for the fiscal year ending June 28, 2002 from $37.7 million or 7.2% of net sales for the fiscal year ending June 29, 2001 due to our Swan acquisition. YEAR ENDED JUNE 29, 2001 COMPARED TO YEAR ENDED JUNE 30 2000 Net Sales, increased to $525.8 million for the year ended June 29, 2001 from $524.8 million for the year ended June 30, 2000, representing an increase of $1.0 million or 0.2%. Sales increases in our Food and Consumer businesses were generally offset by weaker sales in our Healthcare and Specialty Resins businesses. Healthcare sales were down because of generally soft economic conditions and inventory de-stocking by some of our customers. Sales of our Specialty Resins segment were down as we continue to reposition this business in both markets and products. Cost of Goods Sold, increased to $399.8 million for the year ended June 29, 2001 from $394.5 million for the year ended June 30, 2000. Expressed as a percentage of Net Sales, Cost of Goods Sold increased to 76.0% for the year ended June 29, 2001 compared to 75.2% for the year ended June 30, 2000. The increase in Cost of Goods Sold as a percentage of Net Sales was due primarily to raw material costs, which rose rapidly in the early part of the year before trending down over the remainder of the year. Gross Profit, as a result, fell to $126.0 million for the year ended June 29, 2001 from $130.3 million for the year ended June 30, 2000. The ratio of Gross Profit to Net Sales decreased to 24.0% for the year ended June 29, 2001 from 24.8% for the year ended June 30, 2000. Selling, General and Administrative Expenses, increased to $61.0 million for the year ended June 29, 2001 from $58.3 million for the year ended June 30, 2000, an increase of $2.7 million or 4.6%. This increase reflects general cost of living increases for our salaried personnel as well as the Selling, General and Administrative expenses associated with our Super Plastics acquisition. The resultant ratio to Net Sales increased to 11.6% for the year ended June 29, 2001 from 11.1% for the year ended June 30, 2000. 17 Operating Profit, as a result of the above, decreased to $65.0 million or 12.4% for the year ended June 29, 2001 from $72.0 million or 13.7% for the year ended June 30, 2000. Other Expenses, decreased to $0.6 million for the year ended June 29, 2001 from $4.7 million for the year ended June 29, 2000 primarily due to non-recurring expenses associated with the recapitalization. The year ended June 30, 2000 included approximately $4.0 million of non-recurring expenses associated with the recapitalization. Interest Expense, increased to $76.6 million for the fiscal year ending June 29, 2001 from $38.4 million for the fiscal year ending June 30, 2000 primarily due to increased debt associated with the recapitalization. The Company has also incurred an unrealized loss of $13.9 million from derivative contracts for the year ended June 29, 2001. The Company had no similar gains or losses for the year ended June 30, 2000. The ratio of the provision (benefit) for income taxes to income (loss) before income taxes was 27.1% for the year ended June 29, 2001 compared to 50.1% for the year ending June 30, 2000. The decrease in the effective rate for the year ended June 29, 2001 is due to non-deductible goodwill and other permanent differences in foreign subsidiaries. Net Income (loss), as a result, was a loss of ($19) million or (3.6%) of net sales for the fiscal year ending June 29, 2001 compared to a loss of ($21.0) million or (4.0%) of net sales after an extraordinary charge of ($35.4) million for the year ending June 30, 2000. Depreciation and Amortization Expense, increased to 37.7 million or 7.2% of net sales for the fiscal year ending June 29, 2001 from $34.7 million or 6.6% of net sales for the fiscal year ending June 30, 2000 due to increased depreciation and amortization expense primarily associated with our Super Plastics acquisition. LIQUIDITY AND CAPITAL RESOURCES For the year ended June 28, 2002, net cash provided by operating activities was $7.9 million compared to ($3.3) million of cash used by operating activities in the prior year. The $11.2 million increase was due primarily to improved profitability as well as lower inventories before accounting for the impact of our Swan acquisition. These improvements more than offset an increase in accounts receivable in our Consumer Segment that accompanied a shift in the buying patterns of this segment's customers. Various year-over-year changes in operating assets, accrued expenses, and liabilities are generally due to offsetting timing differences. Working capital at June 28, 2002 was $216.9 million compared to $199.1 million at June 29, 2001 primarily due to our Swan acquisition. As of June 28, 2002, we had an outstanding balance of $46.0 million under our $100.0 million revolving credit line of our existing credit facility. This was a decrease of $19.0 million from the $65.0 million outstanding balance as of June 29, 2001. The decrease in revolver borrowings was primarily due to the application of the proceeds from our $40 million senior subordinated notes offering to pay down revolver borrowings. As of June 28, 2002 we had $28.2 million of cash compared to $44.6 million of cash as of June 29, 2001. Our cash balance at the end of our 2002 fiscal year was positively impacted by the senior subordinated notes offering we completed in May. The large cash balance at the end of our 2001 fiscal year was primarily due to the $30 million equity capital contribution that was made in June of 2001 to partially finance our Swan acquisition. As of June 28, 2002, we had $54.0 million undrawn and available under our revolving credit facility to fund ongoing general corporate and working capital requirements. In addition, as part of the recapitalization, our new equity investors agreed to contribute to Tekni-Plex Partners $269.6 million in the aggregate, of which $167.0 million was used to purchase interests of certain previous Tekni-Plex investors. An additional $85.0 million was used to finance 18 acquisitions, including the acquisition of Elm Packaging which closed in July 2002. Tekni-Plex Management, the managing member of Tekni-Plex Partners, may for at least five years from the recapitalization, call upon the remainder of the commitment, $17.6 million, for our future use for general corporate purposes, including acquisitions. Apart from acquisitions, our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the year ended June 28, 2002 and June 29, 2001 were $24.7 million and $17.1 million, respectively. We expect that annual capital expenditures will increase somewhat from historical levels during the next few years as we make improvements in our recently acquired operations. Management believes that cash generated from operations plus funds from our existing credit facility will be sufficient to meet our expected debt service requirements, planned capital expenditures and operating needs. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet our anticipated cash needs. To the extent we pursue future acquisitions, we may be required to obtain additional financing. We cannot assure you that we will be able to obtain such financing in amounts and on terms acceptable to us. The terms of the notes and the credit facility each include various covenants that limit our ability to incur additional debt. At June 28, 2002, the Company's contractual obligations for borrowings are as follows:
Long-term Total Payments Due by Period Debt Leases (in millions) - ---------------------------------------------------------------------------------------- Less than 1 year $ 13.4 $ 7.9 $ 21.3 Year 2 12.9 5.7 18.6 Year 3 37.9 4.3 42.2 Year 4 83.9 4.1 88.0 Year 5 115.0 4.0 119.0 After 5 years 432.1 14.7 446.8 Critical Accounting Policies
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. Preparing financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. You should also review Note 1 to the financial statements for further discussion of significant accounting policies. The Company records revenue when products are shipped. Legal title and risk of loss with respect to the products pass to customers at the point of shipment. The Company provides an allowance for returned product and volume sales rebates on an estimated basis. The Company evaluates its long-lived assets for impairment based on the undiscounted future cash flows of such assets. If a long-lived asset is identified as impaired, the value of the asset will be reduced to its fair value. 19 NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of June 28, 2002, the net carrying amount of goodwill for acquisitions prior to July 1, 2001 is $164,100 and other intangible assets is $600. Amortization expense during the period ended June 28, 2002 was $15,500 related to those acquisitions. The acquisition of the Swan garden hose division of Mark IV Industries, Inc. was accounted for as a purchase. The acquisition resulted in customer lists and goodwill of $3,900 and $38,200 respectively. In accordance with SFAS 142, the Swan goodwill is not being amortized. Amortization of customer lists was approximately $600 for the year ended June 28, 2002. Currently, the Company is assessing, but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. 20 In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supersedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The Company is currently assessing the impact SFAS 144 will have on its financial position and results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new Statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. INFLATION During the closing months of fiscal year 2002, we contended with rising raw material prices. We believe we have generally been able to offset the effects thereof through continuing improvements in operating efficiencies and by increasing prices to our customers to the extent permitted by competitive factors. However, we cannot assure you that such cost increases can be passed through to our customers in the future or that the effects can be offset by further improvements in operating efficiencies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates. At June 28, 2002 and June 29, 2001 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $375,120 and $401,560 respectively. A hypothetical 1% adverse change in interest rates would have had an annualized unfavorable impact of approximately $1,304 and $4,000, respectively, on the Company's earnings and cash flows based upon these year-end debt levels. To ameliorate these risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344,000. ITEM 8. FINANCIAL STATEMENTS The financial statements commence on Page F-1. 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our current directors and executive officers 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 our by-laws, we indemnify our officers and directors to the fullest extent permitted by the General Corporation Law of the State of Delaware and our certificate of incorporation. The board of directors is composed of six directors. A nominating committee composed of Dr. Smith and Mr. Cronin designate two directors, Dr. Smith designates three directors, and Mr. Cronin designates one director. Directors may only be removed for cause or at the request of the person entitled to designate that director.
NAME AGE POSITION Dr. F. Patrick Smith........ 54 Chairman of the Board and Chief Executive Officer Kenneth W.R. Baker.......... 58 President, Chief Operating Officer and Director Arthur P. Witt.............. 72 Corporate Secretary and Director John S. Geer................ 56 Director J. Andrew McWethy........... 61 Director Michael F. Cronin........... 48 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. Since 2000, Dr. Smith has been a general partner of Eastport Operating Partners L.P. 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 Tekni-Plex in 1994. 22 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. John S. Geer has served as a director of Tekni-Plex since June 2000. He is a partner of Mellon Ventures, Inc., having joined Mellon in 1997. Previously, Mr. Geer was senior vice president of Security Pacific Capital Corp. He has served on 20 boards of directors of emerging growth and middle market companies. J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He co-founded and managed MST Partners L.P., a private equity investment fund, from 1989 to 2000. In 2000, Mr. McWethy co-founded Eastport Operating Partners, L.P., a private equity investment fund that he continues to manage. Prior to 1989, Mr. McWethy was employed by Irving Trust Company for 12 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, each director is paid an annual fee of $50,000. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the remuneration paid by Tekni-Plex to the Chief Executive Officer and the two next most highly compensated executive officers of Tekni-Plex
SUMMARY COMPENSATION TABLE FISCAL STOCK OTHER ANNUAL NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(A) - ------------------------- ---- ------ ----- ------- --------------- Dr. F. Patrick Smith,.................. 2002 $ 5,500,000 $ -- -- $ 16,000 Chairman and Chief Executive Officer 2001 5,000,000 -- -- 16,000 2000 1,200,000 4,622,100 -- 16,000 Mr. Kenneth W.R. Baker,................ 2001 $ 2,750,000 $ -- -- $ 9,000 President and Chief Operating Officer 2000 2,500,000 -- -- 9,000 1999 600,000 2,311,050 -- 9,000 Mr. James E. Condon...................... 2002 $ 341,030 $ -- $ -- $ 7,200 Vice President and Chief Financial Officer 2001 122,308 -- 254,000 7,200 2000 -- -- -- --
(a) Includes amounts reimbursed during the fiscal year for payment of taxes, auto expense, membership fees, etc. 23
OPTION/SAR GRANTS IN LAST FISCAL YEAR POTENTIAL POTENTIAL REALIZABLE REALIZABLE PERCENT OF VALUE AT VALUE AT TOTAL ASSUMED ANNUAL ASSUMED ANNUAL NUMBER OF OPTIONS/ EXERCISE RATES OF RATES OF SECURITIES SARS GRANTED OR BASE STOCK PRICE STOCK PRICE UNDERLYING TO EMPLOYEES PRICE APPRECIATION APPRECIATION FOR OPTIONS/ IN FISCAL PER EXPIRATION FOR OPTION TERM FOR OPTION TERM NAME SARS GRANTED YEAR SHARE DATE 5% 10% - ---- ------------ ---- ----- ---- -- --- ($000) ($000) ($000) Dr. F. Patrick Smith..... -- --% -- -- -- -- Kenneth W.R. Baker....... -- --% -- -- -- -- James E. Condon.......... -- --% -- -- -- --
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............................... -- -- -- --/-- Kenneth W.R. Baker ................................ -- -- -- --/-- James E. Condon......................................... -- -- -- --/--
EMPLOYMENT AGREEMENTS As part of the recapitalization, Dr. Smith and Mr. Baker entered into amended and restated employment agreements that currently expire July 1, 2005 and contain renewal provisions. Each employment agreement provides that the executive may be terminated by us for cause or upon death or disability of the executive. Each of Dr. Smith and Mr. Baker is entitled to severance benefits if he is terminated due to death or disability. The employment agreements also contain certain non-compete provisions. The annual salaries of Dr. Smith and Mr. Baker are $5 million and $2.5 million, respectively, and each of these salaries will be increased by 10% annually. Neither Dr. Smith's nor Mr. Baker's amended and restated employment agreement provides for any mandatory bonus compensation. No other provisions of Dr. Smith's and Mr. Baker's employment agreements changed materially. 24 COMPENSATION COMMITTEE The board of directors maintains a three-member compensation committee comprised of Dr. Smith, Mr. Witt and Mr. Cronin. The compensation committee's duties include the annual review and approval of the compensation for each of our Chief Executive Officer and President, as well as the administration of our stock incentive plan. No member of the compensation committee is allowed to vote on issues pertaining to that member's compensation (including option grants). The board may also delegate additional duties to the compensation committee in the future. Compensation levels and bonus awards for all other employees are controlled by Dr. Smith and Mr. Baker. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 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). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Tekni-Plex Partners LLC holds approximately 96.2% (approximately 93.6% on a fully diluted basis) and MST/TP Partners LLC holds approximately 3.8% (approximately 3.7% on a fully diluted basis) of Tekni-Plex's outstanding common stock. Tekni-Plex Management LLC, controlled by Dr. Smith, is the sole managing member of both Tekni-Plex Partners LLC and MST/TP Partners LLC. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONSULTING ARRANGEMENTS In fiscal years 2001 and 2000 we had an arrangement with Arthur P. Witt, one of our directors and our corporate secretary, under which Mr. Witt provided us with customary management consulting services. Mr. Witt's compensation for consulting services rendered on our behalf was approximately $50,400 and $66,500 for fiscal years 2001 and 2000, respectively. Our policy is not to enter into any significant transaction with one of our affiliates unless a majority of the disinterested directors of the board of directors determines that the terms of the transaction are at least as favorable as those we could obtain in a comparable transaction made on an arm's-length basis with unaffiliated parties. This determination is made in the board's sole discretion. 25 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 26 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: October 8, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ James E. Condon ----------------------------------- James E. Condon Chief Financial Officer Date October 8, 2002 ------------------------------------------------------------------------- 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 October 1, 2001. SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive - --------------------------------- Officer F. Patrick Smith /s/ KENNETH W.R. BAKER President and Chief Operating Officer - --------------------------------- and Director Kenneth W.R. Baker /s/ ARTHUR P. WITT Corporate Secretary and Director - --------------------------------- Arthur P. Witt /s/ JOHN S. GEER Director - --------------------------------- John S. Geer /s/ J. ANDREW MCWETHY Director - --------------------------------- J. Andrew McWethy /s/ MICHAEL F. CRONIN Director - --------------------------------- Michael F. Cronin CERTIFICATIONS * I, Dr. F. Patrick Smith, certify that: 1. I have reviewed this annual report on Form 10-K of Tekni-Plex; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: October 8, 2002 /s/ Dr. F. Patrick Smith ------------------------ Dr. F. Patrick Smith Chief Executive Officer CERTIFICATIONS* I, James E. Condon, certify that: 1. I have reviewed this annual report on Form 10-K of Tekni-Plex; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; Date: October 8, 2002 /s/ James E. Condon --------------------------------------- James E. Condon Chief Financial Officer TEKNI-PLEX, INC. CONTENTS - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets F-3 Statements of operations F-4 Statements of stockholders' deficit F-5 Statements of cash flows F-6 Notes to financial statements F-7-F-48 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE F-49 SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves F-50
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Tekni-Plex, Inc. Somerville, New Jersey We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc. and its subsidiaries (the "Company") as of June 28, 2002 and June 29, 2001, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended June 28, 2002. 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 auditing standards generally accepted in the United States of America. 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 subsidiaries as of June 28, 2002 and June 29, 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 28, 2002, in conformity with accounting principles generally accepted in the United States of America. BDO Seidman, LLP September 13, 2002 Woodbridge, New Jersey F-2 TEKNI-PLEX, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
JUNE 28, 2002 June 29, 2001 ------------- ------------- ASSETS (NOTE 7) CURRENT: Cash and cash equivalents $ 28,199 $ 44,645 Accounts receivable, net of an allowance of $1,671 and $1,500 for possible losses 147,198 105,316 Inventories (Note 4) 117,632 106,258 Deferred income taxes (Note 8) 7,472 5,153 Prepaid expenses and other current assets 5,583 5,595 --------- --------- TOTAL CURRENT ASSETS 306,084 266,967 PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 5) 158,118 137,008 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION (NOTE 6) 204,252 179,616 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $5,030 AND $2,549 14,343 16,607 DEFERRED INCOME TAXES (NOTE 8) 16,278 19,010 OTHER ASSETS 1,078 2,286 --------- --------- $ 700,153 $ 621,494 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long term debt (Note 7) $ 13,407 $ 8,072 Accounts payable 32,643 34,076 Accrued payroll and benefits 8,965 5,222 Accrued interest 4,789 1,673 Accrued integration reserve (Note 3) 6,755 -- Accrued customer allowances 8,214 4,904 Accrued liabilities - other 13,877 10,542 Income taxes payable 515 3,349 --------- --------- TOTAL CURRENT LIABILITIES 89,165 67,838 LONG-TERM DEBT (NOTE 7) 679,414 670,078 OTHER LIABILITIES (NOTE 1) 22,685 18,275 --------- --------- TOTAL LIABILITIES 791,264 756,191 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTES 8, 9 AND 12) STOCKHOLDERS' DEFICIT: Common stock, $.01 par value, authorized 20,000 shares, issued 1088 at June 28, 2002 and 1011 at June 29, 2001 -- -- Additional paid-in capital 170,176 120,176 Accumulated other comprehensive loss (6,805) (7,039) Accumulated deficit (33,959) (27,372) Less: Treasury stock at cost, 431 shares (Note 2) (220,523) (220,462) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (91,111) (134,697) --------- --------- $ 700,153 $ 621,494 ========= =========
See accompanying notes to consolidated financial statements. F-3 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
Years ended JUNE 28, 2002 June 29, 2001 June 30, 2000 - ----------- ------------- ------------- ------------- NET SALES $ 577,749 $ 525,837 $ 524,817 COST OF SALES 430,457 399,836 394,480 --------- --------- --------- GROSS PROFIT 147,292 126,001 130,337 OPERATING EXPENSES: Selling, general and administrative 69,444 60,999 58,343 --------- --------- --------- INCOME FROM OPERATIONS 77,848 65,002 71,994 OTHER EXPENSES: Interest, net 70,934 76,569 38,447 Unrealized loss on derivative contracts (Note 1) 7,830 13,891 -- Other (Note 10) (6) 605 4,705 --------- --------- --------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES AND EXTRAORDINARY ITEM (910) (26,063) 28,842 PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 8): Current 4,443 4,098 12,333 Deferred 1,234 (11,167) 2,103 --------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (6,587) (18,994) 14,406 EXTRAORDINARY ITEM, NET OF INCOME TAXES (NOTE 2) -- -- (35,374) --------- --------- --------- NET LOSS $ (6,587) $ (18,994) $ (20,968) ========= ========= =========
See accompanying notes to consolidated financial statements. F-4 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (DOLLARS IN THOUSANDS)
Accumulated Additional Other Common Paid-In Comprehensive Accumulated Treasury stock Capital Loss Deficit Stock TOTAL ----------- --------- ------------- ----------- --------- --------- BALANCE, JULY 2, 1999 $ -- $ 41,075 $ (1,368) $ 12,590 $ -- $ 52,297 Net loss -- -- -- (20,968) -- (20,968) Foreign currency translation -- -- (3,118) -- -- (3,118) --------- Comprehensive loss -- -- -- -- -- (24,086) Purchase of treasury stock -- -- -- -- (220,462) (220,462) Capital contribution -- 43,101 -- -- -- 43,101 ----------- --------- --------- --------- --------- --------- BALANCE, JUNE 30, 2000 -- 84,176 (4,486) (8,378) (220,462) (149,150) Net loss -- -- -- (18,994) -- (18,994) Foreign currency translation -- -- (2,553) -- -- (2,553) --------- Comprehensive loss -- -- -- -- -- (21,547) Capital contributions -- 36,000 -- -- -- 36,000 ----------- --------- --------- --------- --------- --------- BALANCE, JUNE 29, 2001 -- 120,176 (7,039) (27,372) (220,462) (134,697) Net loss -- -- -- (6,587) -- (6,587) Foreign currency translation -- -- 3,319 -- -- 3,319 Unrealized loss of pension plan, net of tax -- -- (3,085) -- -- (3,085) --------- Comprehensive loss -- -- -- -- -- (6,353) Acquisition of shares -- -- -- -- (61) (61) Capital contributions -- 50,000 -- -- -- 50,000 ----------- --------- --------- --------- --------- --------- BALANCE, JUNE 28, 2002 $ -- $ 170,176 $ (6,805) $ (33,959) $(220,523) $ (91,111) =========== ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 14) (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
Years ended JUNE 28, 2002 June 29, 2001 June 30, 2000 - -------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (6,587) $ (18,994) $ (20,968) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 20,981 18,741 16,026 Amortization 18,882 18,929 18,722 Unrealized loss on derivative contracts 7,830 13,891 Provision for bad debts 484 250 310 Deferred income taxes 1,234 (11,167) 2,103 Loss on sale of assets -- -- 62 Extraordinary loss on extinguishment of debt, net of tax -- -- 35,374 Changes in assets and liabilities, net of acquisitions: Accounts receivable (35,632) (9,527) 186 Inventories 4,226 (11,019) (29,243) Prepaid expenses and other current assets 866 8,859 4,898 Other assets (50) (58) 205 Accounts payable and other current liabilities (6,136) 2,713 (15,994) Income taxes payable 5,419 3,349 (742) Other liabilities (3,595) (19,233) (1,454) --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,922 (3,266) 9,485 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of net assets including acquisition costs (63,624) (9,233) -- Capital expenditures (24,653) (17,116) (16,258) Additions to intangibles (169) (428) (805) Cash proceeds from sale of assets -- -- 158 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (88,446) (26,777) (16,905) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (19,000) 35,000 (2,030) Proceeds from long-term debt 40,747 -- 645,232 Repayments of long-term debt (7,440) (8,820) (448,631) Proceeds from capital contributions 50,000 36,000 43,101 Debt financing costs (154) -- (18,897) Purchase of treasury stock (61) -- (220,462) --------- --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 64,092 62,180 (1,687) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (14) (17) (485) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,446) 32,120 (9,592) CASH, BEGINNING OF PERIOD AND CASH EQUIVALENTS 44,645 12,525 22,117 --------- --------- --------- CASH, END OF PERIOD AND CASH EQUIVALENTS $ 28,199 $ 44,645 $ 12,525 ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 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. and its subsidiaries ("Tekni-Plex" or the "Company") 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 two primary business groups: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. Consolidation Policy The consolidated financial statements include the financial statements of Tekni-Plex, Inc. and its 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 primarily on 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, trademarks, and customer lists over seventeen, five and ten years, respectively. Recoverability is evaluated periodically based on the expected undiscounted net cash flows of the related businesses. F-7 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 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). 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. Shipping and Handling Costs Shipping and handling costs are recorded to cost of sales. Research and Development Research and development expenditures for the Company's projects are expensed as incurred. Treasury Stock Treasury Stock is recorded at cost. Gains and losses on disposition are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. F-8 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Fiscal Year-End The Company utilizes a 52/53 week fiscal year ending on the Friday closest to June 30. The years ended June 28, 2002, June 29, 2001, and June 30, 2000 contained 52 weeks each. Reclassifications Certain items in the prior year financial statements have been reclassified to conform to the current year presentation. Foreign Currency Translation Assets and liabilities of international subsidiaries are translated at year end exchange rates and related translation adjustments are reported as a component of stockholders' deficit. The statement of operations accounts are translated at the average rates during the period. Long-Lived Assets Long-lived assets, such as goodwill, customer lists 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 June 28, 2002. Use of estimates 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-9 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 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. Derivative Instruments Effective July 1, 2000, Tekni-Plex adopted Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. FAS 133 requires that all derivative instruments, such as interest rate swaps, be recognized in the financial statements and measured at their fair market value. Changes in the fair market value of derivative instruments are recognized each period in current operations or stockholders' equity (as a component of accumulated other comprehensive loss), depending on whether a derivative instrument qualifies as a hedge transaction. In the normal course of business, Tekni-Plex is exposed to changes in interest rates. The objective in managing its exposure to interest rates is to decrease the volatility that changes in interest rates might have on operations and cash flows. To achieve this objective, Tekni-Plex uses interest rate swaps and caps to hedge a portion of total long-term debt that is subject to variable interest rates. These derivative contracts are considered to be a hedge against changes in the amount of future cash flows associated with the interest payments on variable-rate debt obligations, however, they do not qualify for hedge accounting under FASB 133. Accordingly, the interest rate swaps are reflected at fair value in the Consolidated Balance Sheet and the related gains or losses on these contracts are recorded as an unrealized loss from derivative instruments in the Consolidated Statements of Operations. Currently these are the only derivative instruments held by Tekni-Plex as of June 28, 2002. The fair value of derivative contracts are determined based on quoted market values obtained from a third party. F-10 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ As of July 1, 2000, Tekni-Plex had interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on a 3 month dollar LIBOR on an aggregate of $29,000 amount of indebtedness with maturity dates ranging from June 2006 through June 2008. In conjunction with these swap contracts, Tekni-Plex also purchased an interest rate cap. The aggregate fair market value of these interest rate swap and cap contracts was $(21,721) and $(13,891) on June 28, 2002 and June 29, 2001, respectively, and is included in other liabilities on the Consolidated Balance Sheet. For the years ended June 28, 2002 and June 29, 2001, Tekni-Plex incurred realized losses of $7,939 and $1,806, respectively, which have been reflected in interest expense. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. F-11 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of June 28, 2002, the net carrying amount of goodwill for acquisitions prior to July 1, 2001 is $164,100 and other intangible assets are $600. Amortization expense during the year ended June 28, 2002 was $15,500 related to those acquisitions. The acquisition of the Swan garden hose division of Mark IV Industries, Inc. was accounted for as a purchase. The acquisition resulted in customer lists and goodwill of $3,900 and $36,200, respectively. In accordance with SFAS 142, the Swan goodwill is not being amortized. Amortization of customer lists was approximately $600 for the year ended June 28, 2002. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. F-12 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supercedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The Company is currently assessing the impact SFAS 144 will have on its financial position and results of operations. In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. F-13 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new Statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. 2. RECAPITALIZATION In June 2000, the Company entered into a Recapitalization (the "Recapitalization") with certain of its stockholders, whereby the Company purchased approximately 51% of the outstanding stock for approximately $220,500 including related transaction fees. This stock has been reflected as treasury stock in the accompanying balance sheet. As a result of provisions in the Company's Senior Debt and Subordinated Note Agreements, the Company redeemed it's $200,000 9-1/4% Senior Subordinated Notes, its $75,000 11-1/4% Senior Subordinated Notes and repaid its Senior Debt in the amount of approximately $153,000. These transactions resulted in an extraordinary loss on the extinguishment of debt of approximately $35,374. The extraordinary loss is comprised of prepayment penalties and other interest costs of $39,303, the write-off of deferred financing costs of $16,696 and other fees of $1,325, net of a tax benefit of $21,950. These transactions were funded by $43,101 of new equity, $275,000 12-3/4% Senior Subordinated Notes (see Note 7(b)) and initial borrowings of $374,000 on a $444,000 Senior Credit Facility (see Note 7(a)). F-14 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 3. ACQUISITIONS In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The allocation of the purchase price was follows: Assets: Accounts receivable $ 7,184 Inventory 15,600 Deferred taxes 4,350 Fixed Assets 17,568 Customer lists 3,900 Goodwill 36,228 ------ Total Assets 84,830 Liabilities: Accounts payable and accrued expenses 11,230 Integration reserve 10,000 ------ Net Investment $63,600 =======
The components of the Integration reserve and activity through June 28, 2002 is as follows:
Cost charged to Balance October 2001 reserve June 28, 2002 ------------ ------- ------------- Cost to close duplicate facilities $ 3,500 $1,340 $2,160 Reduction in personnel and related costs 2,100 718 1,382 Legal and environmental 1,275 40 1,245 Manufacturing reconfiguration 1,455 175 1,275 Other 1,670 972 698 ----- --- --- $10,000 $3,245 $6,755 ======= ====== ======
F-15 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The remaining personnel related costs will be paid over the next four-six months, lease payments on duplicate warehouse facilities will extend over the next two years and the manufacturing reconfiguration is expected to be completed during the next year. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on July 1, 2000. Since Swan was purchased subsequent to July 1, 2001, no amortization of goodwill has been reflected for the years ended June 28, 2002 or June 29, 2001 in accordance with SFAS 142.
