10-K 1 y03692e10vk.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 2, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-28157 ________________ TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3286312 (State of Incorporation) (I.R.S. Employer Identification No.) 260 NORTH DENTON TAP ROAD 75019 COPPELL, TEXAS (Zip Code) (Address of principal executive offices) (Registrant's telephone number, including area code) (972) 304-5077 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date. None Documents Incorporated by Reference: See Index to Exhibits. ================================================================================ ITEM 1. BUSINESS INTRODUCTION We were founded as a Delaware corporation in 1967 to acquire the General Felt Products division of Standard Packaging Corporation. At that time, we were located in Brooklyn, NY, where we produced laminated closure (cap) liners primarily for the pharmaceutical and food industries. Over the years, we have built a reputation for solving difficult packaging problems and providing customers with high quality, advanced packaging materials. In 1970, we built an additional manufacturing facility in Somerville, New Jersey, diversifying into the business of producing polystyrene foam trays for the poultry processing industry. In March 1994, Tekni-Plex was acquired by Dr. F. Patrick Smith and other investors. Dr. Smith was elected Chief Executive Officer. In April 1994, Mr. Kenneth W.R. Baker joined our company and was appointed Chief Operating Officer. At that time, the principal product lines consisted of clear, high-barrier laminations for pharmaceutical blister packaging (which we refer to as clear blister packaging); closure liners, primarily for pharmaceutical end-uses; and foam processor trays primarily for the poultry industry. In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and business of Hargro Flexible Packaging Corporation. The Flemington plant utilized lamination and coating technology to produce packaging materials primarily for pharmaceutical products such as transdermal patches, sutures, iodine and alcohol swabs, aspirin and other physician samples. We relocated the Brooklyn equipment and business into the Flemington facility during 1996. The synergistic result of having complementary technologies in one location created a combined operation with considerably higher efficiencies and lower costs than the sum of the stand-alone operations. In February 1996, we expanded our food packaging business by completing our acquisition of Dolco Packaging Corp., a publicly-traded $81 million foam products company that was nearly twice the size of Tekni-Plex. Dolco had been in the business of producing foam packaging products since the 1960s and had attained the leading share of foam egg carton sales in the United States. The Dolco acquisition also solidified our position as a leading supplier of foam processor trays. In August 1997, Dolco, which had been a wholly owned subsidiary of Tekni-Plex, was merged into Tekni-Plex. In July 1997, we acquired the business and operating facility of PurePlast Inc. of Cambridge, Ontario, Canada. PurePlast produced calendered polyvinyl chloride (vinyl) sheet primarily for food and electronics packaging applications. Following the acquisition, we diversified the end markets served by this location by developing proprietary formulations of vinyl sheet for vertical integration into our clear blister packaging business and for sale directly to our global pharmaceutical customers. In March 1998, Tekni-Plex acquired PureTec Corporation, a publicly-traded company with annual sales of $315 million. PureTec was a leading manufacturer of plastic packaging, products, and materials primarily for the healthcare and consumer markets. PureTec enjoyed leading market positions in its core products, including garden and irrigation hose, precision tubing and gaskets primarily for the aerosol packaging industry, vinyl medical tubing, and vinyl compounds for the production of medical devices. PureTec is a wholly-owned subsidiary of Tekni-Plex. In January 1999, we acquired substantially all the assets of Tri-Seal International, Inc., a leader in sophisticated extruded and co-extruded capliners and seals. The Tri-Seal operations have been integrated with and into our closure liner business. In April 1999, we acquired substantially all the assets of Natvar, a producer of disposable medical tubing and electrical sheathing. As with Tri-Seal, the Natvar acquisition was intended to strengthen our existing core business and expand product offerings. The Natvar operation has been integrated into our medical tubing and industrial extrusions businesses. In June 2000, we completed a recapitalization of Tekni-Plex. As part of the recapitalization, existing investors other than management sold most of their interests, and a group of new investors contributed an aggregate of $167 million in new equity and agreed to contribute up to $103 million in additional equity over the next five years. All members of management maintained 100% of their interests in the Company. Also, Tekni-Plex entered into a new credit agreement, issued $275 million in new senior subordinated notes, and repaid the debt that existed prior to the recapitalization. In October 2000, we acquired substantially all the assets of the Super Plastics division of RCR International Inc. Super Plastics is primarily a manufacturer of garden hose and has a manufacturing facility in Mississauga, Ontario, Canada. The Super Plastics operations have been integrated with and into our garden hose business. 2 In October 2001, we acquired substantially all of the assets of the garden hose business of Mark IV Industries, Inc. which operates under the name Swan Hose. Swan, which has one manufacturing facility located in Bucyrus, Ohio, enhanced Tekni-Plex's geographic coverage of the North American garden hose market. The Swan operations have been integrated with and into our garden hose business. In July 2002, we acquired substantially all of the assets of Elm Packaging Company. Elm produces polystyrene foam plates, bowls, and meat and bakery trays. The Elm acquisition significantly increases our capacity to produce foamed polystyrene products primarily for customers in the food packaging and foodservice markets. In July 2004, we acquired the egg carton business of Genpak and we have integrated this business into our food packaging operations. DESCRIPTION OF SEGMENTS See footnote 14 of our July 2, 2004 audited financial statements. DESCRIPTION OF BUSINESS We are a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. We primarily serve the food, healthcare and consumer markets. We have built leadership positions in our core markets, and focus on vertically integrated production of highly specialized products. We have operations in the United States, Europe and Canada. We believe that our end market and product line diversity has the effect of reducing overall risk related to any single product or customer. Our operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. Representative product lines in each of our business segments are listed below: BUSINESS SEGMENT
PACKAGING TUBING PRODUCTS --------- --------------- - Foam egg cartons - Garden and irrigation hose - Pharmaceutical blister films - Medical tubing - Poultry and meat processor trays - Pool and vacuum hose - Closure Liners - Aerosol and pump packaging components - Foam plates
COMPETITIVE STRENGTHS We believe that our competitive strengths include: - Strong customer relationships. We have long-standing relationships with many of our customers. We attribute our long-term customer relationships to our ability to consistently manufacture high quality products and provide a superior level of customer service. We routinely win customer awards for our superior products and customer service and have recently been recognized for supplier excellence by 3M Pharmaceuticals, Pfizer, Eli Lilly, Boston Scientific, and Kraft Foods, among others. - Strong market positions in core businesses. We have a strong market presence in our core product lines. The following table shows what we believe to be our market position in the U.S. in our primary product lines: PRODUCT MARKET POSITION Vinyl medical device materials.................................................. 1 Vinyl medical tubing............................................................ 1 Laminated, clear, high barrier pharmaceutical blister packaging................. 1 Multi-layered co-extruded and laminated closure liners.......................... 1 Garden and irrigation hose...................................................... 1 Precision tubing and gaskets for aerosol packaging.............................. 1 Egg cartons..................................................................... 1 Foam processor trays............................................................ 2
3 - Experienced management team. Our management team has been successful in selecting and integrating strategic acquisitions as well as improving underlying business fundamentals. After significantly improving the business of Tekni-Plex following our 1994 acquisition, management successfully integrated both the Flemington and Dolco operations during 1996, the latter being a public company then nearly twice our size. During the same period, our Brooklyn operation was successfully merged into our Flemington plant. In 1997, we acquired and integrated the PurePlast operations. In 1998, we acquired PureTec, a public company then more than twice our size. In 1999, we acquired and integrated the assets and business of Tri-Seal and Natvar. In 2000, we acquired and integrated all of the assets of the Super Plastics division of RCR International, Inc. In 2001, we acquired and integrated the Swan Hose business of Mark IV Industries, Inc. In 2002, we acquired the assets and business of Elm Packaging. Management has substantially improved the operating margins of each of these acquisitions. Members of our management team have integrated acquisitions, effected turnarounds, provided strategic direction and leadership, increased sales and market share, improved manufacturing efficiencies and productivity, and developed new technologies to enhance the competitive strengths of the companies they have managed. - Cost efficient producer. We continually focus on improving underlying operations and reducing costs. Our acquisitions since 1995 have provided significant opportunities to realize cost savings and synergies in the combined businesses through the sharing of complementary technologies and manufacturing techniques, as well as economies of scale, including the purchase of raw materials. - Producer of high quality, technically sophisticated products. We believe, based upon our knowledge and experience in the industry, we have a long-standing reputation as a manufacturer of high quality, high performance products, materials and primary packaging (where the packaging material comes into direct contact with the end product). Our emphasis on quality is evidenced by our product lines which address the more technically sophisticated areas of their respective markets. - Strong equity sponsorship. We have obtained a strong equity commitment from co-investors in conjunction with the recapitalization in June 2000. New investors agreed to $269.6 million in aggregate equity commitments to Tekni-Plex Partners, of which $167.0 million was contributed to consummate the recapitalization in June 2000. The remaining $102.6 million was contributed in conjunction with our acquisitions of Super Plastics, Mark IV's Swan Division, and Elm Packaging. In fiscal 2004 we raised an additional $22.5 million of new equity from a combination of new and existing investors. In connection with the recapitalization, all members of our current management maintained their entire equity investment. EMPLOYEES We have approximately three thousand two hundred employees. A portion of our employees are represented by labor