EX-13.2 3 y61170a3exv13w2.txt ANNUAL REPORT ON 10-K/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K/A (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 75019 COPPELL, TEXAS (Zip Code) (Address of principal executive offices)
(Registrant's telephone number, including area code) (972) 304-5077 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 joined our company and 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 electrical 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. 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, 1 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, packaging products and materials as well as tubing products. We primarily serve 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. 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 overall risk related to any single product or customer. Our 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. 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 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, and Kraft Foods, among others. 2 - 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. In 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. - 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. - 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, $85.0 million was contributed in conjunction with our acquisitions of Super Plastics, Mark IV's Swan Division, and Elm Packaging. 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. 3 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. - 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 Packaging business segment. PACKAGING SEGMENT The Packaging segment of our business had revenues of $234.7 million (40.6% total revenues) for the year ended June 28, 2002. Further details of the major markets served by this segment are given below: FOAM 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 4 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). PHARMACEUTICAL BLISTER FILMS 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 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. 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, who 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 5 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. AEROSOL AND PUMP PACKAGING COMPONENTS Our Aerosol and Pump Packaging Components business produces 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. The group also produces writing instrument products including pen barrels and ink tubing as well as ink reservoirs for felt-tip pens. Sales are primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments. These products are sold throughout the United States and Europe, as well as selected worldwide markets. Sales are made through our direct sales force. We believe that we are the leading supplier of aerosol valve and dispenser pump gaskets and dip tubes in the world. Our dip tubes and pen barrels 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. We are the single-source supplier to much of the industry. The principal competitive pressure in this product line, particularly the dip tube portion, 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. FOAM PLATES Our foam plate operations produce thermoformed foam polystyrene disposable plates, bowls, and hinged-lid containers as well as agricultural packaging products. Our sales are primarily to the consumer, agricultural and foodservice industries. We compete with numerous participants who use a variety of materials including foam polystyrene, pulp-based products and various plastic materials. TUBING PRODUCTS The Tubing Products segment of our business had revenues of $235.5 million (40.8% 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". 6 We sell these products primarily through our direct sales force 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. 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 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 our direct sales force. We remain competitive by focusing on product quality, performance and prompt delivery. 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
7
APPROXIMATE LOCATION PRIMARY FUNCTION SQUARE FEET -------- --------------------------- ----------- 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 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 (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. Furthermore, we cannot assure you that future environmental laws or regulations will not require substantial expenditures by us or significant modifications of our operations. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Not Applicable. 9 ITEM 6. SELECTED FINANCIAL DATA 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 --------- -------- --------- --------- -------- (DOLLARS IN THOUSANDS) 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%
--------------- (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. 10 (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. 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, JUNE 29, JUNE 28, 2000 2001 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 Packaging Segment reported a 0.8% decline in Net Sales to $234.7 million in the fiscal year ended June 28, 2002 compared to $236.6 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 Tubing Products Segment's Net Sales increased by $61.0 million or 35.0%, to $235.5 million from $174.5 million last year, primarily due to our Swan acquisition. Net Sales for our other products declined to $107.6 million in the current year from $114.7 million in the previous year primarily due to soft demand for specialty resins. 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. 