Year ended June Year ended June 28, 2002 29, 2001 -------- -------- Net sales $589,045 $602,593 Income from operations 75,863 73,305 Loss before income taxes (2,895) (17,760) ====== =======
In November 2000, the Company purchased certain assets of Super Plastics Division ("Super Plastics") of RCR International, Inc., for approximately $10,200. The acquisition was recorded under the purchase method, whereby Super Plastics' net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. As a result of the acquisition, goodwill of approximately $5,500 has been recorded, which is being amortized over 15 years. In connection with the acquisition, the Company established a reserve of $2,600. The reserve was comprised of the costs to close a duplicate facility and terminate employees. There was no balance remaining in this reserve at June 29, 2001. 4. INVENTORIES Inventories are summarized as follows:
JUNE 28, 2002 June 29, 2001 ------------- ------------- Raw materials $ 37,727 $ 33,971 Work-in-process 8,621 7,812 Finished goods 71,284 64,475 ------ ------ $117,632 $106,258 ======== ========
F-16 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 5. PROPERTY, PLANT AND Property, plant and equipment consists of EQUIPMENT the following:
Estimated JUNE 28, 2002 June 29, 2001 useful lives ------------- ------------- ------------ Land $ 21,256 $ 15,390 Building and improvements 47,383 34,886 30-40 years Machinery and equipment 163,909 139,591 5 - 10 years Furniture and fixtures 7,125 6,176 5 - 10 years Construction in progress 8,663 10,115 -------- -------- 248,336 206,158 Less: Accumulated depreciation 90,218 69,150 -------- -------- $158,118 $137,008 ======== ========
F-17 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 6. INTANGIBLE ASSETS Intangible assets consist of the following:
JUNE 28, 2002 June 29, 2001 ------------- ------------- Goodwill $ 278,006 $ 241,311 Customer lists 3,900 - Patents 745 576 --------- --------- 282,651 241,887 Less: Accumulated amortization 78,399 62,271 --------- --------- $204,252 $179,616 ======== ========
7. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 28, 2002 June 29, 2001 ------------- ------------- Senior Debt (a): Revolving line of credit $ 46,000 $ 65,000 Term notes 329,120 336,560 Senior Subordinated Notes issued June 21, 2000 at 12-3/4%, due June 15, 2010 (less unamortized discount of $3,015 and $3,391) (b). 271,985 271,609 Senior Subordinated Notes issued May 2002 at 12-3/4%, due June 15, 2010 (less unamortized premium of $588) (b). 40,588 - Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2003 to 2010. 5,128 4,981 --------- --------- 692,821 678,150 Less: Current maturities 13,407 8,072 --------- --------- $ 679,414 $ 670,078 ========= =========
F-18 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ a) Senior Debt The Company has a Senior Debt agreement, which includes a $100,000 revolving credit agreement, and two term loans in the original aggregate amount of $344,000. The proceeds of the credit agreement were used as part of the Recapitalization (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 compliance with customary financial ratios. The Company is in compliance with all such financial covenants. Revolving Credit Agreement Borrowings under the agreement may be used for general corporate purposes with $54,000 of additional borrowings available at June 28, 2002. Interest, at the Company's option, is charged at the Prime Rate, plus the Applicable Base Rate Margin (initially 2%) or the Adjusted LIBOR Rate, as defined, plus the Applicable Euro-Dollar Margin (initially 3%). The Applicable Base Rate Margin and Applicable Euro-Dollar Margin can be reduced by up to 1.25 % based on the maintenance of certain leverage ratios. At June 28, 2002 the balance of $46,000 outstanding was borrowed at 4.875% At June 29, 2001, the rates charged were at various rates ranging from 6.754% to 8.75%. The Revolving Credit Agreement expires in June 2006. Term Loan A Borrowings under this loan, in the original amount of $100,000, were used in connection with the Recapitalization. Interest is payable quarterly at the same rates and margins discussed above under the Revolving Credit Agreement, 5.0% and 7.5% at June 28, 2002 and June 29, 2001, respectively. Principal is currently payable in quarterly installments of $1,250. The quarterly installments subsequently increase with payments totaling $70,000 due in the final two years in the period ending in June 2006. F-19 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Term Loan B Borrowings under this loan in the original amount of $244,000 were used in connection with the Recapitalization. Interest is payable quarterly at the same rate discussed above, except the Applicable Base Rate Margin is initially 2.5% and the Applicable Euro-Dollar Margin is initially 3.5%. Rates of 5.5% and 7.25% were charged at June 28, 2002 and June 29, 2001, respectively. In addition, the Applicable Base Rate and Applicable Euro-Dollar Margin can be reduced by .5% based on the maintenance of certain leverage ratios. Principal is currently payable in quarterly installments of $610. The quarterly installments subsequently increase with payments totaling $229,000 due in the final two years in the period ending in June 2008. b) Senior Subordinated Notes Issued June 2000 and May 2002 In June 2000, the Company issued $275,000 of 12-3/4% ten year Senior Subordinated Notes less a discount of $3,768, the proceeds of which were used in connection with the Recapitalization. The discount is being amortized over the term of the notes on the interest method. Interest is payable semi-annually and the notes are unsecured obligations and rank subordinate to existing and future senior debt, including current term loans and revolving credit facilities. The notes are callable by the Company after June 15, 2005 at a premium of 6.375%, which decreases to par after June 2008. In addition, prior to June 15, 2003, the Company may call up to 35% of the principal amount of the notes outstanding with proceeds from one or more public offerings of the Company's Capital Stock at a premium of 12.75%. 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 the sale of assets. F-20 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ On May 6, 2002, the Company issued an additional $40,000 of 12-3/4% Senior Subordinated Notes plus a premium of $600, the proceeds of which were used to repay borrowings under the revolving credit facility. The premium is being amortized over the term of the notes on the interest method. These notes have the same terms and maturity as the June 2000 notes discussed above. Principal payments on long-term debt over the next five years and thereafter are as follows: 2003 $ 13,407 2004 12,915 2005 37,915 2006 83,915 2007 114,975 Thereafter 432,121 ===============================================
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-21 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 8. INCOME TAXES The provision for income taxes, excluding the income tax benefit associated with the extraordinary item in 2000, is summarized as follows:
JUNE 28, June 29, June 30, Years ended 2002 2001 2000 -------- -------- -------- Current: Federal $ 259 $ -- $ 7,763 Foreign 2,180 3,984 3,554 State and local 2,004 114 1,016 -------- -------- -------- 4,443 4,098 12,333 -------- -------- -------- Deferred: Federal 474 (9,945) 1,756 Foreign 676 (370) 217 State and local 84 (852) 130 -------- -------- -------- 1,234 (11,167) 2,103 -------- -------- -------- Provision (benefit) for income taxes $ 5,677 $ (7,069) $ 14,436 ======== ======== ========
The components of income (loss) before income taxes are as follows:
JUNE 28, June 29, June 30, Years ended 2002 2001 2000 ------- -------- ------- Domestic $(6,739) $(38,116) $20,150 Foreign 5,829 12,053 8,692 ------- -------- ------- $ (910) $(26,063) $28,842 ======= ======== =======
F-22 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The provision (benefit) for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
JUNE 28, June 29, June 30, Years ended 2002 2001 2000 ------- ------- -------- Provision (benefit) for Federal income taxes at statutory rate $ (309) $(8,861) $ 9,806 State and local income taxes, net of Federal benefit 1,427 (677) 756 Non-deductible goodwill amortization 3,647 2,785 2,310 Foreign tax rates in excess of Federal tax rate 874 (470) 785 Other, net 38 154 779 ------- ------- -------- Provision (benefit) for income taxes $ 5,677 $(7,069) $ 14,436 ======= ======= ========
Significant components of the Company's deferred tax assets and liabilities are as follows:
JUNE 28, June 29, 2002 2001 -------- -------- Current deferred taxes: Allowance for doubtful accounts $ 1,309 $ 582 Inventory 1,928 1,190 Net operating loss carryforwards 1,402 3,201 Accrued expenses 2,833 180 -------- -------- Total current deferred tax assets $ 7,472 $ 5,153 ======== ======== Long-term deferred taxes: Net operating loss carryforwards $ 29,836 $ 39,593 Accrued pension and post-retirement 1,365 1,457 Unrealized loss on derivative contracts 8,254 5,360 Unrealized loss of pension plan 1,890 -- Difference in book vs. tax basis of assets (1,500) (3,028) Accelerated tax vs. book depreciation (18,419) (19,292) Other expenses 652 620 -------- -------- Total long-term net deferred tax assets 22,078 24,710 Valuation allowance (5,800) (5,700) -------- -------- Total long-term net deferred tax assets $ 16,278 $ 19,010 ======== ========
F-23 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Net Operating Losses The Company and its U.S. subsidiaries file a consolidated tax return. The Company and its U.S. subsidiaries have net operating loss ("NOL") carryforwards of approximately $81,369. These NOL's expire at various dates from 2009 through 2021. Approximately $80,000 of the NOL's are as a result of the acquisition of PureTec in 1997 (the "PureTec NOL's"). The PureTec NOL's are subject to IRC Section 382 change of ownership annual limitation of approximately $5,900. The Company and its U.S. subsidiaries would need to realize taxable income of not less than $15,000 through to 2009, and not less than $80,000 through 2013 in order to fully realize the benefit of the NOL carryforwards. The net long-term domestic deferred tax assets have been subjected to a valuation allowance of $5,000 since management believes it is more likely than not that a portion of the NOL balance will not be realized as a result of the various limitations on their usage, discussed above. In addition to the domestic NOL balances, the Company has incurred losses relating to a subsidiary, taxable in Northern Ireland. Through fiscal 2002 losses aggregated $2,500 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. 9. EMPLOYEE BENEFIT (a) Savings Plans PLANS i. The Company maintains a discretionary 401(k) plan covering all eligible employees with at least one year of service Contributions to the plan were determined annually by the Board of Directors. F-24 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The Company will determine matching contributions to the plan each year not to exceed 2% of the employee's eligible compensation. Contributions for the fiscal years ended June 28, 2002, June 29, 2001 and June 30, 2000 amounted to approximately $1,130, $863 and $996, respectively. (b) Pension Plans i. The Company's Burlington subsidiary has a non-contributory defined benefit pension plan that covers substantially all hourly compensated employees covered by a collective bargaining agreement, who have completed one year of service. The funding policy of the Company is to make contributions to this plan based on actuarial computations of the minimum required contribution for the plan year. The components of net periodic pension costs are as follows:
YEAR ENDED Year ended Year ended JUNE 28, 2002 June 29, 2001 June 30, 2000 ------------- ------------- ------------- Service cost $ 105 $ 105 $ 117 Interest cost on projected benefit obligation 400 393 390 Expected actual return on plan assets (494) (494) (492) ------- ------- ------- Net pension cost $ 11 $ 4 $ 15 ======= ======= ======= CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 5,600 $ 5,334 Service cost 105 105 Interest cost 400 393 Plan amendments 111 -- Actuarial loss 145 38 Benefits paid (327) (270) ------- ------- Projected benefit obligation, end of period $ 6,034 $ 5,600 ======= ======= CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 5,440 $ 5,550 Actual return on plan assets (179) 3 Company contributions 233 157
F-25 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
YEAR ENDED Year ended JUNE 28, 2002 June 29, 2001 ------------- ------------- Benefits paid (327) (270) ------- ------- Plan assets at fair value, end of period $ 5,167 $ 5,440 ======= =======
F-26 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:
JUNE 28, June 29, 2002 2001 ------- ----- Funded status of the plan $ (867) $(160) Unrecognized prior service cost 111 - Unrecognized net loss 1,494 676 ------- ----- Prepaid pension cost $ 738 $ 516 ======= =====
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate was 7.0% and 7-1/2% at June 28, 2002 and June 29, 2001. During 2002, the Company recorded an unrecognized pension liability of $1,494 as an accumulated other comprehensive loss adjustment to stockholders' equity. This amount represents a portion of the unrecognized net actuarial loss for the year ending June 28, 2002 as a result of investment return less than the actuarial assumption. ii. 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. F-27 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - --------------------------------------------------------------------------------
YEAR ENDED Year ended Year ended JUNE 28, 2002 June 29, 2001 June 30, 2000 ------------- ------------- ------------- Service cost $ -- $ -- $ -- Interest cost on projected benefit obligation 787 750 704 Expected actual return on plan assets (931) (978) (986) ---------- ---------- ---------- Net pension cost $ (144) $ (228) $ (282) ========== ========== ==========
YEAR ENDED Year ended JUNE 28, 2002 June 29, 2001 ------------- ------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 10,501 $ 9,978 Interest cost 762 750 Actuarial loss 525 204 Benefits paid (514) (431) ---------- ---------- Projected benefit obligation, end of period $ 11,274 $ 10,501 ========== ========== CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 10,545 $ 11,055 Actual return on plan assets (492) (79) Benefits paid (514) (431) ---------- ---------- Plan assets at fair value, end of period $ 9,539 $ 10,545 ========== ==========
F-28 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:
JUNE 28, June 29, 2002 2001 -------- -------- Funded status of the plan $ (1,735) $ 44 Unrecognized net loss 3,480 1,557 -------- -------- Prepaid pension cost $ 1,745 $ 1,601 ======== ========
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate was 7.0% and 7-1/2% at June 28, 2002 and June 29,2001. During 2002, the Company recorded an unrecognized pension liability of $3,480 as an accumulated other comprehensive loss adjustment to stockholders' equity. This amount represents a portion of the unrecognized net actuarial loss for the year ending June 28, 2002 as a result of investment return less than the actuarial assumption. 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. F-29 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- (c) Post-retirement Benefits In addition to providing pension benefits, the Company also sponsors the Burlington Retiree Welfare Plan, which provides certain healthcare benefits for retired employees of the Burlington division who were employed on an hourly basis, covered under a collective bargaining agreement and retired prior to July 31, 1997. Those employees and their families became eligible for these benefits after the employee completed five years of service, if retiring at age fifty-five, or at age sixty-five, the normal retirement age. Post retirement healthcare benefits paid for the years ended June 28, 2002, June 29, 2001 and June 30, 2000 amounted to $177, $182 and $130, respectively. F-30 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 Year ended Year ended JUNE 28, June 29, June 30, 2002 2001 2000 ---------- ---------- ---------- Service cost $ 55 $ 45 $ 45 Interest cost 206 179 155 Transition obligation 34 4 -- ---------- ---------- ---------- Net post-retirement benefit cost $ 295 $ 228 $ 200 ========== ========== ========== CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 2,847 $ 2,457 Service cost 55 45 Interest cost 206 179 Actuarial loss 690 348 Benefits paid (177) (182) ---------- ---------- Projected benefit obligation, end of period $ 3,621 $ 2,847 ========== ========== CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ -- $ -- Company contributions 177 182 Benefits paid (177) (182) ---------- ---------- Plan assets at fair value, end of period $ -- $ -- ========== ==========
F-31 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:
YEAR ENDED Year ended JUNE 28, June 29, 2002 2001 ---------- ---------- Funded status of the plan $ (3,621) $ (2,847) Unrecognized loss 1,286 630 ---------- ---------- Accrued post retirement cost $ (2,335) $ (2,217) ========== ==========
The accumulated post-retirement benefit obligation was deter-mined using a 7.0% and 7-1/2% discount rate for the periods presented. The healthcare cost trend rate for medical benefits was assumed to be 6%. 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 $282 and $295 and increase the service and interest components by $24 and $27 at June 28, 2002 and June 29, 2001, respectively. 10. RELATED PARTY The Company had a management consulting agreement with TRANSACTIONS an affiliate of a stockholder. The terms of the agreement required the Company to pay a fee of approximately $30 per month for a period of ten years, with certain renewal provisions. Consulting service fees were approximately $400 for the year ending July 2, 1999. In June 2000 the Company agreed to terminate the management consulting agreement at a cost of $3,651 which has been included in other income/expense. F-32 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- 11. STOCK OPTIONS 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 2001, 2000, 1999 and 1998, options were granted to purchase 4.02, 1.27, 7.52 and 30.65 shares of common stock at weighted-average exercise prices of $559, $508, $270 and $154 per share, respectively. The options are subject to vesting provisions, as determined by the Board of Directors, and generally vest 100% five years from grant date and expire 10 years from date of grant. In connection with the Recapitalization 25.16363 of the 1998 options were cancelled. At June 28, 2002, no options were exercisable and no options have been exercised or forfeited as of June 28, 2002. 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 income (loss) before extraordinary items would have been reduced (increased) to the pro forma amounts indicated below. The calculations were based on a risk free interest rate of 4.0% and 5.7% for the 2001 and 2000 options, respectively, expected volatility of zero, a dividend yield of zero and expected lives of 8 years.
Years ended JUNE 28, 2002 June 29, 2001 June 30, 2000 - --------------------- ------------- ------------- ------------- Income (loss) before extraordinary item: As reported $ (6,587) $ (18,994) $ 14,406 ========== ========== ========== Pro forma $ (6,725) $ (19,093) $ 14,343 ========== ========== ==========
F-33 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- 12. COMMITMENTS AND Commitments CONTINGENCIES (a) The Company leases building space and certain equipment in approximately 20 locations throughout the United States, Canada and Europe. At June 28, 2002, the Company's future minimum lease payments are as follows: 2003 $ 7,921 2004 5,698 2005 4,278 2006 4,132 2007 4,000 Thereafter 14,703 -------- $ 40,732 ========
Rent expense, including escalation charges, amounted to approximately $6,665, $5,308 and $4,427 for the years ended June 28, 2002 and June 29, 2001 and June 30, 2000, respectively. (b) The Company has employment contracts with two employees, providing minimum salaries of $7,500 with no mandatory bonuses. The salaries will increase 10% annually until the agreements expire on July 1, 2005. Salaries and bonuses for the years ended June 28, 2002, June 29, 2001 and June 30, 2000 amounted to $8,250, $7,500 and $8,733. Contingencies (a) 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, results of operations or cash flows. 13. CONCENTRATIONS Financial instruments that potentially subject the OF CREDIT RISKS Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. F-34 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- 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 Canada and Europe. As part of its cash management process, the Company periodically reviews the credit standing of these banks. 14. SUPPLEMENTAL (a) Cash Paid CASH FLOW INFORMATION
JUNE 28, June 29, June 30, Years ended 2002 2001 2000 -------- -------- -------- Interest $ 65,831 $ 74,568 $102,359 ======== ======== ======== Income taxes $ 2,771 $ 1,661 $ 7,540 ======== ======== ========
(b) Non-Cash Financing and Investing Activities The Company purchased certain assets of Swan effective October 2001, for approximately $63,600 in cash. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 48,602 Goodwill 36,228 Purchase price (63,600) -------- Liabilities assumed $ 21,230 ========
F-35 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- The Company purchased certain assets of RCR International, Inc. effective November 2000, for approximately $10,226 in cash. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 7,314 Goodwill 5,558 Purchase price (10,226) -------- Liabilities assumed $ 2,646 ========
15. SEGMENT Tekni-Plex has reorganized its business into two INFORMATION industry segments: Industrial Packaging, Products, and Materials and Consumer Packing and Products. The Industrial Packaging, Products, and Materials segment principally produces pharmaceutical packaging, medical tubing and medical device materials, foamed polystyrene packaging products for the poultry, meat and egg industries and vinyl resins and compounds. The Consumer Packaging and Products segment principally produces precision tubing and gaskets, and garden and irrigation hose products. Both segments have operations in the United States, Europe and Canada. F-36 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:
Industrial Packaging, Consumer Products Packaging and and Year end June 28, 2002 Materials Products TOTALS - ------------------------------------- ---------- ---------- ---------- Revenues from external customers $ 317,664 $ 260,085 $ 577,749 Interest expense 48,409 22,525 70,934 Depreciation and amortization 25,421 13,395 38,816 Segment income from operations 45,593 49,108 94,701 Segment assets 314,967 372,591 687,558 Expenditures for segment fixed assets 10,539 6,347 16,886 ========== ========== ==========
Industrial Packaging, Consumer Products Packaging and and Year end June 29, 2001 Materials Products TOTALS - ------------------------------------- ---------- ---------- ---------- Revenues from external customers $ 323,799 $ 202,038 $ 525,837 Interest expense 52,925 23,644 76,569 Depreciation and amortization 23,891 13,501 37,392 Segment income from operations 40,706 36,914 77,620 Segment assets 333,570 270,731 604,301 Expenditures for segment fixed assets 9,069 8,047 17,116 ========== ========== ==========
Industrial Packaging, Consumer Products Packaging and and Year end June 30, 2000 Materials Products TOTALS - ------------------------------------- ---------- ---------- ---------- Revenues from external customers $ 328,881 $ 195,936 $ 524,817 Interest expense 25,910 12,537 38,447 Depreciation and amortization 22,222 12,316 34,538 Segment income from operations 49,205 35,491 84,696 Segment assets 333,306 220,576 553,882 Expenditures for segment fixed assets 12,246 4,012 16,258 ========== ========== ==========
F-37 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - --------------------------------------------------------------------------------
JUNE 28, 2002 June 29, 2001 June 30, 2000 ------------- ------------- ------------- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 94,701 $ 77,620 $ 84,696 Corporate and eliminations (16,853) (12,618) (12,702) ------------ ------------ ------------ $ 77,848 $ 65,002 $ 71,994 ============ ============ ============ ASSETS Total assets from reportable segments $ 687,558 $ 604,301 $ 553,882 Other unallocated amounts 12,595 17,193 20,907 ------------ ------------ ------------ Consolidated total $ 700,153 $ 621,494 $ 574,789 ============ ============ ============ DEPRECIATION AND AMORTIZATION Segment totals $ 38,816 $ 37,392 $ 34,538 Corporate 1,047 278 210 ------------ ------------ ------------ Consolidated total $ 39,863 $ 37,670 $ 34,748 ============ ============ ============ REVENUES GEOGRAPHIC INFORMATION United States $ 516,873 $ 466,804 $ 477,489 Foreign 60,876 59,033 47,328 ------------ ------------ ------------ Total $ 577,749 $ 525,837 $ 524,817 ============ ============ ============ LONG-LIVED ASSETS GEOGRAPHIC INFORMATION United States $ 360,929 $ 307,328 $ 323,691 Foreign 44,250 42,308 29,250 ------------ ------------ ------------ Total $ 405,179 $ 349,636 $ 352,941 ============ ============ ============
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. F-38 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- For the year ended June 28, 2002, no single customer represented at least 10% of sales nor did any customer represent at least 10% of accounts receivable at June 28, 2002. No customer represented 10% or more of total sales during the year ended June 29, 2001 and one customer represented 10% of sales during the year ended June 30, 2000. 16. SUPPLEMENTAL Tekni-Plex, Inc. issued 12-3/4% Senior Subordinated CONDENSED Notes in June 2000 and May 2002. These notes are CONSOLIDATING guaranteed by all domestic subsidiaries of Tekni-Plex. FINANCIAL The guarantor subsidiaries are 100% owned by the issuer. STATEMENTS The guaranties are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). F-39 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Statement of Operations - For the year ended June 28, 2002
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Sales, net $ 160,252 $ 356,621 $ 60,876 $ 577,749 Cost of sales 116,130 270,380 43,947 430,457 ---------- ---------- ---------- ---------- Gross profit 44,122 86,241 16,929 147,292 Selling, general and administrative 39,610 23,464 6,370 69,444 ---------- ---------- ---------- ---------- Income from operations 4,512 62,777 10,559 77,848 Interest expense, net 70,881 (101) 154 70,934 Unrealized loss on derivative contract 7,830 -- -- 7,830 Other expense (income) (756) (1,155) 1,905 (6) ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes (73,443) 64,033 8,500 (910) Provision (benefit) for income taxes (25,979) 28,597 3,059 5,677 ---------- ---------- ---------- ---------- Net income (loss) $ (47,464) $ 35,436 $ 5,441 $ (6,587) ========== ========== ========== ==========
F-40 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Balance Sheet - at June 28, 2002
Non- Issuer Guarantors Guarantors Eliminations TOTAL ---------- ---------- ---------- ------------ ---------- CURRENT ASSETS $ 44,828 $ 209,798 $ 51,458 $ -- $ 306,084 Property, plant and equipment, net 41,704 95,366 21,048 -- 158,118 Intangible assets 7,907 184,093 12,252 -- 204,252 Investment in subsidiaries 498,518 -- -- (498,518) -- Deferred financing costs, net 14,134 -- 209 -- 14,343 Deferred taxes 20,177 -- (3,899) -- 16,278 Other long-term assets 74,008 236,444 12,094 (321,468) 1,078 ---------- ---------- ---------- ------------ ---------- TOTAL ASSETS $ 701,276 $ 725,701 $ 93,162 $ (819,986) $ 700,153 ========== ========== ========== ============ ========== CURRENT LIABILITIES $ 29,889 $ 38,715 $ 20,561 $ -- $ 89,165 Long-term debt 675,253 -- 4,161 -- 679,414 Other long-term liabilities 79,193 230,166 34,794 (321,468) 22,685 ---------- ---------- ---------- ------------ ---------- TOTAL LIABILITIES 784,335 268,881 59,516 (321,468) 791,264 ---------- ---------- ---------- ------------ ---------- Additional paid-in capital 170,156 296,784 15,656 (312,420) 170,176 Retained earnings (accumulated deficit) (32,692) 163,121 21,710 (186,098) (33,959) Accumulated other comprehensive loss -- (3,085) (3,720) -- (6,805) Treasury stock (220,523) -- -- -- (220,523) ---------- ---------- ---------- ------------ ---------- TOTAL STOCKHOLDERS' DEFICIT (83,059) 456,820 33,646 (498,518) (91,111) ---------- ---------- ---------- ------------ ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 701,276 $ 725,701 $ 93,162 $ (819,986) $ 700,153 ========== ========== ========== ============ ==========
F-41 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Cash Flows - For the year ended June 28, 2002
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities: $ (31,450) $ 35,167 $ 4,205 $ 7,922 ---------- ---------- ---------- ---------- Cash flows from investing activities: Acquisitions -- (63,624) -- (63,624) Capital expenditures (11,147) (11,421) (2,085) (24,653) Additions to intangibles (169) -- -- (169) ---------- ---------- ---------- ---------- Net cash used in investing activities (11,316) (75,045) (2,085) (88,446) ---------- ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (repayment) under line of credit (19,000) -- -- (19,000) Proceeds from long-term debt 40,600 -- 147 40,747 Repayment of long-term debt (7,440) -- -- (7,440) Proceeds from capital contribution 50,000 -- -- 50,000 Deferred financing costs (154) -- -- (154) Purchase of Treasury Stock (61) -- -- (61) Change in intercompany accounts (45,034) 45,217 (183) -- ---------- ---------- ---------- ---------- Net cash provided by financing activities 18,911 45,217 (36) 64,092 ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash -- -- (14) (14) ---------- ---------- ---------- ---------- Net increase (decrease) in cash (23,855) 5,339 2,070 (16,446) Cash, beginning of period 32,890 5,321 6,434 44,645 ---------- ---------- ---------- ---------- Cash, end of period $ 9,035 $ 10,660 $ 8,504 $ 28,199 ========== ========== ========== ==========
F-42 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Statement of Operations - For the year ended June 29, 2001
