10-K 1 y40766e10-k.txt TEKNI-PLEX, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ----------------------------- (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 2000 [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 333-28157 Tekni-Plex, Inc. ---------------- (Exact name of registrant as specified in its charter) Delaware 22-3286312 ------------------------------ ------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 201 Industrial Parkway, Somerville, New Jersey 08876 ---------------------------------------------------- (Address of principal executive offices and zip code) (908) 722-4800 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date. None ---- Documents Incorporated by Reference: See Index to Exhibits. 1 2 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. The Somerville facility serves as the current headquarters of the Company. In March 1994, Tekni-Plex was acquired by Dr. F. Patrick Smith and MST/TP Partners, our controlling shareholder at that time Dr. Smith was elected Chief Executive Officer. In April 1994, Mr. Kenneth W.R. Baker was appointed Chief Operating Officer. At that time, the principal product lines consisted of clear, high-barrier laminations for pharmaceutical blister packaging (which we refer to as clear blister packaging); closure liners, primarily for pharmaceutical end-uses; and foam processor trays primarily for the poultry industry. In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and business of Hargro Flexible Packaging Corporation. At that time, the Flemington plant produced 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, primarily egg cartons, since the 1960s. 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 developed 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, we acquired PureTec Corporation, a publicly-traded company with annual sales of $315 million. PureTec is a leading manufacturer of plastic packaging, products, and materials primarily for the healthcare and consumer markets. PureTec's core products include 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 leading manufacturer of sophisticated extruded and coextruded cap liners and seals. The Tri-Seal operations have been integrated with our closure liner business. In April 1999, we acquired substantially all the assets of Natvar, Inc., a leading producer of disposable medical tubing. As with Tri-Seal, the Natvar acquisition was intended to strengthen our existing core business and expand our product offerings. The Natvar operation has been integrated into our medical tubing business. In June 2000, we completed a recapitalization of Tekni-Plex. As part of the recapitalization, MST/TP Partners (the holders of a majority of our common stock prior to the recapitalization) and certain other investors sold most of their interests, and a group of new investors contributed an aggregate of $167 million in new equity, and agreed to contribute up to $103 million in additional equity over the next five years. All members of management maintained 100% of their interests in the Company. Also, Tekni-Plex entered into a new credit agreement, issued $275 million in new senior subordinated notes, and repaid the debt that existed prior to the recapitalization. 2 3 DESCRIPTION OF BUSINESS We are a global, diversified manufacturer of packaging, products, and materials for the healthcare, consumer, and food packaging industries. We have built a leadership position in our core markets, and focus on vertically integrated production of highly specialized products. Our operations are aligned under four primary business groups: Healthcare Packaging, Products, and Materials; Consumer Packaging and Products; Food Packaging; and Specialty Resins and Compounds. Our end market and product line diversity has the effect of reducing overall risk related to any single product or customer. Representative product lines in each group are listed below:
----------------------------------------------------------------------------------------------- HEALTHCARE PACKAGING, CONSUMER PACKAGING FOOD PACKAGING SPECIALTY RESINS PRODUCTS, AND MATERIALS AND PRODUCTS AND COMPOUNDS ----------------------------------------------------------------------------------------------- Pharmaceutical packaging Precision tubing Foamed egg cartons Specialty PVC and gaskets resins Medical tubing Garden and Poultry and meat Recycled PET resins irrigation hose processor trays products Medical device materials Pool hose products Agricultural foam General purpose PVC packaging compounds -----------------------------------------------------------------------------------------------
HEALTHCARE PACKAGING, PRODUCTS, AND MATERIALS Pharmaceutical Packaging Our pharmaceutical packaging product line includes flexible, semi-rigid, and rigid packaging films, coated films, co-extrusions, and laminations. 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 plastic 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 3 4 scrutiny by the FDA. The packaging materials for pharmaceutical applications also require special documentation of material sources and uses within the manufacturing process as well as heightened quality assurance measures. Tekni-Plex is also a leading producer of sophisticated extruded, coextruded and laminated cap liners and seals, known as closure liners, for glass and plastic bottles. Closure liners perfect the seal between a container and its closure, for example, between a bottle and its cap. The liner material has become an integral part of the container/closure package. Without the gasketing effect of the liner, most container/closure packages would not be secure enough to protect the contents from contamination or loss of product efficacy. We sell these products through our direct sales force primarily to packagers of pharmaceutical, healthcare and food products. We have two principal competitors in North America but also compete with several smaller companies having substantially smaller market shares. However, as a result of the Tri-Seal acquisition, we believe that we offer the widest range of liner materials in the industry. We remain competitive by focusing on product quality and performance and prompt delivery. Medical Tubing We are a leading non-captive supplier of vinyl medical tubing in North America and Europe. 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. We manufacture medical tubing using proprietary plastic extrusion processes. The primary raw materials are proprietary compounds, which we produce. Our medical tubing is sold primarily to manufacturers of medical devices that are packaged specifically for specific surgical procedures and related medical applications. We sell our products through direct salespeople. We remain competitive by focusing on product quality and performance and prompt delivery. Medical Device Materials We believe that we are a leading non-captive producer of high quality vinyl compounds for use in the medical industry. Our chemists work closely with customers to develop compounds that address their specific requirements. Through this custom work, we have introduced a number of breakthroughs to the medical device industry by developing formulations with unique physical characteristics. For example, we recently developed a new family of flexible vinyl compounds designed to replace silicone rubber in a variety of medical tubing and commercial applications. These medical-grade materials are sold to leading manufacturers of medical devices and equipment. They are also sold to producers of tubing and, to some extent, to producers of closures for the food and beverage industry. We sell these compounds in worldwide markets directly through our salespeople. The market for medical-grade vinyl compounds is highly specialized, and we have two smaller, but significant competitors. For more than 30 years, we have been supplying these specialized vinyl compounds for FDA-regulated applications. We believe that we compete effectively based on product quality and performance and prompt delivery. 4 5 CONSUMER PACKAGING AND PRODUCTS Precision Tubing and Gaskets Our precision tubing and gaskets product line is sold primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments. Sales to the aerosol valve and dispenser pump industries consist primarily of dip tubes, which transmit the contents of a dispenser can to the nozzle, and specialized molded or punched rubber-based valve gaskets that serve to control the release of the product from the container. Writing instrument products include pen barrels and ink tubing as well as ink reservoirs for felt-tip pens. 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 a leading precision tubing extruder in North America and the leading supplier of aerosol valve and dispenser pump gaskets worldwide. Our precision tubing products are manufactured at extremely high speeds while holding to precise tolerances. The process enhancements that allow simultaneous high speed and precision are proprietary to us. The precision 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. We have also developed proprietary methods for achieving extremely accurate thickness control, superior surface finish, and the elimination of internal imperfections prevalent in other processing methods. The principal competitive pressure in this product line is the possibility of customers switching to internal production, i.e., vertical integration. To counteract this possibility, the Company focuses on product quality, cost reduction, prompt delivery, technical service and functional innovation. Garden and Irrigation Hose Products We believe that we are a leading producer of garden hose in the United States. We have produced garden hose and related products for fifty years. We are vertically integrated and produce the primary components of our garden hoses ourselves, 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 irrigation, or "soaker" hose. We sell these products primarily through our direct salespeople and also through independent representatives. Both private label and brand-name products are sold to the retail market, primarily to home centers, hardware cooperatives, food, automotive, drug and mass merchandising chains and catalog companies throughout the United States and Canada. Our customers include some of the fastest growing and the most widely respected retail chains in North America. Our market strategy is to provide a complete line of innovative, high-quality products along with superior customer service. The garden hose business is highly seasonal with approximately 75% of sales occurring in the spring and early summer months. This seasonality tends to have an impact on the Company's financial results from quarter to quarter. FOOD PACKAGING The Food Packaging group produces primarily thermoformed foam polystyrene packaging products such as egg cartons and processor trays for the poultry and meat industries. We believe that we are the leading manufacturer of foam egg cartons in the United States and also a leading supplier of processor trays to the poultry industry. Thermoformed foam polystyrene packaging has been the material of choice for food packaging cartons and trays for many years. In terms of economic and functional characteristics, foamed polystyrene products offer a combination of high strength, minimum material content and superior moisture barrier performance. Foamed polystyrene products also offer greater dimensional consistency that enhances the high speed mechanical feeding of cartons and trays into automated package filling operations. We sell these products through our direct sales force. 5 6 Within the polystyrene foam processor tray market, we compete principally with two large competitors, both of whom have financial resources greater than ours, and who, together, control the largest share of this market. In the egg packaging market, our primary competitor manufactures pulp-based egg cartons. We believe, that we compete effectively based on product quality and performance and prompt delivery. SPECIALTY RESINS AND COMPOUNDS Specialty Vinyl Resins Tekni-Plex manufactures specialty vinyl resins, with an annual production capacity of approximately 100 million pounds. We employ specialized technology to produce dispersion, blending, and copolymer suspension resins for use by suppliers to a variety of industries, including floor covering, automotive sealants and adhesives, coil coatings, plastisol and medical device compounding, and vinyl packaging. We sell these products through our direct sales force as well as through independent sales representatives. We compete with a number of large chemical companies offering greater breadth of products. However, we believe that we are building a relatively unique position in the specialty resins market by offering customized products for niche markets that the larger producers do not serve. We provide individual customer service and the highest standards of quality. PATENTS AND TRADEMARKS The Company seeks to protect its proprietary know-how through the application of patent and trademark laws. However, in the opinion of management, none of its patents or trademarks are material to its operations. RESEARCH AND DEVELOPMENT The Company employs certain professionals who, along with other responsibilities, are engaged in research relating to the development of new products and to the improvement of existing products and processes. The Company works closely with certain clients to develop and improve certain products and product lines. Our product development efforts are typically either funded by clients or such costs are absorbed in the Company's manufacturing cost of sales, and therefore are not reflected as research and development expense. SALES, MARKETING AND CUSTOMERS Excluding customer service representatives, as of June 30, 2000, we had a total of approximately 51 direct sales and marketing personnel covering both our domestic and international businesses. There were also approximately 153 commissioned independent sales representatives (not direct employees of Tekni-Plex) providing additional coverage. Overall customer concentration is low, with our largest single customer, Wal-Mart, acccounting for approximately 10% of total sales and no other customer accounting for 10% or more of total sales. MANUFACTURING As of June 30, 2000 we had 32 strategically located manufacturing facilities throughout North America and Europe, totaling over 3,000,000 square feet of floor space. We utilize many proprietary material formulations throughout our operations. These formulations provide superior processing and end-product performance characteristics, giving us a competitive edge across many of our businesses. Typically, these proprietary material formulations are protected by trade secret rather than through patents. We believe this is a more effective approach to maintaining our competitive edge. 6 7 We utilize many proprietary, highly efficient manufacturing processes, developed by our own engineering staffs throughout our operations. These processes allow us to make products with superior dimensional tolerances at higher speeds with lower waste factors than our competitors. Our various business units share technological information regarding process and material formulation improvements routinely, and actively seek new synergistic applications for newly developed technologies throughout our company. RAW MATERIALS We purchase raw materials from several sources that differ for each product line. We use commodity petrochemicals, primarily polyvinyl chloride, polystyrene, vinyl chloride monomer, polypropylene and polyethylene. All of these materials are widely available from numerous sources and we currently purchase them from multiple suppliers. This diversity of raw material suppliers, as well as the availability of alternative suppliers, has the effect of reducing our overall risk related to any one supplier. One exception is Aclar(R), a key raw material used in manufacturing our clear blister packaging materials. We currently have a long-term contract for Aclar(R) with Honeywell, the sole manufacturer and supplier of Aclar(R). To the extent that our supply of this raw material is hindered, we would substitute alternative materials. There has never been a significant disruption of the supply of this material in our 32 years of manufacturing this product line. In the past we have generally been able to pass on raw materials cost increases to customers on a relatively timely basis. The exception has been our garden hose products, the prices for which are typically set annually in advance of each season. To the extent that raw material costs increase more than anticipated, these additional costs generally cannot be passed on until the following season. INTELLECTUAL PROPERTY We primarily rely on confidentiality agreements contained in our employment applications and the restriction of access to our plants and confidential information to safeguard our proprietary technology. Although we also file and register patents and trademarks, we do not believe that any of our patents or trademarks is material to our operations. EMPLOYEES As of June 30, 2000, the Company employed approximately 2,900 full-time employees. Approximately 30% of all employees are represented by various collective bargaining agreements that expire between October 18, 2000 and July 31, 2003. Of these, 35 employees at one of our facilities are represented by an agreement that expires October 18, 2000. We do not anticipate any difficulties with extending that agreement. 7 8 Item 2. FACILITIES We believe that our facilities are suitable and have sufficient productive capacity for our current and foreseeable operational and administrative needs. Set forth below is a list and brief description of all of our offices and facilities, all of which are owned unless otherwise indicated.