11 Our Packaging Segment Gross Profit increased by $3.2 million to $67.0 million from $63.8 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 Packaging Segment Gross Profit increased to 28.5% for the year ended June 28, 2002 from 27.0% for the year ended June 29, 2001. Our Tubing Products Segment Gross Profit increased by $19.1 million to $65.2 million from $46.1 million in the fiscal year ending June 28, 2002 primarily due to our Swan acquisition. Measured as a percentage of Net Sales our Tubing Products Segment Gross Profit increased to 27.7% for the year ended June 28, 2002 from 26.4% for the year ended June 29, 2001. Gross Profit for our other products declined to $15.1 million in the current fiscal year from $16.1 million in the previous year. Measured as a percentage of Net Sales, other segment Gross Profit increased to 14.1% in the current fiscal year from 14.0% in the previous year 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 Packaging Segment Operating Profit increased by $4.0 million or 10.0% to $43.9 million from $39.9 million last year, primarily due to lower raw material costs and improved operating efficiencies. Measured as a percentage of Net Sales, Packaging Segment Operating Profit improved to 18.7% in the year ended June 28, 2002 compared to 16.8% in the previous year. Our Tubing Products Segment Operating Profit increased by $13.8 million or 45.2% to $44.2 million from $30.4 million in the year ended June 28, 2002, primarily due to our Swan acquisition. Measured as a percentage of Net Sales, Tubing Products Segment Operating Profit improved to 18.8% from 17.4% last year. Operating Profit for our other products declined to $6.6 million in the current year from $7.3 million in the previous year. Measured as a percentage of Net Sales, other segment Operating Profit declined to 6.2% in the current fiscal year from 6.4% in the previous fiscal 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%. Our Packaging Segment reported Net Sales of $236.6 million for the fiscal year ending June 29, 2001 compared to $226.6 million for the fiscal year ending June 30, 2000, a 4.4% increase. Net Sales increases to our food customers more than offset weaker sales to our healthcare customers. Our Tubing Products Segment reported a $3.1 million decline in Net Sales to $174.5 million in fiscal 2001 compared to $177.6 million in fiscal 2000 as a result of inventory de-stocking by some of our customers. Net Sales for our other products declined to $114.7 million in Fiscal 2001 from $120.6 million in the previous year primarily due to soft demand for specialty resins. 12 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. Our Packaging Segment reported a $1.9 million decline in Gross Profit to $63.8 million in fiscal 2001 compared to $65.7 million in fiscal 2000. Measured as a percentage of Net Sales, Packaging Segment Gross Profit declined to 27.0% in 2001 compared to 29.0% in 2000. Our Tubing Products Segment Gross Profit declined slightly to $46.1 million in fiscal 2001 from $46.5 million in the previous year. Measured as a percentage of Net Sales, Tubing Products Segment Gross Profit improved to 26.4% in fiscal 2001 from 26.2% in fiscal 2000. Our other segment Gross Profit declined to $16.1 million in fiscal 2001 from $18.2 million in the previous year. Measured as a percentage of Net Sales, Gross Profit for our other products decreased to 14.0% in fiscal 2001 from 15.1% in the previous fiscal year. 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. 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. Our Packaging Segment reported a $3.0 million decline in Operating Profit to $39.9 million in fiscal 2001 compared to $42.9 million in fiscal 2000. Measured as a percentage of Net Sales, Packaging Segment Operating Profit declined to 16.8% in 2001 compared to 18.9% in 2000. Our Tubing Products Segment Operating Profit declined to $30.4 million in fiscal 2001 from $32.4 million in the previous year. Measured as a percentage of Net Sales, Tubing Products Segment Operating Profit declined to 17.4% in fiscal 2001 from 18.2% in fiscal 2000. Operating Profit for our other products declined to $7.3 million in fiscal 2001 from $9.4 million in the previous year. Measured as a percentage of Net Sales, other segment Operating Profit declined to 6.4% in fiscal 2001 from 7.8% in the previous fiscal year. 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. 13 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 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. Concurrent with our recapitalization, Tekni-Plex entered into a series of interest rate derivative transactions designed to protect us from rising interest rates on our senior term debt facilities while enabling us to partially benefit from falling interest rates. Since our recapitalization, LIBOR, the benchmark interest rate for our senior term debt facilities, has declined. Because we did not receive all of the benefit of falling interest rates, we recorded an unrealized loss from derivative transactions of $7.8 million and $13.9 million in fiscal years 2002 and 2001, respectively. 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. Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which require a minimum consolidated EBITDA, as defined in the debt agreement, minimum fixed charge coverage ratio and a minimum leverage ratio. At June 28, 2002, we are in compliance with all covenants. 14 At June 28, 2002, the Company's contractual obligations for borrowings are as follows:
LONG-TERM PAYMENTS DUE BY PERIOD DEBT LEASES TOTAL ---------------------- --------- ------ ------------- (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. 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 15 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. 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. 16 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. 17 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.................. 2002 $2,750,000 $ -- -- $ 9,000 President and Chief Operating Officer 2001 2,500,000 -- -- 9,000 2000 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. 18 OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL EXERCISE STOCK PRICE SECURITIES OPTIONS/SARS OR BASE APPRECIATION FOR UNDERLYING GRANTED TO PRICE OPTION TERM OPTIONS/SARS EMPLOYEES IN PER EXPIRATION --------------------- NAME GRANTED FISCAL YEAR SHARE DATE 5% 10% ---- ------------ ------------ ---------- ---------- ------ ------ 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) UNDERLYING OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY-END AT FY-END SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON 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. 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). 19 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. 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 20 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: April 28, 2003 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 April 28, 2003 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