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Sales, net $ 161,854 $ 304,950 $ 59,033 $ 525,837 Cost of sales 121,521 236,723 41,592 399,836 ---------- ---------- ---------- ---------- Gross profit 40,333 68,227 17,441 126,001 Selling, general and administrative 38,295 17,320 5,384 60,999 ---------- ---------- ---------- ---------- Income from operations 2,038 50,907 12,057 65,002 Interest expense, net 76,958 (318) (71) 76,569 Unrealized loss on derivative contract 13,891 -- -- 13,891 Other expense (income) (1,119) 1,063 661 605 ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes (87,692) 50,162 11,467 (26,063) Provision (benefit) for income taxes (16,574) 6,626 2,879 (7,069) ---------- ---------- ---------- ---------- Net income (loss) $ (71,118) $ 43,536 $ 8,588 $ (18,994) ========== ========== ========== ==========
F-43 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Balance Sheet - At June 29, 2001
Non- Issuer Guarantors Guarantors Eliminations TOTAL ---------- ---------- ---------- ------------ ---------- CURRENT ASSETS $ 80,305 $ 146,839 $ 39,823 $ -- $ 266,967 Property, plant and equipment, net 38,788 79,517 18,703 -- 137,008 Intangible assets 13,208 153,960 12,448 -- 179,616 Investment in subsidiaries 457,641 -- -- (457,641) -- Deferred financing costs, net 16,607 -- -- -- 16,607 Deferred taxes 19,022 (12) -- -- 19,010 Other long-term assets 28,577 261,520 12,510 (300,321) 2,286 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS $ 654,148 $ 641,824 $ 83,484 $ (757,962) $ 621,494 ========== ========== ========== ========== ========== CURRENT LIABILITIES $ 22,370 $ 26,923 $ 18,545 $ -- $ 67,838 Long-term debt 665,729 -- 4,349 -- 670,078 Other long-term liabilities 92,460 190,399 35,737 (300,321) 18,275 ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES 780,559 217,322 58,631 (300,321) 756,191 ---------- ---------- ---------- ---------- ---------- Additional paid-in capital 120,156 296,784 15,656 (312,420) 120,176 Retained earnings (accumulated deficit) (26,105) 127,685 16,269 (145,221) (27,372) Accumulated other comprehensive loss -- 33 (7,072) -- (7,039) Treasury stock (220,462) -- -- -- (220,462) ---------- ---------- ---------- ---------- ---------- TOTAL STOCKHOLDERS' DEFICIT (126,411) 424,502 24,853 (457,641) (134,697) ---------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 654,148 $ 641,824 $ 83,484 $ (757,962) $ 621,494 ========== ========== ========== ========== ==========
F-44 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Statement of Cash Flows - For the year ended June 29, 2001
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities: $ (47,908) $ 36,694 $ 7,948 $ (3,266) ---------- ---------- ---------- ---------- Cash flows from investing activities: Acquisitions, net of cash acquired -- (9,233) -- (9,233) Capital expenditures (2,710) (11,208) (3,198) (17,116) Additions to intangibles (322) (106) -- (428) ---------- ---------- ---------- ---------- Net cash used in investing activities (3,032) (20,547) (3,198) (26,777) ---------- ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (repayments) under line of credit 35,000 -- -- 35,000 Repayments of long-term debt (7,400) -- (1,420) (8,820) Proceeds from capital contribution 36,000 -- -- 36,000 Change in intercompany accounts 14,592 (14,592) -- -- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 78,192 (14,592) (1,420) 62,180 ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash -- -- (17) (17) ---------- ---------- ---------- ---------- Net increase in cash 27,252 1,555 3,313 32,120 Cash, beginning of period 5,638 3,766 3,121 12,525 ---------- ---------- ---------- ---------- Cash, end of period $ 32,890 $ 5,321 $ 6,434 $ 44,645 ========== ========== ========== ==========
F-45 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Statement of Operations - For the year ended June 30, 2000
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Sales, net $ 151,587 $ 325,902 $ 47,328 $ 524,817 Cost of sales 110,272 251,512 32,696 394,480 ---------- ---------- ---------- ---------- Gross profit 41,315 74,390 14,632 130,337 Selling, general and administrative 37,991 16,042 4,310 58,343 ---------- ---------- ---------- ---------- Income from operations 3,324 58,348 10,322 71,994 Interest expense, net 38,717 (280) 10 38,447 Other expense (income) 4,272 (1,187) 1,620 4,705 ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes and extraordinary item (39,665) 59,815 8,692 28,842 Provision (benefit) for income taxes (22,359) 33,211 3,584 14,436 ---------- ---------- ---------- ---------- Income (loss) before extraordinary item (17,306) 26,604 5,108 14,406 Extraordinary item (35,374) -- -- (35,374) ---------- ---------- ---------- ---------- Net income (loss) $ (52,680) $ 26,604 $ 5,108 $ (20,968) ========== ========== ========== ==========
F-46 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- Condensed Consolidating Statement of Cash Flows - For the year ended June 30, 2000
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities: $ (25,883) $ 29,834 $ 5,534 $ 9,485 ---------- ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures (7,224) (6,747) (2,287) (16,258) Additions to intangible (805) -- -- (805) Cash proceeds from sale of assets -- -- 158 158 ---------- ---------- ---------- ---------- Net cash used in investing activities (8,029) (6,747) (2,129) (16,905) ---------- ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (repayments) under line of credit (2,030) -- -- (2,030) Proceeds from long-term debt 645,232 -- -- 645,232 Repayments of long-term debt (446,661) -- (1,970) (448,631) Proceeds from capital contribution 43,101 -- -- 43,101 Debt financing costs (18,897) -- -- (18,897) Purchase of treasury stock (220,462) -- -- (220,462) Change in intercompany accounts 34,880 (26,508) (8,372) -- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 35,163 (26,508) (10,342) (1,687) ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash -- -- (485) (485) ---------- ---------- ---------- ---------- Net increase (decrease) in cash 1,251 (3,421) (7,422) (9,592) Cash, beginning of period 4,387 7,187 10,543 22,117 ---------- ---------- ---------- ---------- Cash, end of period $ 5,638 $ 3,766 $ 3,121 $ 12,525 ========== ========== ========== ==========
F-47 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------- 17. SUBSEQUENT During July 2002, the Company acquired substantially all EVENT the net assets of Elm Packaging Company for $16,400. Elm produces polystyrene foam packaging products for the food and foodservice industries. 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth 2002 Quarter Quarter Quarter Quarter ---- --------- --------- --------- --------- Net sales $ 115,164 $ 113,740 $ 153,393 $ 195,452 Gross profit 27,014 27,684 42,008 50,586 Income from operations 11,838 11,075 23,479 31,456 Net income (loss) (9,453) 67 2,305 494 2001 Net sales $ 111,907 $ 105,873 $ 140,681 $ 167,376 Gross profit 22,422 24,123 36,785 42,671 Income from operations 7,311 9,755 21,127 26,809 Net income (loss) (5,739) (12,136) (1,473) 354 ========= ========= ======== ========
Fluctuations in net sales are due primarily to seasonality in a number of product lines, particularly garden hose and irrigation hose products. F-48 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE Board of Directors Tekni-Plex, Inc. Somerville, New Jersey The audits referred to in our report dated September 13, 2002 relating to the consolidated financial statements of Tekni-Plex, Inc. and its subsidiaries (the "Company"), included the audits of the financial statement schedule for the years ended June 28, 2002, June 29, 2001 and June 30, 2000 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. BDO Seidman, LLP Woodbridge, New Jersey September 13, 2002 F-49 TEKNI-PLEX, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) - --------------------------------------------------------------------------------
Balance at Charged to BALANCE AT Beginning Costs and Deductions END OF of Period Expenses(1) (2) PERIOD ---------- ---------- ---------- ---------- YEAR ENDED JUNE 30, 2000 Accounts receivable allowance $ 1,662 $ 310 $ 330 $ 1,642 ========== ========== ========== ========== YEAR ENDED JUNE 29, 2001 Accounts receivable allowance $ 1,642 $ 250 $ 392 $ 1,500 ========== ========== ========== ========== YEAR ENDED JUNE 28, 2002 Accounts receivable allowance $ 1,500 $ 484 $ 313 $ 1,671 ========== ========== ========== ==========
(1) To increase accounts receivable allowance. (2) Uncollectible accounts written off, net of recoveries. F-50 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc.* 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.* 3.3 Certificate of Incorporation of PureTec Corporation.* 3.4 By-laws of PureTec Corporation.* 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.* 3.6 By-laws of Tri Seal Holdings, Inc.* 3.7 Certificate of Incorporation of Natvar Holdings, Inc.* 3.8 By-laws of Natvar Holdings.* 3.9 Certificate of Incorporation of Plastic Specialities and Technologies, Inc.* 3.10 By-laws of Plastic Specialities and Technologies, Inc.* 3.11 Certificate of Incorporation of Plastic Specialities and Technologies Investments, Inc.* 3.12 By-laws of Plastic Specialities and Technologies Investments, Inc.* 3.13 Certificate of Incorporation of Burlington Resins, Inc.* 3.14 By-laws of Burlington Resins, Inc.* 3.15 Certificate of Incorporation of Pure Tech APR, Inc.* 3.16 By-laws of Pure Tech APR, Inc.* 3.17 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.* 3.18 By-laws of TPI Acquisition Subsidiary, Inc.* 3.19 Certificate of Incorporation of Coast Recycling North, Inc.* 3.20 By-laws of Coast Recycling North, Inc.* 3.21 Certificate of Incorporation of Distributors Recycling, Inc.* 3.22 By-laws of Distributors Recycling, Inc.* 3.23 Certificate of Incorporation of REI Distributors, Inc.* 3.24 By-laws of REI Distributors, Inc.* 3.25 Certificate of Incorporation of Pure Tech Recycling of California.* 3.26 By-laws of Pure Tech Recycling of California.* 3.27 Certificate of Incorporation of Alumet Smelting Corp.* 3.28 By-laws of Alumet Smelting Corp.* 3.29 Certificate of Incorporation of TP/Elm Acquisition Subsidiary, Inc.* 3.30 By-laws of TP/Elm Acquisition Subsidiary, Inc.* 4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee.* 4.2 First Supplemental Indenture, dated as of May 6, 2002 among Tekni-Plex, Inc., TPI Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee* 4.3 Second Supplemental Indenture, dated as of August 22, 2002 among Tekni-Plex, Inc., TP/Elm Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee* 4.4 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1). 4.5 Purchase Agreement, dated as of May 1, 2002 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc.* 4.6 Registration Right Agreement, dated as of May 6, 2002 among Tekni-Plex, Inc., the Guarantors listed therein and Lehman Brothers Inc.*
- --------------- * Filed previously as an Exhibit to the Form S-4 (File No. 333-43800) filed on August 15, 2000. ** Filed herewith. EX-13.3 7 y61170a2exv13w3.txt QUARTERLY REPORT ON FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission file number 333-28157 TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 North Denton Tap Road (972) 304-5077 Coppell, TX 75019 (Registrant's telephone number) (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] TEKNI-PLEX, INC. PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 27, 2002 and June 28, 2002 ....................................... 3 Consolidated Statements of Operations for the three months ended September 27, 2002 and September 28, 2001 .... 4 Consolidated Statements of Comprehensive Loss for the three months ended September 27, 2002 and September 28, 2001 ...................................... 4 Consolidated Statements of Cash Flows for the three months ended September 27, 2002 and September 28, 2001 .. 5 Notes to Consolidated Financial Statements ................ 6-13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 14-15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................... 15 PART II. OTHER INFORMATION Item 1. Legal proceedings .......................................... 15 Item 2. Changes in securities ...................................... 15 Item 3. Defaults upon senior securities ............................ 15 Item 4. Submission of matters to a vote of securities holders ...... 15 Item 5. Subsequent events .......................................... 15 Item 6. Exhibits and reports on Form 8-K ........................... 15 PART III. CERTIFICATION ................................................ 16-18 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
SEPTEMBER 27, JUNE 28, 2002 2002 (UNAUDITED) (AUDITED) ------------- ---------- ASSETS CURRENT: Cash $ 28,099 $ 28,199 Accounts receivable, net of an allowance for doubtful accounts of $2,675 and $1,671 respectively 112,855 147,198 Inventories 129,831 117,632 Deferred taxes 9,752 7,472 Prepaid expenses and other current assets 9,363 5,583 --------- --------- TOTAL CURRENT ASSETS 289,900 306,084 PROPERTY, PLANT AND EQUIPMENT, NET 170,072 158,118 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $78,601 AND $78,399 RESPECTIVELY 213,664 204,252 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $5,662 AND $5,030 RESPECTIVELY 13,900 14,343 DEFERRED INCOME TAXES 19,317 16,278 OTHER ASSETS 972 1,078 --------- --------- $ 707,825 $ 700,153 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 13,533 $ 13,407 Accounts payable - trade 28,023 32,643 Accrued payroll and benefits 7,506 8,965 Accrued interest 16,756 4,789 Accrued liabilities - other 37,430 28,846 Income taxes payable 1,795 515 --------- --------- TOTAL CURRENT LIABILITIES 105,043 89,165 LONG-TERM DEBT 668,703 679,414 OTHER LIABILITIES 30,003 22,685 --------- --------- TOTAL LIABILITIES 803,749 791,264 --------- --------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 170,568 170,176 Other comprehensive income (7,243) (6,805) Retained deficit (38,727) (33,959) Less: Treasury stock (220,522) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (95,924) (91,111) --------- --------- $ 707,825 $ 700,153 ========= =========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (in thousands) (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ NET SALES $ 140,583 $ 115,164 COST OF GOODS SOLD 110,691 88,150 --------- --------- GROSS PROFIT 29,892 27,014 OPERATING EXPENSES: Selling, general and administrative 13,911 15,176 --------- --------- Operating profit 15,981 11,838 Other expenses Interest expense 17,662 17,785 Unrealized loss on derivative contracts 5,344 8,314 Other expense 303 292 --------- --------- Loss before income taxes (7,328) (14,553) Income tax benefit (2,560) (5,100) --------- --------- NET LOSS $ (4,768) $ (9,453) ========= ========= CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS NET LOSS $ (4,768) $ (9,453) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES Foreign currency translation adjustment (438) 701 --------- --------- COMPREHENSIVE LOSS $ (5,206) $ (8,752) ========= =========
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 27, SEPTEMBER 28, 2002 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,768) $ (9,453) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,475 9,303 Unrealized loss on derivative contracts 5,344 8,314 Deferred income taxes (3,041) (4,623) Changes in operating assets and liabilities: Accounts receivable 36,743 26,900 Inventories (9,019) (6,968) Prepaid expenses and other current assets (3,445) (1,738) Income Taxes 1,280 -- Accounts payable-trade (11,793) (7,389) Accrued interest 11,964 13,122 Accrued expenses and other liabilities 2,511 (5,115) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 33,251 22,353 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,033) (4,723) Acquisition costs (16,806) (501) Additions to intangibles (32) -- Deposits and other assets 104 315 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (22,767) (4,909) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (10,658) (37,585) Payment for treasury stock -- (60) Receipt of additional paid-in capital 392 -- Debt financing costs (189) -- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (10,455) (37,645) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (129) 24 -------- -------- Net decrease in Cash (100) (20,177) Cash, beginning of period 28,199 44,645 -------- -------- Cash, end of period $ 28,099 $ 24,468 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 5,191 $ 4,785 -------- -------- Income taxes 722 -- -------- --------
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL Tekni-Plex is a global, diversified manufacturer of packaging, products, and materials primarily for the healthcare, food and consumer 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 two business groups: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2002. NOTE 2 New Accounting Pronouncements a) In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of September 27, 2002, the net carrying amount of goodwill is $210,195 and other intangible assets are $3,694. If the Company adopted FASB 142 on June 30, 2001, the Company's pre-tax loss for the three months ended September 28, 2001 would have been improved by $3,875 due to reduced amortization. The Company has completed its transitional analysis of goodwill and has determined no adjustments are necessary. b) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supersedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. 6 c) In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective for exit or disposal activities after December 31, 2002, with earlier adoption encouraged. SFAS 146 does not currently affect the Company. 7 NOTE 3 - INVENTORIES Inventories as of September 27, 2002 and June 28, 2002 are summarized as follows:
SEPTEMBER 27,2002 JUNE 28, 2002 ----------------- ------------- Raw materials $ 41,902 $ 37,727 Work-in-process 8,578 8,621 Finished goods 79,351 71,284 -------- -------- $129,831 $117,632 -------- --------
NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ---------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $2,921 and $3,015) $ 272,079 $ 271,985 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $570 and $588) 40,570 40,588 Senior Debt: Revolving line of credit, expiring June, 2006. At September 27, 2002, the interest rate ranged from 4.8125% to 6.75% 35,000 46,000 Term notes due June, 2006 and June, 2008, with interest rates at September 27, 2002 and June 28, 2002 of 4.875% and 5.375% 329,120 329,120 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2003 to 2010 5,467 5,128 --------------- --------------- 682,236 692,821 Less: Current maturities 13,533 13,407 --------------- --------------- $ 668,703 $ 679,414 =============== ===============
NOTE 5 - CONTINGENCIES The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. NOTE 6 - SEGMENT INFORMATION Tekni-Plex has organized its business into two industry segments: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. The Industrial Packaging, Products, and Materials Segment principally produces pharmaceutical packaging, medical tubing, medical device materials, foamed polystyrene packaging products for the poultry, meat and egg industries and vinyl resins and compounds. The Consumer Packaging and Products Segment principally produces precision tubing and gaskets, and garden and irrigation hose products. Both segments have operations in the United States, Europe and Canada. Financial information concerning the Company's business segments and the geographic areas in which they operate are as follows:
INDUSTRIAL PACKAGING, CONSUMER PRODUCTS, PACKAGING AND MATERIALS AND PRODUCTS TOTAL ------------ ------------ ------------ September 27, 2002 Revenues from external customers $ 85,884 $ 54,699 $ 140,583 Interest expense 12,055 5,607 17,662 Depreciation and amortization 5,163 2,056 7,219 Segment income from operations 9,998 10,011 20,009 Expenditures for segment assets 1,044 4,826 5,870 Segment assets 339,695 341,795 681,490 ------------ ------------ ------------ September 28, 2001 Revenues from external customers $ 76,450 $ 38,714 $ 115,164 Interest expense 12,074 5,711 17,785 Depreciation and amortization 5,926 3,121 9,047 Segment income from operations 8,551 7,016 15,567 Expenditures for segment assets 1,586 2,967 4,553 ------------ ------------ ------------ June 28, 2002
8
INDUSTRIAL PACKAGING, CONSUMER PRODUCTS, PACKAGING AND MATERIALS AND PRODUCTS TOTAL ------------ ------------ ------------ Segment assets 314,967 372,591 687,558 ------------ ------------ ------------
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ OPERATING PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 20,009 $ 15,567 Corporate and eliminations (4,028) (3,729) --------------- --------------- $ 15,981 $ 11,838 =============== =============== DEPRECIATION AND AMORTIZATION Segment totals $ 7,219 $ 9,047 Corporate 256 256 --------------- --------------- Consolidated total $ 7,475 $ 9,303 =============== =============== EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 5,870 $ 4,553 Other unallocated expenditures 163 170 --------------- --------------- Consolidated total $ 6,033 $ 4,723 =============== ===============
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ---------------- ASSETS Total assets from reportable segments $ 681,265 $ 687,558 Other unallocated amounts 26,560 12,595 --------------- --------------- Consolidated total $ 707,825 $ 700,153 =============== ===============
GEOGRAPHIC INFORMATION
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ REVENUES United States $ 124,539 $ 102,032 International 16,044 13,132 --------------- ------------- Total $ 140,583 $ 115,164 =============== =============
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ------------------ LONG-LIVED ASSETS United States $ 374,530 $ 352,365 International 45,900 41,704 --------------- --------------- Total $ 420,430 $ 394,069 =============== ===============
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings (in thousands) (Unaudited) For the three months ended September 27, 2002
NON- TOTAL ISSUER GUARANTORS GUARANTORS --------------- --------------- --------------- --------------- Net sales $ 140,583 $ 39,197 $ 85,342 $ 16,044 Cost of goods sold 110,691 27,435 71,723 11,533 --------------- --------------- --------------- --------------- Gross profit 29,892 11,762 13,619 4,511 Operating expenses: Selling, General and administrative 13,911 6,094 6,377 1,440 --------------- --------------- --------------- --------------- Operating profit 15,981 5,668 7,242 3,071 Interest expense, net 17,662 17,665 (23) 20 Unrealized loss on derivative contracts 5,344 5,344 -- -- Other expense 303 69 (279) 513 --------------- --------------- --------------- --------------- Income (loss) before income taxes (7,328) (17,410) 7,544 2,538 Provision for income taxes (2,560) (6,090) 2,640 890 --------------- --------------- --------------- --------------- Net loss $ (4,768) $ (11,320) $ 4,904 $ 1,648 =============== =============== =============== ===============
9 Consolidated Statement of Earnings (in thousands) (Unaudited) For the three months ended September 28, 2001
NON- TOTAL ISSUER GUARANTORS GUARANTORS --------- --------- ---------- ---------- Net sales $ 115,164 $ 39,430 $ 62,602 $ 13,132 Cost of sales 88,150 29,901 48,143 10,106 --------- --------- --------- --------- Gross profit 27,014 9,529 14,459 3,026 Operating expenses: Selling, General and administrative 15,176 10,067 3,657 1,452 --------- --------- --------- --------- Operating profit (loss) 11,838 (538) 10,802 1,574 Interest expense, net 17,785 17,795 (46) 36 Unrealized loss on derivative contracts 8,314 8,314 -- -- Other expense (income) 292 53 (139) 378 --------- --------- --------- --------- Income (loss) before provision for income (14,553) (26,700) 10,987 1,160 taxes Provision (benefit) for income taxes (5,100) (8,644) 2,800 744 --------- --------- --------- --------- Net income(loss) $ (9,453) $ (18,056) $ 8,187 $ 416 ========= ========= ========= =========
Condensed Consolidated Balance Sheet - at September 27, 2002 (Unaudited)
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ --------- ---------- ---------- Current assets $ 289,900 $ -- $ 56,686 $ 180,829 $ 52,385 Property, plant and equipment, net 170,072 -- 39,461 109,065 21,546 Intangible assets 213,664 -- 8,103 193,563 11,998 Investment in subsidiaries -- (505,070) 505,070 -- -- Deferred income taxes 19,317 -- 20,940 -- (1,623) Deferred financing costs 13,900 -- 13,604 -- 296 Other assets 972 (345,557) 64,656 269,813 12,060 --------- --------- --------- --------- --------- Total assets $ 707,825 $(850,627) $ 708,520 $ 753,270 $ 96,662 ========= ========= ========= ========= ========= Current liabilities $ 105,043 $ -- $ 43,291 $ 47,648 $ 14,104 Long-term debt 668,703 -- 664,329 -- 4,374 Other long-term liabilities 30,003 (345,557) 89,601 247,059 38,900 --------- --------- --------- --------- --------- Total liabilities 803,749 (345,557) 797,221 294,707 57,378 --------- --------- --------- --------- --------- Additional paid-in capital 170,568 (312,420) 170,548 296,784 15,656 Retained earnings (deficit) (38,727) (192,650) (38,727) 164,864 27,786 Other comprehensive income (7,243) -- -- (3,085) (4,158) adjustment Less: Treasury stock (220,522) -- (220,522) -- -- --------- --------- --------- --------- --------- Total deficit (95,924) (505,070) (88,701) 458,563 39,284 --------- --------- --------- --------- --------- Total liabilities and deficit $ 707,825 $(850,627) $ 708,520 $ 753,270 $ 96,662 ========= ========= ========= ========= =========
Condensed Consolidated Balance Sheet - at June 28, 2002
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ --------- ---------- ---------- Current assets $ 306,084 $ -- $ 44,828 $ 209,798 $ 51,458 Property, plant and equipment, net 158,118 -- 41,704 95,366 21,048 Intangible assets 204,252 -- 7,907 184,093 12,252 Investment in subsidiaries -- (498,518) 498,518 -- -- Deferred income taxes 16,278 -- 20,177 -- (3,899) Deferred financing costs 14,343 -- 14,134 -- 209 Other assets 1,078 (321,468) 74,008 236,444 12,094 --------- --------- --------- --------- --------- Total assets $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= ========= Current liabilities $ 89,165 $ -- $ 29,889 $ 42,563 $ 16,713 Long-term debt 679,414 -- 675,253 -- 4,161 Other long-term liabilities 22,685 (321,468) 80,460 229,752 33,941 --------- --------- --------- --------- --------- Total liabilities 791,264 (321,468) 785,602 272,315 54,815 --------- --------- --------- --------- --------- Additional paid-in capital 170,176 (312,420) 170,156 296,784 15,656 Retained earnings (deficit) (33,959) (186,098) (33,959) 159,960 26,138 Other comprehensive income (6,805) -- -- (3,358) (3,447) Less: Treasury stock (220,523) -- (220,523) -- -- --------- --------- --------- --------- --------- Total deficit (91,111) (498,518) (84,326) 453,386 38,347 --------- --------- --------- --------- --------- Total liabilities and deficit $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= =========
10 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the three months ended September 27, 2002
NON- TOTAL ISSUER GUARANTORS GUARANTORS ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 33,251 $ (3,838) $ 30,122 $ 6,967 -------- -------- -------- -------- Cash flows from Investing activities: Capital expenditures (6,033) 242 (5,122) (1,153) Acquisition costs (16,806) -- (16,806) -- Additions to intangibles (32) (32) -- -- Deposits and other assets 104 71 1 32 -------- -------- -------- -------- Net cash provided by (used in) provided by investing activities (22,767) 281 (21,927) (1,121) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt (10,658) (10,924) -- 266 Receipt of additional paid in capital 392 392 -- -- Debt financing (189) -- -- (189) Change in intercompany accounts -- 17,879 (18,038) 159 -------- -------- -------- -------- Net cash flows provided by (used in) financing activities (10,455) 7,347 (18,038) 236 -------- -------- -------- -------- Effect of exchange rate changes on cash (129) -- -- (129) -------- -------- -------- -------- Net increase (decrease) in cash (100) 3,790 (9,843) 5,953 Cash, beginning of period 28,199 9,035 10,660 8,504 -------- -------- -------- -------- Cash, end of period $ 28,099 $ 12,825 $ 817 $ 14,457 ======== ======== ======== ========
For the three months ended September 28, 2001
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ 22,353 $ (213) $ 19,541 $ 3,025 -------- -------- -------- ------- Cash flows from Investing activities: Capital expenditures (4,723) (1,647) (1,658) (1,418) Additions to intangibles (501) (140) -- (361) Deposits and other assets 315 (1,909) 2,751 (527) -------- -------- -------- ------- Net cash provided by (used in) provided by investing activities (4,909) (3,696) 1,093 (2,306) -------- -------- -------- ------- Cash flows from financing activities Repayment of long term debt (37,585) (37,860) -- 275 Payment for treasury stock (60) (60) -- -- Change in intercompany accounts -- 20,117 (20,117) -- -------- -------- -------- ------- Net cash flows provided by (used in) financing activities (37,645) (17,803) (20,117) 275 -------- -------- -------- ------- Effect of exchange rate changes on cash 24 -- -- 24 -------- -------- -------- ------- Net increase (decrease) in cash (20,177) (21,712) 517 1,018 Cash, beginning of period 44,645 32,890 5,321 6,434 -------- -------- -------- ------- Cash, end of period $ 24,468 $ 11,178 $ 5,838 $ 7,452 ======== ======== ======== =======
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 8 - ACQUISITIONS The Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" on July 10, 2002, for approximately $16,806, including acquisition costs, in cash. The allocation of the purchase is as follows: Assets: Accounts receivable $ 2,640 Inventory 3,159 Prepaid expenses 334 Deferred Taxes 2,280 Fixed Assets 12,487 Goodwill 9,582 ------- Total Assets 30,482 ------- Accounts payable and accrued liabilities 7,676 Integration reserve 6,000 ------- Net Investment $16,806 =======
The Company utilized preliminary estimates and assumptions in determining the allocation of purchase price to assets acquired and liabilities assumed of ELM. While management believes such estimates and assumptions are reasonable, the final allocation of the purchase price may differ from that reflected in the unaudited September 27, 2002 consolidated balance sheet after a more extensive review of fair values of the assets and liabilities is completed. In connection with the acquisition, a reserve of $6,000 has been established for the costs to integrate ELM's operations with the company. The reserve is included in accrued expenses. The components of the integration reserve and activity through September 27, 2002.