APPROXIMATE LOCATION FUNCTION SQUARE FEET -------- -------- ----------- Somerville, New Jersey Corporate Headquarters; Manufactures 172,000 food packaging and healthcare packaging Auburn, Maine (5) Specialty resins 24,000 Belfast, Northern Ireland Healthcare materials 55,000 Blauvelt, New York (8) Healthcare packaging 56,400 Burlington, New Jersey Specialty resins 107,000 Cambridge, Ontario Healthcare packaging 25,000 City of Industry, Healthcare products 110,000 California (5) Clayton, North Carolina Healthcare products 76,000 Clinton, Illinois Consumer packaging 62,500 Dallas, Texas (1) Food packaging 139,000 Dalton, Georgia Healthcare products 40,000 Decatur, Indiana Food packaging 187,000 Decatur, Indiana (1) Warehouse 3,750 East Farmingdale, New York (2) Specialty resins 50,000 Erembodegem Consumer packaging and 99,100 (Aalst), Belgium healthcare products Flemington, New Jersey Healthcare packaging 145,000 Lakewood, Colorado (2) Healthcare products 17,300 Lawrenceville, Georgia Food packaging 150,000 Lawrenceville, Georgia (1) Warehouse 31,700 Livonia, Michigan (4) Specialty resins 60,000 McKenzie, Tennessee Consumer products 20,000 Milan (Gaggiano), Italy (7) Consumer packaging 14,100 Milan (Gaggiano), Italy Consumer packaging 25,800
8 9 Milan (Rosate), Italy (3) Consumer packaging 24,000 Mississauga, Ontario (6) Consumer products 100,000 Piscataway, New Jersey (3) Compounds 150,000 Ridgefield, New Jersey Consumer products and 328,000 healthcare materials Ridgefield, New Jersey (3) Warehouse 70,000 Rockaway, New Jersey Consumer packaging 98,600 Schaumburg, Illinois (9) Consumer packaging 58,000 Schiller Park, Illinois Consumer packaging 20,000 Sparks, Nevada (3) Consumer products and 248,000 healthcare materials Tonawanda, New York (2) Consumer products 32,000 Waco, Texas Consumer products 104,600 Wenatchee, Washington Food packaging 97,000 Wenatchee, Washington (4) Warehouse 26,200
(Years relate to calendar years) (1) Leased on a month-to-month basis. (2) Lease expires in 2001. (3) Lease expires in 2002. (4) Lease expires in 2003. (5) Lease expires in 2004. (6) Lease expires in 2005. (7) Lease expires in 2006. (8) Lease expires in 2008. (9) Lease expires in 2019. 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 nonhazardous 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. We are not aware of any environmental proceedings that are likely to have a material adverse effect on our consolidated financial position or results of operations. Also, in our opinion, no such proceedings nor compliance with federal, state and local environmental laws and regulations will require material capital expenditures for environmental control facilities in the foreseeable future. 9 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Not Applicable. Item 6. SELECTED FINANCIAL DATA (Dollars in thousands) The following table sets forth our selected historical consolidated financial information and has been derived from and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, which appear elsewhere herein.
YEARS ENDED ----------- JUN. 28, JUN. 27, JULY 3, JULY 2, JUN. 30, 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- INCOME STATEMENT DATA: Net sales $ 80,917 $ 144,736 $ 309,597 $ 489,237 $ 506,828 Cost of goods sold 62,335 107,007 232,499 358,293 376,491 Gross profit 18,582 37,729 77,098 130,944 130,337 Selling, general and administrative expenses 10,339 15,886 39,220 62,534 58,343 Income from operations 8,243 21,843 37,878 68,410 71,994 Interest expense, net 5,816 8,094 19,682 38,977 38,447 Other expense 469 646 415 286 4,705 Pre-tax income before extraordinary item 1,958 13,103 17,781 29,147 28,842 Income tax provision 982 4,675 9,112 14,150 14,436 Income before extraordinary item 976 8,428 8,669 14,997 14,406 Extraordinary item (loss) (c) (d) -- (20,666) -- -- (35,374) Net income (loss) $ 976 $ (12,238) $ 8,669 $ 14,997 $ (20,968) BALANCE SHEET DATA (at period end): Working capital $ 11,660 $ 25,950 $ 84,897 $ 101,445 $ 145,879 Total Assets 121,770 129,029 539,279 559,436 574,789 Total debt (including current portion) 70,436 75,000 401,905 416,394 651,593 Stockholders' equity (deficit) 24,162 30,397 38,673 52,297 (149,150) OTHER FINANCIAL DATA: EBITDA (a) (b) $ 14,157 $ 30,223 $ 54,479 $ 101,681 $ 104,595 EBITDA margin (a) 17.5% 20.9% 17.6% 20.8% 20.6% Depreciation and amortization $ 6,821 $ 9,551 $ 17,249 $ 35,343 $ 34,748 Capital expenditures 2,275 3,934 7,283 12,950 16,258 Cash flows: From operations 6,568 19,537 29,009 38,794 9,485 From investing (49,522) (6,273) (310,672) (58,089) (16,905) From financing 43,669 (3,217) 299,926 12,057 (1,687)
(a) EBITDA is defined as net income before interest, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's 10 11 profitability or liquidity. In addition, this measure of EBITDA may not be comparable to similar measures reported by other companies. EBITDA margin is calculated as the ratio of EBITDA to net sales for the period. For fiscal 1996, amortization included $522 related to the write off of prior unamortized debt costs. (b) EBITDA for fiscal 2000 includes $4.1 million of non-recurring costs associated with our recapitalization. (c) Net loss for the year ended June 27, 1997, includes an extraordinary loss comprised of (i) a prepayment penalty of $1.2 million and the write-off of deferred financing costs and debt discount of $3.4 million, net of the combined tax benefit of $1.8 million, and (ii) a loss of $17.8 million on the repurchase of redeemable warrants. (d) Net loss for the year ended June 30, 2000 includes an extraordinary loss of approximately $35.4 million. The extraordinary loss is comprised of prepayment penalties and other interest costs of $39.3 million, the write-off of deferred financing costs of $16.7 million and other fees of $1.3 million, net of a tax benefit of $21.9 million. 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 ------------------------------------------------ JULY 3, 1998 JULY 2, 1999 JUNE 30, 2000 ------------------------------------------------ Net sales............................................. 100.0% 100.0% 100.0% Cost of sales......................................... 75.1 73.2 74.3 Gross profit.......................................... 24.9 26.8 25.7 Selling, general and administrative expenses.......... 12.7 12.8 11.5 Income from operations................................ 12.2 14.0 14.2 Interest expense...................................... 6.4 8.0 7.6 Provision for income taxes............................ 2.9 2.9 2.8 Income before extraordinary item...................... 2.8 3.1 2.8 Extraordinary item (loss)............................. --- --- (7.0) Net income (loss)..................................... 2.8 3.1 (4.1) Depreciation and amortization......................... 5.6 7.2 6.9 EBITDA................................................ 17.6 20.8 20.6
11 12 EBITDA is defined as net income before interest, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of our profitability or liquidity. In addition, this measure of EBITDA may not be comparable to similar measures reported by other companies. EBITDA margin is calculated as the ratio of EBITDA to net sales for the period. YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JULY 2, 1999 Net Sales, increased to $506.8 million for the year ended June 30, 2000 from $489.2 million for the year ended July 2, 1999, representing an increase of $17.6 million or 3.6%. The increased sales occurred primarily in our Healthcare and Food business segments and in our European Consumer operations. These increases were partially offset by decreases in the Specialty Resins and Compounding business segment, which continues its restructuring process of developing new, differentiated product lines. Fiscal 2000 sales were also negatively affected by the impact of an unusually wet spring and early summer on our garden hose business. Cost of Goods Sold, increased to $376.5 million for the year ended June 30, 2000 from $358.3 million for the year ended July 2, 1999. Expressed as a percentage of net sales, cost of goods sold increased to 74.3% for the year ended June 30, 2000 from 73.2% for the year ended July 2, 1999. The increase in cost of goods sold as a percentage of net sales was primarily due to higher resin costs, which escalated rapidly throughout fiscal year 2000. Our garden hose business competes in the seasonal retail marketplace, where prices are negotiated well in advance of the selling season. As such, we are unable to pass through unanticipated resin cost increases affecting our garden hose business during that season, and the timing of any pass through of cost increases falls to the following selling season. Gross Profit, as a result, was virtually unchanged for the fiscal year ended June 30, 2000 at $130.3 million compared to $130.9 million in the fiscal year ended July 2, 1999. The ratio of gross profit to net sales, therefore, decreased to 25.7% for fiscal year 2000 from 26.8% in fiscal year 1999. Selling, General and Administrative Expenses, decreased to $58.3 million in the fiscal year ended June 30, 2000 from $62.5 million in the fiscal year July 2, 1999. The resultant ratios to net sales decreased to 11.5% from 12.8%, respectively. Primary reasons for the reduction were a decrease in administrative costs and completion of our programs to integrate prior year acquisitions into our operations. Income from Operations, as a result of the above, increased to $72.0 million or 14.2% of sales in the fiscal year ended June 30, 2000 from $68.4 million or 14.0% for the fiscal year ended July 2, 1999. Other Expenses, in the fiscal year ended June 30, 2000 included about $4.1 million of non-recurring costs as a result of our recapitalization program completed near the end of June 2000. Interest Expense, was $38.4 million for the fiscal year ended June 30, 2000, down slightly from $39.0 million in the prior year. Average monthly usage and interest rates were roughly the same in both years. Interest expense as a ratio to net sales declined in fiscal year 2000 to 7.6% from 8.0% in the prior year. The large increase in total debt at the end of fiscal year 2000 compared to the end of fiscal year 1999, result from our recapitalization completed June 21, 2000, had little impact on interest expense for the year ending June 30, 2000, but will increase in the future. Provision for Income Taxes increased slightly to $14.4 million in the fiscal year ended June 30, 2000, from $14.2 million in the fiscal year ended July 2, 1999. Accordingly, the ratio of the provision for income taxes to net sales fell to 2.8% from 2.9%, respectively. Our effective tax rate was 50.1% for the fiscal year ended June 30, 2000 compared with 48.5% for the fiscal year ended July 2, 1999. The difference between the two years was primarily a function of tax carryover credits in the fiscal year ending July 2, 1999, and a greater contribution to pretax income by our European operations in fiscal year 2000 than in fiscal year 1999. Extraordinary Expense Net of Income Tax, of $35.4 million in the fiscal year ended June 30, 2000 represented the costs of refinancing the old Senior Subordinated Notes and bank debt with new Senior Subordinated Notes and bank debt as part of our recapitalization in June 2000. 12 13 Net Income (loss), for the fiscal year ending June 30, 2000 showed a loss of ($21.0) million or (4.1)% of net sales due to the extraordinary loss net of applicable taxes and non-recurring costs of the recapitalization which totaled about $39.5 million. We showed a net profit in the fiscal year ending July 2, 1999 of $15.0 million or 3.1% of net sales. Depreciation and Amortization decreased slightly to $34.7 million for the year ended June 30, 2000 from $35.3 million for the year ended July 2, 1999. Expressed as a percentage of net sales, depreciation and amortization decreased to 6.9% for the year ended June 30, 2000 from 7.2% for the same period in 1999. EBITDA, adjusted for $4.1 million in non-recurring costs of the recapitalization, increased to $104.6 million or 20.6% of net sales for the year ended June 30, 2000, from $101.7 million or 20.8% of net sales for the same period in 1999 for the same reasons discussed above. FOR THE YEAR ENDED JULY 2, 1999 COMPARED WITH THE YEAR ENDED JULY 3, 1998 Net Sales for the year ended July 2, 1999 were $489.2 million, a 58.0% increase over net sales of $309.6 million for the year ended July 3, 1998. The increase was due primarily to our acquisition of PureTec in March 1998, and, to a lesser extent, our acquisition of Tri-Seal in January, 1999 and Natvar in April, 1999. The year-over-year change related to the impact of these acquisitions amounted to $184.4 million. This increase was partially offset by the elimination in fiscal 1999 of certain low-margin sales related to the restructuring of acquired operations. Cost of Sales, increased to $358.3 million for the year ended July 2, 1999, of which $121.3 million was due to the acquired operations discussed above, from $232.5 million for the year ended July 3, 1998. Expressed as a percentage of net sales, cost of goods sold decreased to 73.2% for the year ended July 2, 1999 from 75.1% for the same period in 1998. The decrease in cost of goods sold as a percentage of net sales was due primarily to efficiencies achieved in operations acquired with the purchase of PureTec, and lower raw material costs. Gross Profit as a result, increased to $130.9 million or 26.8% of net sales for the year ended July 2, 1999, from $77.1 million or 24.9% of net sales for the same period in 1998. Selling, general and administrative expenses increased to $62.5 million or 12.8% of net sales for the year ended July 2, 1999 from $39.2 million or 12.7% of net sales for the same period in 1998. Selling, general and administrative expenses increased in proportion to the increase in net sales resulting from acquired operations and related compensation increases. Income from Operations increased to $68.4 million or 14.0% of net sales for the year ended July 2, 1999, from $37.9 million or 12.2% for the same period in 1998, for the reasons discussed above. Interest expense increased to $39.0 million or 8.0% of net sales for the year ended July 2, 1999, from $19.7 million or 6.4% of net sales for the same period in 1998 due primarily to an issuance of new bonds and notes to acquire PureTec. We also borrowed under our revolving line of credit in fiscal 1999 to fund the purchase of Tri-Seal and Natvar. Provision for income taxes increased to $14.2 million or 2.9% of net sales for the year ended July 2, 1999, from $9.1 million or 2.9% for the same period in 1998. Our effective tax rate was 48.5% for the year ended July 2, 1999 compared to 51.2% for the same period in 1998. The decrease between periods is due primarily to the use of tax carryover credits. Net income increased to $15.0 million or 3.1% of net sales for the year ended July 2, 1999, from $8.7 million or 2.8% of net sales for the same period in 1998, for the reasons discussed above. Depreciation and Amortization increased to $35.3 million for the year ended July 2, 1999 from $17.2 million for the year ended July 3, 1998. Expressed as a percentage of net sales, depreciation and amortization increased to 7.2% for the year ended July 2, 1999 from 5.6% for the same period in 1998. The increase in depreciation and amortization as a percentage of net sales was due to the effect of the full year of the PureTec acquisition and the acquisition of Natvar and Tri-Seal during 1999. 