unions, and we believe our labor relations with those unions are good. BUSINESS STRATEGY We seek to maximize our profitability and growth and take advantage of our competitive strengths by pursuing the following business strategy: - Ongoing cost reduction through technical process improvement. We have an ongoing program to improve manufacturing and other processes in order to drive down costs. Examples of cost improvement programs include: - material and energy conservation through enhanced process controls and advanced product design; - reduction in machine set-up time through the use of proprietary technology; - continual product line rationalization; and - development of backward and forward integration opportunities. - Internal growth through product line extension and improvement. We continually seek to improve and extend our product lines and leverage our existing technological capabilities in order to increase market share in existing markets, effectively penetrate new markets and improve profitability. Our strategy is to emphasize our expertise in providing packaging, products 4 and materials with specific high performance characteristics through the development of various unique proprietary materials and proprietary manufacturing process techniques. - Growth through acquisitions. We will continue to pursue acquisitions selectively when the opportunity arises. Our objective is to pursue acquisitions that provide us with the opportunity to gain economies of scale and reduce costs through, among other things, technology sharing and synergistic cost reduction. - Growth through international expansion. We believe that there is significant opportunity to expand our international sales, which currently represent approximately 14.2% of our total revenues. At present, we have manufacturing operations with attached sales offices in Belgium, Italy, The United Kingdom, Canada and Argentina. We have a regional sales office in Singapore covering southeast Asia, including the People's Republic of China. In addition, we have manufacturing liaisons and strategic supplier agreements in Japan, Germany and Italy and a manufacturing licensee in Japan. We have recently added sales representatives for Jordan, Saudi Arabia and the United Arab Emirates as well as in the Philippines and India to our existing representatives in Australia/New Zealand, South Africa, Central America, Brazil, Mexico, Chile, China (including Hong Kong), Taiwan, Greece and Turkey. We believe that our growing international presence, which is a combination of our own regional manufacturing and sales forces and independent sales representatives, will continue to generate opportunities to increase our sales. PACKAGING SEGMENT The Packaging segment of our business had revenues of $306.1 million (48.2% of total revenues) for the year ended July 2, 2004 and $291.8 million (47.8% of total revenues) for the year ended June 27, 2003. Further details of the major markets served by this segment are given below: FOAM EGG CARTONS We believe that we are the leading manufacturer of egg cartons in the United States. Thermoformed foam polystyrene packaging has been the material of choice for food packaging cartons for many years. In terms of economic and functional characteristics, foamed polystyrene products offer a combination of high strength, minimum material content and superior moisture barrier performance. Foamed polystyrene products also offer greater dimensional consistency that enhances the high speed mechanical feeding of cartons into automated package filling operations. We sell these products through our direct sales force. In the egg packaging market, our primary competitor manufactures pulp-based egg cartons. We believe that we compete effectively based on product quality, performance and prompt delivery. Our customer base includes most of the domestic egg packagers (including those owned by egg retailers). PHARMACEUTICAL BLISTER FILMS We believe that we are a market leader for clear, high-barrier laminations for pharmaceutical blister packaging. These packaging materials are used for fast-acting pharmaceuticals that are generally highly reactive to moisture. Transparent, high-barrier blister packaging is primarily used to protect drugs from moisture vapor infiltration or desiccation. Blister packaging is the preferred packaging form when dispenser handling can affect shelf life or drug efficacy, or when unit dose packaging is needed. Unit dose packaging is being used to improve patient compliance with regard to dosage regimen, and has been identified as the packaging form of choice in addressing child safety aspects of drug packaging. The advantages of transparent blisters, as opposed to opaque foil-based materials manufactured by various competitors, include the ability to visually inspect the contents of the blister and to present the product with maximum confidence. We believe the flexible and semi-rigid packaging segment of the pharmaceutical packaging industry is growing at a faster rate than the non-plastics segments because of the generally lower package cost and broader range of functional characteristics of plastic packaging. As a result, the technologies used to manufacture plastic packaging materials continue to develop at a faster pace than those used in the more mature paper, glass, and metal products. Our high-barrier blister packaging is sold to major pharmaceutical companies (or their designated contract packagers). We market our full pharmaceutical product line directly on a worldwide basis, and have assembled a global network of sales and marketing personnel on six continents. 5 In the clear blister packaging market, we have two principal competitors worldwide with resources equal to or greater than ours. However, we believe that neither of these competitors has the breadth of product offering to match ours, and that this differentiation is significant as viewed by the pharmaceutical industry. Also, the high manufacturing and audit compliance standards imposed by the pharmaceutical companies on their suppliers provide a significant barrier to the entry of new competitors. Entry barriers also arise due to the lengthy and stringent approval process required by pharmaceutical companies. Since approval requires that the drug be tested while packaged in the same packaging materials intended for commercial use, changing materials after approval risks renewed scrutiny by the FDA. The packaging materials for pharmaceutical applications also require special documentation of material sources and uses within the manufacturing process as well as heightened quality assurance measures. POULTRY AND MEAT PROCESSOR TRAYS Our processor tray operations produce thermoformed foam polystyrene poultry and meat processor trays. We are a leading supplier of processor trays to the poultry industry. As with egg cartons, thermoformed foam polystyrene has been the material of choice for processor trays for the same reasons noted above. Within the polystyrene foam processor tray market, we compete principally with one large competitor, who has significantly greater financial resources than ours and who controls the largest share of this market. CLOSURE LINERS Tekni-Plex is also a leading producer of sophisticated extruded, co-extruded and laminated cap-liners and seals, known as closure liners, for glass and plastic bottles. Closure liners perfect the seal between a container and its closure, for example, between a bottle and its cap. The liner material has become an integral part of the container/closure package. Without the gasketing effect of the liner, most container/closure packages would not be secure enough to protect the contents from contamination or loss of product efficacy. We sell these products through our direct sales force primarily to packagers of pharmaceutical, healthcare and food products. We have two principal competitors in North America but also compete with several smaller companies having substantially smaller market shares. However, as a result of the Tri-Seal acquisition, we believe that we offer the widest range of liner materials in the industry. We remain competitive by focusing on product quality, performance and prompt delivery. AEROSOL AND PUMP PACKAGING COMPONENTS Our Aerosol and Pump Packaging Components business produces dip tubes, which transmit the contents of the container to the nozzle, and specialized, molded or punched rubber-based valve gaskets that serve to control the release of the product from the container. The group also produces writing instrument products, including pen barrels and ink tubing as well as ink reservoirs for felt-tip pens. Sales are primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments. These products are sold throughout the United States and Europe, as well as selected worldwide markets. Sales are made through our direct sales force. We believe that we are the leading supplier of aerosol valve and dispenser pump gaskets and dip tubes in the world. Our dip tubes and pen barrels are manufactured at extremely high speeds while holding to precise tolerances. The process enhancements that allow simultaneous high speed and precision are proprietary to us. The precision rubber gasket products, which we have manufactured for over fifty years, are produced using proprietary formulations. These formulations are designed to provide consistent functional performance throughout the entire shelf life of the product by incorporating chemical resistance characteristics appropriate to the fluid being packaged. For example, we have developed unique formulations that virtually eliminate contamination of the products packaged in spray dispensers. This has greatly expanded the use of these dispensers for personal hygiene products, foods, and fragrances. The Company has also developed proprietary methods for achieving extremely accurate thickness control, superior surface finish, and the elimination of internal imperfections prevalent in other processing methods. We are the single-source supplier to much of the industry. The principal competitive pressure in this product line, particularly the dip tube portion, is the possibility of customers switching to internal production, or vertical integration. To counteract this possibility, the Company focuses on product quality, cost reduction, prompt delivery, technical service and innovation. 