BALANCE COSTS CHARGED TO BALANCE JULY 2002 RESERVE SEPTEMBER 27, 2002 Manufacturing Reconfiguration $ 2,500 $ 103 $ 2,397 Reduction in personnel and related costs 1,000 227 773 Legal, environmental and other 2,500 26 2,474 ---------- ----------- ----------- $ 6,000 $ 356 $ 5,644 ========== =========== ===========
The remaining costs are expected to be paid over the next six to nine months. 12 The proforma results of operations for the quarter ended September 28, 2001, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through September 27, 2002 is as follows:
BALANCE COSTS CHARGED BALANCE OCTOBER 2001 TO RESERVE SEPTEMBER 27, 2002 ------------ --------------- ------------------ Cost to close duplicate facilities $ 3,500 $2,245 $1,255 Reduction in personnel and related costs 2,100 864 1,236 Legal and environmental 1,275 53 1,222 Manufacturing reconfiguration 1,455 199 1,256 Other 1,670 1,164 506 ------- ------ ------ $10,000 $4,525 $5,475 ======= ====== ======
The remaining personnel related costs will be paid over the next four-six months, lease payments on duplicate warehouse facilities will extend over the next two years and the manufacturing reconfiguration is expected to be completed during the next year. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on July 1, 2001. Since Swan was purchased subsequent to July 1, 2001, no amortization of goodwill has been reflected in accordance with SFAS 142.
QUARTER ENDED SEPTEMBER 28, 2001 ------------------ Net sales $ 125,276 Income from operations 11,155 Loss before income taxes (15,236) ==========
13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2003 COMPARED WITH THE FIRST QUARTER OF FISCAL 2002 Net Sales increased by $25.4 million or 22.1% to $140.6 million for the three months ended September 27, 2002 from $115.2 million for the three months ended September 28, 2001. The increase in sales is largely attributable to the inclusion of Swan Hose which was acquired in October 2001 and Elm Packaging which was acquired in July 2002. Swan and Elm combined accounted for approximately $21.7 million of net sales in the current period. Net Sales for our Industrial Segment increased 8.1% to $85.9 million in the current period from $76.5 million in the prior period. This increase was primarily due to our Elm acquisition. Net Sales for our Consumer Segment increased 41.3% to $54.7 million in the current period from $38.7 million in the prior period primarily due to our Swan acquisition. Cost of Sales increased to $110.7 million for the three months ended September 27, 2002 from $88.2 million for the three months ended September 28, 2001. Expressed as a percentage of net sales, cost of sales increased to 78.7% for the three months ended September 27, 2002 from 76.5% for the three months ended September 28, 2001 primarily due to the inclusion of lower margin business from Elm Packaging. Higher raw material cost also contributed to the increase in cost of sales. Gross Profit, as a result, increased to $29.9 million for the three months ended September 27, 2002 from $27.0 million for the three months ending September 28, 2001. Expressed as a percentage of net sales, gross profit declined to 21.3% in the current year from 23.5% in the previous year. Selling, general and administrative expense declined to $13.9 million in the three months ended September 27, 2002 compared to $15.2 million in the three months ended September 28, 2001. Higher selling, general and administrative expenses associated with our Swan and Elm acquisitions were more than offset by a $3.9 million reduction in amortization expense associated with goodwill due to a mandated change in accounting policy. The ratio of selling, general and administrative expense to net sales decreased to 9.9% for the three months ending September 27, 2002 from 13.2% in the comparable period of last year. Operating profit, as a result of the foregoing, increased to $16.0 million or 11.4% of net sales for the three months ended September 27, 2002 from $11.8 million or 10.3% of net sales for the three months ended September 28, 2001. Operating Profit for our Industrial Segment increased to $10.0 million in the current period from $8.6 million in the prior period. Measured as a percentage of net sales, operating profit increased to 11.6% in the current period from 11.2% in the prior period. Operating Profit for our Consumer Segment increased $10.0 million in the current period from $7.0 million in the prior period due to our Swan acquisition. Measured as a percent of net sales, operating profit for our Consumer Segment increased to 18.3% in the current period from 18.1% in the prior period. Interest expense decreased to $17.7 million or 12.6% of net sales in the three months ended September 27, 2002 from $17.8 million or 15.4% of net sales in the three months ended September 28, 2001. The decrease as a percent of sales is due to increased sales. Loss before income taxes, as a result, was a loss of ($7.3) million for the three months ended September 27, 2002 compared to a loss of ($14.6) million for the three months ended September 28, 2001. Benefit for income taxes was a credit of ($2.6) million for the three months ended September 27, 2002, compared to a credit of ($5.1) million for the three months ended September 28, 2001. The Company's effective tax rate was 34.9% for the three months ended September 27, 2002 compared to 35.0% for the three months ending September 28, 2001. Net loss, as a result, was a loss of ($4.8) million for the three months ended September 27, 2002 compared with a loss of ($9.5) million for the three months ended September 28, 2001. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the three months ended September 27, 2002 was $33.3 million compared with $22.3 million in the same period of the prior year. The $10.9 million increase was due primarily to the increase in the normal seasonal reduction of accounts receivable related to our Swan Hose acquisition. Working capital on September 27, 2002 was $184.9 million compared to $216.9 million on June 28, 2002. The decrease was due primarily to cash expended to acquire Elm at $16.8 million, the acquisition of fixed assets of $6.0 million and the reduction of borrowings under our revolving line of credit at $11.0 million. As of September 27, 2002, the Company had an outstanding balance of $35 million under the $100.0 million revolving credit line. This represents a reduction of $11.0 million from the $46.0 million outstanding balance as of June 28, 2002. The Company's capital expenditures for the three months ended September 27, 2002 and September 28, 2001 were $6.0 million and $4.7 million respectively. 14 The Company continues to expect that its principal uses of cash for the next several years will be acquisitions, debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the probability exists that the Company may need additional financing to take advantage of all the acquisition opportunities that might arise. There can be no assurance that such financing will be available in the amounts and terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At September 27, 2002, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $363.7 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.7 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or [to our knowledge,] in other factors that could significantly affect our internal controls subsequent to the Evaluation Date. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Subsequent Events Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 15 CERTIFICATION I, Dr. F. Patrick Smith, Chairman of the Board and Chief Executive Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12,2002 By: /s/ Dr. F. Patrick Smith ---------------------------- Dr. F. Patrick Smith Chairman and Chief Executive Officer 16 CERTIFICATION I, James E. Condon, Chief Financial Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12,2002 By: /s/ James E. Condon --------------------------- James E. Condon Chief Financial Officer 17 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending September 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. F. Patrick Smith, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Dr. F. Patrick Smith - ------------------------------------ Dr. F. Patrick Smith Chairman and Chief Executive Officer November , 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending September 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James E. Condon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James E. Condon - ------------------------------- James E. Condon Chief Financial Officer November , 2002 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. November 12, 2002 By: /s/ F. Patrick Smith --------------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker --------------------------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon --------------------------------------- James E.Condon Vice President and Chief Financial Officer EX-13.4 8 y61170a2exv13w4.txt QUARTERLY REPORT ON FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission file number 333-28157 TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 North Denton Tap Road (972) 304-5077 Coppell, TX 75019 (Registrant's telephone number) (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] TEKNI-PLEX, INC. PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 27, 2002 and June 28, 2002 ....................................... 3 Consolidated Statements of Operations for the three months ended September 27, 2002 and September 28, 2001 .... 4 Consolidated Statements of Comprehensive Loss for the three months ended September 27, 2002 and September 28, 2001 ...................................... 4 Consolidated Statements of Cash Flows for the three months ended September 27, 2002 and September 28, 2001 .. 5 Notes to Consolidated Financial Statements ................ 6-13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 14-15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................... 15 PART II. OTHER INFORMATION Item 1. Legal proceedings .......................................... 15 Item 2. Changes in securities ...................................... 15 Item 3. Defaults upon senior securities ............................ 15 Item 4. Submission of matters to a vote of securities holders ...... 15 Item 5. Subsequent events .......................................... 15 Item 6. Exhibits and reports on Form 8-K ........................... 15 PART III. CERTIFICATION ................................................ 16-18 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
SEPTEMBER 27, JUNE 28, 2002 2002 (UNAUDITED) (AUDITED) ------------- ---------- ASSETS CURRENT: Cash $ 28,099 $ 28,199 Accounts receivable, net of an allowance for doubtful accounts of $2,675 and $1,671 respectively 112,855 147,198 Inventories 129,831 117,632 Deferred taxes 9,752 7,472 Prepaid expenses and other current assets 9,363 5,583 --------- --------- TOTAL CURRENT ASSETS 289,900 306,084 PROPERTY, PLANT AND EQUIPMENT, NET 170,072 158,118 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $78,601 AND $78,399 RESPECTIVELY 213,664 204,252 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $5,662 AND $5,030 RESPECTIVELY 13,900 14,343 DEFERRED INCOME TAXES 19,317 16,278 OTHER ASSETS 972 1,078 --------- --------- $ 707,825 $ 700,153 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 13,533 $ 13,407 Accounts payable - trade 28,023 32,643 Accrued payroll and benefits 7,506 8,965 Accrued interest 16,756 4,789 Accrued liabilities - other 37,430 28,846 Income taxes payable 1,795 515 --------- --------- TOTAL CURRENT LIABILITIES 105,043 89,165 LONG-TERM DEBT 668,703 679,414 OTHER LIABILITIES 30,003 22,685 --------- --------- TOTAL LIABILITIES 803,749 791,264 --------- --------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 170,568 170,176 Other comprehensive income (7,243) (6,805) Retained deficit (38,727) (33,959) Less: Treasury stock (220,522) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (95,924) (91,111) --------- --------- $ 707,825 $ 700,153 ========= =========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (in thousands) (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ NET SALES $ 140,583 $ 115,164 COST OF GOODS SOLD 110,691 88,150 --------- --------- GROSS PROFIT 29,892 27,014 OPERATING EXPENSES: Selling, general and administrative 13,911 15,176 --------- --------- Operating profit 15,981 11,838 Other expenses Interest expense 17,662 17,785 Unrealized loss on derivative contracts 5,344 8,314 Other expense 303 292 --------- --------- Loss before income taxes (7,328) (14,553) Income tax benefit (2,560) (5,100) --------- --------- NET LOSS $ (4,768) $ (9,453) ========= ========= CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS NET LOSS $ (4,768) $ (9,453) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES Foreign currency translation adjustment (438) 701 --------- --------- COMPREHENSIVE LOSS $ (5,206) $ (8,752) ========= =========
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED SEPTEMBER 27, SEPTEMBER 28, 2002 2001 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,768) $ (9,453) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,475 9,303 Unrealized loss on derivative contracts 5,344 8,314 Deferred income taxes (3,041) (4,623) Changes in operating assets and liabilities: Accounts receivable 36,743 26,900 Inventories (9,019) (6,968) Prepaid expenses and other current assets (3,445) (1,738) Income Taxes 1,280 -- Accounts payable-trade (11,793) (7,389) Accrued interest 11,964 13,122 Accrued expenses and other liabilities 2,511 (5,115) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 33,251 22,353 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,033) (4,723) Acquisition costs (16,806) (501) Additions to intangibles (32) -- Deposits and other assets 104 315 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (22,767) (4,909) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (10,658) (37,585) Payment for treasury stock -- (60) Receipt of additional paid-in capital 392 -- Debt financing costs (189) -- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (10,455) (37,645) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (129) 24 -------- -------- Net decrease in Cash (100) (20,177) Cash, beginning of period 28,199 44,645 -------- -------- Cash, end of period $ 28,099 $ 24,468 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 5,191 $ 4,785 -------- -------- Income taxes 722 -- -------- --------
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL Tekni-Plex is a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. Tekni-Plex primarily serves the food, healthcare and consumer markets. Tekni-Plex has built leadership positions in its core markets, and focus on vertically integrated production of highly specialized products. Tekni-Plex has operations in the United States, Europe and Canada. Tekni-Plex's operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected as Other. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2002. NOTE 2 New Accounting Pronouncements a) In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of September 27, 2002, the net carrying amount of goodwill is $210,195 and other intangible assets are $3,694. If the Company adopted FASB 142 on June 30, 2001, the Company's pre-tax loss for the three months ended September 28, 2001 would have been reduced because of lower amounts of amortization as follows: Net loss, as reported $ (9,453) add amortization, net of tax 1,729 adjusted net loss -------- $ (7,724) The Company has completed its transitional analysis of goodwill and has determined no adjustments are necessary. b) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supersedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. 6 c) In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective for exit or disposal activities after December 31, 2002, with earlier adoption encouraged. SFAS 146 does not currently affect the Company. 7 NOTE 3 - INVENTORIES Inventories as of September 27, 2002 and June 28, 2002 are summarized as follows:
SEPTEMBER 27,2002 JUNE 28, 2002 ----------------- ------------- Raw materials $ 41,902 $ 37,727 Work-in-process 8,578 8,621 Finished goods 79,351 71,284 -------- -------- $129,831 $117,632 -------- --------
NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ---------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $2,921 and $3,015) $ 272,079 $ 271,985 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $570 and $588) 40,570 40,588 Senior Debt: Revolving line of credit, expiring June, 2006. At September 27, 2002, the interest rate ranged from 4.8125% to 6.75% 35,000 46,000 Term notes due June, 2006 and June, 2008, with interest rates at September 27, 2002 and June 28, 2002 of 4.875% and 5.375% 329,120 329,120 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2003 to 2010 5,467 5,128 --------------- --------------- 682,236 692,821 Less: Current maturities 13,533 13,407 --------------- --------------- $ 668,703 $ 679,414 =============== ===============
NOTE 5 - CONTINGENCIES The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. 8 NOTE 6 - SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. As a result, beginning in fiscal year 2002, Tekni-Plex has aggregated its operating plants into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe and Canada. Other products not included in either segment are produced in the United States. The prior year has been restated to conform to this presentation. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:
TUBING PACKAGING PRODUCTS OTHER TOTAL ------------ ------------ ------------ ------------ September 27, 2002 Revenues from external customers $ 66,348 $ 47,799 $ 26,436 $ 140,583 Interest expense 5,624 8,291 3,747 17,662 Depreciation and amortization 4,082 1,791 1,346 7,219 Segment income from operations 11,919 7,951 139 20,009 Expenditures for segment assets 662 3,941 1,267 5,870 Segment assets 251,493 293,716 136,281 681,490 ------------ ------------ ------------ ------------ September 28, 2001 Revenues from external customers $ 57,310 $ 31,417 $ 26,437 $ 115,164 Interest expense 6,685 6,406 4,694 17,785 Depreciation and amortization 4,704 2,532 1,811 9,047 Segment income from operations 9,559 4,892 1,116 15,567 Expenditures for segment assets 2,653 1,386 514 4,553 ------------ ------------ ------------ ------------- June 28,2002 Segment assets $ 222,798 $ 334,710 $ 130,050 $ 687,558 ------------ ------------ ------------ ------------
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ OPERATING PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 20,009 $ 15,567 Corporate and eliminations (4,028) (3,729) --------------- --------------- $ 15,981 $ 11,838 =============== =============== DEPRECIATION AND AMORTIZATION Segment totals $ 7,219 $ 9,047 Corporate 256 256 --------------- --------------- Consolidated total $ 7,475 $ 9,303 =============== =============== EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 5,870 $ 4,553 Other unallocated expenditures 163 170 --------------- --------------- Consolidated total $ 6,033 $ 4,723 =============== ===============
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ---------------- ASSETS Total assets from reportable segments $ 681,265 $ 687,558 Other unallocated amounts 26,560 12,595 --------------- --------------- Consolidated total $ 707,825 $ 700,153 =============== ===============
GEOGRAPHIC INFORMATION
SEPTEMBER 27, 2002 SEPTEMBER 28, 2001 ------------------ ------------------ REVENUES United States $ 124,539 $ 102,032 International 16,044 13,132 --------------- ------------- Total $ 140,583 $ 115,164 =============== =============
SEPTEMBER 27, 2002 JUNE 28, 2002 ------------------ ------------------ LONG-LIVED ASSETS United States $ 374,530 $ 352,365 International 45,900 41,704 --------------- --------------- Total $ 420,430 $ 394,069 =============== ===============
9 NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings (in thousands) (Unaudited) For the three months ended September 27, 2002
NON- TOTAL ISSUER GUARANTORS GUARANTORS --------------- --------------- --------------- --------------- Net sales $ 140,583 $ 39,197 $ 85,342 $ 16,044 Cost of goods sold 110,691 27,435 71,723 11,533 --------------- --------------- --------------- --------------- Gross profit 29,892 11,762 13,619 4,511 Operating expenses: Selling, General and administrative 13,911 6,094 6,377 1,440 --------------- --------------- --------------- --------------- Operating profit 15,981 5,668 7,242 3,071 Interest expense, net 17,662 17,665 (23) 20 Unrealized loss on derivative contracts 5,344 5,344 -- -- Other expense 303 69 (279) 513 --------------- --------------- --------------- --------------- Income (loss) before income taxes (7,328) (17,410) 7,544 2,538 Provision for income taxes (2,560) (6,090) 2,640 890 --------------- --------------- --------------- --------------- Net loss $ (4,768) $ (11,320) $ 4,904 $ 1,648 =============== =============== =============== ===============
Consolidated Statement of Earnings (in thousands) (Unaudited) For the three months ended September 28, 2001
NON- TOTAL ISSUER GUARANTORS GUARANTORS --------- --------- ---------- ---------- Net sales $ 115,164 $ 39,430 $ 62,602 $ 13,132 Cost of sales 88,150 29,901 48,143 10,106 --------- --------- --------- --------- Gross profit 27,014 9,529 14,459 3,026 Operating expenses: Selling, General and administrative 15,176 10,067 3,657 1,452 --------- --------- --------- --------- Operating profit (loss) 11,838 (538) 10,802 1,574 Interest expense, net 17,785 17,795 (46) 36 Unrealized loss on derivative contracts 8,314 8,314 -- -- Other expense (income) 292 53 (139) 378 --------- --------- --------- --------- Income (loss) before provision for income (14,553) (26,700) 10,987 1,160 taxes Provision (benefit) for income taxes (5,100) (8,644) 2,800 744 --------- --------- --------- --------- Net income(loss) $ (9,453) $ (18,056) $ 8,187 $ 416 ========= ========= ========= =========
Condensed Consolidated Balance Sheet - at September 27, 2002 (Unaudited)
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ --------- ---------- ---------- Current assets $ 289,900 $ -- $ 56,686 $ 180,829 $ 52,385 Property, plant and equipment, net 170,072 -- 39,461 109,065 21,546 Intangible assets 213,664 -- 8,103 193,563 11,998 Investment in subsidiaries -- (505,070) 505,070 -- -- Deferred income taxes 19,317 -- 20,940 -- (1,623) Deferred financing costs 13,900 -- 13,604 -- 296 Other assets 972 (345,557) 64,656 269,813 12,060 --------- --------- --------- --------- --------- Total assets $ 707,825 $(850,627) $ 708,520 $ 753,270 $ 96,662 ========= ========= ========= ========= ========= Current liabilities $ 105,043 $ -- $ 43,291 $ 47,648 $ 14,104 Long-term debt 668,703 -- 664,329 -- 4,374 Other long-term liabilities 30,003 (345,557) 89,601 247,059 38,900 --------- --------- --------- --------- --------- Total liabilities 803,749 (345,557) 797,221 294,707 57,378 --------- --------- --------- --------- --------- Additional paid-in capital 170,568 (312,420) 170,548 296,784 15,656 Retained earnings (deficit) (38,727) (192,650) (38,727) 164,864 27,786 Other comprehensive income (7,243) -- -- (3,085) (4,158) adjustment Less: Treasury stock (220,522) -- (220,522) -- -- --------- --------- --------- --------- --------- Total deficit (95,924) (505,070) (88,701) 458,563 39,284 --------- --------- --------- --------- --------- Total liabilities and deficit $ 707,825 $(850,627) $ 708,520 $ 753,270 $ 96,662 ========= ========= ========= ========= =========
Condensed Consolidated Balance Sheet - at June 28, 2002
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ --------- ---------- ---------- Current assets $ 306,084 $ -- $ 44,828 $ 209,798 $ 51,458 Property, plant and equipment, net 158,118 -- 41,704 95,366 21,048 Intangible assets 204,252 -- 7,907 184,093 12,252 Investment in subsidiaries -- (498,518) 498,518 -- -- Deferred income taxes 16,278 -- 20,177 -- (3,899) Deferred financing costs 14,343 -- 14,134 -- 209 Other assets 1,078 (321,468) 74,008 236,444 12,094 --------- --------- --------- --------- --------- Total assets $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= ========= Current liabilities $ 89,165 $ -- $ 29,889 $ 42,563 $ 16,713 Long-term debt 679,414 -- 675,253 -- 4,161 Other long-term liabilities 22,685 (321,468) 80,460 229,752 33,941 --------- --------- --------- --------- --------- Total liabilities 791,264 (321,468) 785,602 272,315 54,815 --------- --------- --------- --------- --------- Additional paid-in capital 170,176 (312,420) 170,156 296,784 15,656 Retained earnings (deficit) (33,959) (186,098) (33,959) 159,960 26,138 Other comprehensive income (6,805) -- -- (3,358) (3,447) Less: Treasury stock (220,523) -- (220,523) -- -- --------- --------- --------- --------- --------- Total deficit (91,111) (498,518) (84,326) 453,386 38,347 --------- --------- --------- --------- --------- Total liabilities and deficit $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= =========
10 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the three months ended September 27, 2002
NON- TOTAL ISSUER GUARANTORS GUARANTORS ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 33,251 $ (3,838) $ 30,122 $ 6,967 -------- -------- -------- -------- Cash flows from Investing activities: Capital expenditures (6,033) 242 (5,122) (1,153) Acquisition costs (16,806) -- (16,806) -- Additions to intangibles (32) (32) -- -- Deposits and other assets 104 71 1 32 -------- -------- -------- -------- Net cash provided by (used in) provided by investing activities (22,767) 281 (21,927) (1,121) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt (10,658) (10,924) -- 266 Receipt of additional paid in capital 392 392 -- -- Debt financing (189) -- -- (189) Change in intercompany accounts -- 17,879 (18,038) 159 -------- -------- -------- -------- Net cash flows provided by (used in) financing activities (10,455) 7,347 (18,038) 236 -------- -------- -------- -------- Effect of exchange rate changes on cash (129) -- -- (129) -------- -------- -------- -------- Net increase (decrease) in cash (100) 3,790 (9,843) 5,953 Cash, beginning of period 28,199 9,035 10,660 8,504 -------- -------- -------- -------- Cash, end of period $ 28,099 $ 12,825 $ 817 $ 14,457 ======== ======== ======== ========
For the three months ended September 28, 2001
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ 22,353 $ (213) $ 19,541 $ 3,025 -------- -------- -------- ------- Cash flows from Investing activities: Capital expenditures (4,723) (1,647) (1,658) (1,418) Additions to intangibles (501) (140) -- (361) Deposits and other assets 315 (1,909) 2,751 (527) -------- -------- -------- ------- Net cash provided by (used in) provided by investing activities (4,909) (3,696) 1,093 (2,306) -------- -------- -------- ------- Cash flows from financing activities Repayment of long term debt (37,585) (37,860) -- 275 Payment for treasury stock (60) (60) -- -- Change in intercompany accounts -- 20,117 (20,117) -- -------- -------- -------- ------- Net cash flows provided by (used in) financing activities (37,645) (17,803) (20,117) 275 -------- -------- -------- ------- Effect of exchange rate changes on cash 24 -- -- 24 -------- -------- -------- ------- Net increase (decrease) in cash (20,177) (21,712) 517 1,018 Cash, beginning of period 44,645 32,890 5,321 6,434 -------- -------- -------- ------- Cash, end of period $ 24,468 $ 11,178 $ 5,838 $ 7,452 ======== ======== ======== =======
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 8 - ACQUISITIONS The Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" on July 10, 2002, for approximately $16,806, including acquisition costs, in cash. The allocation of the purchase is as follows: Assets: Accounts receivable $ 2,640 Inventory 3,159 Prepaid expenses 334 Deferred Taxes 2,280 Fixed Assets 12,487 Goodwill 9,582 ------- Total Assets 30,482 ------- Accounts payable and accrued liabilities 7,676 Integration reserve 6,000 ------- Net Investment $16,806 =======
The Company utilized preliminary estimates and assumptions in determining the allocation of purchase price to assets acquired and liabilities assumed of ELM. While management believes such estimates and assumptions are reasonable, the final allocation of the purchase price may differ from that reflected in the unaudited September 27, 2002 consolidated balance sheet after a more extensive review of fair values of the inventory and the acquisition reserve. The Company expects to finalize this allocation in the next nine months. In connection with the acquisition, a reserve of $6,000 has been established for the costs to integrate ELM's operations with the company. The reserve is included in accrued expenses. The components of the integration reserve and activity through September 27, 2002.
BALANCE COSTS CHARGED TO BALANCE JULY 2002 RESERVE SEPTEMBER 27, 2002 Manufacturing Reconfiguration $ 2,500 $ 103 $ 2,397 Reduction in personnel and related costs 1,000 227 773 Legal, environmental and other 2,500 26 2,474 ---------- ----------- ----------- $ 6,000 $ 356 $ 5,644 ========== =========== ===========
The remaining costs are expected to be paid over the next six to nine months. 12 The proforma results of operations for the quarter ended September 28, 2001, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through September 27, 2002 is as follows:
BALANCE COSTS CHARGED BALANCE OCTOBER 2001 TO RESERVE SEPTEMBER 27, 2002 ------------ --------------- ------------------ Cost to close duplicate facilities $ 3,500 $2,245 $1,255 Reduction in personnel and related costs 2,100 864 1,236 Legal and environmental 1,275 53 1,222 Manufacturing reconfiguration 1,455 199 1,256 Other 1,670 1,164 506 ------- ------ ------ $10,000 $4,525 $5,475 ======= ====== ======
The remaining personnel related costs will be paid over the next four-six months, lease payments on duplicate warehouse facilities will extend over the next two years and the manufacturing reconfiguration is expected to be completed during the next year. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on July 1, 2001. Since Swan was purchased subsequent to July 1, 2001, no amortization of goodwill has been reflected in accordance with SFAS 142.