13 14 LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2000, net cash provided by operating activities was $9.5 million compared to $38.8 million for the same period in the prior year for an increased usage of $29.3 million. The increase was due to higher inventories in Consumer Packaging and Products to accommodate a higher anticipated sales level in that business segment, a reduction in accrued expenses and liabilities, and the effect of non-recurring costs associated with our recapitalization. Various year-over-year changes in operating assets, accrued expenses, and liabilities are generally due to offsetting timing differences. Working capital at June 30, 2000 was $145.9 million compared to $101.4 million at July 2, 1999. The increase was primarily due to higher inventory levels in our Consumer Packaging and Products business segment and higher refundable income taxes for the year ended June 30, 2000. Approximately 75% of the annual sales in garden hose, which is the largest business unit in the Consumer Packaging and Products segment, normally occur in the spring and early summer months. 14 15 As of June 30, 2000, we had an outstanding balance of $30.0 million under the $100.0 million revolving credit line of the existing credit facility. This was an increase of $8.0 million from the outstanding balance as of July 2, 1999, and was due primarily to higher inventory levels of our Consumer Packaging and Products business segment. The aggregate amount of funds required to be paid by us for the recapitalization was $693.2 million. The financing for the recapitalization was provided by the offering of the new Senior Subordinated Notes, the new credit facility and new equity contributions by Tekni-Plex Partners. In April 1997, we issued $75.0 million aggregate principal amount of 11 1/4% notes, and in March 1998, we issued $200.0 million aggregate principal amount of 9 1/4% notes. As part of the recapitalization, we purchased all of the outstanding 9 1/4% notes and 99.97% of the outstanding principal amount of the 11 1/4% notes. In addition, as part of the recapitalization, we entered into a new credit facility consisting of a $100.0 million A term loan maturing in 2006, a $244.0 million B term loan maturing in 2008 and a $100.0 million revolving credit facility maturing in 2006. The new revolving credit facility replaced our $90.0 million prior revolving credit facility. As of June 30, 2000 and July 2, 1999, there were outstanding balances of $30.0 million and $22.0 million, respectively, under the respective credit facility. Borrowings under the term loan will be subject to annual amortization, payable in quarterly installments. As of June 30, 2000, there was $70 million undrawn and available under the new 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 $269.4 million in the aggregate, of which $167 million has been contributed and used to purchase interests of certain previous Tekni-Plex investors, Tekni-Plex Management LLC. The managing member of Tekni-Plex Partners, may for at least five years call upon the remainder of the commitment, $102.4 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 30, 2000 and July 2, 1999 were $16.3 million and $13.0 million, respectively. Management believes that cash generated from operations plus funds from the new 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 the new credit facility to meet our anticipated cash needs. To the extent we pursue future acquisitions, we may be required to obtain additional financing. We cannot assure you that we will be able to obtain such financing in amounts and on terms acceptable to us. The terms of the notes and the new credit facility each include various covenants that limit our ability to incur additional debt. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" was issued, SFAS 133, as amended by SFAS 137, is effective for our 2001 fiscal year. SFAS 133 does not apply to us since we do not currently have hedging activities. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Recognition ("SAB 101") which broadly addresses how companies report revenues in their financial statements. We are in the process of evaluating the accounting requirements of SAB 101 and do not expect that this standard will have an effect on our financial position, results of operations or cash flows. INFLATION During fiscal year 2000, we have 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. 15 16 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable Item 8. FINANCIAL STATEMENTS The financial statements commence on Page F-1. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 16 17 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 members of management as directors, and the last director is designated by Mr. Cronin. 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 52 Chairman of the Board and Chief Executive Officer Kenneth W.R. Baker 56 President, Chief Operating Officer and Principal Accounting and Financial Officer Arthur P. Witt 70 Corporate Secretary and Director John S. Geer 54 Director J. Andrew McWethy 59 Director Michael F. Cronin 46 Director
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive Officer of Tekni-Plex since March 1994. He received his doctorate degree in chemical engineering from Texas A&M University in 1975. He served as Senior Chemical Engineer to Texas Eastman Company, a wholly owned chemical and plastics subsidiary of Eastman Kodak, where he developed new grades of polyolefin resins and hot melt and pressure sensitive adhesives. In 1979, he became Technical Manager of the Petrochemicals and Plastics Division of Cities Service Company, and a Member of the Business Steering Committee of that division. From 1982 to 1984, Dr. Smith was Vice President of R&D and Marketing for Guardian Packaging Corporation, a diversified flexible packaging company. Thereafter, he joined Lily-Tulip, Inc. and managed their research and marketing functions before becoming Senior Vice President of Manufacturing and Technology. Following the acquisition of Lily-Tulip by Fort Howard Corporation in 1986, he became the Corporate Vice President of Fort Howard, responsible for the manufacturing and technical functions of the combined Sweetheart Products and Lily-Tulip operations. From 1987 to 1990, Dr. Smith was Chairman and Chief Executive Officer of WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos Financial Group, a business consulting firm. Dr. Smith is the managing member of Tekni-Plex Management, which is the controlling member of both Tekni-Plex Partners and MST/TP Partners, the limited liability companies that together own 100% of the issued and outstanding stock of Tekni-Plex. Dr. Smith is also a member of Tekni-Plex Partners and MST/TP Partners. 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. Mr. Baker is a member of Tekni-Plex Management, Tekni-Plex Partners and MST/TP Partners. Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was appointed Secretary in January 1997. Since July 1989, he has been president of PAJ Investments which is involved in financial consulting and property management. Over the same period, Mr. Witt also served as a temporary chief financial officer for WFP Corporation and Flexible Technology. Prior to 1989, Mr. Witt served in a number of senior management positions for companies such as Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. Mr. Witt is a member of Tekni-Plex Partners and MST/TP Partners. 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 17 18 served on 20 boards of directors of emerging growth and middle market companies. Mellon Ventures, Inc. is a member of Tekni-Plex Partners. J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He is a co-founder of Eastport Operating Partners L.P., a private equity investment fund formed in January 2000. He was co-founder and General Partner of MST Partners L.P. from 1989 to 2000. Prior to 1989, Mr. McWethy was employed by Irving Trust Company for twelve years. Mr. McWethy is a member of MST/TP Partners. 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, which is a member of Tekni-Plex Partners. 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. Item 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the remuneration paid by Tekni-Plex to the Chief Executive Officer and the next most highly compensated executive officer of Tekni-Plex whose salary and bonus exceeded $100,000 for the years indicated in connection with his position with Tekni-Plex: SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a) ------------------------- ---- ------ ----- ------- --------------- Dr. F. Patrick Smith 2000 $1,200,000 $4,622,100 -- $ 16,000 Chief Executive Officer 1999 1,200,000 8,981,000 -- 42,000 1998 770,577 5,072,134 9.15041 150,283 Mr. Kenneth W.R. Baker, 2000 $ 600,000 $2,311,050 -- $ 9,000 President, Chief Operating 1999 600,000 4,490,000 -- 9,000 Officer and Principal 1998 385,289 2,536,062 13.72562 6,315 Accounting Officer
(a) Includes amounts reimbursed during the fiscal year for payment of taxes, auto expense, membership fees, etc. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL POTENTIAL REALIZABLE REALIZABLE PERCENT VALUE AT VALUE AT NUMBER OF TOTAL ASSUMED ASSUMED OF OPTIONS/ EXER- ANNUAL RATES ANNUAL RATES SECURITIES SARS CISE OR OF STOCK OF STOCK UNDER- GRANTED BASE PRICE PRICE LYING TO PRICE APPRECIATION APPRECIATION OPTIONS/ EMPLOYEES PER EXPI- FOR OPTION FOR OPTION SARS IN FISCAL SHARE RATION TERM 5% TERM 10% NAME GRANTED YEAR ($000) DATE ($000) ($000) Dr. F. Patrick Smith --- ---% --- --- --- --- Kenneth W.R. Baker --- ---% --- --- --- ---
18 19 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE ($000) OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT FY-END FY-END SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE --- --- --- / --- --- / --- Dr. F. Patrick Smith --- / --- Kenneth W.R. Baker --- --- --- / ---
EMPLOYMENT AGREEMENTS As part of the recapitalization, Dr. Smith and Mr. Baker entered into amended and restated employment agreements that expire June 27, 2003 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 amended and restated employment agreement annual salaries of Dr. Smith and Mr. Baker are $5 million and $2.5 million, respectively. Neither Dr. Smith's nor Mr. Baker's amended and restated employment agreement provides for any mandatory bonus compensation. No other provisions of the employment agreements changed materially. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION 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. The bonus awards for fiscal 2000 for Dr. Smith and Mr. Baker were based upon their respective employment contracts as amended in March of 1998, and are performance based. Compensation levels and bonus awards for all other employees are controlled by Dr. Smith and Mr. Baker. In fiscal 2000, Dr. Smith recommended, and the Board approved, stock options to seven employees under a stock option plan approved by the Board of Directors effective December 31, 1997. 19 20 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Witt, who is also the corporate Secretary of Tekni-Plex, serves as a member of the compensation committee of Tekni-Plex's board of directors. In addition, as Chief Executive Officer of Tekni-Plex, Dr. Smith participated in deliberations concerning the compensation of the Chief Operating Officer of Tekni-Plex (but not the compensation for himself or Mr. Witt). Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Tekni-Plex Partners holds approximately 95.6% (approximately 93.0% on a fully diluted basis) and MST/TP Partners holds approximately 4.4% (approximately 4.2% on a fully diluted basis) of Tekni-Plex's outstanding common stock. Tekni-Plex Management, controlled by Dr. Smith, is the sole managing member of both Tekni-Plex Partners and MST/TP Partners, and is entitled to receive the first 20% of profits from each of these companies regardless of its capital contribution to each. Dr. Smith and Messrs. Baker and Witt are members of Tekni-Plex Partners and MST/TP Partners. In connection with the recapitalization, Dr. Smith and Messrs. Baker and Witt acquired a class of membership interest in Tekni-Plex Partners and MST/TP Partners entitling them to receive priority capital account allocations in the aggregate equal to the first $25.6 million in profits of Tekni-Plex Partners and MST/TP Partners. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INVESTOR'S AGREEMENT MST/TP Partners and Tekni-Plex Partners are parties to an investor's agreement that provides as follows: - Board of directors. The board of directors is composed of six directors. A nominating committee composed of Dr. Smith and Mr. Cronin has the right to designate two directors, Dr. Smith has the right to designate three members of management as directors and the last director is designated by Mr. Cronin. Each stockholder of Tekni-Plex has agreed to vote its shares of common stock for these designees. Each director is paid an annual fee of $50,000. Directors may only be removed for cause or at the request of the person entitled to designate that director. The board of directors must maintain a compensation committee and an audit committee. All actions of the board require the affirmative vote of at least a majority of the directors present; a quorum of the board consists of four directors. If either Dr. Smith or Mr. Cronin ceases to own at least 20% of the outstanding Tekni-Plex common stock and to be actively involved in the management of Tekni-Plex, he will lose his right to designate directors and to participate on the nominating committee. - Employment agreements. We may not further amend the employment agreements with Dr. Smith or Mr. Baker unless a majority of the board of directors (including at least one director not designated by Dr. Smith) determines that the amendment is desirable for Tekni-Plex. This restriction shall terminate at any time Dr. Smith is entitled to designate two-thirds or more of the directors pursuant to the investor's agreement. - Capital contributions. Tekni-Plex Partners and MST/TP Partners, in connection with any capital contribution they make to Tekni-Plex, will receive a number of shares of Tekni-Plex common stock equal to the amount of its respective capital contribution divided by an amount equal to: - The enterprise value of Tekni-Plex on the date the shares are issued to Tekni-Plex Partners; minus - Tekni-Plex's funded debt as of such date; plus - Cash held by Tekni-Plex, outstanding loans to Tekni-Plex shareholders and aggregate option Exercise prices for all options on Tekni-Plex stock outstanding on such date; divided by - The aggregate number of shares (on a fully diluted basis) issued by Tekni-Plex before such 20 21 date. - Transfer restrictions. A stockholder may only transfer its common stock to third parties with the approval of Tekni-Plex Management or, after an initial public offering, to its members as a distribution in kind with the approval of Tekni-Plex Management. - Registration rights. Beginning nine months after an initial public offering of our stock, stockholders holding 51% of our common stock may require us to file a registration statement registering at least 51% of their common stock with the SEC. We refer to this as a demand registration. We are only required to file two completed demand registration statements and only one in any 12-month period. Stockholders also have rights to be included in three other registrations of our common stock. We may delay or withdraw a registration if we determine that the registration would be significantly disadvantageous to us. In the event of a withdrawal, we must file a new registration statement within 120 days of the withdrawal. Stockholders will also agree not to sell their common stock during a period of seven days prior to and up to 180 days in the case of the initial public offering and 90 days in the event of any other public offering after the effectiveness of a registration statement. The registration rights provisions of the investors' agreement will terminate when we have satisfied our demand registration and incidental registration obligations. - Purchase right. Stockholders will have the right of first offer on all newly issued common stock or securities convertible into common stock (other than stock issued pursuant to an employee benefit plan, an acquisition by Tekni-Plex, a capital contribution by Tekni-Plex Partners or the conversion of securities for which the right of first offer has already been extended). If the stockholders do not purchase 100% of the securities to be issued, however, we may sell the entire new issuance to one or more third parties. - Termination. Except for the registration rights provisions, the transfer restrictions on the common stock, certain miscellaneous provisions and as otherwise noted above, the provisions of the investors' agreement will terminate upon an initial public offering of our common stock. CONSULTING ARRANGEMENTS We had a Management consulting agreement with MST Management Company. Pursuant to this agreement, MST Management Company provided us with regular and customary management consulting services. The terms of the agreement required us to pay a monthly management fee to MST Management Company for a period of ten years from March 18, 1994 with certain renewal provisions. In June 2000, we agreed to terminate the consulting agreement for $3,651. We also have an arrangement with Arthur P. Witt, one of our directors and our corporate secretary, under which Mr. Witt provides us with customary management consulting services. Mr. Witt's compensation for consulting services rendered on our behalf was approximately $66,500 and $95,000 for fiscal years 2000 and 1999, 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. GOVERNANCE OF TEKNI-PLEX Tekni-Plex Management is the sole managing member of Tekni-Plex partners. As the sole managing member, Tekni-Plex Management has the power and authority to conduct the affairs of Tekni-Plex Partners without requiring the consent or vote of any other member (except as described below). Tekni-Plex Management is the only member with the power and authority to act on behalf of or to bind Tekni-Plex Partners, unless Tekni-Plex Management expressly grants another member the authority to do so. Tekni-Plex Management, as sole managing member, has the authority to approve any merger or consolidation of Tekni-Plex Partners without approval or consent of any other member. Tekni-Plex Management will delegate the right to approve or disapprove any transaction between Tekni-Plex (or any of its subsidiaries) and Tekni-Plex Management (or any of its affiliates) to the disinterested directors on the Tekni-Plex board. Substantially similar arrangements exist with respect to Tekni-Plex Management's control of MST/TP Partners. 21 22 Tekni-Plex Partners owns approximately 95.6% and MST/TP Partners owns approximately 4.4% of the outstanding common stock of Tekni-Plex. Tekni-Plex Management, which is controlled by Dr. F. Patrick Smith, our chairman of the board and chief executive officer, is the sole managing member of both Tekni-Plex Partners and MST/TP Partners and as a result controls both Tekni-Plex Partners and MST/TP Partners. Therefore, Tekni-Plex Management also controls Tekni-Plex. Dr. Smith also owns approximately 30% of Tekni-Plex Partners (not including the priority allocation discussed in the section entitled "security ownership"). Pursuant to the amended and restated Tekni-Plex Partners Limited Liability Company agreement and the MST/TP Partners limited liability company agreement, if there is a change of governance of Tekni-Plex (as described below), then Tekni-Plex Management must obtain the prior written approval of the members holding a majority interest in Tekni-Plex Partners or MST/TP Partners, as the case may be, in order to: - Cause Tekni-Plex Partners or MST/TP Partners, as the case may be, to vote for the directors proposed for election to our board; - Issue or enter into an agreement to issue any Tekni-Plex common stock, other than that permitted by the employee stock incentive plan; - Declare or pay individuals or other distributions on Tekni-Plex common stock or repurchase Tekni-Plex common or preferred stock, other than redemptions under the employee stock incentive plan; - Permit us or any of our subsidiaries to make any loans except to Tekni-Plex or a subsidiary; - Permit us or any of our subsidiaries to make any loans to any employee, except in the ordinary course of business; - Make any guarantees for the benefit of any person except in the ordinary course of business; - Mortgage, pledge or create a security interest in all or substantially all of our or any of our subsidiaries' property; - Merge or consolidate with, or sell or dispose of all or substantially all of our assets to, any entity; or - Make any amendment to our certificate of incorporation or bylaws or file any resolution of our or Tekni-Plex Partners' or MST/TP Partners', as the case may be, board of directors with the Secretary of State of the state of Delaware. The amended and restated Tekni-Plex Partners Limited Liability Company agreement and the MST/TP Partners Limited Liability Company agreement provide that the following events are considered changes of governance: - If we default in the performance or breach of any material covenant in the investors agreement, any of the credit facilities or the indenture relating to the notes and the default or breach continues for 60 consecutive days aFTER the members holding a majority interest in Tekni-Plex Partners or MST/TP Partners, as the case MAY BE, GIVE US Written notice of the default or breach; - An involuntary bankruptcy case or other insolvency proceeding is commenced against us and remains undismissed for a period of 60 days or an order for relief is entered against us under Federal Bankruptcy Laws; 22 23 - A voluntary bankruptcy case or other insolvency proceeding is commenced by us, we consent to the appointment of a receiver or liquidator for all or substantially all of our assets or we effect any general assignment for the benefit of our creditors; - Dr. Smith is not employed as our chief executive officer because of death, disability or voluntary resignation, unless within six months we appoint a replacement chief executive officer acceptable to the members holding a majority interest in Tekni-Plex Partners; or - We have cumulative negative cash flow (adjusted for positive cash flow) from operating activities (and not redemptions or other extraordinary activities) in excess of 25% of the value of our equity today. 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 On April 17, 2000, we filed a report with the Securities and Exchange Commission on Form 8-K, under Item 5, announcing our Recapitalization Agreement. 23 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKNI-PLEX, INC. By: /S/ F. PATRICK SMITH F. Patrick Smith Chairman of the Board and Chief Executive Officer Dated: September 3, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Registrant and in the capacities indicated, on September 3, 1999.
SIGNATURE TITLE /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive F. Patrick Smith Officer /s/ KENNETH W.R. BAKER President and Chief Operating Officer Kenneth W.R. Baker Principal Accounting and Financial Officer /s/ ARTHUR P. WITT Arthur P. Witt Corporate Secretary and Director /s/ JOHN S. GEER John S. Geer Director /s/ J. ANDREW MCWETHY J. Andrew McWethy Director /s/ MICHAEL F. CRONIN Michael F. Cronin Director
25 EXHIBIT INDEX
Exhibit ------- Number Document Description ------ -------------------- 3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc. (Filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 3.2 Amended and Restated By-laws of Tekni-Plex, Inc. (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee (Filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 4.2 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1). 4.3 Purchase Agreement, dated as of June 15, 2000 among Tekni-Plex, Inc., the Guarantors listed therein, and J.P. Morgan Securities, Inc. (Filed as Exhibit 4.3 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 4.4 Registration Right Agreement, dated as of June 21, 2000 among Tekni-Plex, Inc. the Guarantors listed therein, and J.P. Morgan Securities, Inc. (Filed as Exhibit 4.4 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 10.1 Credit Agreement, dated as of June 21, 2000, among Tekni-Plex, Inc., the Guarantors party thereto, the Lenders party thereto, the LC Issuing Banks referred to therein and Morgan Guaranty Trust Company of New York, as Agent. (Filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 10.2 Note (original not included; form of Note included in Exhibit 10.1). 10.3 Security Agreement, dated as of June 21, 2000, among Tekni-Plex, Inc., the Guarantors listed therein and Morgan Guaranty Trust Company of New York, as Collateral Agent (original not included; form of Security Agreement included in Exhibit 10.1). 10.4 Pledge Agreement, dated as of June 21,2000, between Tekni-Plex, Inc. and Morgan Guaranty Trust Company of New York, as Agent (original not included; form of Pledge Agreement included in Exhibit 10.1). 10.5 Form of Mortgage, dated as of June 21,2000, made by Tekni-Plex, Inc., or the Guarantors listed therein. in favor of Morgan Guaranty Trust Company, as Agent (original not included; form of Mortgage included in Exhibit 10.1). 10.6 Employment Agreement, dated as of June 21,2000, between Dr. F. Patrick Smith and Tekni-Plex, Inc. (Filed as Exhibit 10.6 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference). 10.7 Employment Agreement, dated as of June 21,2000, between Mr. Kenneth W.R. Baker and Tekni-Plex, Inc. (Filed as Exhibit 10.7 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference).