6 FOAM PLATES Our foam plate operations produce thermoformed foam polystyrene disposable plates, bowls, and hinged-lid containers as well as agricultural packaging products. Our sales are primarily to the consumer, agricultural and foodservice industries. We compete with numerous participants who use a variety of materials including foam polystyrene, pulp-based products and various plastic materials. TUBING SEGMENT The Tubing Products segment of our business had revenues of $210.2 million (33.1% of total revenues) for the year ended July 2, 2004 and $209.7 million (34.3% of total revenues) for the year ended June 27, 2003. Further details of the major markets served by this segment are given below: GARDEN AND IRRIGATION HOSE PRODUCTS We believe that we are the leading producer of garden hose in North America. We have produced garden hose products for over fifty years, and produce its primary components internally, including proprietary material formulations and brass couplings. Innovations have included the patented Colorite(R) Evenflow(R) design and ultra high quality product lines that utilize medical-grade plastics. We also manufacture specialty hose products such as air hose and irrigator "soaker hose". We sell these products primarily through our direct sales force and also through independent representatives. Both private label and brand-name products are sold to the retail market, primarily to home centers, hardware cooperatives, food, automotive, drug and mass merchandising chains and catalog companies throughout the United States and Canada. Our customers include some of the fastest growing and the most widely respected retail chains in North America. Our market strategy is to provide a complete line of innovative, high-quality products along with superior customer service. The garden hose business is highly seasonal with approximately 75% of sales occurring in the spring and early summer months. This seasonality tends to have an impact on the Company's financial results from quarter to quarter. MEDICAL TUBING We believe we are the leading non-captive supplier of vinyl medical tubing in North America and Europe. We manufacture medical tubing using proprietary plastic extrusion processes. The primary raw materials are proprietary compounds, which we produce. We specialize in high-quality; close tolerance tubing for various surgical procedures and related medical applications. These applications include intravenous ("IV") therapy, hemodialysis therapy, cardio-vascular procedures such as coronary bypass surgery, suction and aspiration products, and urinary drainage and catheter products. New medical tubing products we have developed include microbore tubing and silicone substitute formulations. Microbore tubing can be used to regulate the delivery of critical intravenous fluids without the need for more expensive drip control devices. Medical professionals can precisely control the drug delivery speed simply by selecting the proper (color-coded) diameter tube, thereby improving accuracy and reducing cost. More importantly, as home healthcare trends continue, the use of microbore tubing will help eliminate critical dosage errors on the part of the non-professional caregiver or the patient. Medical tubing is sold primarily to manufacturers of medical devices that are packaged specifically for such procedures and applications. These products are sold through our direct sales force. We remain competitive by focusing on product quality, performance and prompt delivery. ITEM 2. FACILITIES The Company believes that its facilities are suitable for their purposes and have sufficient productive capacity for its current and foreseeable operational and administrative needs. Set forth below is a list and brief description of all of the Company's offices and facilities, all of which are owned unless otherwise indicated. 7
APPROXIMATE LOCATION PRIMARY FUNCTION SQUARE FEET -------- ---------------- ----------- Auburn, Maine(2)........................... Manufacturing 24,000 Belfast, Northern Ireland.................. Manufacturing 47,580 Blauvelt, New York(6)...................... Manufacturing 56,400 Burlington, New Jersey..................... Manufacturing 124,000 Bucyrus, Ohio.............................. Manufacturing 587,649 Buenos Aires, Argentina(4)................. Manufacturing and warehouse 12,900 Cambridge, Ontario, Canada................. Manufacturing and warehouse 40,000 City of Industry, California(7)............ Manufacturing 110,000 Clayton, North Carolina.................... Manufacturing 99,665 Clinton, Illinois.......................... Manufacturing 69,000 Columbus, Ohio(3).......................... Sales Offices 3,761 Coppell, Texas(4).......................... Executive Offices 3,125 Dallas, Texas.............................. Manufacturing 139,000 Decatur, Indiana........................... Manufacturing 187,000 East Farmingdale, New York(4).............. Manufacturing 56,556 East Farmingdale, New York (4)............. Warehouse 11,000 Erembodegem (Aalst), Belgium............... Manufacturing 125,667 Flemington, New Jersey..................... Manufacturing 145,000 Fullerton, California (9).................. Manufacturing and warehouse 60,250 Harrison, New Jersey(5).................... Warehouse 135,501 Huntingdon, Tennessee (3).................. Warehouse 25,000 Lawrenceville, Georgia..................... Manufacturing 150,000 Lawrenceville, Georgia(3).................. Warehouse 13,000 Livonia, Michigan(1)....................... Warehouse 7,240 McKenzie, Tennessee........................ Manufacturing and warehouse 60,000 Memphis, Tennessee(6)...................... Manufacturing and warehouse 149,800 Memphis, Tennessee(2)...................... Warehouse 50,000 Milan (Gaggiano), Italy(4)................. Warehouse 12,920 Milan (Gaggiano), Italy.................... Manufacturing 14,900 Milan (Gaggiano), Italy.................... Manufacturing 25,800 Milan (Rosate), Italy(6)................... Manufacturing 24,000 Mississauga, Ontario, Canada(10)........... Manufacturing 118,196 Mississauga, Ontario, Canada(5)............ Manufacturing 100,000 Piscataway, New Jersey(5).................. Manufacturing 155,000 Ridgefield, New Jersey..................... Manufacturing 330,000 Rockaway, New Jersey....................... Manufacturing 90,550 Schaumburg, Illinois(12)................... Manufacturing 59,100 Schiller Park, Illinois.................... Manufacturing 15,232 Shelby, Ohio(7)............................ Warehouse 350,000 Singapore(1)............................... Sales Office 550 Somerville, New Jersey..................... Manufacturing 172,000 Sparks, Nevada(8).......................... Manufacturing 448,000 Tonawanda, New York(8)..................... Manufacturing 32,000 Troy, Ohio(6).............................. Manufacturing and warehouse 200,000 Waco, Texas................................ Manufacturing 104,600 Wenatchee, Washington...................... Manufacturing 97,000 Wenatchee, Washington(6)................... Warehouse 26,200 Wenatchee, Washington(1)................... Warehouse 8,000
------------------ (Years relate to calendar years) (1) Leased on a month-to-month basis. (2) Lease expires in 2004. 8 (3) Lease expires in 2005. (4) Lease expires in 2006. (5) Lease expires in 2007. (6) Lease expires in 2008. (7) Lease expires in 2009. (8) Lease expires in 2012. (9) Lease expires in 2013. (10) Lease expires in 2015. (11) Lease expires in 2019. (12) Lease expires in 2020. ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS We are regularly involved in legal proceedings arising in the ordinary course of business, none of which are currently expected to have a material adverse effect on our businesses, financial condition or results of operation. Like similar companies, our facilities, operations and properties are subject to foreign, federal, state, provincial and local laws and regulations relating to, among other things, emissions to air, discharges to water, the generation, handling, storage, transportation and disposal of hazardous and non-hazardous materials and wastes and the health and safety of employees. We maintain a primary commitment to employee health and safety, and environmental responsibility. Our intention and policy are to be at all times a responsible corporate citizen. Our management includes a Director of Environmental Affairs who is responsible for compliance with all foreign, federal, state and local laws and regulations relating to the environment, and health and safety. This director performs internal auditing procedures and provides direction to all local facility managers in the compliance areas. The Director of Environmental Affairs and our President direct outside environmental counsel and outside environmental consulting firms to ensure that regulations are properly interpreted and reporting requirements are met. We are also subject to environmental laws requiring the investigation and cleanup of environmental contamination. Currently, we are remediating contamination resulting from past industrial activity at three of our New Jersey facilities which we acquired from PureTec in 1998. This remediation is being conducted pursuant to the requirements of New Jersey's Industrial Site Recovery Act which were triggered by the 1998 PureTec transaction. We believe that any costs ultimately borne by us in connection with this remediation would not be material. Although we believe that, based on historical experience, the costs of achieving and maintaining compliance with environmental laws and regulations are unlikely to have a material adverse effect on our business, financial condition or results of operations, it is possible that we could incur significant fines, penalties, capital costs or other liabilities associated with any confirmed noncompliance or remediation of contamination or natural resource damage liability at or related to any of our current or former facilities, the precise nature of which we cannot now predict. Furthermore, we cannot assure you that future environmental laws or regulations will not require substantial expenditures by us or significant modifications of our operations. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Not Applicable. 9 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical consolidated financial information of the Company, and has been derived from and should be read in conjunction with the Company's audited consolidated financial statements, including the notes thereto, which appear elsewhere herein. Acquisitions the Company made in certain years result in years not being comparable.
YEARS ENDED ---------------------------------------------------------------- JUNE 30, JUNE 29, JUNE 28, JUNE 27, JULY 2, 2000 2001 2002 2003 2004 ---------- ---------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Net sales............................................. $ 524,817 $ 525,837 $ 577,749 $ 610,663 $ 635,642 Cost of goods sold.................................... 394,480 399,836 430,457 459,471 527,646 Gross profit.......................................... 130,337 126,001 147,292 151,192 107,996 Integration Expense -- -- -- 11,164 7,775 Selling, general and administrative expenses.......... 58,343 60,999 69,444 61,600 69,159 Income from operations................................ 71,994 65,002 77,848 78,428 31,062 Interest expense, net(a).............................. 73,821 76,569 70,934 71,266 84,451 Unrealized loss (gain) on derivative contracts........ -- 13,891 7,830 1,997 (10,654) Other expense (income)................................ 4,705 605 (6) (531) 605 Pre-tax income (loss)................................. 28,842 (26,063) (910) 5,696 (43,340) Income tax provision (benefit)........................ 14,436 (7,069) 5,677 2,306 11,121 Net income (loss)..................................... (20,968) (18,994) (6,587) 3,390 (54,461) BALANCE SHEET DATA (AT PERIOD END): Working capital....................................... 145,879 199,129 $ 218,919 249,665 229,876 Total Assets.......................................... 574,789 621,494 691,963 784,764 747,682 Total debt (including current portion)................ 651,593 678,150 692,821 729,484 734,007 Stockholders' equity (deficit)........................ (149,150) (134,697) (91,111) (64,811) (101,035) OTHER FINANCIAL DATA: Depreciation and amortization......................... 34,748 37,670 $ 39,863 28,342 32,304 Capital expenditures.................................. 16,258 17,116 24,653 32,232 30,128 Cash flows: From operations....................................... 9,485 (3,266) 7,922 15,029 (7,364) From investing........................................ (16,905) (26,777) (88,446) (49,994) (34,126) From financing........................................ (1,687) 62,180 64,092 54,203 23,513
------------------- (a) In connection with the adoption of SFAS 145, included in interest expense for the year ended June 30, 2000 is approximately $35,374 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. For the period ended July 2, 2004, interest expense included a $5,000 reduction in deferred financing costs. 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. 10 SELECTED FINANCIAL INFORMATION (PERCENTAGE OF NET SALES)
YEARS ENDED ------------------------------------ JUNE 28, JUNE 27, JULY 2, 2002 2003 2004 -------- -------- ------- Net sales........................................... 100.0% 100.0% 100.0% Cost of sales....................................... 74.5 75.2 83.0 Gross profit........................................ 25.5 24.8 17.0 Integration Expense................................. 1.8 1.2 Selling, general and administrative expenses........ 12.0 10.1 10.9 Income from operations.............................. 13.5 12.8 4.9 Interest expense.................................... 12.3 11.7 13.3 Provision (Benefit) for income taxes................ 1.0 0.4 1.7 Net income (loss)................................... (1.1) 0.6 (8.6) Depreciation and amortization....................... 6.9 4.6 5.1