QUARTER ENDED SEPTEMBER 28, 2001 ------------------ Net sales $ 125,276 Income from operations 11,155 Loss before income taxes (15,236) ==========
13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2003 COMPARED WITH THE FIRST QUARTER OF FISCAL 2002 Net Sales increased by $25.4 million or 22.1% to $140.6 million for the three months ended September 27, 2002 from $115.2 million for the three months ended September 28, 2001. The increase in sales is largely attributable to the inclusion of Swan Hose which was acquired in October 2001 and Elm Packaging which was acquired in July 2002. Swan and Elm combined accounted for approximately $21.7 million of net sales in the current period. Net Sales for our Packaging Segment increased 15.8% to $66.3 million in the current period from $57.3 million in the prior period. This increase was primarily due to our Elm acquisition. Net Sales for our Tubing Products Segment increased 52.1% to $47.8 million in the current period from $31.4 million in the prior period primarily due to our Swan acquisition. Other sales were flat at $26.4 million in both the current period and prior period. Cost of Sales increased to $110.7 million for the three months ended September 27, 2002 from $88.2 million for the three months ended September 28, 2001. Expressed as a percentage of net sales, cost of sales increased to 78.7% for the three months ended September 27, 2002 from 76.5% for the three months ended September 28, 2001 primarily due to the inclusion of lower margin business from Elm Packaging. Higher raw material cost also contributed to the increase in cost of sales. Gross Profit, as a result, increased to $29.9 million for the three months ended September 27, 2002 from $27.0 million for the three months ending September 28, 2001. Expressed as a percentage of net sales, gross profit declined to 21.3% in the current year from 23.5% in the previous year. Selling, general and administrative expense declined to $13.9 million in the three months ended September 27, 2002 compared to $15.2 million in the three months ended September 28, 2001. Higher selling, general and administrative expenses associated with our Swan and Elm acquisitions were more than offset by a $3.9 million reduction in amortization expense associated with goodwill due to a mandated change in accounting policy. The ratio of selling, general and administrative expense to net sales decreased to 9.9% for the three months ending September 27, 2002 from 13.2% in the comparable period of last year. Operating profit, as a result of the foregoing, increased to $16.0 million or 11.4% of net sales for the three months ended September 27, 2002 from $11.8 million or 10.3% of net sales for the three months ended September 28, 2001. Operating Profit for our Packaging Segment increased to $11.9 million in the current period from $9.6 million in the prior period. Measured as a percentage of net sales, operating profit increased to 18.0% in the current period from 16.7% in the prior period. Operating profit for our Tubing Products Segment increased to $8.0 million in the current period from $4.9 million in the prior period due to our Swan acquisition. Measured as a percent of net sales, operating profit for our Tubing Segment increased to 16.6% in the current period from 15.6% in the prior period. Other operating profit decreased to $0.1 million in the current period from $1.1 million in the previous period. Interest expense decreased to $17.7 million or 12.6% of net sales in the three months ended September 27, 2002 from $17.8 million or 15.4% of net sales in the three months ended September 28, 2001. The decrease as a percent of sales is due to increased sales. Loss before income taxes, as a result, was a loss of ($7.3) million for the three months ended September 27, 2002 compared to a loss of ($14.6) million for the three months ended September 28, 2001. Benefit for income taxes was a credit of ($2.6) million for the three months ended September 27, 2002, compared to a credit of ($5.1) million for the three months ended September 28, 2001. The Company's effective tax rate was 34.9% for the three months ended September 27, 2002 compared to 35.0% for the three months ending September 28, 2001. Net loss, as a result, was a loss of ($4.8) million for the three months ended September 27, 2002 compared with a loss of ($9.5) million for the three months ended September 28, 2001. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the three months ended September 27, 2002 was $33.3 million compared with $22.3 million in the same period of the prior year. The $10.9 million increase was due primarily to the increase in the normal seasonal reduction of accounts receivable related to our Swan Hose acquisition. Working capital on September 27, 2002 was $184.9 million compared to $216.9 million on June 28, 2002. The decrease was due primarily to cash expended to acquire Elm at $16.8 million, the acquisition of fixed assets of $6.0 million and the reduction of borrowings under our revolving line of credit at $11.0 million. As of September 27, 2002, the Company had an outstanding balance of $35 million under the $100.0 million revolving credit line. This represents a reduction of $11.0 million from the $46.0 million outstanding balance as of June 28, 2002. The Company's capital expenditures for the three months ended September 27, 2002 and September 28, 2001 were $6.0 million and $4.7 million respectively. 14 The Company continues to expect that its principal uses of cash for the next several years will be acquisitions, debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the probability exists that the Company may need additional financing to take advantage of all the acquisition opportunities that might arise. There can be no assurance that such financing will be available in the amounts and terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At September 27, 2002, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $363.7 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.7 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls subsequent to the Evaluation Date. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Subsequent Events Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 15 CERTIFICATION I, Dr. F. Patrick Smith, Chairman of the Board and Chief Executive Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12,2002 By: /s/ Dr. F. Patrick Smith ---------------------------- Dr. F. Patrick Smith Chairman and Chief Executive Officer 16 CERTIFICATION I, James E. Condon, Chief Financial Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12,2002 By: /s/ James E. Condon --------------------------- James E. Condon Chief Financial Officer 17 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending September 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. F. Patrick Smith, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Dr. F. Patrick Smith - ------------------------------------ Dr. F. Patrick Smith Chairman and Chief Executive Officer November 12, 2002 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending September 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James E. Condon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ James E. Condon - ------------------------------- James E. Condon Chief Financial Officer November 12, 2002 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. November 12, 2002 By: /s/ F. Patrick Smith --------------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker --------------------------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon --------------------------------------- James E.Condon Vice President and Chief Financial Officer EX-13.5 9 y61170a2exv13w5.txt QUARTERLY REPORT ON FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 27, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT - --- For the transition period from to ---------------- ---------------- Commission file number 333-28157 TEKNI-PLEX, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3286312 - --------------------------------- ------------------------------------ (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 N. Denton Tap Road, Suite 150 (972) 304-5077 Coppell, TX 75019 ------------------------------- - --------------------------------------- (Registrant's telephone number) (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / TEKNI-PLEX, INC.
Page # PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 27, 2002 and June 28, 2002 3 Consolidated Statements of Operations for the six months and three months ended December 27, 2002 and December 28, 2001 4 Consolidated Statements of Other Comprehensive Income for the six months and three months ended December 27, 2002 and December 28, 2001 4 Consolidated Statements of Cash Flows for the six months ended December 27, 2002 and December 28, 2001 5 Notes to Consolidated Financial Statements 6-18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19-21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 PART II. OTHER INFORMATION Item 1. Legal proceedings 22 Item 2. Changes in securities 22 Item 3. Defaults upon senior securities 22 Item 4. Submission of matters to a vote of securities holders 22 Item 5. Other information 22 Item 6. Exhibits and reports on Form 8-K 22 Item 7. Certifications 23-26
TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 27, 2002 June 28, 2002 (UNAUDITED) ----------- --------- ASSETS CURRENT: Cash $ 16,208 $ 28,199 Accounts receivable, net of allowance for doubtful accounts of $2,903 and $1,671 respectively 102,285 147,198 Inventories 157,857 117,632 Deferred income taxes 7,472 7,472 Prepaid and other current assets 9,336 5,583 ---------- ---------- TOTAL CURRENT ASSETS 293,158 306,084 PROPERTY, PLANT AND EQUIPMENT, NET 172,208 158,118 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $78,852 AND $78,399 RESPECTIVELY 215,214 204,252 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $6,271 AND $5,030 RESPECTIVELY 13,102 14,343 DEFERRED INCOME TAXES 20,687 16,278 OTHER ASSETS 982 1,078 ---------- ---------- $ 715,351 $ 700,153 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 13,269 $ 13,407 Accounts payable - trade 24,887 32,643 Accrued payroll and benefits 6,997 8,965 Accrued interest 6,490 4,789 Accrued liabilities - other 34,430 28,846 Income taxes payable 1,648 515 ---------- ---------- TOTAL CURRENT LIABILITIES 87,721 89,165 LONG-TERM DEBT 694,030 679,414 OTHER LIABILITIES 26,737 22,685 ---------- ---------- TOTAL LIABILITIES 808,488 791,264 ========== ========== STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 170,568 170,176 Accumulated other comprehensive Loss (5,985) (6,805) Accumulated deficit (37,198) (33,959) Less: Treasury stock (220,522) (220,523) ---------- ---------- TOTAL STOCKHOLDERS' DEFICIT (93,137) (91,111) ---------- ---------- $ 715,351 $ 700,153 ========== ==========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (Unaudited -- in thousands) CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended DECEMBER 27, December 28, DECEMBER 27, December 28, 2002 2001 2002 2001 NET SALES $ 118,584 $ 113,740 $ 259,167 $ 228,904 COST OF SALES 87,214 86,056 197,905 174,206 --------- --------- --------- --------- GROSS PROFIT 31,370 27,684 61,262 54,698 OPERATING EXPENSES: Selling, general and administrative 14,573 16,609 28,484 31,785 --------- --------- --------- --------- OPERATING PROFIT 16,797 11,075 32,778 22,913 OTHER EXPENSES: Interest expense 17,587 16,590 35,249 34,375 Unrealized (gain) loss on derivative contracts (3,208) (5,724) 2,136 2,590 Other expenses 79 42 382 334 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 2,339 167 (4,989) (14,386) PROVISION (benefit) FOR INCOME TAXES 810 100 (1,750) (5,000) --------- --------- --------- --------- NET INCOME (LOSS) $ 1,529 $ 67 $ (3,239) $ (9,386) ========= ========= ========= ========= CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME NET INCOME (LOSS) $ 1,529 $ 67 $ (3,239) $ (9,386) COMPREHENSIVE INCOME (LOSS), NET OF TAXES Foreign currency translation adjustment 1,112 (993) 820 (292) --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 2,641 $ (926) $ (2,419) $ (9,678) ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited -- in thousands)
Six months ended DECEMBER 27 2002 December 28 2001 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,239) $ (9,386) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,851 19,054 Unrealized loss on derivative contracts 2,136 2,590 Deferred income taxes 156 (4,591) Changes in operating assets and liabilities: Accounts receivable 48,722 28,449 Inventories (40,441) (16,021) Prepaid expenses and other current assets (3,366) (1,749) Income taxes 1,133 (2,369) Accounts payable (15,643) (9,552) Accrued interest 1,702 3,277 Accrued expenses and other liabilities (905) (5,386) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,106 4,316 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,609) (9,142) Acquisition costs (16,806) (65,757) Additions to intangibles (503) (222) Deposits and other assets 98 894 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (30,820) (74,227) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) of long-term debt 14,370 (8,813) Payment for treasury stock -- (60) Receipt of additional paid-in capital 392 50,000 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,762 41,127 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (39) (39) -------- -------- NET DECREASE IN CASH (11,991) (28,823) CASH, BEGINNING OF PERIOD 28,199 44,645 -------- -------- CASH, END OF PERIOD $ 16,208 $ 15,822 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 32,513 $ 31,207 Income taxes 2,325 1,543
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ( in thousands) NOTE 1 - GENERAL Tekni-Plex and Subsidiaries (''Tekni-Plex'' or the ''Company'') is a global, diversified manufacturer of packaging, products, and materials primarily for the healthcare, food and consumer 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 two business groups: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2002. NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS a) In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141, requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that the companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of December 27, 2002, the net carrying amount of goodwill is $211,268 and other intangible assets are $3,946. The Company has completed its transitional analysis of goodwill and has determined no adjustments are necessary. 6 If SFAS 142 had been adopted June 30, 2001, the Company's net loss for the six months ended December 28, 2001 wild have been reduced because of lower amounts of amortization as follows:
Three Months Ended Six Months Ended Net (loss), as reported $ (4,693) $ (9,386) Add amortization, net of tax 3,458 6,915 ---------- ----------- Adjusted net (loss) $ (1,235) $ (2,471) ---------- -----------
b) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supersedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. c) In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. NOTE 3 - INVENTORIES Inventories as of December 27, 2002 and June 28, 2002 are summarized as follows:
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- Raw materials $ 46,237 $ 37,727 Work-in-process 9,942 8,621 Finished goods 101,678 71,284 --------- --------- $ 157,857 $ 117,632 ========= =========
7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (Less unamortized discount of $2,827 and $3,015) $272,174 $271,985 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium at $550 and $588) 40,550 40,588 Senior Debt: Revolving line of credit, expiring June, 2006. At December 27, 2002, the interest rates ranged from 4.44 % to 6.25%. 63,000 46,000 Term notes due June, 2006 and June, 2008, with interest rates at December 27, 2002 of 4.38% and 4.88%. 326,010 329,120 Other, primarily international term loans, with interest rates ranging from 4.44% to 5.44% and maturities ranging from 2003 to 2010 5,565 5,128 -------- -------- 707,299 692,821 Less: Current maturities 13,269 13,407 -------- -------- $694,030 $679,414 -------- --------
8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - SEGMENT INFORMATION Tekni-plex has organized its business into two industry segments: Industrial Packaging, Products, and Materials and Consumer Packaging and Products. The Industrial Packaging, Products, and Materials segment principally produces pharmaceutical packaging, medical tubing, medical device materials, foamed polystyrene packaging products for the poultry, meat and egg industries and vinyl resins and compounds. The Consumer Packaging and Products Segment principally produces precision tubing and gaskets, and garden and irrigation hose products. Both segments have operations in the United States, Europe and Canada. Financial information concerning the Company's business segments and the geographic areas in which they operate are as follows:
Industrial Packaging, Consumer Products, Packaging and Materials and Products TOTAL ------------- ------------ ----- Three months ended December 27,2002 Revenues from external Customers $ 83,230 $ 35,354 $118,584 Interest expense 12,056 5,531 17,587 Depreciation and Amortization 3,988 2,132 6,120 Income from operations 14,896 6,666 21,562 Expenditures for segment Assets 3,784 3,566 7,350 -------- -------- -------- Three months ended December 28,2001 Revenues from external Customers $ 77,283 $ 36,457 $113,740 Interest expense 11,321 5,269 16,590 Depreciation and Amortization 6,142 3,353 9,495 Income from operations 11,372 3,550 14,922 Expenditures for segment Assets 2,942 1,049 3,991 -------- -------- --------
9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
Industrial Packaging, Consumer Products, Packaging and Materials and Products TOTAL ------------- ------------ ----- Six months ended December 27, 2002 Revenues from external Customers $169,114 $ 90,053 $259,167 Interest expense 24,111 11,138 35,249 Depreciation and Amortization 9,151 4,188 13,339 Income from operations 24,894 16,677 41,571 Expenditures for segment Assets 4,828 8,392 13,220 ----- ----- ----- Six months ended December 28, 2001 Revenues from external Customers $153,733 $ 75,171 $228,904 Interest expense 23,441 10,934 34,375 Depreciation and Amortization 12,068 6,474 18,542 Income from operations 19,923 10,566 30,489 Expenditures for segment Assets 4,528 4,323 8,851 ----- ----- -----
Three months ended Six months ended DECEMBER 27, December 28, DECEMBER 27 December 28 2002 2001 2002 2001 ---- ---- ---- ---- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 21,562 $ 14,922 $ 41,571 $ 30,489 Corporate and eliminations (4,765) (3,847) (8,793) (7,576) -------- -------- -------- -------- $ 16,797 $ 11,075 $ 32,778 $ 22,913 ======== ======== ======== ======== DEPRECIATION AND AMORTIZATION Segment totals $ 6,120 $ 9,495 $ 13,339 $ 18,542 Corporate 256 256 512 512 -------- -------- -------- -------- Consolidated total $ 6,376 $ 9,751 $ 13,851 $ 19,054 ======== ======== ======== ======== EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 7,350 $ 3,991 $ 13,220 $ 8,851 Other unallocated expenditures 226 121 389 291 -------- -------- -------- -------- Consolidated total $ 7,576 $ 4,112 $ 13,609 $ 9,142 ======== ======== ======== ========
10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) SEGMENT ASSETS
Industrial Packaging, Consumer Products, Packaging and Materials and Products TOTAL ------------- ------------ ----- December 27, 2002 332,957 357,735 690,692 June 28, 2002 314,967 372,591 687,558 --- ---- ------- ------- -------
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- TOTAL ASSETS Total assets from reportable segments $ 690,692 $ 687,558 Other unallocated amounts 24,659 12,595 --------- --------- Consolidated total $ 715,351 $ 700,153 ========= =========
GEOGRAPHIC INFORMATION
Three months ended Six months ended ------------------ ---------------- DECEMBER 27, December 28, DECEMBER 27, December 28, 2002 2001 2002 2001 ---- ---- ---- ---- REVENUES United States $103,615 $101,649 $ 228,154 $203,681 International 14,969 12,091 31,013 25,223 -------- -------- ---------- -------- Total $118,584 $113,740 $ 259,167 $228,904 ======== ======== ========== ========
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- LONG-LIVED ASSETS United States $ 377,260 $ 352,365 International 44,933 41,704 --------- --------- Total $ 422,193 $ 394,069 ========= =========
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 118,584 $ 35,163 $ 68,452 $ 14,969 Cost of sales 87,214 24,864 51,044 11,306 --------- -------- -------- -------- Gross profit 31,370 10,299 17,408 3,663 Operating expenses: Selling, General and administrative 14,573 6,634 6,256 1,683 --------- -------- -------- -------- Operating profit 16,797 3,665 11,152 1,980 Interest expense 17,587 17,568 (20) 39 Unrealized gain on derivative contracts (3,208) (3,208) -- -- Other expense (income) 79 (93) (321) 493 --------- -------- -------- -------- Income (loss) before income taxes 2,339 (10,602) 11,493 1,448 Provision (benefit) for income taxes 810 (3,768) 4,020 558 --------- -------- --------- --------- Net income (loss) $ 1,529 $ (6,834) $ 7,473 $ 890 ========= ======== ========= =========
For the six months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 259,167 $ 74,360 $ 153,794 $ 31,013 Cost of sales 197,905 52,299 122,767 22,839 --------- --------- --------- --------- Gross profit 61,262 22,061 31,027 8,174 Operating expenses: Selling, General and administrative 28,484 12,728 12,633 3,123 --------- --------- --------- --------- Operating profit 32,778 9,333 18,394 5,051 Interest expense 35,249 35,233 (43) 59 Unrealized loss on derivative contracts 2,136 2,136 -- -- Other expense (income) 382 (24) (600) 1,006 --------- --------- --------- --------- Income (loss) before income taxes (4,989) (28,012) 19,037 3,986 Provision (benefit) for income taxes (1,750) (9,858) 6,660 1,448 --------- --------- --------- --------- Net income (loss) $ (3,239) $ (18,154) $ 12,377 $ 2,538 ========= ========= ========= =========
12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors Net sales $ 113,740 $ 41,876 $ 59,773 $ 12,091 Cost of sales 86,056 30,186 46,854 9,016 --------- --------- --------- --------- Gross profit 27,684 11,690 12,919 3,075 Operating expenses: Selling, General and administrative 16,609 8,816 6,220 1,573 --------- --------- --------- --------- Operating profit 11,075 2,874 6,699 1,502 Interest expense 16,590 16,559 (30) 61 Unrealized gain on derivative contracts (5,724) (5,724) -- -- Other expense (income) 42 (543) (125) 710 --------- --------- --------- --------- Income (loss) before income taxes 167 (7,418) 6,854 731 Provision (benefit) for income taxes 100 (3,266) 3,450 (84) --------- --------- --------- --------- Net income (loss) $ 67 $ (4,152) $ 3,404 $ 815 ========= ========= ========= =========
For the six months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 228,904 $ 81,306 $ 122,375 $ 25,223 Cost of sales 174,206 60,087 94,997 19,122 --------- --------- --------- --------- Gross profit 54,698 21,219 27,378 6,101 Operating expenses: Selling, General and administrative 31,785 18,883 9,877 3,025 --------- --------- --------- --------- Operating profit 22,913 2,336 17,501 3,076 Interest expense 34,375 34,354 (76) 97 Unrealized loss on derivative contracts 2,590 2,590 -- -- Other expense (income) 334 (490) (264) 1,088 --------- --------- --------- --------- Income (loss) before income taxes (14,386) (34,118) 17,841 1,891 Provision (benefit) for income taxes (5,000) (11,910) 6,250 660 --------- --------- --------- --------- Net income (loss) $ (9,386) $ (22,208) $ 11,591 $ 1,231 ========= ========= ========= =========
13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at December 27, 2002
Non- TOTAL Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 293,158 $ -- $ 40,002 $ 201,858 $ 51,298 Property, plant and equipment, net 172,208 -- 39,535 110,392 22,281 Intangible assets, net 215,214 -- 8,329 194,782 12,103 Investment in subsidiaries -- (513,433) 513,433 -- -- Deferred income taxes 20,687 -- 21,940 470 (1,723) Deferred charges, net 13,102 -- 12,986 (86) 202 Other assets 982 (345,557) 79,804 254,665 12,070 --------- --------- --------- --------- --------- Total assets $ 715,351 $(858,990) $ 716,029 $ 762,081 $ 96,231 ========= ========= ========= ========= ========= Current liabilities $ 87,721 $ -- $ 30,281 $ 42,592 $ 14,848 Long-term debt 694,030 -- 689,294 -- 4,736 Other liabilities 26,737 (345,557) 84,996 247,290 40,008 --------- --------- --------- --------- --------- Total liabilities 808,488 (345,557) 804,571 289,882 59,592 --------- --------- --------- --------- --------- Additional paid-in capital 170,568 (312,420) 170,549 296,783 15,656 Retained earnings,accumulated (deficit) (37,198) (201,013) (38,569) 178,501 23,883 Accumulated other comprehensive Loss (5,985) -- -- (3,085) (2,900) Less: Treasury stock (220,522) -- (220,522) -- -- --------- --------- --------- --------- --------- Total stockholders' deficit (93,137) (513,433) (88,542) 472,199 36,639 --------- --------- --------- --------- --------- Total liabilities and deficit $ 715,351 $(858,990) $ 716,029 $ 762,081 $ 96,231 ========= ========= ========= ========= =========
14 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at June 28, 2002
Non- Total Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 306,084 $ -- $ 44,828 $ 209,798 $ 51,458 Property, plant and equipment, net 158,118 -- 41,704 95,366 21,048 Intangible assets, net 204,252 -- 7,907 184,093 12,252 Investment in subsidiaries -- (498,518) 498,518 -- -- Deferred charges, net 14,343 -- 14,134 -- 209 Deferred taxes 16,278 -- 20,177 -- (3,899) Other income assets 1,078 (321,468) 74,008 236,444 12,094 --------- --------- ----------- --------- --------- Total assets $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= =========== ========= ========= Current liabilities $ 89,165 $ -- $ 29,889 $ 42,563 $ 16,713 Long-term debt 679,414 -- 675,253 -- 4,161 Other liabilities 22,685 (321,468) 80,460 229,752 33,941 --------- --------- ----------- --------- --------- Total liabilities 791,264 (321,468) 785,602 272,315 54,815 --------- --------- ----------- --------- --------- Additional paid-in capital 170,176 (312,420) 170,156 296,784 15,656 Retained earnings, Accumulated (deficit) (33,959) (186,098) (33,959) 159,960 26,138 Accumulated other comprehensive income (6,805) -- -- (3,358) (3,447) Treasury stock (220,523) -- (220,523) -- -- --------- --------- ----------- --------- --------- Total deficit (91,111) (498,518) (84,326) 453,386 38,347 --------- --------- ----------- --------- --------- Total liabilities and deficit $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= =========== ========= =========
15 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows For the six months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 4,106 $ (7,765) $ 10,272 $ 1,599 -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures (13,609) (1,873) (9,161) (2,575) Acquisition costs (16,806) -- (16,806) -- Additions to intangibles (503) (267) -- (236) Deposits and other assets 98 74 -- 24 -------- -------- -------- -------- Net cash used in investing activities (30,820) (2,066) (25,967) (2,787) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt 14,370 13,933 -- 437 Receipt of additional paid-in capital 392 392 -- -- Change in intercompany accounts -- (5,011) 3,625 1,386 -------- -------- -------- -------- Net cash flows provided by financing activities 14,762 9,314 3,625 1,823 -------- -------- -------- -------- Effect of exchange rate changes on cash (39) -- -- (39) -------- -------- -------- -------- Net increase (decrease) in cash (11,991) (517) (12,070) 596 Cash, beginning of period 28,199 9,035 10,660 8,504 -------- -------- -------- -------- Cash, end of period $ 16,208 $ 8,518 $ (1,410) $ 9,100 ======== ======== ======== ========
For the six months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 4,316 $(105,959) $ 106,824 $ 3,451 --------- --------- --------- --------- Cash flows from Investing activities: Capital expenditures (9,142) (3,103) (3,941) (2,098) Acquisition costs (65,757) -- (65,757) -- Additions to intangibles (222) (140) -- (82) Deposits and other assets 894 (1,909) 3,331 (528) --------- --------- --------- --------- Net cash used in investing activities (74,227) (5,152) (66,367) (2,708) --------- --------- --------- --------- Cash flows from financing activities Repayment of long term debt (8,813) (8,863) -- 50 Receipt of additional paid in capital 50,000 50,000 -- -- Payment for treasury stock (60) (60) -- -- Change in intercompany accounts -- 48,322 (48,586) 264 --------- --------- --------- --------- Net cash flows provided by (used in) financing activities 41,127 89,399 (48,586) 314 --------- --------- --------- --------- Effect of exchange rate changes on cash (39) -- -- (39) --------- --------- --------- --------- Net increase (decrease) in cash (28,823) (21,712) (8,129) 1,018 Cash, beginning of period 44,645 32,890 5,321 6,434 --------- --------- --------- --------- Cash, end of period $ 15,822 $ 11,178 $ (2,808) $ 7,452 ========= ========= ========= =========
16 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 7- ACQUISITIONS The Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" on July 10, 2002, for approximately $16,806, including acquisition costs, in cash. The allocation of the purchase is as follows: Assets: Accounts receivable $ 3,449 Inventories 1,829 Prepaid expenses 334 Deferred Taxes 2,280 Property, Plant and Equipment 12,487 Intangibles, including goodwill 10,912 ------- Total Assets 31,291 ------- Accounts payable and accrued liabilities 8,485 Integration reserve 6,000 ------- Net Investment $16,806 =======
The Company has utilized preliminary estimates and assumptions in determining the allocation of purchase price to assets acquired and liabilities assumed of ELM. While management believes such estimates and assumptions are reasonable, the final allocation of the purchase price may differ from that reflected in the December 27, 2002 consolidated balance sheet after a more extensive review of fair values of the assets and liabilities is completed. In connection with the acquisition, a reserve of $6,000 has been established for the costs to integrate ELM's operations with the Company. The reserve is included in accrued expenses. The components of the integration reserve and activity through December 27, 2002, is as follows:
BALANCE COSTS CHARGED BALANCE JULY 10, 2002 TO RESERVE DECEMBER 27, 2002 Manufacturing Reconfiguration $2,500 $ 873 $1,627 Reduction in personnel and related costs 1,000 528 472 Legal, environmental and other 2,500 122 2,378 ------ ------ ------ $6,000 $1,523 $4,477 ====== ====== ======
The remaining costs are expected to be paid over the next six to nine months. 17 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) The proforma results of operations for the quarter and six months ended December 28, 2001, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through December 27, 2002 is as follows:
BALANCE COSTS CHARGED BALANCE OCTOBER 2001 TO RESERVE DECEMBER 27, 2002 ------------ ------------- ----------------- Cost to close duplicate facilities $ 3,500 $ 2,305 $ 1,195 Reduction in personnel and related costs 2,100 1,082 1,018 Legal and environmental 1,275 280 995 Manufacturing reconfiguration 1,455 1,303 152 Other 1,670 1,166 504 ------- ------- ------- $10,000 $ 6,136 $ 3,864 ======= ======= =======
The remaining personnel related costs will be paid over the next four-six months, lease payments on duplicate warehouse facilities will extend over the next two years and the manufacturing reconfiguration is expected to be completed during the next year. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on July 1, 2001. Since Swan was purchased subsequent to June 30, 2001, no amortization of goodwill has been reflected in accordance with SFAS 142.