26 10.8 Form of Amended and Restated Option Agreement, dated as of June 21,2000, among Tekni-Plex, Inc., Tekni-Plex Partners L.P. and F. Patrick Smith (Filed as Exhibit 10.8 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference). 21.0 List of Subsidiaries.* 25.1 Statement of Eligibility of Trustee, HSBC Bank USA, on Form T-1 (Filed as Exhibit 25.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-43800, and incorporated herein by reference.) 27.1 Financial Data Schedule.*
* Filed herewith. 27 {LAST PRINTED ON SEPTEMBER 25, 2000} CONTENTS =============================================================================== INDEPENDENT AUDITORS' REPORT F-2 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets F-3 Statements of operations F-4 Statements of comprehensive income (loss) F-5 Statements of stockholders' equity (deficit) F-6 Statements of cash flows F-7 Notes to financial statements F-8-F-44 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F-45 SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves F-46
F-1 28 INDEPENDENT AUDITORS' REPORT The Board of Directors Tekni-Plex, Inc. Somerville, New Jersey We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc. and its wholly owned subsidiaries (the "Company") as of June 30, 2000 and July 2, 1999, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tekni-Plex, Inc. and its wholly owned subsidiaries as of June 30, 2000 and July 2, 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with generally accepted accounting principles. August 15, 2000 F-2 29 {LAST PRINTED ON SEPTEMBER 25, 2000} CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
JUNE 30, 2000 July 2, 1999 ----------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT: Cash $ 12,525 $ 22,117 Accounts receivable, net of an allowance of $1,642 and $1,662 for possible losses 96,039 96,835 Inventories (Note 4) 91,233 63,190 Deferred income taxes (Note 7) 4,997 5,900 Refundable income taxes 14,883 - Prepaid expenses and other current assets 2,171 3,664 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 221,848 191,706 PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 5) 135,926 136,953 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $45,480 AND $29,581 190,492 206,140 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $0 AND $4,287 18,897 19,358 DEFERRED INCOME TAXES (NOTE 7) 5,398 1,346 OTHER ASSETS 2,228 3,933 ----------------------------------------------------------------------------------------------------------------------------- $ 574,789 $ 559,436 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt (Note 6) $ 8,401 $ 5,748 Accounts payable trade 30,026 27,612 Accrued payroll and benefits 11,662 21,581 Accrued interest 2,359 7,965 Accrued liabilities - other 23,521 26,613 Income taxes payable - 742 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 75,969 90,261 LONG-TERM DEBT (NOTE 6) 643,192 410,646 OTHER LIABILITIES 4,778 6,232 ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 723,939 507,139 ----------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 7, 8, 9 AND 11) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value, authorized 20,000 shares, issued 848 at June 30, 2000 and July 2, 1999 - - Additional paid-in capital 84,176 41,075 Cumulative currency translation adjustment (4,486) (1,368) Retained earnings (deficit) (8,378) 12,590 Less: Treasury stock at cost, 432 shares (Note 2) (220,462) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (149,150) 52,297 ----------------------------------------------------------------------------------------------------------------------------- $ 574,789 $ 559,436 =============================================================================================================================
See accompanying notes to consolidated financial statements. F-3 30 {LAST PRINTED ON SEPTEMBER 25, 2000} CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998 -------------------------------------------------------------------------------------------------------------------- NET SALES $ 506,828 $ 489,237 $ 309,597 COST OF SALES 376,491 358,293 232,499 -------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 130,337 130,944 77,098 OPERATING EXPENSES: Selling, general and administrative 58,343 62,534 39,220 -------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 71,994 68,410 37,878 OTHER EXPENSES: Interest, net 38,447 38,977 19,682 Other (Note 9) 4,705 286 415 -------------------------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM 28,842 29,147 17,781 PROVISION FOR INCOME TAXES (NOTE 7): Current 12,333 7,004 7,232 Deferred 2,103 7,146 1,880 -------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 14,406 14,997 8,669 EXTRAORDINARY ITEM, NET OF INCOME TAXES (NOTE 2) (35,374) - - -------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (20,968) $ 14,997 $ 8,669 ====================================================================================================================
See accompanying notes to consolidated financial statements. F-4 31 {LAST PRINTED ON SEPTEMBER 25, 2000} CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998 -------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(20,968) $ 14,997 $ 8,669 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES: Foreign currency translation (3,118) (1,373) 5 -------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $(24,086) $ 13,624 $ 8,674 ========================================================================================================
See accompanying notes to consolidated financial statements. F-5 32 {LAST PRINTED ON SEPTEMBER 25, 2000} CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Cumulative Additional Currency Common Paid-In Translation Retained Treasury stock Capital Adjustment Earnings Stock TOTAL ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 27, 1997 $ - $ 41,473 $ - $ (11,076) $ - $ 30,397 Repurchase and cancellation of shares - (398) - - - (398) Foreign currency translation - - 5 - - 5 Net income - - - 8,669 - 8,669 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, JULY 3, 1998 - 41,075 5 (2,407) - 38,673 Foreign currency translation - - (1,373) - - (1,373) Net income - - - 14,997 - 14,997 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, JULY 2, 1999 - 41,075 (1,368) 12,590 - 52,297 Foreign currency translation - - (3,118) - - (3,118) Net loss - - - (20,968) - (20,968) 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) ===================================================================================================================================
See accompanying notes to consolidated financial statements. F-6 33 {LAST PRINTED ON SEPTEMBER 25, 2000} CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (20,968) $ 14,997 $ 8,669 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 16,026 16,930 8,856 Amortization 18,722 18,413 8,393 Provision for bad debts 310 370 705 Deferred income taxes 2,103 7,146 1,880 Loss on sale of assets 62 - - Extraordinary loss on extinguishment of debt 35,374 - - Changes in assets and liabilities, net of acquisitions: Accounts receivable 186 (5,709) (22,269) Inventories (29,243) (4,778) 24,730 Prepaid expenses and other current assets 4,898 (1,483) 1,918 Other assets 205 (532) 534 Accounts payable and other current liabilities (15,994) (4,859) (4,335) Income taxes payable (742) (1,701) 4,262 Other liabilities (1,454) - (4,334) ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,485 38,794 29,009 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of net assets including acquisition costs, net of cash acquired - (45,139) (303,389) Capital expenditures (16,258) (12,950) (7,283) Additions to intangibles (805) - - Cash proceeds from sale of assets 158 - - ---------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (16,905) (58,089) (310,672) ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (2,030) 22,234 7 Proceeds from long-term debt 645,232 - 319,156 Repayments of long-term debt (448,631) (10,177) (787) Proceeds from capital contribution 43,101 - - Debt financing costs (18,897) - (18,052) Redemption of capital - - (398) Purchase of treasury stock (220,462) - - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,687) 12,057 299,926 ---------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (485) (8) 5 ---------------------------------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH (9,592) (7,246) 18,268 CASH, BEGINNING OF PERIOD 22,117 29,363 11,095 ---------------------------------------------------------------------------------------------------------------------------- CASH, END OF PERIOD $ 12,525 $ 22,117 $ 29,363 ============================================================================================================================
See accompanying notes to consolidated financial statements. F-7 34 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 1. SUMMARY OF Nature of Business ACCOUNTING POLICIES Tekni-Plex, Inc. is a global, diversified manufacturer of packaging, products, and materials for the healthcare, consumer, and food packaging industries. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under four primary business groups: Healthcare Packaging, Products, and Materials; Consumer Packaging and Products; Food Packaging; and Specialty Resins and Compounds. Consolidation Policy The consolidated financial statements include the financial statements of Tekni-Plex, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost (weighted average) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed over the estimated useful lives of the assets by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Repairs and maintenance are charged to expense as incurred. Intangible Assets The Company amortizes the excess of cost over the fair value of net assets acquired on a straight-line basis over 15 years, and the cost of acquiring certain patents and trademarks, over seventeen and ten years, respectively. Recoverability is evaluated periodically based on the expected undiscounted net cash flows of the related businesses. F-8 35 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Deferred Financing Costs The Company amortizes the deferred financing costs incurred in connection with the Company's borrowings over the life of the related indebtedness (5-10 years). Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized for differences between the financial statement and income tax basis of assets and liabilities based upon statutory rates enacted for future periods. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Revenue Recognition The Company recognizes revenue when goods are shipped to customers. The Company provides for returned goods and volume rebates on an estimated basis. 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 30, 2000 and July 2, 1999 contained 52 weeks each, the year ended July 3, 1998 contained 53 weeks. 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 current exchange rates and related translation adjustments are reported as a component of stockholders' equity. Income statement accounts are translated at the average rates during the period. F-9 36 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Long-Lived Assets Long-lived assets, such as goodwill and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When such impairments exist, the related assets will be written down to fair value. No impairment losses have been recorded through June 30, 2000. 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. Stock Based Compensation The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which allows the Company to apply APB Opinion 25 and related interpretations in accounting for its stock options and present pro forma effects of the fair value of such options. New Accounting Pronouncements In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 133, as amended by SFAS 137, is effective for the Company's 2001 fiscal year. SFAS 133 is not currently expected to be applicable to the Company since the Company does not currently have hedging activities. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101") which broadly addresses how companies report revenues in their financial statements. The Company is in the process of evaluating the accounting requirements of SAB 101 and does not expect that this standard will have an effect on its financial position, results of operations, or cash flows. F-10 37 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 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 6) and initial borrowings of $374,000 on a $444,000 Senior Credit Facility (see Note 6). 3. ACQUISITIONS On April 24, 1999, the Company purchased certain assets and assumed certain liabilities of High Voltage Engineering Corp. - Natvar Division ("Natvar"), for approximately $26,000. The acquisition was recorded under the purchase method, whereby Natvar's 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 $19,786 has been recorded, which is being amortized over 15 years. On January 25, 1999, the Company purchased certain assets and assumed certain liabilities of Tri-Seal International, Inc. ("Tri-Seal") for approximately $21,000. The acquisition was recorded under the purchase method and Tri-Seal's operations have been reflected in the statement of operations since that date. As a result of the acquisition, goodwill of approximately $13,848 has been recorded, which is being amortized over 15 years. F-11 38 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The following table presents the unaudited pro forma results of operations as though the acquisition of Tri-Seal and Natvar occurred on June 28, 1997:
Year ended JULY 2, 1999 July 3, 1998 --------------------------------------------------------------------------------------------- Net sales $510,050 $342,910 Income from operations 70,691 38,477 Income before provision for income taxes $ 31,211 $ 18,731 =============================================================================================
On March 3, 1998, Tekni-Plex acquired PureTec Corporation ("PureTec"), a publicly traded company with annual sales of $315,000, for a purchase price of $312,000. PureTec is a leading manufacturer of plastic packaging, products and materials primarily for the healthcare and consumer markets. PureTec is a wholly-owned subsidiary of Tekni-Plex. This acquisition was financed by the issuance of $200,000 of Senior Subordinated Debt (Note 6(c)) and $115,000 of Senior Term Debt (Note 6(e)). The acquisition was recorded under the purchase method and its operations have been reflected in the statement of operations since the acquisition date. As a result of the acquisition, goodwill of approximately $157,940 has been recorded, which is being amortized over 15 years. In connection with the acquisition of PureTec, a reserve of $24,000 was established. The reserve was comprised of the costs to close or sell incompatible and duplicate facilities, terminate employees and provide for existing litigation. At June 30, 2000, approximately $3,200 was remaining in this reserve, which is included in accrued expenses. The remaining reserve is primarily to cover pre-existing litigation. F-12 39 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The following table presents the unaudited pro forma results of operations as though the acquisition of PureTec occurred on June 28, 1997:
Year ended July 3, 1998 --------------------------------------------------------------------------------------------- Net sales $507,482 Income from operations 45,858 Income before provision for income taxes $ 3,494 =============================================================================================
Proforma adjustments were made to the related historical results to reflect changes in interest expense and goodwill amortization. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 4. INVENTORIES Inventories are summarized as follows:
JUNE 30, 2000 July 2, 1999 --------------------------------------------------------------------------------------------- Raw materials $44,002 $26,663 Work-in-process 7,024 5,282 Finished goods 40,207 31,245 --------------------------------------------------------------------------------------------- $91,233 $63,190 =============================================================================================