YEAR ENDED JULY 2, 2004 COMPARED TO THE YEAR ENDED JUNE 27, 2003 Net Sales, increased to $635.6 million for the year ended July 2, 2004 from $610.7 million for the year ended June 27, 2003, representing an increase of $25.0 million or 4.1%. Our Packaging Segment reported a 4.9% increase in Net Sales to $306.1 million in the fiscal year ended July 2, 2004 compared to $291.8 million in the fiscal year ended June 27, 2003. Our Tubing Products Segment's Net Sales increased 0.3%, to $210.2 million from $209.7 million last year. Net Sales for our other products increased to $119.3 million in the current year from $109.2 million in the previous year, which represents a 9.2% increase. Cost of Goods Sold, increased to $527.6 million for the year ended July 2, 2004 from $459.5 million for the year ended June 27, 2003. Expressed as a percentage of Net Sales, Cost of Goods Sold increased to 83.0% of Net Sales for the year ended July 2, 2004 compared to 75.2% for the year ended June 27, 2003, primarily due to significantly higher raw material costs. Gross Profit, as a result, decreased to $108.0 million for the year ended July 2, 2004 from $151.2 million for the year ended June 27, 2003. The ratio of Gross Profit to Net Sales decreased to 17.0% for the year ended July 2, 2004 from 24.8% for the year ended June 27, 2003. Our Packaging Segment Gross Profit decreased by $5.5 million to $82.8 million from $88.3 million in the fiscal year ended July 2, 2004 primarily due to a lower margin product mix for our foam products as well as significantly higher raw material costs. This was partially offset by strong performances by our other packaging businesses. Measured as a percentage of Net Sales our Packaging Segment Gross Profit decreased to 27.1% for the year ended July 2, 2004 from 30.3% for the year ended June 27, 2003. Our Tubing Products Segment Gross Profit decreased to $20.6 million for the year ended July 2, 2004 from $52.9 million in the fiscal year ended June 27, 2003. Measured as a percentage of Net Sales our Tubing Products Segment Gross Profit decreased to 9.8% for the year ended July 2, 2004 from 25.2% for the year ended June 27, 2003. This decline was largely due to higher raw material cost at our Garden Hose unit which could not be passed through to our customers during the fiscal year. In addition, we wrote-down our inventory by $4.6 million to reflect market values for some garden hoses that were less than our cost and we adjusted our estimates of accruals for rebates, discounts and sales allowances resulting in an $8.0 million increase in our reserves. Gross Profit for our other products declined to $4.5 million in the current fiscal year from $10.0 million in the previous year. Measured as a percentage of Net Sales, other Gross Profit decreased to 3.8% in the current fiscal year from 9.2% in the previous year primarily due to our inability to fully pass through significantly higher raw material costs. Selling, General and Administrative Expenses increased to $69.2 million for the year ended July 2, 2004 from $61.6 million for the year ended June 27, 2003 primarily due to a charge of $10 million from a write-off in goodwill associated with our specialty resin operations. The resultant ratio to Net Sales increased to 10.9% for the year ended July 2, 2004 from 10.1% for the year ended June 27, 2003. Operating Profit, as a result of the above, decreased to $31.1 million in the current fiscal year compared to $78.4 million in the previous year. Measured as a percentage of Net Sales, Operating Profit decreased to 4.9% in fiscal 2004 from 12.8% in fiscal 2003. Our Packaging Segment Operating Profit decreased to $54.0 million from $60.2 million last year. Measured as a percentage of Net Sales, Packaging Segment Operating Profit decreased to 17.7% in the year ended July 2, 2004 compared to 20.6% in the previous year. Our Tubing Products Segment Operating Profit decreased to $6.5 million from $35.4 million in the year ended July 2, 2004. Measured as a percentage of Net Sales, Tubing Products Segment Operating Profit decreased to 3.1% from 16.9% last year. Operating Profit for our other products declined to a ($11.8) million loss in the current year from a $3.5 million gain in the previous year largely 11 due to a $10.0 million write-down of goodwill associated with our Specialty Resin operations. Measured as a percentage of Net Sales, other Operating Profit declined to a (9.9%) loss in the current fiscal year from a 3.2% gain in the previous fiscal year. Interest Expense, increased to $84.5 million for the fiscal year ending July 2, 2004 from $71.3 million for the fiscal year ending June 27, 2003 primarily due to higher interest rates as well as the write-off of $5.0 million of deferred financing costs resulting from the early retirement of some of our term loans. The unrealized (gain) loss on derivative obligations reflected a ($10.7) million gain in the current fiscal year compared to a $2.0 million loss in the previous fiscal year. Depreciation and Amortization Expense, increased to $32.3 million or 5.1% of Net Sales for the fiscal year ending July 2, 2004 from $28.3 million or 4.6% of Net Sales for the fiscal year ending June 27, 2003. The provision for income taxes increased to $11.1 million in the current fiscal year from $2.3 million in the previous year primarily due to $7.0 million reduction in our deferred tax asset. In addition, the company increased its reserve on deferred taxes by approximately 15.0 million to reserve for deferred taxes generated by 4th Quarter losses. Net Income (loss), as a result, was a loss of ($54.5) million or (8.6%) of Net Sales for the fiscal year ending July 2, 2004 compared to income of $3.4 million or 0.6% of Net Sales for the year ending June 27, 2003. YEAR ENDED JUNE 27, 2003 COMPARED TO THE YEAR ENDED JUNE 28, 2002 Net Sales, increased to $610.7 million for the year ended June 27, 2003 from $577.7 million for the year ended June 28, 2002, representing an increase of $33.0 million or 5.7%. Our Packaging Segment reported a 15.1% increase in Net Sales to $291.8 million in the fiscal year ended June 27, 2003 compared to $253.6 million in the fiscal year ended June 28, 2002. (The increase was primarily due to the inclusion of our Elm acquisition that occurred in July 2002.) Our Tubing Products Segment's Net Sales decreased by $6.9 million or 3.2%, to $209.7 million from $216.6 million last year, primarily due to soft garden hose sales in our Fourth Quarter resulting from an unusually rainy Spring and Summer throughout most of North America. Net Sales for our other products increased to $109.2 million in the current year from $107.6 million in the previous year primarily due to higher volume. Cost of Goods Sold, increased to $459.5 million for the year ended June 27, 2003 from $430.5 million for the year ended June 28, 2002. Expressed as a percentage of Net Sales, Cost of Goods Sold increased to 75.2% of Net Sales for the year ended June 27, 2003 compared to 74.5% for the year ended June 28, 2002, primarily due to higher raw material costs. Gross Profit, as a result, increased to $151.2 million for the year ended June 27, 2003 from $147.3 million for the year ended June 28, 2002. The ratio of Gross Profit to Net Sales decreased to 24.8% for the year ended June 27, 2003 from 25.5% for the year ended June 28, 2002. Our Packaging Segment Gross Profit increased by $16.5 million to $88.3 million from $71.8 million in the fiscal year ending June 27, 2003 primarily due to our Elm acquisition. Measured as a percentage of Net Sales our Packaging Segment Gross Profit increased to 30.3% for the year ended June 27, 2003 from 28.3% for the year ended June 28, 2002. Our Tubing Products Segment Gross Profit decreased by $7.4 million to $52.9 million from $60.3 million in the fiscal year ending June 27, 2003. Measured as a percentage of Net Sales our Tubing Products Segment Gross Profit decreased to 25.2% for the year ended June 27, 2003 from 27.9% for the year ended June 28, 2002. This decline was the result of both higher raw material costs as well as weak garden hose sales in the Fourth Quarter as noted above. Gross Profit for our other products declined to $10.0 million in the current fiscal year from $15.1 million in the previous year. Measured as a percentage of Net Sales, other Gross Profit decreased to 9.2% in the current fiscal year from 14.1% in the previous year primarily due to our inability to fully pass through higher raw material costs for our specialty resins business. Selling, General and Administrative Expenses decreased to $61.6 million for the year ended June 27, 2003 from $69.4 million for the year ended June 28, 2002 primarily due to the elimination of $12.4 million of goodwill amortization expense due to a mandated change in accounting for goodwill effective during the year ended June 27, 2003 offset by an increase in expenses due to the Elm acquisition. The resultant ratio to Net Sales decreased to 10.1% for the year ended June 27, 2003 from 12.0% for the year ended June 28, 2002. Operating Profit, as a result of the above, increased to $78.4 million in the current fiscal year compared to $77.8 million in the previous year. Measured as a percentage of Net Sales, Operating Profit decreased to 12.8% in fiscal 2003 from 13.5% in fiscal 2002. Our Packaging Segment Operating Profit increased by $12.9 million or 27.3% to $60.2 million from $47.3 million last year. Measured as a percentage of Net Sales, Packaging Segment Operating Profit improved to 20.6% in the year ended June 27, 2003 compared to 18.6% in the previous year. Our Tubing Products Segment Operating Profit decreased by $5.4 million to $35.4 million from $40.8 million in the year ended June 27, 2003. Measured as a percentage of Net Sales, Tubing Products Segment Operating Profit decreased 12 to 16.9% from 18.8% last year. Operating Profit for our other products declined to $3.5 million in the current year from $6.6 million in the previous year. Measured as a percentage of Net Sales, other Operating Profit declined to 3.2% in the current fiscal year from 6.2% in the previous fiscal year. Interest Expense, increased to $71.3 million for the fiscal year ending June 27, 2003 from $70.9 million for the fiscal year ending June 28, 2002 primarily due to higher average debt levels. The unrealized loss on derivative obligations decreased to $2.0 million in the current fiscal year compared to a loss of $7.8 million in the previous fiscal year. Depreciation and Amortization Expense, decreased to $28.3 million or 4.6% of Net Sales for the fiscal year ending June 27, 2003 from $39.9 million or 6.9% of Net Sales for the fiscal year ending June 28, 2002 primarily due to a $12.4 million reduction in goodwill amortization resulting from a mandated change in the accounting for goodwill effective during the year ended June 27, 2003. The provision for income taxes decreased to $2.3 million in the current fiscal year from $5.7 million in the previous year due to lower earnings. Our effective tax rate declined to 40.4% in 2003 from 623.8% in 2002 due to a large portion of our goodwill amortization not being tax deductible in 2002. Net Income (loss), as a result, was income of $3.4 million or 0.6% of Net Sales for the fiscal year ending June 27, 2003 compared to a loss of ($6.6) million or (1.1%) of Net sales for the year ending June 28, 2002. LIQUIDITY AND CAPITAL RESOURCES For the year ended July 2, 2004, net cash used by operating activities was $(7.4) million compared to $15.0 million of cash provided by operating activities in the prior year. The $22.4 million decrease was due primarily to lower earnings. Various year-over-year changes in operating assets, accrued expenses, and liabilities are generally due to offsetting timing differences. Working capital at July 2, 2004 was $229.9 million compared to $249.7 million at June 27, 2003. The decrease was primarily caused by lower borrowings on the revolver and lower inventories. As of July 2, 2004, we had an outstanding balance of $76.0 million under our $100.0 million revolving credit line of our existing credit facility. This was a decrease of $15.0 million from the $91.0 million outstanding balance as of June 27, 2003. The decrease in revolver borrowings resulted from the use of cash to reduce the revolver balance in fiscal 2004 compared to fiscal 2003. In March of 2004 we raised $10.5 million of equity from a new investor and in July of 2004 we raised an additional $12 million of equity from an existing investor. Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the years ended July 2, 2004, June 27, 2003 and June 29, 2001 were $30.1 million, $32.2 million and $24.7 million, respectively. In June 2000, Tekni-Plex entered into a series of interest rate derivative transactions designed to protect us from rising interest rates on our senior term debt facilities while enabling us to partially benefit from falling interest rates. Accordingly, we recorded an unrealized (gain) loss from derivative transactions of ($10.7) million and $2.0 million in fiscal years 2004 and 2003, respectively. Management believes that cash generated from operations plus funds from our existing credit facility will be sufficient to meet our expected debt service requirements, planned capital expenditures and operating needs. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet our anticipated cash needs. To the extent we pursue future acquisitions, we may be required to obtain additional financing. We cannot assure you that we will be able to obtain such financing in amounts and on terms acceptable to us. Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which require a minimum consolidated EBITDA, as defined in the debt agreement, minimum fixed charge coverage ratio and a minimum leverage ratio. We have amended certain of such covenants, as a result of violations, for the period ending July 2, 2004 and future periods. In connection with that amendment, the interest rate margins of the credit facilities have been increased by approximately 50 basis points. At July 2, 2004, the Company's contractual obligations for borrowings are as follows: 13
LONG-TERM PAYMENTS DUE BY PERIOD DEBT LEASES TOTAL ---------------------- --------- ----------- ---------- (IN THOUSANDS) Less than 1 year................. $ 2,121 $ 8,037 $ 10,158 Year 2........................... 77,076 7,844 84,920 Year 3........................... 35,145 7,411 42,556 Year 4........................... 35,161 6,028 41,189 Year 5........................... 380 4,577 4,957 After 5 years.................... 584,124 16,822 600,946
Not included in this table is interest expense and a contractural obligation under a derivative contract with a liability of $13.1 million at July 2, 2004. CRITICAL ACCOUNTING POLICIES The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. Preparing financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following paragraphs include a discussion of some critical areas where estimates are required. You should also review Note 1 to the financial statements for further discussion of significant accounting policies. The Company records revenue when products are shipped. Legal title and risk of loss with respect to the products pass to customers at the point of shipment. The Company provides an allowance for returned product and volume sales rebates on an estimated basis based on written agreements and past experience. The Company evaluates its long-lived assets for impairment based on the undiscounted future cash flows of such assets. If a long-lived asset is identified as impaired, the value of the asset will be reduced to its fair value. The Company records inventories at the lower of cost (weighted average) or market. We record inventory reserves to reduce the carrying value of inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves may be required. At the end of fiscal 2004, we reduced our inventory by approximately $4.6 million to reflect market values that were lower than cost. The Company extends credit based upon evaluations of a customer's financial condition and provide for any anticipated credit losses in our financial statements based upon management's estimates and ongoing reviews of recorded allowances. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required. Conversely, reserves are deducted to reflect credit and collection improvements. The Company has intangible assets related to acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves management judgments. Changes in strategy and/or market conditions could significantly impact these judgments and required adjustments to recorded asset balances. We adopted SFAS 142, which requires us to cease amortization of goodwill, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. As a result of impairment tests being performed at the end of 2004, the Company recorded an impairment charge of $10.0 million associated with its Specialty Resin operations. In performing the above noted goodwill impairment testing, the Company uses a measure of fair value based on an evaluation of future discounted cash flows. This evaluation utilized what management believes to be the best information available in the circumstances, including what management believes to reasonable and supportable assumptions and projections. Such assumptions are consistent with those utilized in the Company's annual planning process and appropriately take into account managements' initiatives to improve operational efficiencies. If these turnaround initiatives do not achieve their earning objectives, the assumptions and estimates underlying this goodwill impairment evaluation could be modified in the future leading to further impairment in the recorded value of goodwill. The Company records a valuation allowance to reduce the amount of our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event that we determined that we would not be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if it were determined that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Based on our recent financial performance, In fiscal 2004 we created a valuation allowance that reduced our deferred tax asset by approximately $7.0 million. The Company makes estimates of sales rebates and allowances related to current period product revenue. Management analyzes historical trends, current economic conditions, and compliance with written agreements when evaluating the adequacy of the reserve for sales rebates and allowances. Management judgments and estimates must be made and used in connection with establishing the 14 sales rebates and allowances in any accounting period. Based on investigation and review of charge backs, at the end of fiscal 2004 we modified our estimates for sales rebates and allowances, increasing this accrual by $8.0 million. NEW ACCOUNTING PRONOUNCEMENTS In July 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." SFAS 150 requires the shares that are mandatorily redeemable for cash or other assets at a specified or determinable date or upon an event certain to occur, be classified as liabilities, not as part of shareholders equity. SFAS 150 does not currently apply to the Company. INFLATION During fiscal 2004, we contended with significant and rapidly rising raw material prices. Over, the long term, we believe we have generally been able to offset the effects thereof through continuing improvements in operating efficiencies and by increasing prices to our customers to the extent permitted by competitive factors. However, we cannot assure you that such cost increases can be passed through to our customers in the future or that the effects can be offset by further improvements in operating efficiencies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates. At July 2, 2004 and June 27, 2003 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $153.0 million and $416.6 million respectively. A hypothetical 1% adverse change in interest rates would have had an annualized unfavorable impact of approximately $1.5 million and $4.2 million respectively, on the Company's earnings and cash flows based upon these year-end debt levels. To ameliorate these risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344.0 million. 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 ITEM 9a. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In connection with the completion of its audit of and the issuance of an unqualified report on the Company's consolidated financial statements for the fiscal year ended July 2, 2004, the Company's independent auditors, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that the following matters involving the Company's internal controls and operations were considered to be "reportable conditions", as defined under standards established by the American Institute of Certified Public Accountants or AICPA: o Lack of quantity of staff which led to issues related to timeliness of financial reporting and year end closing process. o Lack of quantity of staff which led to issues related to process related to estimating chargeback reserves and inventory lower of cost or market analysis, including preparation and review of analysis. Reportable conditions are matters coming to the attention of the independent auditors that in their judgment, relate to significant deficiencies in the design or operation of internal controls and could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider these matters, which are listed above, to be "material weaknesses" that, by themselves or in a combination, may increase the possibility that a material misstatement in our financial statements might not be prevented or detected by our employees in the normal course of performing their assigned functions. As required by SEC Rule 13a-15(b), the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures as of July 2, 2004. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer determined that the deficiencies identified by BDO could cause the Company's disclosure controls and procedures to be less effective at a reasonable assurance level than was desirable. However, the Chief Executive Officer and Chief Financial Officer noted that the Company is actively seeking to remedy the deficiencies identified herein including hiring additional staff to assure timeliness of financial reporting as well as reviewing our estimates of chargeback reserves and inventory on a more frequent basis. The Company's Chief Executive Officer and Chief Financial Officer did not note any other material weakness or significant deficiencies in the Company's disclosure controls and procedures during their evaluation. The Company continues to improve and refine its internal controls. This process is ongoing. Other than for the matters discussed above, the Company's Chief Executive Officer and Chief Financial Officer have determined that the Company's internal controls and procedures were effective as of the end of the period covered by this report. In the fourth quarter of fiscal 2004, there were no significant changes in the Company's internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 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. 15 Pursuant to our by-laws, we indemnify our officers and directors to the fullest extent permitted by the General Corporation Law of the State of Delaware and our certificate of incorporation. The board of directors is composed of six directors. A nominating committee composed of Dr. Smith and Mr. Cronin designate two directors, Dr. Smith designates three directors, and Mr. Cronin designates one director. Directors may only be removed for cause or at the request of the person entitled to designate that director.