SIX MONTHS ENDED DECEMBER 28,2001 ---------------- Net sales $ 239,016 Operating profit 22,230 Loss before income taxes (15,169) =======
18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER OF FISCAL 2003 COMPARED WITH THE SECOND QUARTER OF FISCAL 2002 Net Sales increased to $118.6 million for the three months ended December 27, 2002 from $113.7 million for the three months ended December 28, 2001, representing a 4.3% increase. Net sales in our Industrial Segment grew 7.7%, primarily due to our Elm acquisition which closed in July 2002. Net sales in our Consumer Segment fell 3.0% or approximately $1.1 million primarily due to slightly weaker garden hose sales in late December. Cost of Sales increased to $87.2 million for the three months ended December 27, 2002 from $86.1 million for the three months ended December 28, 2001, an increase of $1.1 million. Expressed as a percentage of net sales, cost of sales decreased to 73.5% for the three months ended December 27, 2002 from 75.7% for the three months ended December 28, 2001. Continuous cost improvements coupled with the realization of synergies from our Swan and Elm acquisitions accounted for this improvement. Gross Profit, as a result of the above, increased to $31.4 million or 26.5% of net sales for the three months ended December 27, 2002 from $27.7 million or 24.3% of net sales for the three months ended December 28, 2001. Selling, general and administrative expense decreased to $14.6 million in the three months ended December 27, 2002 compared to $16.6 million in the three months ended December 28, 2001. The $2 million decrease is primarily due to a $4.0 million decrease in amortization expense as required by a change in the accounting for goodwill, partially offset by an increase in selling, general and administrative expense associated with our Elm acquisition. The ratio of selling, general and administrative expense to net sales decreased to 12.3% for the three months ending December 27, 2002 from 14.6% in the comparable period of last year. Operating profit, as a result of the foregoing, increased to $16.8 million or 14.2% of net sales for the three months ended December 27, 2002 from $11.1 million or 9.7% of net sales for the three months ended December 28, 2001. Operating profit for our Industrial Segment increased to $14.9 million for the three months ending December 27, 2002 compared to $11.4 million for the three months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 17.9% in the most recent period from 14.7% in the previous year's period due to continuous cost improvement and the realization of synergies from our Elm acquisition. A decrease in amortization expense also contributed to this improvement. Operating profit for our Consumer Segment increased to $6.7 million for the three months ending December 27, 2002 compared to $3.5 million for the three months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 18.9% in the most recent period from 9.7% in the comparable period of the previous year due to continuous cost improvement and the realization of synergies at from our Swan acquisition. A decrease in amortization expense also contributed to this improvement. Interest expense increased to $17.6 million or 14.8% of net sales in the three months ended December 27, 2002 from $16.6 million or 14.6% of net sales in the three months ended December 28, 2001. The increase was due to higher average interest rates and debt levels resulting from our issuance of $40 million of senior subordinated notes in May 2002. Unrealized (gain) loss on derivative transactions was a ($3.2) million gain or 2.7% of net sales for the three months ending December 27, 2002 compared to a ($5.7) million gain or 5.0% of net sales for the three months ending December 28, 2001. The gains were due to changes in the market interest rates underlying our derivatives. Income (loss) before income taxes, as a result, was $2.3 million for the three months ended December 27, 2002 compared to $0.2 million for the three months ended December 28, 2001. Income tax was $0.8 million for the three months ended December 27, 2002, compared to $0.1 million for the three months ended December 28, 2001. The Company's effective tax rate was 34.6% for the three months ended December 27, 2002 compared to 59.9% for the three months ending December 28, 2001, primarily as a result of discontinuing the amortization of goodwill, which was previously not deductible, in 2002. Net income, as a result, was $1.5 million for the three months ended December 27, 2002 compared with $0.1 million for the three months ended December 28, 2001. 19 FIRST SIX MONTHS OF FISCAL 2003 COMPARED WITH THE FIRST SIX MONTHS OF FISCAL 2002 Net Sales increased to $259.2 million for the six months ended December 27, 2002 from $228.9 million for the six months ended December 28, 2001, representing a 13.2% increase. The Swan and Elm acquisitions combined with strong garden hose sales in the first quarter of fiscal 2003 were the primary factors contributing to this gain. Cost of Sales increased to $197.9 million for the six months ended December 27, 2002 from $174.2 million for the six months ended December 28, 2001. Expressed as a percentage of net sales, cost of sales increased slightly to 76.4% for the six months ended December 27, 2002 from 76.1% for the six months ended December 28, 2001 primarily due to the inclusion of lower-margin business from our Elm acquisition that closed during the first quarter of the current fiscal year. Gross Profit, as a result of the above, increased to $61.3 million for the six months ended December 27, 2002 from $54.7 million for the six months ended December 28, 2001. Expressed as a percentage of net sales, gross profit decreased slightly to 23.6% in the most recent period from 23.9% in the previous year's first half. Selling, general and administrative expense decreased to $28.5 million in the six months ended December 27, 2002 compared to $31.8 million in the six months ended December 28, 2001 due to the reasons previously discussed. The ratio of selling, general and administrative expense to net sales decreased to 11.0% for the six months ending December 27, 2002 from 13.9% in the comparable period of last year. Operating profit, as a result of the foregoing, increased 43.1% to $32.8 million or 12.6% of net sales for the six months ended December 27, 2002 from $22.9 million or 10.0% of net sales for the six months ended December 28, 2001. Operating profit for our Industrial Segment increased to $24.9 million for the six months ending December 27, 2002 compared to $19.9 million for the six months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 14.7% in the most recent period from 13.0% in the comparable period of the previous year due to continuous cost improvement and the realization of synergies from our Elm acquisition. A decrease in amortization expense also contributed to this improvement. Operating profit for our Consumer Segment increased to $16.7 million for the six months ending December 27, 2002 compared to $10.6 million for the six months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 18.5% in the most recent period from 14.1% in the previous year's period due to continuous cost improvement and the realization of synergies from our Swan acquisition. A decrease in amortization expense also contributed to this improvement. Interest expense increased slightly to $35.2 in the six months ended December 27, 2002 from $34.4 million in the six months ended December 28, 2001 primarily due to higher average interest rates and debt levels resulting from our issuance of $40 million of senior subordinated notes in May 2002. Expressed as a percentage of net sales, interest expense decreased to 13.6% in the current period compared to 15.0% in the comparable period of last year. Unrealized (gain) loss on derivative transactions was a $2.1 million loss or 0.8% of net sales for the six months ending December 27, 2002 compared to a $2.6 million loss or 1.1% of net sales for the six months ending December 28, 2001. The loss was due to changes in the market interest rates underlying our derivatives. Income (loss) before income taxes, as a result, was a loss of ($5.0) million for the six months ended December 27, 2002 compared to a loss of ($14.4) million for the six months ended December 28, 2001. Income tax (benefit) was a credit of ($1.8) million for the six months ended December 27, 2002, compared to a credit of ($5.0) million for the six months ended December 28, 2001. The Company's effective tax rate was 35.1% for the six months ended December 27, 2002 compared to 34.8% for the six months ending December 28, 2001. Net income (loss), as a result, was a loss of ($3.2) million for the six months ended December 27, 2002 compared with a loss of ($9.4) million for the six months ended December 28, 2001. 20 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the six months ended December 27, 2002 was $4.1 million compared with $4.3 million in the same period of the prior year. The decrease of $0.2 million was primarily due to a larger seasonal inventory build-up offset by a larger seasonal reduction in accounts receivable at our garden hose unit compared to last year resulting from our Swan acquisition. Working capital on December 27, 2002 was $205.4 million compared to $216.9 million on June 28, 2002. The decrease was due primarily to a seasonal reduction in accounts receivable offset by a normal seasonal increase in inventories. During the period the Company also reduced the accounts payable at our Elm acquisition by approximately $4.0 million. As of December 27, 2002, the Company had an outstanding balance of $63.0 million under the $100.0 million revolving credit line. This represents an increase of $17.0 million from the outstanding balance as of June 28, 2002. The Company's capital expenditures for the six months ended December 27, 2002 and December 28, 2001 were $13.6 million and $9.1 million respectively. In addition, the Company paid $16.8 million for acquisitions in the six months ending December 27, 2002 compared to $65.8 million in the comparable period of the previous year. The Company continues to expect that its principal uses of cash for the next several years will be acquisitions, debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the Company may need additional financing to take advantage of acquisition opportunities that may arise in the next several quarters. There can be no assurance that such financing will be available in the amounts required for such acquisitions and on terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At December 27, 2002, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $389.0 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.3 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(C) and 15-d-14(C)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. To ameliorate those risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344,000. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls subsequent to the Evaluation Date. 21 PART II. OTHER INFORMATION Item 1 Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 22 CERTIFICATION I, Dr. F. Patrick Smith, Chairman of the Board and Chief Executive Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10,2003 By:/s/ Dr. F. Patrick Smith --------------------------- Dr. F. Patrick Smith Chairman and Chief Executive Officer 23 CERTIFICATION I, James E. Condon, Chief Financial Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 By:/s/ James E. Condon ---------------------- James E. Condon Chief Financial Officer 24 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. F. Patrick Smith, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /S/ DR. F. PATRICK SMITH Dr. F. Patrick Smith Chairman and Chief Executive Officer February 10, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James E. Condon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /S/ JAMES E. CONDON James E. Condon Chief Financial Officer February 10, 2003 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. February 10, 2003 By: /s/ F. Patrick Smith -------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker -------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon -------------------- James E.Condon Vice President and Chief Financial Officer 26 EX-13.6 10 y61170a2exv13w6.txt QUARTERLY REPORT ON FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 27, 2002 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT - --- For the transition period from to ---------------- ---------------- Commission file number 333-28157 TEKNI-PLEX, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3286312 - --------------------------------- ------------------------------------ (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 N. Denton Tap Road, Suite 150 (972) 304-5077 Coppell, TX 75019 ------------------------------- - --------------------------------------- (Registrant's telephone number) (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / TEKNI-PLEX, INC.
Page # PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 27, 2002 and June 28, 2002 3 Consolidated Statements of Operations for the six months and three months ended December 27, 2002 and December 28, 2001 4 Consolidated Statements of Other Comprehensive Income for the six months and three months ended December 27, 2002 and December 28, 2001 4 Consolidated Statements of Cash Flows for the six months ended December 27, 2002 and December 28, 2001 5 Notes to Consolidated Financial Statements 6-18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19-21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 PART II. OTHER INFORMATION Item 1. Legal proceedings 22 Item 2. Changes in securities 22 Item 3. Defaults upon senior securities 22 Item 4. Submission of matters to a vote of securities holders 22 Item 5. Other information 22 Item 6. Exhibits and reports on Form 8-K 22 Item 7. Certifications 23-26
TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 27, 2002 June 28, 2002 (UNAUDITED) ----------- --------- ASSETS CURRENT: Cash $ 16,208 $ 28,199 Accounts receivable, net of allowance for doubtful accounts of $2,903 and $1,671 respectively 102,285 147,198 Inventories 157,857 117,632 Deferred income taxes 7,472 7,472 Prepaid and other current assets 9,336 5,583 ---------- ---------- TOTAL CURRENT ASSETS 293,158 306,084 PROPERTY, PLANT AND EQUIPMENT, NET 172,208 158,118 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $78,852 AND $78,399 RESPECTIVELY 215,214 204,252 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $6,271 AND $5,030 RESPECTIVELY 13,102 14,343 DEFERRED INCOME TAXES 20,687 16,278 OTHER ASSETS 982 1,078 ---------- ---------- $ 715,351 $ 700,153 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 13,269 $ 13,407 Accounts payable - trade 24,887 32,643 Accrued payroll and benefits 6,997 8,965 Accrued interest 6,490 4,789 Accrued liabilities - other 34,430 28,846 Income taxes payable 1,648 515 ---------- ---------- TOTAL CURRENT LIABILITIES 87,721 89,165 LONG-TERM DEBT 694,030 679,414 OTHER LIABILITIES 26,737 22,685 ---------- ---------- TOTAL LIABILITIES 808,488 791,264 ---------- ---------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 170,568 170,176 Accumulated other comprehensive Loss (5,985) (6,805) Accumulated deficit (37,198) (33,959) Less: Treasury stock (220,522) (220,523) ---------- ---------- TOTAL STOCKHOLDERS' DEFICIT (93,137) (91,111) ---------- ---------- $ 715,351 $ 700,153 ========== ==========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (Unaudited -- in thousands) CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended DECEMBER 27, December 28, DECEMBER 27, December 28, 2002 2001 2002 2001 NET SALES $ 118,584 $ 113,740 $ 259,167 $ 228,904 COST OF SALES 87,214 86,056 197,905 174,206 --------- --------- --------- --------- GROSS PROFIT 31,370 27,684 61,262 54,698 OPERATING EXPENSES: Selling, general and administrative 14,573 16,609 28,484 31,785 --------- --------- --------- --------- OPERATING PROFIT 16,797 11,075 32,778 22,913 OTHER EXPENSES: Interest expense 17,587 16,590 35,249 34,375 Unrealized (gain) loss on derivative contracts (3,208) (5,724) 2,136 2,590 Other expenses 79 42 382 334 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES 2,339 167 (4,989) (14,386) PROVISION (benefit) FOR INCOME TAXES 810 100 (1,750) (5,000) --------- --------- --------- --------- NET INCOME (LOSS) $ 1,529 $ 67 $ (3,239) $ (9,386) ========= ========= ========= ========= CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME NET INCOME (LOSS) $ 1,529 $ 67 $ (3,239) $ (9,386) COMPREHENSIVE INCOME (LOSS), NET OF TAXES Foreign currency translation adjustment 1,112 (993) 820 (292) --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS) $ 2,641 $ (926) $ (2,419) $ (9,678) ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited -- in thousands)
Six months ended DECEMBER 27 2002 December 28 2001 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,239) $ (9,386) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,851 19,054 Unrealized loss on derivative contracts 2,136 2,590 Deferred income taxes 156 (4,591) Changes in operating assets and liabilities: Accounts receivable 48,722 28,449 Inventories (40,441) (16,021) Prepaid expenses and other current assets (3,366) (1,749) Income taxes 1,133 (2,369) Accounts payable (15,643) (9,552) Accrued interest 1,702 3,277 Accrued expenses and other liabilities (905) (5,386) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,106 4,316 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,609) (9,142) Acquisition costs (16,806) (65,757) Additions to intangibles (503) (222) Deposits and other assets 98 894 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (30,820) (74,227) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) of long-term debt 14,370 (8,813) Payment for treasury stock -- (60) Receipt of additional paid-in capital 392 50,000 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,762 41,127 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (39) (39) -------- -------- NET DECREASE IN CASH (11,991) (28,823) CASH, BEGINNING OF PERIOD 28,199 44,645 -------- -------- CASH, END OF PERIOD $ 16,208 $ 15,822 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 32,513 $ 31,207 Income taxes 2,325 1,543
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL Tekni-Plex is a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. Tekni-Plex primarily serves the food, healthcare and consumer markets. Tekni-Plex has built leadership positions in its core markets, and focus on vertically integrated production of highly specialized products. Tekni-Plex has operations in the United States, Europe and Canada. Tekni-Plex's operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2002. NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS a) In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141, requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that the companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. 6 If SFAS 142 had been adopted June 30, 2001, the Company's net loss for the six months ended December 28, 2001 wild have been reduced because of lower amounts of amortization as follows:
Three Months Ended Six Months Ended Net (loss), as reported $ (4,693) $ (9,386) Add amortization, net of tax 3,458 6,915 ---------- ----------- Adjusted net (loss) $ (1,235) $ (2,471) ---------- -----------
b) In August 2001, the FASB issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). The new guidance resolves significant implementation issues related to FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 supersedes SFAS 121, but it retains its fundamental provisions. It also amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidate a subsidiary for which control is likely to be temporary. SFAS 144 retains the requirement of SFAS 121 to recognize an impairment loss only if the carrying amount of a long-lived asset within the scope of SFAS 144 is not recoverable from its undiscounted cash flows and exceeds its fair value. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of SFAS 144 generally are to be applied prospectively. The adoption of SFAS 144 did not have a material impact on the Company's financial position or results of operations. c) In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring Costs. SFAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. Under SFAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company cannot restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. NOTE 3 - INVENTORIES Inventories as of December 27, 2002 and June 28, 2002 are summarized as follows:
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- Raw materials $ 46,237 $ 37,727 Work-in-process 9,942 8,621 Finished goods 101,678 71,284 --------- --------- $ 157,857 $ 117,632 ========= =========
7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (Less unamortized discount of $2,827 and $3,015) $272,174 $271,985 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium at $550 and $588) 40,550 40,588 Senior Debt: Revolving line of credit, expiring June, 2006. At December 27, 2002, the interest rates ranged from 4.44 % to 6.25%. 63,000 46,000 Term notes due June, 2006 and June, 2008, with interest rates at December 27, 2002 of 4.38% and 4.88%. 326,010 329,120 Other, primarily international term loans, with interest rates ranging from 4.44% to 5.44% and maturities ranging from 2003 to 2010 5,565 5,128 -------- -------- 707,299 692,821 Less: Current maturities 13,269 13,407 -------- -------- $694,030 $679,414 -------- --------
8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. As a result, beginning in fiscal year 2002, Tekni-Plex has aggregated its operating plants into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe and Canada. Other products not included in either segment are produced in the United States. The prior year has been restated to conform to this presentation. Financial information concerning the Company's business segments and the geographic areas in which they operate are as follows:
Tubing Packaging Products Other TOTAL --------- --------- ----- ----- Three months ended December 27, 2002 Revenues from external Customers $ 63,900 $ 28,661 $26,023 $118,584 Interest expense 5,596 8,247 3,744 17,587 Depreciation and Amortization 3,357 1,501 1,262 6,120 Income from operations 15,607 4,956 999 21,562 Expenditures for segment Assets 3,303 2,704 1,343 7,350 -------- -------- -------- -------- Three months ended December 28, 2001 Revenues from external Customers $ 58,291 $ 30,327 $25,122 $113,740 Interest expense 6,255 5,934 4,355 16,590 Depreciation and Amortization 5,106 2,589 1,800 9,495 Income from operations 10,591 3,491 840 14,922 Expenditures for segment Assets 1,636 1,696 966 3,991 -------- -------- -------- --------
9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
Tubing Packaging Products Other TOTAL --------- -------- ----- ----- Six months ended December 27, 2002 Revenues from external Customers $130,248 $ 76,460 $52,459 $259,167 Interest expense 11,220 16,538 7,491 35,249 Depreciation and Amortization 7,439 3,292 2,608 13,339 Income from operations 27,526 12,907 1,138 41,571 Expenditures for segment Assets 3,965 6,645 2,610 13,220 ----- ----- ----- ------ Six months ended December 28, 2001 Revenues from external Customers $115,601 $ 61,744 $51,559 $228,904 Interest expense 12,986 12,340 9,049 34,375 Depreciation and Amortization 9,810 5,121 3,611 18,542 Income from operations 20,150 8,383 1,956 30,489 Expenditures for segment Assets 4,289 3,082 1,480 8,851 ----- ----- ----- -----
Three months ended Six months ended DECEMBER 27, December 28, DECEMBER 27 December 28 2002 2001 2002 2001 ---- ---- ---- ---- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 21,562 $ 14,922 $ 41,571 $ 30,489 Corporate and eliminations (4,765) (3,847) (8,793) (7,576) -------- -------- -------- -------- $ 16,797 $ 11,075 $ 32,778 $ 22,913 ======== ======== ======== ======== DEPRECIATION AND AMORTIZATION Segment totals $ 6,120 $ 9,495 $ 13,339 $ 18,542 Corporate 256 256 512 512 -------- -------- -------- -------- Consolidated total $ 6,376 $ 9,751 $ 13,851 $ 19,054 ======== ======== ======== ======== EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 7,350 $ 3,991 $ 13,220 $ 8,851 Other unallocated expenditures 226 121 389 291 -------- -------- -------- -------- Consolidated total $ 7,576 $ 4,112 $ 13,609 $ 9,142 ======== ======== ======== ========
10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) SEGMENT ASSETS
Tubing Packaging Products Other TOTAL --------- -------- ----- ----- December 27, 2002 250,399 308,289 132,004 690,692 ------- ------- ------- ------- June 28, 2002 222,798 334,710 130,050 687,558 ------- ------- ------- -------
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- TOTAL ASSETS Total assets from reportable segments $ 690,692 $ 687,558 Other unallocated amounts 24,659 12,595 --------- --------- Consolidated total $ 715,351 $ 700,153 ========= =========
GEOGRAPHIC INFORMATION
Three months ended Six months ended ------------------ ---------------- DECEMBER 27, December 28, DECEMBER 27, December 28, 2002 2001 2002 2001 ---- ---- ---- ---- REVENUES United States $103,615 $101,649 $ 228,154 $203,681 International 14,969 12,091 31,013 25,223 -------- -------- ---------- -------- Total $118,584 $113,740 $ 259,167 $228,904 ======== ======== ========== ========
DECEMBER 27, 2002 June 28, 2002 ----------------- ------------- LONG-LIVED ASSETS United States $ 377,260 $ 352,365 International 44,933 41,704 --------- --------- Total $ 422,193 $ 394,069 ========= =========
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 118,584 $ 35,163 $ 68,452 $ 14,969 Cost of sales 87,214 24,864 51,044 11,306 --------- -------- -------- -------- Gross profit 31,370 10,299 17,408 3,663 Operating expenses: Selling, General and administrative 14,573 6,634 6,256 1,683 --------- -------- -------- -------- Operating profit 16,797 3,665 11,152 1,980 Interest expense 17,587 17,568 (20) 39 Unrealized gain on derivative contracts (3,208) (3,208) -- -- Other expense (income) 79 (93) (321) 493 --------- -------- -------- -------- Income (loss) before income taxes 2,339 (10,602) 11,493 1,448 Provision (benefit) for income taxes 810 (3,768) 4,020 558 --------- -------- --------- --------- Net income (loss) $ 1,529 $ (6,834) $ 7,473 $ 890 ========= ======== ========= =========
For the six months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 259,167 $ 74,360 $ 153,794 $ 31,013 Cost of sales 197,905 52,299 122,767 22,839 --------- --------- --------- --------- Gross profit 61,262 22,061 31,027 8,174 Operating expenses: Selling, General and administrative 28,484 12,728 12,633 3,123 --------- --------- --------- --------- Operating profit 32,778 9,333 18,394 5,051 Interest expense 35,249 35,233 (43) 59 Unrealized loss on derivative contracts 2,136 2,136 -- -- Other expense (income) 382 (24) (600) 1,006 --------- --------- --------- --------- Income (loss) before income taxes (4,989) (28,012) 19,037 3,986 Provision (benefit) for income taxes (1,750) (9,858) 6,660 1,448 --------- --------- --------- --------- Net income (loss) $ (3,239) $ (18,154) $ 12,377 $ 2,538 ========= ========= ========= =========
12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors Net sales $ 113,740 $ 41,876 $ 59,773 $ 12,091 Cost of sales 86,056 30,186 46,854 9,016 --------- --------- --------- --------- Gross profit 27,684 11,690 12,919 3,075 Operating expenses: Selling, General and administrative 16,609 8,816 6,220 1,573 --------- --------- --------- --------- Operating profit 11,075 2,874 6,699 1,502 Interest expense 16,590 16,559 (30) 61 Unrealized gain on derivative contracts (5,724) (5,724) -- -- Other expense (income) 42 (543) (125) 710 --------- --------- --------- --------- Income (loss) before income taxes 167 (7,418) 6,854 731 Provision (benefit) for income taxes 100 (3,266) 3,450 (84) --------- --------- --------- --------- Net income (loss) $ 67 $ (4,152) $ 3,404 $ 815 ========= ========= ========= =========
For the six months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $ 228,904 $ 81,306 $ 122,375 $ 25,223 Cost of sales 174,206 60,087 94,997 19,122 --------- --------- --------- --------- Gross profit 54,698 21,219 27,378 6,101 Operating expenses: Selling, General and administrative 31,785 18,883 9,877 3,025 --------- --------- --------- --------- Operating profit 22,913 2,336 17,501 3,076 Interest expense 34,375 34,354 (76) 97 Unrealized loss on derivative contracts 2,590 2,590 -- -- Other expense (income) 334 (490) (264) 1,088 --------- --------- --------- --------- Income (loss) before income taxes (14,386) (34,118) 17,841 1,891 Provision (benefit) for income taxes (5,000) (11,910) 6,250 660 --------- --------- --------- --------- Net income (loss) $ (9,386) $ (22,208) $ 11,591 $ 1,231 ========= ========= ========= =========
13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at December 27, 2002
Non- TOTAL Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 293,158 $ -- $ 40,002 $ 201,858 $ 51,298 Property, plant and equipment, net 172,208 -- 39,535 110,392 22,281 Intangible assets, net 215,214 -- 8,329 194,782 12,103 Investment in subsidiaries -- (513,433) 513,433 -- -- Deferred income taxes 20,687 -- 21,940 470 (1,723) Deferred charges, net 13,102 -- 12,986 (86) 202 Other assets 982 (345,557) 79,804 254,665 12,070 --------- --------- --------- --------- --------- Total assets $ 715,351 $(858,990) $ 716,029 $ 762,081 $ 96,231 ========= ========= ========= ========= ========= Current liabilities $ 87,721 $ -- $ 30,281 $ 42,592 $ 14,848 Long-term debt 694,030 -- 689,294 -- 4,736 Other liabilities 26,737 (345,557) 84,996 247,290 40,008 --------- --------- --------- --------- --------- Total liabilities 808,488 (345,557) 804,571 289,882 59,592 --------- --------- --------- --------- --------- Additional paid-in capital 170,568 (312,420) 170,549 296,783 15,656 Retained earnings,accumulated (deficit) (37,198) (201,013) (38,569) 178,501 23,883 Accumulated other comprehensive Loss (5,985) -- -- (3,085) (2,900) Less: Treasury stock (220,522) -- (220,522) -- -- --------- --------- --------- --------- --------- Total stockholders' deficit (93,137) (513,433) (88,542) 472,199 36,639 --------- --------- --------- --------- --------- Total liabilities and deficit $ 715,351 $(858,990) $ 716,029 $ 762,081 $ 96,231 ========= ========= ========= ========= =========
14 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at June 28, 2002
Non- Total Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 306,084 $ -- $ 44,828 $ 209,798 $ 51,458 Property, plant and equipment, net 158,118 -- 41,704 95,366 21,048 Intangible assets, net 204,252 -- 7,907 184,093 12,252 Investment in subsidiaries -- (498,518) 498,518 -- -- Deferred charges, net 14,343 -- 14,134 -- 209 Deferred taxes 16,278 -- 20,177 -- (3,899) Other income assets 1,078 (321,468) 74,008 236,444 12,094 --------- --------- ----------- --------- --------- Total assets $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= =========== ========= ========= Current liabilities $ 89,165 $ -- $ 29,889 $ 42,563 $ 16,713 Long-term debt 679,414 -- 675,253 -- 4,161 Other liabilities 22,685 (321,468) 80,460 229,752 33,941 --------- --------- ----------- --------- --------- Total liabilities 791,264 (321,468) 785,602 272,315 54,815 --------- --------- ----------- --------- --------- Additional paid-in capital 170,176 (312,420) 170,156 296,784 15,656 Retained earnings, Accumulated (deficit) (33,959) (186,098) (33,959) 159,960 26,138 Accumulated other comprehensive income (6,805) -- -- (3,358) (3,447) Treasury stock (220,523) -- (220,523) -- -- --------- --------- ----------- --------- --------- Total deficit (91,111) (498,518) (84,326) 453,386 38,347 --------- --------- ----------- --------- --------- Total liabilities and deficit $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= =========== ========= =========
15 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows For the six months ended December 27, 2002
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 4,106 $ (7,765) $ 10,272 $ 1,599 -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures (13,609) (1,873) (9,161) (2,575) Acquisition costs (16,806) -- (16,806) -- Additions to intangibles (503) (267) -- (236) Deposits and other assets 98 74 -- 24 -------- -------- -------- -------- Net cash used in investing activities (30,820) (2,066) (25,967) (2,787) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt 14,370 13,933 -- 437 Receipt of additional paid-in capital 392 392 -- -- Change in intercompany accounts -- (5,011) 3,625 1,386 -------- -------- -------- -------- Net cash flows provided by financing activities 14,762 9,314 3,625 1,823 -------- -------- -------- -------- Effect of exchange rate changes on cash (39) -- -- (39) -------- -------- -------- -------- Net increase (decrease) in cash (11,991) (517) (12,070) 596 Cash, beginning of period 28,199 9,035 10,660 8,504 -------- -------- -------- -------- Cash, end of period $ 16,208 $ 8,518 $ (1,410) $ 9,100 ======== ======== ======== ========
For the six months ended December 28, 2001
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net cash provided by (used in) operating activities $ 4,316 $(105,959) $ 106,824 $ 3,451 --------- --------- --------- --------- Cash flows from Investing activities: Capital expenditures (9,142) (3,103) (3,941) (2,098) Acquisition costs (65,757) -- (65,757) -- Additions to intangibles (222) (140) -- (82) Deposits and other assets 894 (1,909) 3,331 (528) --------- --------- --------- --------- Net cash used in investing activities (74,227) (5,152) (66,367) (2,708) --------- --------- --------- --------- Cash flows from financing activities Repayment of long term debt (8,813) (8,863) -- 50 Receipt of additional paid in capital 50,000 50,000 -- -- Payment for treasury stock (60) (60) -- -- Change in intercompany accounts -- 48,322 (48,586) 264 --------- --------- --------- --------- Net cash flows provided by (used in) financing activities 41,127 89,399 (48,586) 314 --------- --------- --------- --------- Effect of exchange rate changes on cash (39) -- -- (39) --------- --------- --------- --------- Net increase (decrease) in cash (28,823) (21,712) (8,129) 1,018 Cash, beginning of period 44,645 32,890 5,321 6,434 --------- --------- --------- --------- Cash, end of period $ 15,822 $ 11,178 $ (2,808) $ 7,452 ========= ========= ========= =========
16 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 7 - ACQUISITIONS The Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" on July 10, 2002, for approximately $16,806, including acquisition costs, in cash. The allocation of the purchase is as follows: Assets: Accounts receivable $ 3,449 Inventories 1,829 Prepaid expenses 334 Deferred Taxes 2,280 Property, Plant and Equipment 12,487 Intangibles, including goodwill 10,912 ------- Total Assets 31,291 ------- Accounts payable and accrued liabilities 8,485 Integration reserve 6,000 ------- Net Investment $16,806 =======
The Company has utilized preliminary estimates and assumptions in determining the allocation of purchase price to assets acquired and liabilities assumed of ELM. While management believes such estimates and assumptions are reasonable, the final allocation of the purchase price may differ from that reflected in the December 27, 2002 consolidated balance sheet after a more extensive review of fair values of the inventory and acquisition reserve. The Company expects to complete this analysis in the next six months. In connection with the acquisition, a reserve of $6,000 has been established for the costs to integrate ELM's operations with the Company. The reserve is included in accrued expenses. The components of the integration reserve and activity through December 27, 2002, is as follows:
BALANCE COSTS CHARGED BALANCE JULY 10, 2002 TO RESERVE DECEMBER 27, 2002 Manufacturing Reconfiguration $2,500 $ 873 $1,627 Reduction in personnel and related costs 1,000 528 472 Legal, environmental and other 2,500 122 2,378 ------ ------ ------ $6,000 $1,523 $4,477 ====== ====== ======
The remaining costs are expected to be paid over the next six to nine months. 17 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) The proforma results of operations for the quarter and six months ended December 28, 2001, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through December 27, 2002 is as follows:
BALANCE COSTS CHARGED BALANCE OCTOBER 2001 TO RESERVE DECEMBER 27, 2002 ------------ ------------- ----------------- Cost to close duplicate facilities $ 3,500 $ 2,305 $ 1,195 Reduction in personnel and related costs 2,100 1,082 1,018 Legal and environmental 1,275 280 995 Manufacturing reconfiguration 1,455 1,303 152 Other 1,670 1,166 504 ------- ------- ------- $10,000 $ 6,136 $ 3,864 ======= ======= =======
The remaining personnel related costs will be paid over the next four-six months, lease payments on duplicate warehouse facilities will extend over the next two years and the manufacturing reconfiguration is expected to be completed during the next year. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on July 1, 2001. Since Swan was purchased subsequent to June 30, 2001, no amortization of goodwill has been reflected in accordance with SFAS 142.