F-13 40 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 5. PROPERTY, PLANT Property, plant and equipment consists of the following: AND EQUIPMENT
JUNE 30, July 2, Estimated 2000 1999 useful lives ------------------------------------------------------------------------------- Land $ 15,106 $ 14,611 Building and improvements 32,016 31,043 30 - 40 years Machinery and equipment 124,549 114,927 5 - 10 years Furniture and fixtures 4,045 2,691 5 - 10 years Construction in progress 10,009 8,768 ------------------------------------------------------------------------------- 185,725 172,040 Less: Accumulated depreciation 49,799 35,087 ------------------------------------------------------------------------------- $135,926 $136,953 ===============================================================================
6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, 2000 July 2, 1999 ---------------------------------------------------------------------------------- Senior Debt (b): Revolving line of credit $ 30,000 $ - Term notes 344,000 - Senior Subordinated Notes issued June 21, 2000 at 12 3/4%, due June 15, 2010 (less unamortized discount of $3,768) (a) 271,232 - Old Senior Subordinated Notes issued March 3, 1998 at 9 1/4%, due March 1, 2008 (c) - 200,000 Old Senior Subordinated Notes issued April 4, 1997 at 11 1/4%, due April 1, 2007 (d) - 75,000 Old Senior Debt (e): Revolving line of credit - 22,000 Term notes - 111,063 Other, primarily foreign term loans, with interest rates ranging from 3.74% to 8.4% and maturities from 2000 to 2004 6,361 8,331 ---------------------------------------------------------------------------------- 651,593 416,394 Less: Current maturities 8,401 5,748 ---------------------------------------------------------------------------------- $643,192 $410,646 ==================================================================================
F-14 41 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ (a) Senior Subordinated Notes Issued June 2000 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. 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. The discount is being amortized over the term of the notes. (b) Senior Debt The Company has a Senior Debt agreement, which includes a $100,000 revolving credit agreement, and two term loans in the aggregate amount of $344,000. The proceeds of the credit agreement were used as part of the Recapitalization. These loans are senior to all other indebteness and are collateralized by substantially all the assets of the Company. The debt agreement includes various covenants including a limitation on capital expenditures and compliance with customary financial ratios. At June 30, 2000, the Company is in compliance with these covenants. F-15 42 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Revolving Credit Agreement Borrowings under the agreement may be used for general corporate purposes and at June 30, 2000 $70,000 is available for borrowing. Interest, at the Company's option, is charged at the Prime Rate, plus the Applicable Base Rate (initially 2%) or the Adjusted LIBOR Rate, as defined, plus the Applicable Euro-Dollar Margin (initially 3%). The Applicable Base Rate and Applicable Euro-Dollar Margin can be reduced by up to 1.25 % based on the maintenance of certain leverage ratios. At June 30, 2000, the rate charged is 9.69% on $25,000 and 11.5% on $5,000. The Revolving Credit Agreement expires in June 2006. Term Loan A Borrowings under this loan in the 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, 9.81% at June 30, 2000. Principal is payable in quarterly installments of $1,250 beginning in September, 2000. The quarterly installments increase with payments totaling $70,000 due in the final two years ending in June 2006. Term Loan B Borrowings under this loan in the 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 is initially 2.5% and the Applicable Euro-Dollar Margin is initially 3.5%. The rate at June 30, 2000 is 10.31%. 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 payable in quarterly installments of $610 beginning September, 2000. The quarterly installments increase with payments totaling $229,000 due in the final two years ending in June 2008. F-16 43 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ (c) Old Senior Subordinated Notes Issued March 1998 In March 1998, the Company issued $200,000 of 9 1/4%, ten year Senior Subordinated Notes, the net proceeds of which were used in connection with the PureTec acquisition (Note 3). Interest was payable semi-annually. The notes were uncollateralized and ranked equally to the $75,000 Senior Subordinated Notes discussed below and were subordinate to all current and future senior indebtedness of the Company. Upon the Recapitalization, the Company repurchased the notes (see Note 2). (d) Old Senior Subordinated Notes Issues April 1997 In April 1997, the Company issued $75,000 of 11 1/4% ten year notes. Interest on the notes was payable semi-annually. These notes were uncollateralized and ranked equally with the $200,000 Senior Subordinated Notes discussed above and were subordinate to all current and future senior indebtedness of the Company. Upon the Recapitalization, the notes were repurchased during June 2000 (see Note 2). (e) Old Senior Debt The Company had a Senior Debt agreement, which included a $90,000 revolving credit agreement, and two term loans in the aggregate amount of $115,000. The proceeds of the term loans were used as part of the financing for the PureTec acquisition (Note 3). These loans were senior to all other indebtedness and were collateralized by substantially all the assets of the Company. The debt agreement included various covenants including a limitation on capital expenditures and compliance with customary financial ratios. At June 30, 2000 the loans were repaid as part of the Recapitalization (see Note 2). F-17 44 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Old Revolving Credit Agreement Borrowings under the agreement were used for general corporate purposes. Interest, at the Company's option, was charged at the Prime Rate, plus the Applicable Base Rate (initially 1.25%) or the Adjusted LIBOR Rate, as defined, plus the Applicable Euro-Dollar Margin (initially 2.25%). The Applicable Base Rate and Applicable Euro-Dollar Margin can be reduced by up to 1.25% based on the maintenance of certain leverage ratios. Old Term Loan A Borrowings under this loan in the amount of $50,000, were used in connection with the acquisition of PureTec. Interest was payable quarterly at the same rates discussed above under the Revolving Credit Agreement. Old Term Loan B Borrowings under this loan in the amount of $65,000, were used solely in connection with the acquisition of PureTec. Interest was payable quarterly at the same rate discussed above, except the Applicable Base Rate was initially 1.75% and the Applicable Euro-Dollar Margin was initially 2.75%. Principal payments on long-term debt over the next five years and thereafter are as follows: -------------------------------------------------------------------------------- 2001 $ 8,401 2002 8,656 2003 12,888 2004 12,888 2005 37,888 Thereafter 574,634 ================================================================================
The Company believes the recorded value of long-term debt approximates fair value based on current rates available to the Company for similar debt. F-18 45 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 7. INCOME TAXES The provision for income taxes, excluding the income tax benefit associated with the extinguishment of debt, is summarized as follows:
JUNE 30, July 2, July 3, Years ended 2000 1999 1998 ------------------------------------------------------------------------------- Current: Federal $ 7,763 $ 3,604 $ 4,492 Foreign 3,554 2,900 1,345 State and local 1,016 500 1,395 ------------------------------------------------------------------------------- 12,333 7,004 7,232 ------------------------------------------------------------------------------- Deferred: Federal 1,756 5,918 1,656 Foreign 217 328 182 State and local 130 900 42 ------------------------------------------------------------------------------- 2,103 7,146 1,880 ------------------------------------------------------------------------------- Provision for income taxes $14,436 $14,150 $ 9,112 ===============================================================================
The components of income before income taxes are as follows:
JUNE 30, July 2, July 3, Years ended 2000 1999 1998 ---------------------------------------------------------------------------- Domestic $20,150 $21,198 $14,754 Foreign 8,692 7,949 3,027 ---------------------------------------------------------------------------- $28,842 $29,147 $17,781 ============================================================================
F-19 46 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The provision for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
JUNE 30, July 2, July 3, Years ended 2000 1999 1998 ---------------------------------------------------------------------------------------------- Provision for Federal income taxes at $ 9,806 $ 9,910 $ 6,046 statutory rate State and local income taxes, net of Federal benefit 670 330 921 Non-deductible goodwill amortization 3,765 3,765 1,838 Foreign tax rates in excess of Federal tax rate 658 465 328 Other, net (463) (320) (21) ---------------------------------------------------------------------------------------------- Provision for income taxes $ 14,436 $ 14,150 $ 9,112 ==============================================================================================
Significant components of the Company's deferred tax assets and liabilities are as follows:
JUNE 30, July 2, 2000 1999 ---------------------------------------------------------------------------------------- Current deferred taxes: Allowance for doubtful accounts $ 637 $ 533 Inventory 309 934 Accrued expenses 4,051 4,433 ---------------------------------------------------------------------------------------- Total current deferred tax assets $ 4,997 $ 5,900 ======================================================================================== Long-term deferred taxes: Net operating loss carryforwards $ 29,997 $ 29,363 Accrued pension and post-retirement 1,434 1,497 Accrued expenses 1,108 626 Difference in book vs. tax basis of assets (4,556) (6,668) Accelerated tax vs. book depreciation (16,885) (17,972) ---------------------------------------------------------------------------------------- Total long-term net deferred tax assets 11,098 6,846 Valuation allowance (5,700) (5,500) ---------------------------------------------------------------------------------------- Total long-term net deferred tax assets $ 5,398 $ 1,346 ========================================================================================
F-20 47 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Net Operating Losses The Company and its U.S. subsidiaries file a consolidated tax return. The net operating loss carryforwards ("NOL"), as a result of the PureTec acquisition, involve complex issues of federal tax law and are subject to various limitations as follows: - $38,800 - Subject to IRC Section 382 change of ownership annual limitation of approximately $3,900; this includes $4,600 of losses incurred prior to 1992, which are subject to additional limitations; expire 2002-2010. - $17,400 - Subject to IRC Section 382 change of ownership annual limitation of approximately $3,100; expire 2001 - 2010. - $29,900 - Subject to IRC Section 382 change of ownership annual limitation of approximately $5,900; expires 2013. In addition to the domestic NOL balances, the Company has incurred losses relating to a subsidiary, taxable in Northern Ireland. Through fiscal 2000 losses aggregated $2,310 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. In addition, the net long-term domestic deferred tax assets have been subjected to a valuation allowance 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. The domestic net operating losses are subject to matters discussed above and are subject to change due to the restructuring occurring at the subsidiary level, as well as adjustment for the timing of inclusion of expenses and losses in the federal returns as compared to amounts included for financial statement purposes. To the extent the amounts of NOL's reserved are subsequently recognized, they will cause changes in the goodwill arising from the acquisition of PureTec. F-21 48 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 8. EMPLOYEE BENEFIT (a) Savings Plans PLANS i. The Company had a defined contribution profit sharing plan for the benefit of all employees having completed one year of service with its Dolco Division ("Dolco"). The Company contributed 3% of compensation for each participant and a matching contribution of up to 1% when an employee contributed 3% compensation. Contributions totaled approximately $727 and $653 for the years ended July 2, 1999 and July 3, 1998, respectively. ii. Additionally, the Company had a savings plan for all employees of two wholly-owned subsidiaries who are not covered under a collective bargaining agreement. The two subsidiaries are Plastic Specialties & Technology, Inc. ("PST") and Burlington Resins, Inc. ("Burlington"). Under the savings plan, the Company matched each eligible employees' contribution up to 3% of the employees' earnings. Such contribution amounted to approximately $362 for the year ended July 2, 1999 and $215 for the period March 3 through July 3, 1998. iii. The Company maintains a discretionary 401(k) plan covering all eligible employees, excluding those employed by Dolco and PureTec, with at least one year of service. Contributions to the plan were determined annually by the Board of Directors. There were no contributions for years ended July 2, 1999 and July 3, 1998. Effective December 1, 1999 the above plans were merged into this plan. 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 year ended June 30, 2000 amounted to approximately $996. F-22 49 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ (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 JUNE 30, 2000 July 2, 1999 ---------------------------------------------------------------------------- Service cost $ 117 $ 133 Interest cost on projected benefit obligation 390 366 Expected actual return on plan assets (492) (453) ---------------------------------------------------------------------------- Net pension cost $ 15 $ 46 ============================================================================ CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 5,292 $ 4,974 Service cost 117 133 Interest cost 390 366 Actuarial (loss) (230) - Benefits paid (235) (181) ---------------------------------------------------------------------------- Projected benefit obligation, end of period $ 5,334 $ 5,292 ============================================================================ CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 5,431 $ 4,978 Actual return on plan assets 158 410 Company contributions 196 224 Benefits paid (235) (181) ---------------------------------------------------------------------------- Plan assets at fair value, end of period $ 5,550 $ 5,431 ============================================================================
F-23 50 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
JUNE 30, 2000 July 2, 1999 ----------------------------------------------------------------------------- Funded status of the plan $216 $139 Unrecognized net gain 147 43 ----------------------------------------------------------------------------- Prepaid (accrued) pension cost $363 $182 =============================================================================
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate was 7 1/2% at June 30, 2000 and July 2, 1999. 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, resulting in a curtailment gain of $576.