NAME AGE POSITION ---- --- -------- Dr. F. Patrick Smith................................. 56 Chairman of the Board and Chief Executive Officer Kenneth W.R. Baker................................... 60 President, Chief Operating Officer and Director Arthur P. Witt....................................... 74 Corporate Secretary and Director John S. Geer......................................... 58 Director J. Andrew McWethy.................................... 63 Director Michael F. Cronin.................................... 50 Director
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive Officer of Tekni-Plex since March 1994. He received his doctorate degree in chemical engineering from Texas A&M University in 1975. He served as Senior Chemical Engineer to Texas Eastman Company, a wholly owned chemical and plastics subsidiary of Eastman Kodak, where he developed new grades of polyolefin resins and hot melt and pressure sensitive adhesives. In 1979, he became Technical Manager of the Petrochemicals and Plastics Division of Cities Service Company, and a Member of the Business Steering Committee of that division. From 1982 to 1984, Dr. Smith was Vice President of R&D and Marketing for Guardian Packaging Corporation, a diversified flexible packaging company. Thereafter, he joined Lily-Tulip, Inc. and managed their research and marketing functions before becoming Senior Vice President of Manufacturing and Technology. Following the acquisition of Lily-Tulip by Fort Howard Corporation in 1986, he became the Corporate Vice President of Fort Howard, responsible for the manufacturing and technical functions of the combined Sweetheart Products and Lily-Tulip operations. From 1987 to 1990, Dr. Smith was Chairman and Chief Executive Officer of WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos Financial Group, a business consulting firm. Since 2000, Dr. Smith has been a general partner of Eastport Operating Partners L.P. Kenneth W.R. Baker has served as Tekni-Plex Chief Operating Officer since April 1994 and as President since July 1995. Mr. Baker served in various management roles including systems development, finance, industrial engineering, research and development, and manufacturing operations at Owens-Illinois, Inc. and Lily-Tulip, Inc. from 1965 to 1985. From 1986 to 1987, he served as Vice President, Operations at Fort Howard Cup Corporation. In 1987, Mr. Baker joined WFP Corporation, Inc. as Senior Vice President, Operations and eventually became the company's President and CEO before leaving the company in 1992. Thereafter, Mr. Baker became Vice President, Research and Development at the Molded Products Division of Carlisle Plastics, Inc. until joining Tekni-Plex in 1994. Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was appointed Secretary in January 1997. Since July 1989, he has been president of PAJ Investments which is involved in financial consulting and property management. Over the same period, Mr. Witt also served as a temporary chief financial officer for WFP Corporation and Flexible Technology. Prior to 1989, Mr. Witt served in a number of senior management positions for companies such as Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. John S. Geer has served as a director of Tekni-Plex since June 2000. He is a partner of Mellon Ventures, Inc., having joined Mellon in 1997. Previously, Mr. Geer was senior vice president of Security Pacific Capital Corp. He has served on 20 boards of directors of emerging growth and middle market companies. J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He co-founded and managed MST Partners L.P., a private equity investment fund, from 1989 to 2000. In 2000, Mr. McWethy co-founded Eastport Operating Partners, L.P., a private equity investment fund that he continues to manage. Prior to 1989, Mr. McWethy was employed by Irving Trust Company for 12 years. Michael F. Cronin has served as a director of Tekni-Plex since March 1994. He has invested in emerging growth companies and various industrial and service businesses since 1978. Since June 1991, Mr. Cronin has been a general partner of Weston Presidio Capital. COMPENSATION OF DIRECTORS 16 Tekni-Plex reimburses directors for any reasonable out-of-pocket expenses incurred by them in connection with services provided in such capacity. In addition, each director is paid an annual fee of $50,000. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the remuneration paid by Tekni-Plex to the Chief Executive Officer and the two next most highly compensated executive officers of Tekni-Plex SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a) ------------------------- ------ ------ ----- ------- --------------- Dr. F. Patrick Smith.................................... 2004 $ 6,655,000 $ -- -- $ 16,000 Chairman and Chief Executive Officer 2003 6,050,000 -- -- 16,000 2002 5,500,000 -- -- 16,000 Mr. Kenneth W.R. Baker.................................. 2004 $ 3,327,500 $ -- -- $ 9,000 President and Chief Operating Officer 2003 3,025,000 -- -- 9,000 2002 2,750,000 -- -- 9,000 Mr. James E. Condon..................................... 2004 $ 540,000 $ 175,000 -- $ 7,200 Vice President and Chief Financial 2003 500,000 140,000 -- 7,200 Officer 2002 400,000 105,000 -- 7,200
(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 REALIZABLE VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL EXERCISE STOCK PRICE SECURITIES OPTIONS/SARS OR BASE APPRECIATION FOR UNDERLYING GRANTED TO PRICE OPTION TERM OPTIONS/SARS EMPLOYEES IN PER EXPIRATION -------------------- NAME GRANTED FISCAL YEAR SHARE DATE 5% 10% ---- ------------ ------------ -------- ---------- ------ ---- Dr. F. Patrick Smith................... -- --% -- -- -- -- Kenneth W.R. Baker..................... -- --% -- -- -- -- James E. Condon........................ -- --% -- -- -- --
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE ($000) UNDERLYING OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY-END AT FY-END SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE ---- --------------- -------------- ------------- -------------- Dr. F. Patrick Smith.............................. -- -- -- --/-- Kenneth W.R. Baker................................ -- -- -- --/-- James E. Condon................................... -- -- -- --/--
EMPLOYMENT AGREEMENTS In June 2000, Dr. Smith and Mr. Baker entered into amended and restated employment agreements that currently expire June 29, 2007 and contain renewal provisions. The employment agreements provide for a 10% annual salary increase. 17 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. Neither Dr. Smith's nor Mr. Baker's amended and restated employment agreement provides for any mandatory bonus compensation. COMPENSATION COMMITTEE The board of directors maintains a three-member compensation committee comprised of Dr. Smith, Mr. Witt and Mr. Cronin. The compensation committee's duties include the annual review and approval of the compensation for each of our Chief Executive Officer and President, as well as the administration of our stock incentive plan. No member of the compensation committee is allowed to vote on issues pertaining to that member's compensation (including option grants). The board may also delegate additional duties to the compensation committee in the future. Compensation levels and bonus awards for all other employees are controlled by Dr. Smith and Mr. Baker. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION As Chief Executive Officer of Tekni-Plex, Dr. Smith participated in deliberations concerning the compensation of the Chief Operating Officer of Tekni-Plex (but not the compensation for himself). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Tekni-Plex Partners LLC holds approximately 94.0% (approximately 91.7% on a fully diluted basis) and MST/TP Partners LLC holds approximately 6.0% (approximately 5.8% on a fully diluted basis) of Tekni-Plex's outstanding common stock. Tekni-Plex Management LLC, controlled by Dr. Smith, is the sole managing member of both Tekni-Plex Partners LLC and MST/TP Partners LLC. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONSULTING ARRANGEMENTS 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. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the Audit Committee's charter, all audit and audit-related work and all non-audit work performed by our independent accountants, BDO Seidman LLP, is approved in advance by the Audit Committee, including the proposed fees for such work. The Audit Committee is informed of each service actually rendered. Audit and audit-related fees billed or expected to be billed to us by BDO Seidman LLP for the audit of the financial statements included in our Annual Report on Form 10-K and reviews of the financial statements included in our Quarterly Reports on Form 10-Q, for the fiscal years ended July 2, 2004 and June 27, 2003 totaled approximately $740,000 and $63,500 and $720,000 and $50,000, respectively. Audit related fees include reviews of Form 10-Q, offering and SEC comment letters. Tax preparation, review, and advisory services billed or expected to be billed to us by BDO for the fiscal years ended July 2, 2004 and June 27, 2003 totaled approximately $411,000 and $367,000, respectively. PART IV ITEM 15. 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 18 None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKNI-PLEX, INC. By: /s/ F. PATRICK SMITH --------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer Dated: October 15, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ JAMES E. CONDON ---------------------------- James E. Condon Chief Financial Officer Dated: October 15, 2004 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 August , 2004. SIGNATURE TITLE --------------------------- --------------------- --------------------------- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer --------------------------- F. Patrick Smith /s/ KENNETH W.R. BAKER President and Chief Operating Officer and Director --------------------------- Kenneth W.R. Baker /s/ ARTHUR P. WITT Corporate Secretary and Director --------------------------- Arthur P. Witt /s/ JOHN S. GEER Director --------------------------- John S. Geer /s/ J. ANDREW MCWETHY Director --------------------------- J. Andrew McWethy /s/ MICHAEL F. CRONIN Director --------------------------- Michael F. Cronin 19 EXHIBIT INDEX
Exhibit No. Description Page ------- ------------------------------------------------------------------------------------- ---- 3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc.* 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.* 3.3 Certificate of Incorporation of PureTec Corporation.* 3.4 By-laws of PureTec Corporation.* 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.* 3.6 By-laws of Tri Seal Holdings, Inc.* 3.7 Certificate of Incorporation of Natvar Holdings, Inc.* 3.8 By-laws of Natvar Holdings.* 3.9 Certificate of Incorporation of Plastic Specialties and Technologies, Inc.* 3.10 By-laws of Plastic Specialties and Technologies, Inc.* 3.11 Certificate of Incorporation of Plastic Specialties and Technologies Investments, Inc.* 3.12 By-laws of Plastic Specialties and Technologies Investments, Inc.* 3.13 Certificate of Incorporation of Burlington Resins, Inc.* 3.14 By-laws of Burlington Resins, Inc.* 3.15 Certificate of Incorporation of Pure Tech APR, Inc.* 3.16 By-laws of Pure Tech APR, Inc.* 3.17 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.* 3.18 By-laws of TPI Acquisition Subsidiary, Inc.* 3.19 Certificate of Incorporation of Coast Recycling North, Inc.* 3.20 By-laws of Coast Recycling North, Inc.* 3.21 Certificate of Incorporation of Distributors Recycling, Inc.* 3.22 By-laws of Distributors Recycling, Inc.* 3.23 Certificate of Incorporation of REI Distributors, Inc.* 3.24 By-laws of REI Distributors, Inc.* 3.25 Certificate of Incorporation of Pure Tech Recycling of California.* 3.26 By-laws of Pure Tech Recycling of California.* 3.27 Certificate of Incorporation of Alumet Smelting Corp.* 3.28 By-laws of Alumet Smelting Corp.* 3.29 Certificate of Incorporation of TP/Elm Acquisition Subsidiary, Inc.* 3.30 By-laws of TP/Elm Acquisition Subsidiary, Inc.* 4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee.* 4.2 First Supplemental Indenture, dated as of May 6, 2002 among Tekni-Plex, Inc., TPI Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee* 4.3 Second Supplemental Indenture, dated as of August 22, 2002 among Tekni-Plex, Inc., TP/Elm Acquisition Subsidiary, Inc. and HSBC Bank USA, as Trustee* 4.4 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1) 4.5 Purchase Agreement, dated as of May 1, 2002 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc.* 4.6 Registration Right Agreement, dated as of May 6, 2002 among Tekni-Plex, Inc., the Guarantors listed therein and Lehman Brothers Inc.* 31.1 Certification of Chief Executive Officer, as required by Section 302 of the Sabanes-Oxley Act of 2002** 31.2 Certification of Chief Financial Officer, as required by Section 302 of the Sabanes-Oxley Act of 2002** 32.1 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