SIX MONTHS ENDED DECEMBER 28,2001 ---------------- Net sales $ 239,016 Operating profit 22,230 Loss before income taxes (15,169) =======
18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER OF FISCAL 2003 COMPARED WITH THE SECOND QUARTER OF FISCAL 2002 Net Sales increased to $118.6 million for the three months ended December 27, 2002 from $113.7 million for the three months ended December 28, 2001, representing a 4.3% increase. Net sales in our Packaging Segment grew 9.6%, primarily due to our Elm acquisition which closed in July 2002. Net sales in our Tubing Products Segment fell 5.5% or approximately $1.7 million primarily due to slightly weaker garden hose sales in late December. Other net sales increased 1.7%. Cost of Sales increased to $87.2 million for the three months ended December 27, 2002 from $86.1 million for the three months ended December 28, 2001, an increase of $1.1 million. Expressed as a percentage of net sales, cost of sales decreased to 73.5% for the three months ended December 27, 2002 from 75.7% for the three months ended December 28, 2001. Continuous cost improvements coupled with the realization of synergies from our Swan and Elm acquisitions accounted for this improvement. Gross Profit, as a result of the above, increased to $31.4 million or 26.5% of net sales for the three months ended December 27, 2002 from $27.7 million or 24.3% of net sales for the three months ended December 28, 2001. Selling, general and administrative expense decreased to $14.6 million in the three months ended December 27, 2002 compared to $16.6 million in the three months ended December 28, 2001. The $2 million decrease is primarily due to a $4.0 million decrease in amortization expense as required by a change in the accounting for goodwill, partially offset by an increase in selling, general and administrative expense associated with our Elm acquisition. The ratio of selling, general and administrative expense to net sales decreased to 12.3% for the three months ending December 27, 2002 from 14.6% in the comparable period of last year. Operating profit, as a result of the foregoing, increased to $16.8 million or 14.2% of net sales for the three months ended December 27, 2002 from $11.1 million or 9.7% of net sales for the three months ended December 28, 2001. Operating profit for our Packaging Segment increased to $15.6 million for the three months ending December 27, 2002 compared to $10.6 million for the three months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 24.4% in the most recent period from 18.2% in the previous year's period. Operating profit for our Tubing Products Segment increased to $5.0 million for the three months ending December 27, 2002 compared to $3.5 million for the three months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 17.3% in the most recent period from 11.5% in the comparable period of the previous year. Other operating profit increased to $1.0 million in the current period compared to $0.8 million in the previous period. Interest expense increased to $17.6 million or 14.8% of net sales in the three months ended December 27, 2002 from $16.6 million or 14.6% of net sales in the three months ended December 28, 2001. The increase was due to higher average interest rates and debt levels resulting from our issuance of $40 million of senior subordinated notes in May 2002. Unrealized (gain) loss on derivative transactions was a ($3.2) million gain or 2.7% of net sales for the three months ending December 27, 2002 compared to a ($5.7) million gain or 5.0% of net sales for the three months ending December 28, 2001. The gains were due to changes in the market interest rates underlying our derivatives. Income (loss) before income taxes, as a result, was $2.3 million for the three months ended December 27, 2002 compared to $0.2 million for the three months ended December 28, 2001. Income tax was $0.8 million for the three months ended December 27, 2002, compared to $0.1 million for the three months ended December 28, 2001. The Company's effective tax rate was 34.6% for the three months ended December 27, 2002 compared to 59.9% for the three months ending December 28, 2001, primarily as a result of discontinuing the amortization of goodwill, which was previously not deductible, in 2002. Net income, as a result, was $1.5 million for the three months ended December 27, 2002 compared with $0.1 million for the three months ended December 28, 2001. 19 FIRST SIX MONTHS OF FISCAL 2003 COMPARED WITH THE FIRST SIX MONTHS OF FISCAL 2002 Net Sales increased to $259.2 million for the six months ended December 27, 2002 from $228.9 million for the six months ended December 28, 2001, representing a 13.2% increase. The Swan and Elm acquisitions combined with strong garden hose sales in the first quarter of fiscal 2003 were the primary factors contributing to this gain. Cost of Sales increased to $197.9 million for the six months ended December 27, 2002 from $174.2 million for the six months ended December 28, 2001. Expressed as a percentage of net sales, cost of sales increased slightly to 76.4% for the six months ended December 27, 2002 from 76.1% for the six months ended December 28, 2001 primarily due to the inclusion of lower-margin business from our Elm acquisition that closed during the first quarter of the current fiscal year. Gross Profit, as a result of the above, increased to $61.3 million for the six months ended December 27, 2002 from $54.7 million for the six months ended December 28, 2001. Expressed as a percentage of net sales, gross profit decreased slightly to 23.6% in the most recent period from 23.9% in the previous year's first half. Selling, general and administrative expense decreased to $28.5 million in the six months ended December 27, 2002 compared to $31.8 million in the six months ended December 28, 2001 due to the reasons previously discussed. The ratio of selling, general and administrative expense to net sales decreased to 11.0% for the six months ending December 27, 2002 from 13.9% in the comparable period of last year. Operating profit, as a result of the foregoing, increased 43.1% to $32.8 million or 12.6% of net sales for the six months ended December 27, 2002 from $22.9 million or 10.0% of net sales for the six months ended December 28, 2001. Operating profit for our Packaging Segment increased to $27.5 million for the six months ending December 27, 2002 compared to $20.2 million for the six months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 21.1% in the most recent period from 17.4% in the comparable period of the previous year. Operating profit for our Tubing Products Segment increased to $12.9 million for the six months ending December 27, 2002 compared to $8.4 million for the six months ending December 28, 2001. Expressed as a percentage of net sales, operating profit grew to 16.9% in the most recent period from 13.6% in the previous year's period. Interest expense increased slightly to $35.2 in the six months ended December 27, 2002 from $34.4 million in the six months ended December 28, 2001 primarily due to higher average interest rates and debt levels resulting from our issuance of $40 million of senior subordinated notes in May 2002. Expressed as a percentage of net sales, interest expense decreased to 13.6% in the current period compared to 15.0% in the comparable period of last year. Unrealized (gain) loss on derivative transactions was a $2.1 million loss or 0.8% of net sales for the six months ending December 27, 2002 compared to a $2.6 million loss or 1.1% of net sales for the six months ending December 28, 2001. The loss was due to changes in the market interest rates underlying our derivatives. Income (loss) before income taxes, as a result, was a loss of ($5.0) million for the six months ended December 27, 2002 compared to a loss of ($14.4) million for the six months ended December 28, 2001. Income tax (benefit) was a credit of ($1.8) million for the six months ended December 27, 2002, compared to a credit of ($5.0) million for the six months ended December 28, 2001. The Company's effective tax rate was 35.1% for the six months ended December 27, 2002 compared to 34.8% for the six months ending December 28, 2001. Net income (loss), as a result, was a loss of ($3.2) million for the six months ended December 27, 2002 compared with a loss of ($9.4) million for the six months ended December 28, 2001. 20 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the six months ended December 27, 2002 was $4.1 million compared with $4.3 million in the same period of the prior year. The decrease of $0.2 million was primarily due to a larger seasonal inventory build-up offset by a larger seasonal reduction in accounts receivable at our garden hose unit compared to last year resulting from our Swan acquisition. Working capital on December 27, 2002 was $205.4 million compared to $216.9 million on June 28, 2002. The decrease was due primarily to a seasonal reduction in accounts receivable offset by a normal seasonal increase in inventories. During the period the Company also reduced the accounts payable at our Elm acquisition by approximately $4.0 million. As of December 27, 2002, the Company had an outstanding balance of $63.0 million under the $100.0 million revolving credit line. This represents an increase of $17.0 million from the outstanding balance as of June 28, 2002. The Company's capital expenditures for the six months ended December 27, 2002 and December 28, 2001 were $13.6 million and $9.1 million respectively. In addition, the Company paid $16.8 million for acquisitions in the six months ending December 27, 2002 compared to $65.8 million in the comparable period of the previous year. The Company continues to expect that its principal uses of cash for the next several years will be acquisitions, debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the Company may need additional financing to take advantage of acquisition opportunities that may arise in the next several quarters. There can be no assurance that such financing will be available in the amounts required for such acquisitions and on terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At December 27, 2002, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $389.0 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.3 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(C) and 15-d-14(C)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. To ameliorate those risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344,000. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls subsequent to the Evaluation Date. 21 PART II. OTHER INFORMATION Item 1 Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 22 CERTIFICATION I, Dr. F. Patrick Smith, Chairman of the Board and Chief Executive Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10,2003 By:/s/ Dr. F. Patrick Smith --------------------------- Dr. F. Patrick Smith Chairman and Chief Executive Officer 23 CERTIFICATION I, James E. Condon, Chief Financial Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 10, 2003 By:/s/ James E. Condon ---------------------- James E. Condon Chief Financial Officer 24 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. F. Patrick Smith, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /S/ DR. F. PATRICK SMITH Dr. F. Patrick Smith Chairman and Chief Executive Officer February 10, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending December 27, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James E. Condon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /S/ JAMES E. CONDON James E. Condon Chief Financial Officer February 10, 2003 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. February 10, 2003 By: /s/ F. Patrick Smith -------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker -------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon -------------------- James E.Condon Vice President and Chief Financial Officer 26 EX-13.7 11 y61170a2exv13w7.txt QUARTERLY REPORT ON FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from_______________to_____________________ Commission file number 333-28157 TEKNI-PLEX, INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-3286312 - ---------------------------------- ------------------------------------- (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 N. Denton Tap Road, Suite 150 (972) 304-5077 - ---------------------------------- --------------------------------- Coppell, TX 75019 (Registrant's telephone number) - --------------------------------- (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] TEKNI-PLEX, INC.
Page # PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 28, 2003 and June 28, 2002 3 Consolidated Statements of Operations for the nine months and three months ended March 28, 2003 and March 29, 2002 4 Consolidated Statements of Other Comprehensive Income (loss) for the nine months and three months ended March 28, 2003 and March 29, 2002 4 Consolidated Statements of Cash Flows for the nine months ended March 28, 2003 and March 29, 2002 5 Notes to Consolidated Financial Statements 6-18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19-21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21 ITEM 4. CONTROLS AND PROCEDURES 22 PART II. OTHER INFORMATION Item 1. Legal proceedings 23 Item 2. Changes in securities 23 Item 3. Defaults upon senior securities 23 Item 4. Submission of matters to a vote of securities holders 23 Item 5. Other information 23 Item 6. Exhibits and reports on Form 8-K 23 Item 7. Certifications 24-26
TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
MARCH 28, 2003 June 28, 2002 (UNAUDITED) ----------- -------------------- ASSETS CURRENT: Cash $ 16,842 $ 28,199 Accounts receivable, net of allowance for doubtful accounts of $2,101 and $1,671 142,714 147,198 Inventories 165,823 117,632 Deferred income taxes 7,472 7,472 Prepaid and other current assets 7,853 5,583 --------- --------- TOTAL CURRENT ASSETS 340,704 306,084 PROPERTY, PLANT AND EQUIPMENT, NET 177,829 158,118 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $79,085 AND $78,399 215,383 204,252 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $6,899 AND $5,030 12,474 14,343 DEFERRED INCOME TAXES 18,879 16,278 OTHER ASSETS 967 1,078 --------- --------- $ 766,236 $ 700,153 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 13,290 $ 13,407 Accounts payable - trade 39,386 32,643 Accrued payroll and benefits 9,103 8,965 Accrued interest 17,026 4,789 Accrued liabilities - other 25,424 28,846 Income taxes payable 4,539 515 --------- --------- TOTAL CURRENT LIABILITIES 108,768 89,165 LONG-TERM DEBT 715,806 679,414 OTHER LIABILITIES 25,956 22,685 --------- --------- TOTAL LIABILITIES 850,530 791,264 --------- --------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 170,568 170,176 Accumulated other comprehensive loss (4,745) (6,805) Accumulated deficit (29,595) (33,959) Treasury stock (220,522) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (84,294) (91,111) --------- --------- $ 766,236 $ 700,153 ========= =========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (Unaudited -- in thousands) CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended MARCH 28, March 29, MARCH 28, March 29, 2003 2002 2003 2002 -------- --------- --------- -------- NET SALES $166,091 $ 153,393 $ 425,258 $382,297 COST OF SALES 121,966 111,385 319,871 285,591 -------- --------- --------- -------- GROSS PROFIT 44,125 42,008 105,387 96,706 OPERATING EXPENSES: Selling, general and administrative 14,562 18,529 43,046 50,314 -------- --------- --------- -------- OPERATING PROFIT 29,563 23,479 62,341 46,392 OTHER EXPENSES: Interest expense 18,722 19,014 53,971 53,389 Unrealized (gain) loss on derivative contracts (833) 1,085 1,303 3,675 Other (income) expenses (359) (105) 23 229 -------- --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES 12,033 3,485 7,044 (10,901) PROVISION (BENEFIT) FOR INCOME TAXES 4,430 1,180 2,680 (3,820) -------- --------- --------- -------- NET INCOME (LOSS) $ 7,603 $ 2,305 $ 4,364 $ (7,081) ======== ========= ========= ======== CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) NET INCOME (LOSS) $ 7,603 $ 2,305 $ 4,364 $ (7,081) COMPREHENSIVE INCOME (LOSS), NET OF TAXES Foreign currency translation adjustment 1,240 (3,985) 2,060 (4,277) -------- --------- --------- -------- COMPREHENSIVE INCOME (LOSS) $ 8,843 $ (1,680) $ 6,424 $(11,358) ======== ========= ========= ========
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited -- in thousands)
Nine months ended MARCH 28, 2003 March 29, 2002 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,364 $ (7,081) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 20,144 29,011 Unrealized loss on derivative contracts 1,303 3,675 Deferred income taxes (296) (3,465) Changes in operating assets and liabilities: Accounts receivable 8,139 (9,624) Inventories (45,202) (21,769) Prepaid expenses and other current assets (1,857) (2,703) Income taxes 4,024 (2,202) Accounts payable (833) (5,003) Accrued interest 12,248 13,763 Accrued expenses and other liabilities (7,661) (10,033) -------- --------- NET CASH USED IN OPERATING ACTIVITIES (5,627) (15,431) -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (24,587) (12,317) Acquisitions of assets including acquisition costs (16,806) (65,757) Additions to intangibles (807) 797 Deposits and other assets 119 846 -------- --------- NET CASH USED IN INVESTING ACTIVITIES (42,081) (76,431) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 36,098 6,012 Payment for treasury stock -- (60) Receipt of additional paid-in capital 392 50,000 Debt financing costs -- (120) -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 36,490 55,832 -------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (139) 5 -------- --------- NET DECREASE IN CASH (11,357) (36,025) CASH, BEGINNING OF PERIOD 28,199 44,645 -------- --------- CASH, END OF PERIOD $ 16,842 $ 8,620 ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 41,933 $ 38,290 Income taxes 2,716 1,912
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ( in thousands) NOTE 1 - GENERAL Tekni-Plex is a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. Tekni-Plex primarily serves the food, healthcare and consumer markets. Tekni-Plex has built leadership positions in its core markets, and has focused on vertically integrated production of highly specialized products. Tekni-Plex has operations in the United States, Europe and Canada. Tekni-Plex's operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected as Other. The consolidated financial statements include the accounts of Tekni-Plex, Inc. and its Subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 28, 2002. The results of operations and cash flows for the nine months ended March 28, 2003 are not necessarily indicative of the results to be expected for the fiscal year ending June 27, 2003 or any other period. NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS a) In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141, requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that the companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company has completed its transitional analysis of goodwill and has determined no adjustments are necessary. 6 If SFAS 142 had been adopted June 30, 2001, the Company's net loss for the nine months ended March 29, 2002 would have reduced because of lower amounts of amortization as follows:
Three Months Ended Nine Months Ended Net income (loss), as reported $ 2,305 $ (7,081) Add amortization, net of tax 3,462 10,377 -------- --------- Adjusted net income $ 5,767 $ 3,296 ======== =========
b) In December 2002, The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 as it relates to accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not plan to adopt the fair value based method prescribed by FASB 123. Under the accounting provisions of FASB 123, the Company's net income (loss) would have been adjusted to the pro forma amounts indicated below, using the following assumptions: expected lives of 8 years, no dividend yield, volatility at 0%, and risk free interest rate of 4.0% for 2001 (the last year of grants). Three months ended Nine months ended March 28, March 29, March 28, March 29, 2003 2002 2003 2003 -------------------- -------------------- Net income (loss), As reported $7,603 $2,305 $4,364 $(7,081) Adjustments for fair value of stock options, net of tax (32) (36) (96) (109) -------------------- -------------------- Pro forma $7,571 $2,269 $4,268 $(7,190) -------------------- -------------------- NOTE 3 - INVENTORIES Inventories as of March 28, 2003 and June 28, 2002 are summarized as follows:
MARCH 28, 2003 June 28, 2002 -------------- ------------- Raw materials $ 51,268 $ 37,727 Work-in-process 9,970 8,621 Finished goods 104,585 71,284 --------- --------- $ 165,823 $ 117,632 --------- ---------
7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:
MARCH 28, 2003 June 28, 2002 -------------- ------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (Less unamortized $ 272,269 $ 271,985 discount of $2,731 and $3,015) Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium 40,531 40,588 at $531 and $588) Senior Debt: Revolving line of credit, expiring June, 2006. At March 28, 2003, the interest rates ranged from 4.44 % to 6.25%. 88,000 46,000 Term notes due June, 2006 and June, 2008, with interest rates at March 28, 2003 of 4.38% and 322,900 329,120 4.88%. Other, primarily international term loans, with interest rates ranging from 4.44% to 5.44% and 5,396 5,128 maturities ranging from 2003 to 2010 --------- ---------- 729,096 692,821 Less: Current maturities 13,290 13,407 --------- ---------- $ 715,806 $ 679,414 --------- ----------
8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - SEGMENT INFORMATION Tekni-Plex has organized its business into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigating hose, medical tubing and pool and vacuum hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins, have been reflected in Other. Tekni-Plex's segments have operations in the United States, Europe and Canada. Financial information concerning the Company's business segments and the geographic areas in which they operate are as follows:
Tubing Packaging Products Other TOTAL -------- -------- ------- -------- Three months ended March 28,2003 Revenues from external Customers $ 69,005 $ 69,355 $27,731 $166,091 Interest expense 5,965 8,779 3,978 18,722 Depreciation and Amortization 3,054 1,674 1,309 6,037 Operating profit (loss) 17,303 17,127 (289) 34,141 Expenditures for segment Assets 6,554 2,437 1,761 10,752 -------- -------- ------- -------- Three months ended March 29,2002 Revenues from external Customers $ 59,143 $ 67,581 $26,669 $153,393 Interest expense 4,002 12,697 2,315 19,014 Depreciation and Amortization 5,444 3,025 1,226 9,695 Operating profit (loss) 12,317 14,204 2,326 28,847 Expenditures for segment Assets 2,146 142 632 2,920 -------- -------- ------- --------
9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
Tubing Packaging Products Other TOTAL -------- -------- ------- -------- Nine months ended March 28, 2003 Revenues from external Customers $199,253 $145,815 $80,190 $425,258 Interest expense 17,185 25,317 11,469 53,971 Depreciation and Amortization 10,493 4,966 3,917 19,376 Operating profit (loss) 44,829 30,034 849 75,712 Expenditures for segment Assets 10,519 9,082 4,371 23,972 -------- -------- ------- -------- Nine months ended March 29, 2002 Revenues from external Customers $174,744 $129,325 $78,228 $382,297 Interest expense 16,988 25,037 11,364 53,389 Depreciation and Amortization 15,254 8,146 4,837 28,237 Operating profit (loss) 32,467 22,587 4,282 59,336 Expenditures for segment Assets 6,435 3,224 2,112 11,771 -------- -------- ------- --------
Three months ended Nine months ended MARCH 28, March 29, MARCH 28, March 29, 2003 2002 2003 2002 --------- -------- -------- --------- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 34,141 $ 28,847 $ 75,712 $ 59,336 Corporate and eliminations (4,578) (5,368) (13,371) (12,944) --------- -------- -------- --------- $ 29,563 $ 23,479 $ 62,341 $ 46,392 ========= ======== ======== ========= DEPRECIATION AND AMORTIZATION Segment totals $ 6,037 $ 9,695 $ 19,376 $ 28,237 Corporate 256 262 768 774 --------- -------- -------- --------- Consolidated total $ 6,293 $ 9,957 $ 20,144 $ 29,011 ========= ======== ======== ========= EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 10,752 $ 2,920 $ 23,972 $ 11,771 Other unallocated expenditures 226 255 615 546 --------- -------- -------- --------- Consolidated total $ 10,978 $ 3,175 $ 24,587 $ 12,317 ========= ======== ======== =========
10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINACIAL STATEMENTS (in thousands) SEGMENT ASSETS
Packaging Tubing Products Other TOTAL --------- --------------- ------ ----- March 28, 2003 $ 265,367 $ 348,441 $ 130,546 $ 744,354 ---------- ------------ --------- --------- June 28, 2002 $ 222,798 $ 334,710 $ 130,050 $ 687,558 ---------- ------------ --------- ---------
MARCH 28, 2003 June 28, 2002 -------------- ------------- TOTAL ASSETS Total assets from reportable segments $ 744,354 $ 687,558 Other unallocated amounts 21,882 12,595 --------- --------- Consolidated total $ 766,236 $ 700,153 ========= =========
GEOGRAPHIC INFORMATION
Three months ended Nine months ended MARCH 28, March 29, MARCH 28, March 29, 2003 2002 2003 2002 --------- --------- --------- --------- REVENUES United States $ 144,000 $ 137,685 $ 372,154 $ 341,366 International 22,091 15,708 53,104 40,931 --------- --------- --------- --------- Total $ 166,091 $ 153,393 $ 425,258 $ 382,297 ========= ========= ========= =========
MARCH 28, 2003 June 28, 2002 --------------- ------------- LONG-LIVED ASSETS United States $ 378,698 $ 352,365 International 46,834 41,704 --------- --------- Total $ 425,532 $ 394,069 ========= =========
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended March 28, 2003
Non- TOTAL Issuer Guarantors Guarantors -------- --------- ---------- ---------- Net sales $ 166,091 $ 37,522 $ 106,478 $ 22,091 Cost of sales 121,966 26,400 79,396 16,170 --------- --------- --------- ---------- Gross profit 44,125 11,122 27,082 5,921 Operating expenses: Selling, General and administrative 14,562 7,058 5,600 1,904 --------- --------- --------- ---------- Operating profit 29,563 4,064 21,482 4,017 Interest expense (income) 18,722 18,685 (11) 48 Unrealized gain on derivative contracts (833) (833) -- -- Other expense (income) (359) (554) (398) 593 --------- --------- --------- ---------- Income (loss) before income taxes 12,033 (13,234) 21,891 3,376 Provision (benefit) for income taxes 4,430 (5,812) 8,890 1,352 --------- --------- --------- ---------- Net income (loss) $ 7,603 $ (7,422) $ 13,001 $ 2,024 ========= ========= ========= ==========
For the nine months ended March 28, 2003
Non- TOTAL Issuer Guarantors Guarantors --------- --------- ---------- --------- Net sales $ 425,258 $ 111,882 $ 260,272 $ 53,104 Cost of sales 319,871 78,699 202,163 39,009 --------- --------- ---------- --------- Gross profit 105,387 33,183 58,109 14,095 Operating expenses: Selling, General and administrative 43,046 19,786 18,233 5,027 --------- --------- ---------- --------- Operating profit 62,341 13,397 39,876 9,068 Interest expense (income) 53,971 53,918 (54) 107 Unrealized loss on derivative contracts 1,303 1,303 -- -- Other expense (income) 23 (578) (998) 1,599 --------- --------- ---------- --------- Income (loss) before income taxes 7,044 (41,246) 40,928 7,362 Provision (benefit) for income taxes 2,680 (15,670) 15,550 2,800 --------- --------- ---------- --------- Net income (loss) $ 4,364 $ (25,576) $ 25,378 $ 4,562 ========= ========= ========== =========
12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings For the three months ended March 29, 2002
Non- TOTAL Issuer Guarantors Guarantors --------- --------- ---------- ---------- Net sales $ 153,393 $ 40,360 $ 97,325 $ 15,708 Cost of sales 111,385 27,869 72,885 10,631 --------- --------- ---------- --------- Gross profit 42,008 12,491 24,440 5,077 Operating expenses: Selling, General and administrative 18,529 10,854 6,123 1,552 --------- --------- ---------- --------- Operating profit 23,479 1,637 18,317 3,525 Interest expense (income) 19,014 19,002 (10) 22 Unrealized gain on derivative contracts 1,085 1,085 -- -- Other expense (income) (105) (222) (366) 483 --------- --------- ---------- --------- Income (loss) before income taxes 3,485 (18,228) 18,693 3,020 Provision (benefit) for income taxes 1,180 (6,450) 6,700 930 --------- --------- ---------- --------- Net income (loss) $ 2,305 $ (11,778) $ 11,993 $ 2,090 ========= ========= ========== =========
For the nine months ended March 29, 2002
Non- TOTAL Issuer Guarantors Guarantors --------- --------- ---------- ---------- Net sales $ 382,297 $ 121,666 $ 219,700 $ 40,931 Cost of sales 285,591 87,956 167,882 29,753 --------- --------- ---------- --------- Gross profit 96,706 33,710 51,818 11,178 Operating expenses: Selling, General and administrative 50,314 29,737 16,000 4,577 --------- --------- ---------- --------- Operating profit 46,392 3,973 35,818 6,601 Interest expense (income) 53,389 53,356 (86) 119 Unrealized loss on derivative contracts 3,675 3,675 -- -- Other expense (income) 229 (712) (630) 1,571 --------- --------- ---------- --------- Income (loss) before income taxes (10,901) (52,346) 36,534 4,911 Provision (benefit) for income taxes (3,820) (18,360) 12,950 1,590 --------- --------- ---------- --------- Net income (loss) $ (7,081) $ (33,986) $ 23,584 $ 3,321 ========= ========= ========== =========
13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at March 28, 2003
Non- TOTAL Eliminations Issuer Guarantors Guarantors --------- ------------ --------- ---------- ---------- Current assets $ 340,704 $ -- $ 45,668 $ 239,002 $ 56,034 Property, plant and equipment, net 177,829 -- 40,813 112,825 24,191 Intangible assets, net 215,383 -- 8,533 194,481 12,369 Investment in subsidiaries -- (528,458) 528,458 -- -- Deferred income taxes 18,879 -- 19,230 1,430 (1,781) Deferred charges, net 12,474 -- 12,358 116 -- Other assets 967 (343,029) 96,754 235,187 12,055 --------- --------- --------- --------- --------- Total assets $ 766,236 $(871,487) $ 751,814 $ 783,041 $ 102,868 ========= ========= ========= ========= ========= Current liabilities $ 108,768 $ -- $ 48,532 $ 42,440 $ 17,796 Long-term debt 715,806 -- 711,260 -- 4,546 Other liabilities 25,956 (343,029) 71,590 256,772 40,623 --------- --------- --------- --------- --------- Total liabilities 850,530 (343,029) 831,382 299,212 62,965 --------- --------- --------- --------- --------- Additional paid-in capital 170,568 (312,420) 170,549 296,783 15,656 Retained earnings, Accumulated (deficit) (29,595) (216,038) (29,595) 190,131 25,907 Accumulated other comprehensive loss (4,745) -- -- (3,085) (1,660) Less: Treasury stock (220,522) -- (220,522) -- -- --------- --------- --------- --------- --------- Total stockholders' deficit (84,294) (528,458) (79,568) 483,829 39,903 --------- --------- --------- --------- --------- Total liabilities and stockholders' deficit $ 766,236 $(871,487) $ 751,814 $ 783,041 $ 102,868 ========= ========= ========= ========= =========
14 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Balance Sheet - at June 28, 2002
Non- Total Eliminations Issuer Guarantors Guarantors --------- ------------ --------- ---------- ---------- Current assets $ 306,084 $ -- $ 44,828 $ 209,798 $ 51,458 Property, plant and equipment, net 158,118 -- 41,704 95,366 21,048 Intangible assets, net 204,252 -- 7,907 184,093 12,252 Investment in subsidiaries -- (498,518) 498,518 -- -- Deferred charges, net 14,343 -- 14,134 -- 209 Deferred taxes 16,278 -- 20,177 -- (3,899) Other income assets 1,078 (321,468) 74,008 236,444 12,094 --------- --------- --------- --------- --------- Total assets $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= ========= Current liabilities $ 89,165 $ -- $ 29,889 $ 42,563 $ 16,713 Long-term debt 679,414 -- 675,253 -- 4,161 Other liabilities 22,685 (321,468) 80,460 229,752 33,941 --------- --------- --------- --------- --------- Total liabilities 791,264 (321,468) 785,602 272,315 54,815 --------- --------- --------- --------- --------- Additional paid-in capital 170,176 (312,420) 170,156 296,784 15,656 Retained earnings, Accumulated (deficit) (33,959) (186,098) (33,959) 159,960 26,138 Accumulated other comprehensive income (6,805) -- -- (3,358) (3,447) Treasury stock (220,523) -- (220,523) -- -- --------- --------- --------- --------- --------- Total stockholders' deficit (91,111) (498,518) (84,326) 453,386 38,347 --------- --------- --------- --------- --------- Total liabilities and stockholders' deficit $ 700,153 $(819,986) $ 701,276 $ 725,701 $ 93,162 ========= ========= ========= ========= =========
15 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows For the nine months ended March 28, 2003
Non- TOTAL Issuer Guarantors Guarantors -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ (5,627) $(19,537) $ 17,303 $ (3,393) -------- -------- -------- -------- Cash flows from investing activities: Capital expenditures (24,587) (5,013) (14,350) (5,224) Acquisition costs (16,806) -- (16,806) -- Additions to intangibles (807) (571) -- (236) Deposits and other assets 119 74 -- 45 -------- -------- -------- -------- Net cash used in investing activities (42,081) (5,510) (31,156) (5,415) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt 36,098 36,007 -- 91 Receipt of additional paid-in capital 392 392 -- -- Change in intercompany accounts -- (11,939) 3,390 8,549 -------- -------- -------- -------- Net cash flows provided by financing activities 36,490 24,460 3,390 8,640 -------- -------- -------- -------- Effect of exchange rate changes on cash (139) -- -- (139) -------- -------- -------- -------- Net decrease in cash (11,357) (587) (10,463) (307) Cash, beginning of period 28,199 9,035 10,660 8,504 -------- -------- -------- -------- Cash, end of period $ 16,842 $ 8,448 $ 197 $ 8,197 ======== ======== ======== ========
For the nine months ended March 29, 2002
Non- TOTAL Issuer Guarantors Guarantors -------- -------- ---------- ---------- Net cash used in operating activities $(15,431) $(13,346) $ (154) $ (1,931) -------- -------- -------- -------- Cash flows from Investing activities: Capital expenditures (12,317) (5,209) (4,779) (2,329) Acquisition costs (65,757) -- (65,757) -- Additions to intangibles 797 (191) 1,206 (218) Deposits and other assets 846 117 299 430 -------- -------- -------- -------- Net cash used in investing activities (76,431) (5,283) (69,031) (2,117) -------- -------- -------- -------- Cash flows from financing activities Repayment of long term debt 6,012 6,298 -- (286) Receipt of additional paid in capital 50,000 50,000 -- -- Payment for treasury stock (60) (60) -- -- Debt financing cost (120) (120) -- -- Change in intercompany accounts -- (68,272) 64,148 4,124 -------- -------- -------- -------- Net cash flows provided by (used in) financing activities 55,832 (12,154) 64,148 3,838 -------- -------- -------- -------- Effect of exchange rate changes on cash 5 -- -- 5 -------- -------- -------- -------- Net decrease in cash (36,025) (30,783) (5,037) (205) Cash, beginning of period 44,645 32,890 5,321 6,434 -------- -------- -------- -------- Cash, end of period $ 8,620 $ 2,107 $ 284 $ 6,229 ======== ======== ======== ========
16 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 7- ACQUISITIONS The Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" on July 10, 2002, for approximately $16,806, including acquisition costs, in cash. The allocation of the purchase is as follows: Assets: Accounts receivable $ 3,449 Inventories 1,829 Prepaid expenses 334 Deferred Taxes 2,280 Property, Plant & Equipment 12,487 Intangibles including goodwill 11,010 -------- Total Assets 31,389 -------- Accounts payable and accrued liabilities 8,583 Integration reserve 6,000 -------- Net Investment $ 16,806 ========
The Company has utilized preliminary estimates and assumptions in determining the allocation of purchase price to assets acquired and liabilities assumed of ELM. While management believes such estimates and assumptions are reasonable, the final allocation of the purchase price may differ from that reflected in the March 28, 2003 consolidated balance sheet after a more extensive review of fair values of inventory and the acquisition reserve. The Company expects to finalize this allocation in the next three months. In connection with the acquisition, a reserve of $6,000 has been established for the costs to integrate ELM's operations with the Company. The reserve is included in accrued liabilities. The components of the integration reserve and activity through March 28, 2003, is as follows:
BALANCE COSTS CHARGED BALANCE JULY 10, 2002 TO RESERVE MARCH 28, 2003 ------------- ------------- -------------- Manufacturing Reconfiguration $ 2,500 $ 2,157 $ 343 Reduction in personnel and related costs 1,000 729 271 Legal, environmental and other 2,500 2,120 380 -------- -------- -------- $ 6,000 $ 5,006 $ 994 ======== ======== ========
The remaining costs are expected to be paid over the next three to six months. 17 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) The proforma results of operations for the quarter and nine months ended March 29, 2002, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through March 28, 2003 is as follows:
BALANCE COSTS CHARGED BALANCE OCTOBER 2001 TO RESERVE MARCH 28, 2003 ------------ -------------- -------------- Cost to close duplicate facilities $ 3,500 $ 2,571 $ 929 Reduction in personnel and related costs 2,100 1,196 904 Legal and environmental 1,275 1,388 (113) Manufacturing reconfiguration 1,455 2,747 (1,292) Other 1,670 2,098 (428) -------- -------- -------- $ 10,000 $ 10,000 $ 0 ======== ======== ========
The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on June 30, 2001. Since Swan was purchased subsequent to July 1, 2001, no amortization of goodwill has been reflected in accordance with SFAS 142.