21 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; /s/ DR. F. PATRICK SMITH -------------------------------------- Dr. F. Patrick Smith Chief Executive Officer Date: April 28, 2003 22 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; /s/ JAMES E. CONDON -------------------------------------- James E. Condon Chief Financial Officer Date: April 28, 2003 23 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-29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE..................................... F-30 SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves............ F-31
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. As discussed in Note 15 to the financial statements, the Company has changed its method of aggregating its operating segments. BDO SEIDMAN, LLP September 13, 2002 Woodbridge, New Jersey F-2 TEKNI-PLEX, INC. CONSOLIDATED BALANCE SHEETS
JUNE 28, 2002 JUNE 29, 2001 ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 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
YEARS ENDED --------------------------------------------- JUNE 28, 2002 JUNE 29, 2001 JUNE 30, 2000 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) 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
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN COMPREHENSIVE ACCUMULATED TREASURY STOCK CAPITAL LOSS DEFICIT STOCK TOTAL ------ ---------- ------------- ----------- --------- --------- (DOLLARS IN THOUSANDS) 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)
YEARS ENDED --------------------------------------------- JUNE 28, 2002 JUNE 29, 2001 JUNE 30, 2000 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) 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 ACCOUNTING POLICIES NATURE OF BUSINESS Tekni-Plex, Inc. and its subsidiaries ("Tekni-Plex" or the "Company") is a global, diversified manufacturer of packaging, packaging products, and materials as well as tubing products. We primarily serve the food, healthcare and consumer markets. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under two primary business groups: Packaging and Tubing Products. 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. 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. F-7 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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-8 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. 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. F-9 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. If the Company had adopted SFAS 142 on July 2, 1999, the Company's net loss for each of the three years in the period ended June 28, 2002 would have been as follows:
JUNE 28, JUNE 29, JUNE 20, 2002 2001 2000 -------- -------- -------- Net income (loss) before extraordinary item, as previously reported.................................. $(6,587) $(18,994) $14,406 Add amortization, net of tax........................... 9,299 9,299 9,315 Adjusted net income(loss).............................. $ 2,712 $ (9,695) $23,721
The Company has not yet completed its transitional analysis of goodwill, and has therefore not yet determined the impact, if any, the adoption of SFAS 142 will have on the carrying amount of goodwill or the results of operations, other then discussed above. 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. 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 F-10 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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)). 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 as 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 =======
F-11 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the Integration reserve and activity through June 28, 2002 is as follows:
OCTOBER COST CHARGED BALANCE 2001 TO 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 ======= ====== ======
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 YEAR ENDED JUNE 28, 2002 JUNE 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, JUNE 29, 2002 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-12 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
JUNE 28, JUNE 29, ESTIMATED 2002 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 ======== ========
6. INTANGIBLE ASSETS Intangible assets consist of the following:
JUNE 28, JUNE 29, 2002 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, JUNE 29, 2002 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-13 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. 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 F-14 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 8. INCOME TAXES The provision for income taxes, excluding the income tax benefit associated with the extraordinary item in 2000, is summarized as follows:
YEARS ENDED ------------------------------ JUNE 28, JUNE 29, JUNE 30, 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:
YEARS ENDED ------------------------------ JUNE 28, JUNE 29, JUNE 30, 2002 2001 2000 -------- -------- -------- Domestic............................................... $(9,448) $(38,116) $20,150 Foreign................................................ 8,538 12,053 8,692 ------- -------- ------- $ (910) $(26,063) $28,842 ======= ======== =======
F-15 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision (benefit) for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
YEARS ENDED ------------------------------ JUNE 28, JUNE 29, JUNE 30, 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 ======== ========
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 F-16 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $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 PLANS (A) SAVINGS 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. 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 Benefits paid.................................. (327) (270) ------ ------ Plan assets at fair value, end of period....... $5,167 $5,440 ====== ======
F-17 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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.