YEAR ENDED Year ended JUNE 30, 2000 July 2, 1999 ------------------------------------------------------------------------------- Service cost $ - $ 253 Interest cost on projected benefit obligation 704 674 Expected actual return on plan assets (986) (938) Amortization of unrecognized net gain - (8) Recognized curtailment gain - (576) ------------------------------------------------------------------------------- Net pension cost $ (282) $ (595) ===============================================================================
F-24 51 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
YEAR ENDED Year ended JUNE 30, 2000 July 2, 1999 ------------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period 9,555 10,127 Service cost - 253 Interest cost 704 674 Curtailments - (576) Actuarial (gain) loss 146 (512) Benefits paid (427) (411) ------------------------------------------------------------------------------- Projected benefit obligation, end of period $ 9,978 $ 9,555 =============================================================================== CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 11,113 $ 9,555 Actual return on plan assets 369 827 Company contributions - 1,142 Benefits paid (427) (411) ------------------------------------------------------------------------------- Plan assets at fair value, end of period $ 11,055 $ 11,113 ===============================================================================
The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
JUNE 30, 2000 July 2, 1999 ---------------------------------------------------------------------------- Funded status of the plan $1,077 $ 1,558 Unrecognized net gain (loss) 296 (467) ---------------------------------------------------------------------------- Prepaid (accrued) pension cost $1,373 $ 1,091 ============================================================================
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate was 7 1/2% at June 30, 2000 and July 2, 1999. F-25 52 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 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 30, 2000 and July 2, 1999 amounted to $130 and $84, respectively. Net periodic post-retirement benefit costs are as follows:
YEAR ENDED Year ended JUNE 30, 2000 July 2, 1999 ------------------------------------------------------------------------------------ Service cost $ 45 $ 42 Interest cost 155 146 ------------------------------------------------------------------------------------ Net post-retirement benefit cost $200 $188 ====================================================================================
F-26 53 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================== YEAR ENDED Year ended JUNE 30, 2000 July 2, 1999 ---------------------------------------------------------------------------------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 2,101 $ 1,997 Service cost 45 42 Interest cost 155 146 Actuarial loss (gain) 286 - Benefits paid (130) (84) ---------------------------------------------------------------------------------- Projected benefit obligation, end of period $ 2,457 $ 2,101 ================================================================================== CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ - $ - Company contributions 130 84 Benefits paid (130) (84) ---------------------------------------------------------------------------------- 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 30, 2000 July 2, 1999 ----------------------------------------------------------------------------------- Funded status of the plan $(2,457) $(2,101) Unrecognized gain (loss) 286 - ----------------------------------------------------------------------------------- Accrued post retirement cost $(2,171) $(2,101) ===================================================================================
F-27 54 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The accumulated post-retirement benefit obligation was determined using a 7 1/2% discount rate for the periods presented. The healthcare cost trend rate for medical benefits was assumed to be 6%, gradually declining until it reaches a constant annual rate of 5% in 2002. The healthcare cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in healthcare trend rate would increase the accumulated post-retirement benefit obligation by $254 and $239 and increase the service and interest components by $26 and $6 at June 30, 2000 and July 2, 1999. 9. RELATED PARTY The Company had a management consulting agreement with TRANSACTIONS an affiliate of a stockholder. The terms of the agreement required the Company to pay a fee of approximately $30 per month for a period of ten years, with certain renewal provisions. Consulting service fees were approximately $400 for each of the years ending July 2, 1999 and July 3, 1998, respectively. 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, as well as approximately $400 of other related charges. 10. STOCK OPTIONS In April 1994, the Company granted options to an employee to acquire 2 1/2% of the outstanding common stock for $13.50 per share, with anti-dilution provisions. The options are exercisable as to 33 1/3% of the shares on the first, second and third anniversary dates of the original grant and expire fifteen years from the date of the grant. These options were cancelled in June 2000. F-28 55 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ In January 1998, the Company adopted an incentive stock plan (the "Stock Incentive Plan"). Under the Stock Incentive Plan, 45.75206 shares are available for awards to employees of the Company. Options will be granted at fair market value on the date of grant. During 2000, 1999 and 1998, options were granted to purchase 1.26, 7.32 and 28.37 shares of common stock at an exercise price of $507.93, $222.40 and $154.50 per share, respectively. The options are subject to vesting provisions, as determined by the Board of Directors, at date of grant and expire 10 years from date of grant. In connection with the Recapitalization 22.88 of the 1998 options were cancelled. In addition, an option to purchase 2.29 shares of common stock was granted to a member of the Board of Directors, in April 1998, at an exercise price of $154.50 per share. The options are subject to vesting provisions as determined by the Board of Directors at date of grant, and expire 10 years from date of grant. These options were cancelled in June 2000. At June 30, 2000, no options were exercisable and no options have been exercised or forfeited as of June 30, 2000. F-29 56 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The Company applies APB Opinion 25 and related interpretations in accounting for these options. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant dates for these awards consistent with the method of SFAS Statement 123, the Company's income before extraordinary items would have been reduced to the pro forma amounts indicated below. The calculations were based on a risk free interest rate of 5.70%, 4.75% and 5.28% for the 2000, 1999 and 1998 options, respectively, expected volatility of zero, a dividend yield of zero and expected lives of 8 years.
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998 ----------------------------------------------------------------------------------------- Income before extraordinary item: As reported $14,406 $14,997 $8,669 ========================================================================================= Pro forma $14,343 $14,868 $8,618 =========================================================================================
11. COMMITMENTS AND Commitments CONTINGENCIES (a) The Company leases building space and certain equipment in 20 locations throughout the United States, Canada and Europe. At June 30, 2000, the Company's future minimum lease payments are as follows: ----------------------------------------------------- 2001 $ 3,349 2002 3,710 2003 2,198 2004 1,491 2005 1,171 Thereafter 6,681 ----------------------------------------------------- $18,600 =====================================================
Rent expense, including escalation charges, amounted to approximately $3,427, $3,756 and $2,802 for the years ended June 30, 2000, July 2, 1999 and July 3, 1998, respectively. F-30 57 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ (b) The Company has employment contracts with two employees, which provided for minimum salaries of $1,800 and bonuses based on performance and was scheduled to expire in June 2002. Salaries and bonuses for the year ended July 2, 1999 under these contracts were $1,800 and $13,471, respectively. As part of the Recapitalization, the above employment agreement was amended and restated on June 21, 2000, providing minimum salaries of $7,500. The salaries will increase 10% annually until the agreement expires in June 2002. Salaries and bonuses for the year ended June 30, 2000 were $1,800 and $6,933, respectively. Contingencies (a) In January 1993 and 1994, the Company's Belgian subsidiary received income tax assessments aggregating approximately $1,758 (75,247 Belgian Francs) for the disallowance of certain foreign tax credits and investment losses claimed for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the subsidiary received an income tax assessment of approximately $749 (32,083 Belgian francs) for the year ended July 31, 1992. By Belgian law, these assessments are capped at the values above and do not continue to accrue additional penalties or interest. Although the future outcome of these matters are uncertain, the Company believes that its tax position was appropriate and that the assessments are without merit. Therefore, the Company has appealed the assessments. Based on advice of legal counsel in Belgium, the Company believes that the assessment appeals will be accepted by the tax authorities in Belgium, although there can be no assurance whether or when such appeals will be accepted. (b) The Company is a party to various other legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. F-31 58 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 12. CONCENTRATIONS OF Financial instruments that potentially subject the CREDIT RISKS Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. The Company provides credit to customers on an unsecured basis after evaluating customer credit worthiness. Since the Company sells to a broad range of customers, concentrations of credit risk are limited. The Company provides an allowance for bad debts where there is a possibility for loss. The Company maintains demand deposits at several major banks throughout the United States. As part of its cash management process, the Company periodically reviews the credit standing of these banks. 13. SUPPLEMENTAL CASH (a) Cash Paid FLOW INFORMATION
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998 ------------------------------------------------------------------------ Interest $44,031 $37,376 $15,776 ======================================================================== Income taxes $ 7,540 $10,185 $ 5,832 ========================================================================
(b) Non-Cash Financing and Investing Activities The Company purchased certain assets and assumed certain liabilities of Natvar, effective April 24, 1999, for approximately $26,169 in cash. In conjunction with the acquisition, liabilities were assumed as follows: -------------------------------------------------------------------- Fair value of assets acquired $ 7,513 Goodwill 19,786 Cash paid (26,169) -------------------------------------------------------------------- Liabilities assumed $ 1,130 ====================================================================
F-32 59 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ The Company purchased certain assets and assumed certain liabilities of Tri-Seal, effective January 25, 1999, for approximately $21,272 in cash. In conjunction with the acquisition, liabilities were assumed as follows: ------------------------------------------------------------------------------------- Fair value of assets acquired $ 11,400 Goodwill 13,848 Cash paid (21,272) ------------------------------------------------------------------------------------- Liabilities assumed $ 3,976 =====================================================================================
The Company purchased the outstanding stock of PureTec Corporation on March 3, 1998 for approximately $312,047. In conjunction with the acquisition, liabilities were assumed as follows: ------------------------------------------------------------------------------------- Fair value of assets acquired $ 246,160 Goodwill 157,940 Cash paid (312,047) ------------------------------------------------------------------------------------- Liabilities assumed $ 92,053 =====================================================================================
14. SEGMENT The Company operates in four industry segments: INFORMATION healthcare packaging, products, and materials; consumer packaging and products; food packaging; and specialty resins and compounds. The healthcare packaging, products, and materials segment principally produces pharmaceutical packaging, medical tubing and medical device materials. The consumer packaging and products segment principally produces precision tubing and gaskets, and garden and irrigation hose products. The food packaging segment produces foamed polystyrene packaging products for the poultry, meat and egg industries. The specialty resins and compounds segment produces specialty PVC resins, recycled PET resins, and general purpose PVC compounds. The healthcare packaging, products, and materials and consumer packaging and products segments have operations in the United States, Europe and Canada. F-33 60 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Healthcare Packaging, Consumer Products Packaging Specialty and and Food Resins and June 30, 2000 Materials Products Packaging Compounds TOTALS ------------------------------------------------------------------------------------------------------ Revenues from external customers $153,716 $189,336 $106,311 $ 57,465 $506,828 Interest expense 11,217 12,537 9,001 5,692 38,447 Depreciation and amortization 10,876 12,316 6,866 4,480 34,538 Segment income from operations 26,202 35,491 22,842 161 84,696 Segment assets 171,764 220,576 77,642 83,900 553,882 Expenditures for segment fixed assets $ 7,224 $ 4,012 $ 3,247 $ 1,775 $ 16,258 ======================================================================================================
F-34 61 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Healthcare Packaging, Consumer Products Packaging Specialty and and Food Resins and July 2, 1999 Materials Products Packaging Compounds TOTALS ------------------------------------------------------------------------------------------------------ Revenues from external customers $137,309 $184,684 $100,258 $ 66,986 $489,237 Interest expense 11,818 13,254 8,014 5,891 38,977 Depreciation and amortization 7,327 13,072 9,640 5,086 35,125 Segment income from operations 25,027 37,848 18,777 6,810 88,462 Segment assets 173,704 216,067 73,351 83,601 546,723 Expenditures for segment fixed assets $ 3,761 $ 3,540 $ 4,567 $ 1,082 $ 12,950 ======================================================================================================