-------------------------------- * Filed previously as an Exhibit to the Form S-4 (File No. 333-43800) filed on August 15, 2000. ** Filed herewith. TEKNI-PLEX, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JULY 2, 2004, JUNE 27, 2003, JUNE 28, 2002 F-1 TEKNI-PLEX, INC. CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets 4 Statements of operations 5 Statements of stockholders' deficit 6 Statements of cash flows 7 Notes to financial statements 8-53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL SCHEDULE 54 SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves 55
F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Tekni-Plex, Inc. Somerville, New Jersey We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc. and its subsidiaries (the "Company") as of July 2, 2004 and June 27, 2003, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended July 2, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tekni-Plex, Inc. and its subsidiaries as of July 2, 2004 and June 27, 2003, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2004, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1, the Company changed its policy of accounting for goodwill in 2002 as required by Financial Accounting Standards Board Statement Number 142, "Goodwill and Other Intangible Assets." /s/ BDO Seidman, LLP Woodbridge, New Jersey October 3, 2004 F-3 TEKNI-PLEX, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JULY 2, 2004 June 27, 2003 ------------ ------------- ASSETS CURRENT: Cash and cash equivalents $ 29,735 $ 48,062 Accounts receivable, net of an allowance of $8,408 and $8,398 for possible losses and sales allowances 138,109 135,719 Inventories 153,807 161,333 Deferred income taxes - 6,735 Prepaid expenses and other current assets 6,355 7,939 ------------ ------------- TOTAL CURRENT ASSETS 328,006 359,788 PROPERTY, PLANT AND EQUIPMENT, NET 182,749 179,521 INTANGIBLE ASSETS, NET INCLUDING GOODWILL OF $198,532 AND $209,189 RESPECTIVELY 207,278 213,152 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $9,122 AND $6,899 9,652 11,851 DEFERRED INCOME TAXES 18,793 19,172 OTHER ASSETS 1,204 1,280 ------------ ------------- $ 747,682 $ 784,764 ============ ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long term debt $ 2,121 $ 16,709 Accounts payable 54,312 52,371 Accrued payroll and benefits 10,945 9,525 Accrued interest 6,763 6,317 Accrued integration reserve 2,444 5,000 Accrued liabilities - other 19,692 14,143 Income taxes payable 1,853 6,058 ------------ ------------- TOTAL CURRENT LIABILITIES 98,130 110,123 LONG-TERM DEBT, LESS CURRENT PORTION 731,886 712,775 OTHER NON-CURRENT LIABILITIES 18,701 26,677 ------------ ------------- TOTAL LIABILITIES 848,717 849,575 ------------ ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, $.01 par value, authorized 20,000 shares, issued 1,008 at July 2, 2004 and June 27, 2003 - - Additional paid-in capital 210,518 188,018 Accumulated other comprehensive loss (6,000) (1,737) Accumulated deficit (85,030) (30,569) Less treasury stock at cost, 431 shares (220,523) (220,523) ------------ ------------- TOTAL STOCKHOLDERS' DEFICIT (101,035) (64,811) ------------ ------------- $ 747,682 $ 784,764 ============ =============
See accompanying notes to consolidated financial statements. F-4 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002 ----------- ------------ ------------- ------------- NET SALES $ 635,642 $ 610,663 $ 577,749 COST OF SALES 527,646 459,471 430,457 ---------- ---------- ---------- GROSS PROFIT 107,996 151,192 147,292 OPERATING EXPENSES: Selling, general and administrative 69,159 61,600 69,444 Integration expenses 7,775 11,164 - ---------- ---------- ---------- INCOME FROM OPERATIONS 31,062 78,428 77,848 OTHER (INCOME) EXPENSES: Interest, net 84,451 71,266 70,934 Unrealized loss (gain) on derivative contracts (10,654) 1,997 7,830 Other 605 (531) (6) ---------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (43,340) 5,696 (910) PROVISION FOR INCOME TAXES 11,121 2,306 5,677 ---------- ---------- ---------- NET INCOME (LOSS) $ (54,461) $ 3,390 $ (6,587) ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (DOLLARS IN THOUSANDS)
Accumulated Additional Other Paid-In Comprehensive Accumulated Treasury Common stock Capital Loss Deficit Stock TOTAL ------------ ---------- ------------ ----------- -------- ----- BALANCE, JUNE 29, 2001 - 120,176 (7,039) (27,372) (220,462) (134,697) Net loss - - - (6,587) - (6,587) Foreign currency translation - - 3,319 - - 3,319 Unrealized loss on pension plan, net of tax - - (3,085) - - (3,085) ----------- Comprehensive loss - - - - - (6,353) Acquisition of shares - - - - (61) (61) Capital contributions - 50,000 - - - 50,000 ----- ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 28, 2002 170,176 (6,805) (33,959) (220,523) (91,111) Net income - - - 3,390 - 3,390 Foreign currency translation - - 6,320 - - 6,320 Unrealized loss on pension plan - - (1,252) - - (1,252) ----------- Comprehensive income - - - - - 8,458 Capital contributions - 17,842 - - - 17,842 ----- ----------- ----------- ----------- ----------- ----------- BALANCE, JUNE 27, 2003 - 188,018 (1,737) (30,569) (220,523) (64,811) Net loss - - - (54,461) - (54,461) Foreign currency translation - - (771) - - (771) Unrealized loss on pension plan - - (3,492) - - (3,492) ----------- Comprehensive loss - - - - - (58,724) Capital contributions - 22,500 - - - 22,500 ----- ----------- ----------- ----------- ----------- ----------- BALANCE, JULY 2, 2004 - $ 210,518 $ (6,000) $ (85,030) $ (220,523) $ (101,035) ===== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002 ----------- ------------ ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (54,461) $ 3,390 $ (6,587) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 25,377 24,615 20,981 Amortization 6,927 3,727 18,882 Goodwill impairments 10,000 - - Unrealized (gain) loss on derivative contracts (10,654) 1,997 7,830 Provision for bad debts 2,316 2,350 484 Deferred income taxes 7,290 (2,547) 1,234 Loss on sale of assets 177 - - Changes in assets and liabilities, net of acquisitions: Accounts receivable (4,806) 4,388 (35,632) Inventories 7,305 (40,372) 4,226 Prepaid expenses and other current assets 129 (567) 866 Other assets 76 (202) (50) Accounts payable and other current liabilities 2,600 13,630 (6,136) Income taxes payable (2,318) 4,625 5,419 Other liabilities 2,678 (5) (3,595) ------------ ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,364) 15,029 7,922 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (5,780) (16,762) (63,624) Capital expenditures (29,472) (32,232) (24,653) Cash proceeds from sale of assets 1,346 - - Additions to intangibles (220) (1,000) (169) ------------ ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (34,126) (49,994) (88,446) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (15,000) 45,000 (19,000) Proceeds from long-term debt 267,438 1,116 40,747 Repayments of long-term debt (248,658) (9,755) (7,440) Proceeds from capital contributions 22,500 17,842 50,000 Debt financing costs (2,767) - (154) Purchase of treasury stock - - (61) ------------ ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,513 54,203 64,092 ------------ ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (350) 625 (14) ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,327) 19,863 (16,446) CASH, BEGINNING OF PERIOD AND CASH EQUIVALENTS 48,062 28,199 44,645 ------------ ----------- ----------- CASH, END OF PERIOD AND CASH EQUIVALENTS $ 29,735 $ 48,062 $ 28,199 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-7 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 1. SUMMARY OF ACCOUNTING POLICIES Nature of Business Tekni-Plex, Inc. and its subsidiaries ("Tekni-Plex" or the "Company") is a global, diversified manufacturer of packaging, packaging products, and materials as well as tubing products. The Company primarily serves the food, healthcare and consumer markets. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under three primary business groups: Packaging, Tubing Products, and other. 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. Accounts Receivable and Allowance for Possible Losses Accounts receivable are customer obligations due under normal trade terms. The Company sells its products primarily to large manufacturers, retailers, and pharmaceutical companies. The Company performs continuing credit evaluations of its customers' financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve, in its overall allowance for possible losses. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, the Company believes its allowance for possible losses as of July 02, 2004 is adequate. However, actual write-offs might exceed the recorded allowance. Inventories Inventories are stated at the lower of cost (weighted average) or market. F-8 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed over the estimated useful lives of the assets primarily on the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Repairs and maintenance are charged to expense as incurred. Intangible Assets (other than goodwill) The cost of acquiring certain patents, trademarks, and customer lists is amortized over seventeen, ten and five years, respectively. 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 title and risk of loss has transferred to the customer which is generally when goods are shipped to customers. The Company provides for returned goods and volume rebates on an estimated basis based upon agreements and past experience. Sales Allowances The Company accounts for sales allowances, including volume rebates and advertising programs, on an accrued basis as a reduction in net revenue according to Emerging, Task Force Issue ("EITF") 01-09 "Accounting for consideration given by a vendor to a customer or a reseller of the vendor's products" in the period in which the sales are recognized. Shipping and Handling Costs Shipping and handling costs are recorded to cost of sales. F-9 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Research and Development Research and development expenditures for the Company's projects are expensed as incurred. 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 27, 2003 and June 28, 2002 each contained 52 weeks, and July 2, 2004 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 year-end exchange rates and related translation adjustments are reported as a component of accumulated other comprehensive income (loss). The statement of operations accounts are translated at the average rates during the period. Long-Lived Assets Long-lived assets, excluding goodwill, are evaluated annually 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 which would be determined based on the net present value of estimated future cash flows. No impairment losses have been recorded through July 2, 2004. F-10 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 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," as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure," 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. Had compensation cost been determined based on the fair value at the grant dates for these awards consistent with the method of SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below. The calculations were based on a risk free interest rate of 4.0%, expected volatility of zero, a dividend yield of zero, and expected lives of 8 years.