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-18 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. (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-19 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic post-retirement benefit costs are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED JUNE 28, 2002 JUNE 29, 2001 JUNE 30, 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....... $ -- $ -- ====== ======
The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
YEAR ENDED YEAR ENDED JUNE 28, 2002 JUNE 29, 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 TRANSACTIONS The Company had a management consulting agreement with 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. 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 F-20 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) granted at fair market value on the date of grant. As of July 2, 1999 options to purchase 38.17 shares of common stock were outstanding with an average exercise price of $177. During 2001 and 2000 options were granted to purchase 4.02 and 1.27 shares of common stock at weighted-average exercise prices of $559 and $508 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 options with an exercise price of $154 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, JUNE 29, JUNE 30, 2002 2001 2000 -------- -------- -------- Income (loss) before extraordinary item: As reported.......................................... $(6,587) $(18,994) $14,406 ======= ======== ======= Pro forma............................................ $(6,725) $(19,093) $14,343 ======= ======== =======
12. COMMITMENTS AND CONTINGENCIES COMMITMENTS (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. F-21 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 OF CREDIT RISKS Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. The Company provides credit to customers on an unsecured basis after evaluating customer credit worthiness. Since the Company sells to a broad range of customers, concentrations of credit risk are limited. The Company provides an allowance for bad debts where there is a possibility for loss. The Company maintains demand deposits at several major banks throughout the United States Canada and Europe. As part of its cash management process, the Company periodically reviews the credit standing of these banks. 14. SUPPLEMENTAL CASH FLOW INFORMATION (A) CASH PAID
YEARS ENDED ------------------------------ JUNE 28, JUNE 29, JUNE 30, 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 ========
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 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: Tubing Products and Packaging. The Tubing Products segment principally produces garden and irrigation F-22 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) hose, medical tubing and pool hose. 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. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins, have been reflected in Other. The Tubing Products and Packaging segments have operations in the United States, Europe and Canada. The other segment has operations in the United States. The prior years have 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 YEAR END JUNE 28, 2002 PRODUCTS PACKAGING OTHER TOTALS ---------------------- -------- --------- -------- -------- Revenues from external customers........... $235,494 $234,694 $107,561 $577,749 Interest expense........................... 31,851 24,703 14,380 70,934 Depreciation and amortization.............. 12,117 19,221 7,478 38,816 Segment income from operations............. 44,187 43,892 6,622 94,701 Segment assets............................. 334,710 222,798 130,050 687,558 Expenditures for segment fixed assets...... 5,023 7,390 4,473 16,886 ======== ======== ======== ========
TUBING YEAR END JUNE 29, 2001 PRODUCTS PACKAGING OTHER TOTALS ---------------------- -------- --------- -------- -------- Revenues from external customers........... $174,525 $236,622 $114,690 $525,837 Interest expense........................... 27,795 29,156 20,020 76,971 Depreciation and amortization.............. 10,502 19,359 7,531 37,392 Segment income from operations............. 30,430 39,857 7,333 77,620 Segment assets............................. 225,425 232,944 145,922 604,301 Expenditures for segment fixed assets...... 4,093 7,492 5,531 17,116 ======== ======== ======== ========
TUBING YEAR END JUNE 30, 2000 PRODUCTS PACKAGING OTHER TOTALS ---------------------- -------- --------- -------- -------- Revenues from external customers........... $177,582 $226,592 $120,643 $524,817 Interest expense........................... 13,551 14,541 10,355 38,447 Depreciation and amortization.............. 9,449 17,430 7,659 34,538 Segment income from operations............. 32,387 42,936 9,373 84,696 Segment assets............................. 182,619 235,310 135,953 553,882 Expenditures for segment fixed assets...... 2,002 8,040 6,216 16,258 ======== ======== ======== ========