Healthcare Packaging, Consumer Products Packaging Specialty and and Food Resins and July 3, 1998 Materials Products Packaging Compounds TOTALS ------------------------------------------------------------------------------------------------------ Revenues from external customers $ 90,708 $103,744 $ 99,336 $ 15,809 $309,597 Interest expense 4,844 6,395 6,346 2,097 19,682 Depreciation and amortization 1,705 3,854 9,320 1,952 16,831 Segment income from operations 13,563 14,866 18,321 2,955 49,705 Segment assets 134,053 224,754 73,261 87,105 519,173 Expenditures for segment fixed assets $ 1,347 $ 1,387 $ 4,316 $ 233 $ 7,283 ======================================================================================================
F-35 62 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
JUNE 30, 2000 July 2, 1999 July 3, 1998 --------------------------------------------------------------------------------------- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 84,696 $ 88,462 $ 49,705 Corporate and eliminations (12,702) (20,052) (11,827) --------------------------------------------------------------------------------------- $ 71,994 $ 68,410 $ 37,878 ======================================================================================= ASSETS Total assets from reportable segments $ 553,882 $ 546,723 $ 519,173 Other unallocated amounts 20,907 12,713 20,106 --------------------------------------------------------------------------------------- Consolidated total $ 574,789 $ 559,436 $ 539,279 ======================================================================================= DEPRECIATION AND AMORTIZATION Segment totals $ 34,538 $ 35,125 $ 16,831 Corporate 210 218 418 --------------------------------------------------------------------------------------- Consolidated total $ 34,748 $ 35,343 $ 17,249 =======================================================================================
REVENUES YEARS ENDED JUNE 30, 2000 July 2, 1999 July 3, 1998 --------------------------------------------------------------------------------------- GEOGRAPHIC INFORMATION United States $ 459,500 $ 445,603 $ 288,520 Canada 5,975 4,996 5,868 Europe 41,353 38,638 15,209 --------------------------------------------------------------------------------------- Total $ 506,828 $ 489,237 $ 309,597 ======================================================================================= LONG-LIVED ASSETS --------------------------------------------------------------------------------------- GEOGRAPHIC INFORMATION United States $ 323,691 $ 339,409 $ 325,292 Canada 2,580 2,542 2,302 Europe 26,670 25,779 27,961 --------------------------------------------------------------------------------------- Total $ 352,941 $ 367,730 $ 355,555 =======================================================================================
F-36 63 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 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 30, 2000, one customer represented 10% of sales and one customer represented 11% of accounts receivable at June 30, 2000. For the year ended July 2, 1999, one customer represented 11% of sales and two customers each represented 10% of accounts receivable at July 2, 1999. For the year ended July 3, 1998, one customer represented 10% of sales and two customers each represented 11% of accounts receivable at July 3, 1998. F-37 64 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ 15. SUPPLEMENTAL Tekni-Plex, Inc. issued 12 3/4 % Senior Subordinated CONDENSED Notes in June 2000. These notes are guaranteed by all CONSOLIDATING domestic subsidiaries of Tekni-Plex. The following FINANCIAL condensed consolidating financial statements present STATEMENTS 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 30, 2000
Issuer Guarantors Non-Guarantors TOTAL --------------------------------------------------------------------------------------------------- Sales, net $ 147,098 $ 312,402 $ 47,328 $ 506,828 Cost of sales 105,783 238,012 32,696 376,491 --------------------------------------------------------------------------------------------------- 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 (39,665) 59,815 8,692 28,842 provision for income taxes and extraordinary item Provision 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-38 65 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Condensed Consolidating Balance Sheet - At June 30, 2000
Issuer Guarantors Non-Guarantors Eliminations TOTAL -------------------------------------------------------------------------------------------------------------- CURRENT ASSETS $ 61,275 $ 134,456 $ 26,117 $ - $ 221,848 Property, plant and equipment, net 41,852 78,957 15,117 - 135,926 Intangible assets 31,519 150,476 8,497 - 190,492 Investment in subsidiaries 398,879 - - (398,879) - Deferred financing costs, net 18,897 - - - 18,897 Deferred taxes 5,398 - - - 5,398 Other long-term assets 50,471 240,823 12,636 (301,702) 2,228 -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 608,291 $ 604,712 $ 62,367 $(700,581) $ 574,789 ============================================================================================================== CURRENT LIABILITIES $ 37,296 $ 24,390 $ 14,283 $ - $ 75,969 Long-term debt 637,793 - 5,399 - 643,192 Other long-term liabilities 72,660 211,846 20,682 (300,410) 4,778 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 747,749 236,236 40,364 (300,410) 723,939 -------------------------------------------------------------------------------------------------------------- Additional paid-in capital 85,355 296,880 15,641 (313,700) 84,176 Retained earnings (deficit) (4,351) 71,596 10,848 (86,471) (8,378) Cumulative currency translation adjustment - - (4,486) - (4,486) Treasury stock (220,462) - - - (220,462) -------------------------------------------------------------------------------------------------------------- TOTAL EQUITY (139,458) 368,476 22,003 (400,171) (149,150) -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 608,291 $ 604,712 $ 62,367 $(700,581) $ 574,789 ==============================================================================================================
F-39 66 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Condensed Consolidating Statement of Operations - For the year ended July 2, 1999
Issuer Guarantors Non-Guarantors TOTAL ------------------------------------------------------------------------------------------------------- Sales, net $ 150,564 $ 295,039 $ 43,634 $ 489,237 Cost of sales 110,057 218,428 29,808 358,293 ------------------------------------------------------------------------------------------------------- Gross profit 40,507 76,611 13,826 130,944 Selling, general and administrative 44,815 13,243 4,476 62,534 ------------------------------------------------------------------------------------------------------- Income from operations (4,308) 63,368 9,350 68,410 Interest expense, net 39,487 (739) 229 38,977 Other expense (income) 294 (1,180) 1,172 286 ------------------------------------------------------------------------------------------------------- Income (loss) before provision for income taxes (44,089) 65,287 7,949 29,147 Provision for income taxes (23,682) 34,604 3,228 14,150 ------------------------------------------------------------------------------------------------------- Net income (loss) $ (20,407) $ 30,683 $ 4,721 $ 14,997 =======================================================================================================
F-40 67 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Condensed Consolidating Balance Sheet - at July 2, 1999:
Issuer Guarantors Non-Guarantors Eliminations TOTAL -------------------------------------------------------------------------------------------------------------- CURRENT ASSETS $ 45,967 $ 117,689 $ 28,050 $ - $ 191,706 Property, plant and equipment, net 44,507 77,132 15,314 - 136,953 Intangible assets 50,965 153,747 1,428 - 206,140 Investment in subsidiaries 367,167 - - (367,167) - Deferred financing costs, net 19,257 (128) 229 - 19,358 Deferred taxes 1,346 - - - 1,346 Other long-term assets 106,330 18,938 11,350 (132,685) 3,933 -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436 ============================================================================================================== CURRENT LIABILITIES $ 52,551 $ 26,868 $ 10,842 $ - $ 90,261 Long-term debt 404,288 - 6,358 - 410,646 Other long-term liabilities 119,759 - 19,158 (132,685) 6,232 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 576,598 26,868 36,358 (132,685) 507,139 -------------------------------------------------------------------------------------------------------------- Additional paid-in capital 41,095 296,747 15,641 (312,408) 41,075 Retained earnings (deficit) 17,846 43,763 5,740 (54,759) 12,590 Cumulative currency translation adjustment - - (1,368) - (1,368) -------------------------------------------------------------------------------------------------------------- TOTAL EQUITY 58,941 340,510 20,013 (367,167) 52,297 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436 ==============================================================================================================
F-41 68 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Condensed Consolidating Statement of Operations - For the year ended July 3, 1998
Issuer Guarantors Non-Guarantors TOTAL ------------------------------------------------------------------------------------------------------- Sales, net $ 151,507 $ 137,013 $ 21,077 $ 309,597 Cost of sales 110,886 106,543 15,070 232,499 ------------------------------------------------------------------------------------------------------- Gross profit 40,621 30,470 6,007 77,098 Selling, general and administrative 24,218 12,581 2,421 39,220 ------------------------------------------------------------------------------------------------------- Income from operations 16,403 17,889 3,586 37,878 Interest expense, net 18,996 477 209 19,682 Other expense (income) 346 (281) 350 415 ------------------------------------------------------------------------------------------------------- Income (loss) before provision for income taxes (2,939) 17,693 3,027 17,781 Provision for income taxes (1,447) 9,023 1,536 9,112 ------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,492) $ 8,670 $ 1,491 $ 8,669 =======================================================================================================
F-42 69 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================ Condensed Consolidating Balance Sheet - at July 3, 1998:
Issuer Guarantors Non-Guarantors Eliminations Total -------------------------------------------------------------------------------------------------------------- CURRENT ASSETS $ 18,510 $ 100,147 $ 24,621 $ 40,446 $ 183,724 Property, plant and equipment, net 40,535 71,304 16,395 - 128,234 Goodwill 30,624 151,055 12,170 - 193,849 Investment in subsidiaries 333,498 - - (333,498) - Deferred financing costs, net 22,277 396 118 - 22,791 Other long-term assets 7,041 2,060 1,580 - 10,681 -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 452,485 $ 324,962 $ 54,884 $(293,052) $ 539,279 ============================================================================================================== CURRENT LIABILITIES $ 28,855 $ 57,395 $ 12,577 $ - $ 98,827 Long-term debt 386,063 6,755 3,633 - 396,451 Other long-term liabilities (6,377) (48,273) 21,266 38,712 5,328 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 408,541 15,877 37,476 38,712 500,606 -------------------------------------------------------------------------------------------------------------- Additional paid-in capital 41,095 296,747 15,641 (312,408) 41,075 Retained earnings (deficit) 2,849 12,611 1,489 (19,356) (2,407) Cumulative currency translation adjustment - (273) 278 - 5 -------------------------------------------------------------------------------------------------------------- TOTAL EQUITY 43,944 309,085 17,408 (331,764) 38,673 -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 452,485 $ 324,962 $ 54,884 $(293,052) $ 539,279 ==============================================================================================================
F-43 70 {LAST PRINTED ON SEPTEMBER 25, 2000} NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
16. QUARTERLY RESULTS First Second Third Fourth OF OPERATIONS 2000 Quarter Quarter Quarter Quarter (UNAUDITED) ------------------------------------------------------------------------------------------- Net sales $ 109,926 $ 102,381 $ 138,872 $ 155,649 Gross profit 29,005 27,498 37,994 50,027 Income from operations 14,863 12,652 23,988 20,491 Extraordinary item - net of taxes - - - (35,374) Net income (loss) $ 2,556 $ 1,197 $ 7,020 $ (31,741) 1999 ------------------------------------------------------------------------------------------- Net sales $ 108,069 $ 94,004 $ 129,754 $ 157,410 Gross profit 27,091 24,878 37,680 41,295 Income from operations 13,131 10,320 21,273 23,686 Net income $ 1,543 $ 505 $ 5,849 $ 7,100 1998 ------------------------------------------------------------------------------------------- Net sales $ 37,791 $ 37,831 $ 68,388 $ 165,587 Gross profit 9,934 10,464 17,152 39,548 Income from operations 5,886 6,257 7,438 18,297 Net income $ 2,305 $ 2,436 $ 1,635 $ 2,293 ===========================================================================================
Fluctuations in net sales are due primarily to seasonality in a number of product lines, particularly garden hose and irrigation hose products. The extraordinary loss in the fourth quarter of fiscal 2000 was the result of the Recapitalization (Note 2). F-44 71 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE Board of Directors Tekni-Plex, Inc. Somerville, New Jersey The audits referred to in our report dated August 15, 2000 relating to the consolidated financial statements of Tekni-Plex, Inc. and its wholly owned subsidiaries (the "Company"), which are contained in this Form 10-K, included the audits of the financial statement schedule for the years ended June 30, 2000, July 2, 1999 and July 3, 1998 listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. Woodbridge, New Jersey August 15, 2000 F-45 72 {LAST PRINTED ON SEPTEMBER 25, 2000} VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ================================================================================
Balance at Charged to Charged to BALANCE AT Beginning of Costs and Other END OF Period Expenses (1) Accounts Deductions (2) PERIOD ---------------------------------------------------------------------------------------------------------------- YEAR ENDED JULY 3, 1998 Accounts receivable allowance $ 313 $ 705 $1,592(3) $1,284 $1,326 ================================================================================================================ YEAR ENDED JULY 2, 1999 Accounts receivable allowance $1,326 $ 370 $ 68(3) $ 102 $1,662 ================================================================================================================ YEAR ENDED JUNE 30, 2000 Accounts receivable allowance $1,662 $ 310 $ - $ 330 $1,642 ================================================================================================================
(1) To increase accounts receivable allowance. (2) Uncollectible accounts written off, net of recoveries. (3) Balances related to acquisitions. F-46