NINE MONTHS ENDED MARCH 29, 2002 ----------------- Net sales $393,593 Operating profit 44,407 Loss before income taxes 12,886 ==========
18 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER OF FISCAL 2003 COMPARED WITH THE THIRD QUARTER OF FISCAL 2002 Net sales increased to $166.1 million for the three months ended March 28, 2003 from $153.4 million for the three months ended March 29, 2002, representing an 8.3% gain. Net sales in our Packaging Segment grew 16.7%, primarily due to our Elm acquisition which closed in July 2002. Net sales in our Tubing Products Segment grew 2.6% and other net sales grew 4.0%. Cost of Sales increased to $122.0 million for the three months ended March 28, 2003 from $111.4 million for the three months ended March 29, 2002. Expressed as a percentage of net sales, cost of sales increased to 73.4% in the current period compared to 72.6% in the prior period primarily due to higher raw material costs. Gross Profit, as a result of the above, increased to $44.1 million in the current period compared to $42.0 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 26.6% for the three months ended March 28, 2003 from 27.4% in comparable period of last year. Our Packaging Segment gross profit increased to $22.2 million for the three months ended March 28, 2003 from $18.2 million for the three months ended March 29, 2002. Expressed as a percentage of net sales, Packaging Segment gross profit increased to 32.2% in the current period from 30.7% in the previous period. Our Tubing Products Segment gross profit increased to $20.7 million for the three months ended March 28, 2003 from $19.5 million for the three months ended March 29, 2002. Expressed as a percentage of net sales, Tubing Products Segment gross profit increased to 29.8% in the current period from 28.8% in the previous period. Other gross profit fell to $1.3 million for the three months ended March 28, 2003 from $4.4 million for the three months ended March 29, 2002. Selling, General and Administrative expense decreased to $14.6 million in the most recent quarter from $18.5 million in the comparable period of the previous year primarily due to a $4.0 million reduction in amortization expense associated with a required change in accounting for goodwill. Measured as a percentage of net sales, selling, general and administrative expense decreased to 8.8% in the current period from 12.1% in the previous period. Operating Profit, as a result of the above, increased to $29.6 million for the three months ended March 28, 2003 from $23.5 million for the three months ended March 29, 2002. Expressed as a percentage of net sales, operating profit increased to 17.8% in the most recent period from 15.3% in the comparable period of last year. Our Packaging Segment operating profit increased to $17.3 million or 25.1% of net sales in the current period compared to $12.3 million or 20.8% of net sales in the previous period. Our Tubing Products Segment operating profit increased to $17.1 million or 24.7% of net sales in the current period compared to $14.2 million or 21.0% of net sales in the previous period. Other operating profit declined to a loss of $0.3 million in the current period from income of $2.3 million in the previous period. Interest expense decreased to $18.7 million or 11.3% of net sales in the three months ended March 28, 2003 from $19.0 million or 12.4% of net sales for the three months ended March 29, 2002. Unrealized (gain) loss on derivative transactions was a $0.8 million gain or 0.5% of net sales for the three months ending March 28, 2003 compared to a $1.1 million loss or 0.7% of net sales for the three months ending March 29, 2002. The changes were due to changes in the market interest rates underlying our derivatives. Income before income taxes, as a result, was $12.0 million or 7.2% of net sales for the three months ended March 28, 2003 compared to $3.5 million or 2.3% of net sales for the three months ended March 29, 2002. 19 Income tax was $4.4 million for the three months ended March 28, 2003, compared to $1.2 million for the three months ended March 29, 2002. The Company's effective tax rate was 36.8% for the three months ended March 28, 2003 compared to 33.9% for the three months ending March 29, 2002. Net income, as a result, was $7.6 million for the three months ended March 28, 2003 or 4.6% of net sales compared with $2.3 million for the three months ended March 29, 2002 or 1.5% of net sales. 20 FIRST NINE MONTHS OF FISCAL 2003 COMPARED WITH THE FIRST NINE MONTHS OF FISCAL 2002 Net sales increased to $425.3 million for the nine months ended March 28, 2003 from $382.3 million for the nine months ended March 29, 2002, representing an 11.2% gain. Net sales in our Packaging Segment grew 14.0%, primarily due to our Elm acquisition which closed in July 2002. Net sales in our Tubing Products Segment grew 12.8% primarily due to the inclusion of net sales from our Swan acquisition in the first quarter of fiscal 2003. Other net sales grew 2.5%. Cost of Sales increased to $319.9 million for the nine months ended March 28, 2003 from $285.6 million for the nine months ended March 29, 2002. Expressed as a percentage of net sales, cost of sales increased to 75.2% in the current period compared to 74.7% in the prior period primarily due to higher raw material costs. Gross Profit, as a result of the above, increased to $105.4 million in the current period compared to $96.7 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 24.8% for the nine months ended March 28, 2003 from 25.3% in comparable period of last year. Our Packaging Segment gross profit increased to $59.4 million for the nine months ended March 28, 2003 from $49.6 million for the nine months ended March 29, 2002. Expressed as a percentage of net sales, Packaging Segment gross profit increased to 29.8% in the current period from 28.4% in the previous period. Our Tubing Products Segment gross profit increased to $40.3 million for the nine months ended March 28, 2003 from $36.5 million for the nine months ended March 29, 2002. Expressed as a percentage of net sales, Tubing Products Segment gross profit decreased to 27.6% in the current period from 28.2% in the previous period. Other gross profit fell to $5.7 million or 7.1% of net sales for the nine months ended March 28, 2003 from $10.6 million or 13.6% of net sales for the nine months ended March 29, 2002. Selling, General and Administrative expense decreased to $43.0 million in the most recent quarter from $50.3 million in the comparable period of the previous year primarily due to a $12.1 million reduction in amortization expense associated with a required change in accounting for goodwill. Measured as a percentage of net sales, selling, general and administrative expense decreased to 10.1% in the current period from 13.2% in the previous period. Operating Profit, as a result of the above, increased to $62.3 million for the nine months ended March 28, 2003 from $46.4 million for the nine months ended March 29, 2002. Expressed as a percentage of net sales, operating profit increased to 14.7% in the most recent period from 12.1% in the comparable period of last year. Packaging Segment operating profit increased to $44.8 million or 22.5% of net sales in the current period compared to $32.5 million or 18.6% of net sales in the previous period. Tubing Products Segment operating profit increased to $30.0 million or 20.6% of net sales in the current period compared to $22.6 million or 17.5% of net sales in the previous period. Other operating profit declined to $0.8 million in the current period from $4.3 million in the previous period. Interest expense increased to $54.0 in the nine months ended March 28, 2003 from $53.4 million in the nine months ended March 29, 2002. Expressed as a percentage of net sales, interest expense decreased to 12.7% in the current period compared to 14.0% in the comparable period of last year. Unrealized (gain) loss on derivative transactions was a $1.3 million loss or 0.3% of net sales for the nine months ending March 28, 2003 compared to a $3.7 million loss or 1.0% of net sales for the nine months ending March 29, 2002. The changes were due to changes in the market interest rates underlying our derivatives. Income (loss) before income taxes, as a result, was $7.0 million for the nine months ended March 28, 2003 compared to a loss of ($10.9) million for the nine months ended March 29, 2002. 21 Income tax expense (benefit) was $2.7 million for the nine months ended March 28, 2003, compared to a benefit of ($3.8) million for the nine months ended March 29, 2002. The Company's effective tax rate was 38.0% for the nine months ended March 28, 2003 compared to 35.0% for the nine months ending March 29, 2002. Net income (loss), as a result, was $4.4 million for the nine months ended March 28, 2003 compared with a loss of ($7.1) million for the nine months ended March 29, 2002. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations for the nine months ended March 28, 2003 was $5.6 million compared with $15.4 million in the same period of the prior year. The decrease of $9.8 million was primarily due to a larger seasonal reduction in accounts receivable at our garden hose unit compared to last year. Working capital on March 28, 2003 was $231.9 million compared to $216.9 million on June 28, 2002. The increase was due primarily to a normal seasonal increase in garden hose inventories. As of March 28, 2003, the Company had an outstanding balance of $88.0 million under the $100.0 million revolving credit line. This represents an increase of $42.0 million from the outstanding balance as of June 28, 2002. The Company's capital expenditures for the nine months ended March 28, 2003 and March 29, 2002 were $24.6 million and $12.3 million respectively. In addition, the Company paid $16.8 million for acquisitions in the nine months ending March 28, 2003 compared to $65.8 million in the comparable period of the previous year. The Company continues to expect that its principal uses of cash for the next several years will be acquisitions, debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the Company may need additional financing to take advantage of acquisition opportunities that may arise in the next several quarters. There can be no assurance that such financing will be available in the amounts required for such acquisitions and on terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At March 28, 2003, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $410.9 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.3 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. To mitigate these risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344,000. ITEM 4. Controls and Procedures 22 (a) Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14(C) and 15-d-14(C)) as of a date (the "Evaluation Date") within 90 days of the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our internal controls subsequent to the Evaluation Date. PART II. OTHER INFORMATION Item 1 Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K None 23 CERTIFICATION I, Dr. F. Patrick Smith, Chairman of the Board and Chief Executive Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By: /s/ Dr. F. Patrick Smith ------------------------ Dr. F. Patrick Smith Chairman and Chief Executive Officer 24 CERTIFICATION I, James E. Condon, Chief Financial Officer of Tekni-Plex, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tekni-Plex, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 12, 2003 By: /s/ James E. Condon ------------------- James E. Condon Chief Financial Officer 25 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending March 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Dr. F. Patrick Smith, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /s/ DR. F. PATRICK SMITH Dr. F. Patrick Smith Chairman and Chief Executive Officer May 12, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Tekni-Plex, Inc. (the "Company") on Form 10-Q for the period ending March 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James E. Condon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BY: /s/ JAMES E. CONDON James E. Condon Chief Financial Officer May 12, 2003 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. May 12, 2003 By: /s/ F. Patrick Smith -------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker ----------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon ------------------ James E.Condon Vice President and Chief Financial Officer 27 EX-23.1 12 y61170a2exv23w1.txt CONSENT OF BDO SEIDMAN LLP Exhibit 23.1 Consent of Independent Certified Public Accountants The Board of Directors Tekni-Plex, Inc. Somerville, New Jersey We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Amendment 2 to this Registration Statement of our report dated September 13, 2002, relating to the consolidated financial statements and schedule of Tekni-Plex, Inc. appearing in the Company's annual report on Form 10-K/A for the year ended June 28, 2002. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP BDO Seidman, LLP Woodbridge, NJ May 20, 2003 EX-25.1 13 y61170a2exv25w1.txt T-1 Conformed Copy SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) HSBC BANK USA (Exact name of trustee as specified in its charter) New York 13-2774727 (Jurisdiction of incorporation (I.R.S. Employer or organization if not a U.S. Identification No.) national bank) 452 Fifth Avenue, New York, NY 10018-2706 (212) 525-5600 (Zip Code) (Address of principal executive offices) Warren L. Tischler, Senior Vice President HSBC Bank USA 452 Fifth Avenue New York, New York 10018-2706 Tel: (212) 525-1311 (Name, address and telephone number of agent for service) TEKNI-PLEX, INC.* (Exact name of obligor as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 260 North Denton Tap Road Coppell, Texas 75019 (972) 304-5077 (Zip Code) (Address of principal executive offices) 12-3/4% Series B Senior Subordinated Notes due 2010 Guaranties of 12-3/4% Series B Senior Subordinated Notes due 2010 (Title of Indenture Securities) *TABLE OF ADDITIONAL REGISTRANTS
State or Other Jurisdiction of I.R.S. Employer Incorporation or Identification Name, Address and Telephone Number Organization Number - ---------------------------------- ------------ ------ PureTec Corporation (1) Delaware 22-3376449 Plastic Specialties and Technologies, Inc. (1) Delaware 22-2743384 Plastic Specialties and Technologies Investments, Inc. (1) Delaware 22-2663552 Burlington Resins, Inc. (1) Delaware 22-3334106 Pure Tech APR, Inc. (1) New York 11-3065942 Coast Recycling North, Inc. (1) California 68-0200870 Distributors Recycling, Inc. New Jersey 22-2466975 REI Distributors, Inc. (1) New Jersey 22-2418824 Pure Tech Recycling of California (1) California 77-0356589 Alumet Smelting Corp (1) New Jersey 22-2054447 Tri-Seal Holdings, Inc. (1) Delaware 52-2141575 Natvar Holdings, Inc. (1) Delaware 22-3703725 TPI Acquisition Subsidiary, Inc. (1) Delaware 52-2340472 TP/Elm Acquisition Subsidiary, Inc. (1) Delaware 71-0891561
(1) The address of these additional registrants is: 201 Industrial Parkway, Somerville, New Jersey 08876. The telephone number of each is (908) 722-4800. General Item 1. General Information.. Furnish the following information as to the trustee: (a) Name and address of each examining or supervisory authority to which it is subject. State of New York Banking Department. Federal Deposit Insurance Corporation, Washington, D.C. Board of Governors of the Federal Reserve System, Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes. Item 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None Item 16. List of Exhibits
Exhibit - ------- T1A(i) (1) Copy of the Organization Certificate of HSBC Bank USA. T1A(ii) (1) Certificate of the State of New York Banking Department dated December 31, 1993 as to the authority of HSBC Bank USA to commence business as amended effective on March 29, 1999. T1A(iii) Not applicable. T1A(iv) (3) Copy of the existing By-Laws of HSBC Bank USA as as amended on April 11, 2002. T1A(v) Not applicable. T1A(vi) (2) Consent of HSBC Bank USA required by Section 321(b) of the Trust Indenture Act of 1939. T1A(vii) Copy of the latest report of condition of the trustee (December 31, 2002), published pursuant to law or the requirement of its supervisory or examining authority. T1A(viii) Not applicable. T1A(ix) Not applicable.
(1) Exhibits previously filed with the Securities and Exchange Commission with registration No. 022-22429 and incorporated herein by reference thereto. (2) Exhibit previously filed with the Securities and Exchange Commission with Registration No. 33-53693 and incorporated herein by reference thereto. (3) Exhibit previously filed with the Securities and Exchange Commission with Registration No. 333-88532 and incorporated herein by reference thereto. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, HSBC Bank USA, a banking corporation and trust company organized under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York and State of New York on the 28th day of April, 2003. HSBC BANK USA By: /s/ Frank J. Godino --------------------------- Frank J. Godino Vice President EXHIBIT T1A (VII) Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-0052 Office of the Comptroller of the Currency OMB Number: 1557-0081 FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Expires March 31, 2005 - ------------------------------------------------------------------------------------------------------------------------------------ Please refer to page i, Table of Contents, for the required disclosure of estimated [1] burden. - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND FOREIGN OFFICES -- FFIEC 031 REPORT AT THE CLOSE OF BUSINESS DECEMBER 31, 2002 (19980930) ----------- (RCRI 9999) This report is required by law; 12 U.S.C. Section 324 (State This report form is to be filed by banks with branches and member banks); 12 U.S.C. Section 1817 (State nonmember banks); consolidated subsidiaries in U.S. territories and possessions, and 12 U.S.C. Section 161 (National banks). Edge or Agreement subsidiaries, foreign branches, consolidated foreign subsidiaries, or International Banking Facilities. NOTE: The Reports of Condition and Income must be signed by an The Reports of Condition and Income are to be prepared in authorized officer and the Report of Condition must be accordance with Federal regulatory authority instructions. attested to by not less than two directors (trustees) for State nonmember banks and three directors for State member and We, the undersigned directors (trustees), attest to the National Banks. correctness of this Report of Condition (including the supporting schedules) and declare that it has been examined by I, Gerald A. Ronning, Executive VP & Controller us and to the best of our knowledge and belief has been --------------------------------------------- prepared in conformance with the instructions issued by the Name and Title of Officer Authorized to Sign Report appropriate Federal regulatory authority and is true and correct. Of the named bank do hereby declare that these Reports of Condition and Income (including the supporting schedules) have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and are true to the best of my knowledge and believe. /s/ Youssef Nasr /s/ Gerald A. Ronning --------------------------------------------------------------- - -------------------------------------------------------------- Director (Trustee) Signature of Officer Authorized to Sign Report /s/ Bernard J. Kennedy --------------------------------------------------------------- Director (Trustee) /s/ Sal H. Alfieri 2/14/03 --------------------------------------------------------------- - -------------------------------------------------------------- Director (Trustee) Date of Signature - ------------------------------------------------------------------------------------------------------------------------------------ SUBMISSION OF REPORTS Each Bank must prepare its Reports of Condition and Income For electronic filing assistance, contact EDS Call report either: Services, 2150 N. Prospect Ave., Milwaukee, WI 53202, telephone (800) 255-1571. (a) in electronic form and then file the computer data file directly with the banking agencies' collection agent, To fulfill the signature and attestation requirement for the Electronic Data System Corporation (EDS), by modem or Reports of Condition and Income for this report date, attach computer diskette; or this signature page to the hard-copy for the completed report that the bank places in its files. b) in hard-copy (paper) form and arrange for another party to convert the paper report to automated for. That party (if other than EDS) must transmit the bank's computer data file to EDS. - ------------------------------------------------------------------------------------------------------------------------------------ FDIC Certificate Number | 0 | 0 | 5 | 8 | 9 | (RCRI 9030) http://WWW.BANKING.US.HSBC.COM HSBC Bank USA - -------------------------------------------------------------- --------------------------------------------------------------- Primary Internet Web Address of Bank (Home Page), if any Legal Title of Bank (TEXT 9010) (TEXT 4087) (Example: www.examplebank.com) Buffalo --------------------------------------------------------------- City (TEXT 9130) N.Y. 14203 --------------------------------------------------------------- State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220) Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
REPORT OF CONDITION Consolidated domestic subsidiaries HSBC Bank USA of Buffalo - ------------------------------------------------------------------------ Name of Bank City in the state of New York, at the close of business December 31, 2002 ASSETS
Thousands of dollars Cash and balances due from depository institutions: a. Non-interest-bearing balances currency and coin $ 2,079,940 b. Interest-bearing balances 707,840 Held-to-maturity securities 4,372,512 Available-for-sale securities 13,701,218 Federal funds sold and securities purchased under agreements to resell: a. Federal funds sold in domestic offices 600,000 b. Securities purchased under agreements to resell 2,142,943 Loans and lease financing receivables: Loans and leases held for sale $ 2,490,206 Loans and leases net of unearned income $ 41,038,074 ------------ LESS: Allowance for loan and lease losses 491,801 Loans and lease, net of unearned income, allowance, and reserve $40,546,273 Trading assets 13,243,465 Premises and fixed assets 723,647 Other real estate owned 14,823 Investments in unconsolidated subsidiaries 245,614 Customers' liability to this bank on acceptances outstanding 98,526 Intangible assets: Goodwill 2,224,573 Intangible assets: Other intangible assets 404,242 Other assets 2,819,947 Total assets 86,415,769 LIABILITIES Deposits: In domestic offices 40,034,925 Non-interest-bearing 5,682,618 Interest-bearing 34,352,307 In foreign offices 20,129,661 Non-interest-bearing 397,743 Interest-bearing 19,731,918 Federal funds purchased and securities sold under agreements to repurchase: a. Federal funds purchased in domestic offices 656,181 b. Securities sold under agreements to repurchase 552,583 Trading Liabilities 7,696,329 Other borrowed money 5,361,189 Bank's liability on acceptances 98,526
Thousands of dollars Subordinated notes and debentures 1,549,034 Other liabilities 3,048,561 ---------- Total liabilities 79,126,989 ---------- Minority Interests in consolidated Subsidiaries 173 EQUITY CAPITAL Perpetual preferred stock and related surplus -- Common Stock 205,000 Surplus 6,454,612 Retained earnings 384,408 Accumulated other comprehensive income 244,587 Other equity capital components -- Total equity capital 7,288,607 Total liabilities, minority interests and equity capital 86,415,769
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