F-23 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 28, JUNE 29, JUNE 30, 2002 2001 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. 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. Garden Hose products represented 33%, 24% and 23% of sales in fiscal years 2002, 2001 and 2000, respectively. Foam egg cartons represented 11%, 13% and 11% of sales in fiscal year 2002, 2001 and 2000, respectively. It is impractical for the Company to provide further product line information. However, no other product lines represented 10% or more of revenues in any years presented. F-24 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and May 2002. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor subsidiaries are 100% owned by the issuer. 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"). 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) ======== ======== ======= ========
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 $ 42,563 $16,713 $ -- $ 89,165 Long-term debt....................... 675,253 -- 4,161 -- 679,414 Other long-term liabilities.......... 80,460 229,752 33,941 (321,468) 22,685 --------- -------- ------- --------- --------- TOTAL LIABILITIES.................. 785,602 272,315 54,815 (321,468) 791,264 --------- -------- ------- --------- ---------
F-25 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NON- ISSUER GUARANTORS GUARANTORS ELIMINATIONS TOTAL --------- ---------- ---------- ------------ --------- Additional paid-in capital........... 170,156 296,784 15,656 (312,420) 170,176 Retained earnings (accumulated deficit)........................... (33,959) 159,960 26,138 (186,098) (33,959) Accumulated other comprehensive loss............................... -- (3,358) (3,447) -- (6,805) Treasury stock....................... (220,523) -- -- -- (220,523) --------- -------- ------- --------- --------- TOTAL STOCKHOLDERS' DEFICIT..... (84,326) 453,386 38,347 (498,518) (91,111) --------- -------- ------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT......... $ 701,276 $725,701 $93,162 $(819,986) $ 700,153 ========= ======== ======= ========= =========
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-26 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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..................................... 121,521 239,144 39,171 399,836 -------- -------- ------- -------- Gross profit...................................... 40,333 65,806 19,862 126,001 Selling, general and administrative............... 38,295 17,320 5,384 60,999 -------- -------- ------- -------- Income from operations............................ 2,038 48,486 14,478 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) 47,741 13,888 (26,063) Provision (benefit) for income taxes.............. (16,574) 5,532 3,973 (7,069) -------- -------- ------- -------- Net income (loss)................................. $(71,118) $ 42,209 $ 9,915 $(18,994) ======== ======== ======= ========
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.......... 93,727 193,833 31,036 (300,321) 18,275 --------- -------- ------- --------- --------- TOTAL LIABILITIES.................. 781,826 220,756 53,930 (300,321) 756,191 --------- -------- ------- --------- --------- Additional paid-in capital........... 120,156 296,784 15,656 (312,420) 120,176 Retained earnings (accumulated deficit)........................... (27,372) 124,524 20,697 (145,221) (27,372) Accumulated other comprehensive loss............................... -- 33 (7,072) -- (7,039) Treasury stock....................... (220,462) -- -- -- (220,462) --------- -------- ------- --------- --------- TOTAL STOCKHOLDERS' DEFICIT........ (127,678) 421,068 29,554 (457,641) (134,697) --------- -------- ------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT......................... $ 654,148 $641,824 $83,484 $(757,962) $ 621,494 ========= ======== ======= ========= =========
F-27 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ======== ======== ======= ========
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-28 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ========= ======== ======== =========
17. SUBSEQUENT EVENT During July 2002, the Company acquired substantially all 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-29 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-30 TEKNI-PLEX, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES(1) DEDUCTIONS(2) PERIOD ---------- ----------- ------------- ---------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 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-31 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. F-32