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002 ------------ ------------- ------------- Net income (loss): As reported $(54,461) $3,390 $(6,587) ======== ====== ======= Adjustment for fair value of stock options, net of tax $ (88) $ (124) $ (138) ======== ====== ======= Pro forma $(54,549) $3,266 $(6,725) ======== ====== =======
F-11 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Derivative Instruments The Company applies the provision of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted by SFAS 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivative instruments, such as interest rate swaps, be recognized in the financial statements and measured at their fair market value. Changes in the fair market value of derivative instruments are recognized each period in current operations or stockholders' equity (as a component of accumulated other comprehensive loss), depending on whether a derivative instrument qualifies as a hedge transaction. In the normal course of business, Tekni-Plex is exposed to changes in interest rates. The objective in managing its exposure to interest rates is to decrease the volatility that changes in interest rates might have on operations and cash flows. To achieve this objective, Tekni-Plex uses interest rate swaps and caps to hedge a portion of total long-term debt that is subject to variable interest rates. These derivative contracts are considered to be a hedge against changes in the amount of future cash flows associated with the interest payments on variable-rate debt obligations, however, they do not qualify for hedge accounting under SFAS 133. Accordingly, the interest rate swaps are reflected at fair value in the Consolidated Balance Sheet and the related gains or losses on these contracts are recorded as an unrealized gain or loss from derivative instruments in the Consolidated Statements of Operations. These are the only derivative instruments held by Tekni-Plex as of July 2, 2004. The fair value of derivative contracts are determined based on quoted market values obtained from a third party. F-12 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Tekni-Plex has interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on a 3 month dollar LIBOR on an aggregate of $290,000 amount of indebtedness with maturity dates ranging from June 2006 through June 2008. In conjunction with these swap contracts, Tekni-Plex also purchased an interest rate cap. The aggregate fair market value of these interest rate swap and cap contracts was $(13,065), $(23,719) and $(21,721) on July 2, 2004, June 27, 2003 and June 28, 2002, respectively, and is included in other liabilities on the Consolidated Balance Sheet. For the years ended July 2, 2004, June 27, 2003 and June 28, 2002, Tekni-Plex incurred realized gain (losses) of $10,654, $(8,677) and $(7,939), respectively, which have been reflected in interest expense. Goodwill and Business Combinations On June 29, 2002 the Company adopted SFAS 142 which requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. The Company's business combinations were accounted for using the purchase method and goodwill was amortized over 15 years. In accordance with SFAS 142 no amortization expense was recorded during the year ended July 2, 2004. During the year ended June 28, 2002 the acquisition of the Swan garden hose division of Mark IV Industries, Inc. resulted in customer lists and goodwill of $3,900 and $36,200 respectively. In accordance with SFAS 142, the Swan goodwill was not amortized during the year ended July 2, 2004. F-13 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) If the Company had adopted SFAS 142 on July 2, 1999, the Company's net income (loss) for each of the three years in the period ended July 2, 2004 would have been as follows:
JULY 2, June 27, June 28, 2004 2003 2002 -------- -------- -------- Net income (loss) as previously reported $(54,461) $3,390 $(6,587) Add amortization, net of tax - - 9,299 Adjusted net income (loss) $(54,461) $3,390 $ 2,712 ======== ====== =======
The Company completed its year-end analysis of goodwill, and has concluded an impairment charge of $10.0 million was required in accordance with SFAS 142. The impaired goodwill resulted from the recent losses of our Specialty Resin operations of our Other Segment. New Accounting Pronouncements In July 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity." SFAS 150 requires the shares that are mandatorily redeemable for cash or other assets at a specified or determinable date or upon an event certain to occur, be classified as liabilities, not as part of shareholders equity. SFAS 150 does not currently apply to the Company. F-14 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND 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 during 2000. These transactions were funded by $43,101 of new equity, $275,000 12 3/4% Senior Subordinated Notes (see Note 7(b)) and initial borrowings of $374,000 on a $444,000 Senior Credit Facility (see Note 7(a)). F-15 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 3. ACQUISITIONS a) In July 2004, the Company acquired substantially all the net assets of the egg carton business of Genpak ("Genpak") for $5,780. Genpak produces a variety of foam products, including foam egg cartons. The financial results of the Genpak transaction are included in the Packaging Segment. The proforma results of operation of the Genpak assets as though the acquisition occurred on June 28, 2002 are immaterial. The acquisition was recorded under the purchase method, whereby the acquired Genpak net assets were recorded at estimated fair value, and its operations have been reflected in the statement of operations since that date. The allocation of purchase price is as follows: Assets: Inventory $ 303 Plant property and equipment 1,044 Customer list and covenant not to compete 4,433 ------- Total Assets 5,780 Liabilities -- ------- Net Investment $ 5,780 =======
b) In July 2002, the Company acquired substantially all the net assets of Elm Packaging Company ("ELM") for $16,762. Elm produces polystyrene foam plates, bowls, and meat and bakery trays. The financial results of Elm are included in the Packaging segment. The acquisition was recorded under the purchase method, whereby Elm's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The allocation of purchase price is as follows: Assets: Accounts receivable $ 3,449 Inventory 1,829 Deferred taxes 1,695 Fixed assets 12,487 Goodwill 10,051 Other assets 334 ------- Total Assets 29,845 =======
F-16 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Liabilities: Accounts payable and accrued expenses 8,583 Integration reserve 4,500 ------- Net investment $16,762 =======
The components of the Integration reserve and activity through July 2, 2004 was as follows:
Costs Costs Balance charged to Balance charged to Balance July 2002 reserve July 2003 reserve July 2, 2004 --------- ---------- --------- ---------- ------------ Reduction in personnel and related costs $1,000 1,000 $ - $ - $ - Legal and environmental liability $3,500 1,000 2,500 1,337 1,163 ------ ---------- ---------- --------- ----------- $4,500 $ 2,000 $ 2,500 $ 1,337 $ 1,163 ====== ========== ========== ========= ===========
The remaining legal and environmental costs are expected to extend over the next four years. The following table represents the unaudited proforma results of operations as though the acquisition of Elm occurred on June 29, 2001. The proforma effect on the year ended July 2, 2004 would be immaterial.
Year ended June 28, 2002 ------------- Net sales $617,892 Income from operations 75,553 Loss before income taxes (4,794) ========
F-17 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan for approximately $63,600. Swan is a manufacturer of garden hose. The financial results of Swan are included in the tubing segment. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The allocation of the purchase price is as follows: Assets: Accounts Receivable $ 7,184 Inventory 15,600 Deferred Taxes 3,570 Fixed Assets 17,568 Customer lists 3,900 Goodwill 35,008 ---------- Total Assets 82,830 Liabilities: Accounts Payable and accrued expenses 11,230 Integration reserve 8,000 ---------- Net Investment $ 63,600 ==========
F-18 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) In connection with the acquisition, the Company incurred an integration reserve of $10 million. The components of the Integration reserve and activity through July 2, 2004 was as follows:
Costs Cost Balance Costs charged Balance charged June charged Adjustments Balance October to June 28, to Adjustments 27, to to July 2, 2001 Reserve 2002 Reserve to Reserve 2003 Reserve Reserve 2004 ------- ------- -------- ------- ----------- ------- ------- ----------- ------- Cost to close duplicate facilities $ 3,500 $1,340 $ 2,160 $ 101 $(2,059) $ - $ - $ - $ - Reduction in personnel and related costs 2,100 718 1,382 - (1,382) - - - - Legal and environmental 1,275 40 1,235 1,360 2,625 2,500 1,219 - 1,281 Manufacturing reconfiguration 1,455 175 1,280 - (1,280) - - - - Other 1,670 972 698 794 96 - - - - ------- ------ ------- ------ ------- ------ ------ --- ------ $10,000 $3,245 $ 6,755 $2,255 $(2,000)* $2,500 $1,219 $ - $1,281 ======= ====== ======= ====== ======= ====== ====== === ======
*$2,000 adjustment was recorded to beginning balance Integration reserve as an adjustment to the original estimates prepared by the Company. Goodwill was adjusted for the aforementioned amount. The remaining legal and environmental costs are expected to extend over the next four years. The following table represents the unaudited proforma results of operations as though the acquisition of Swan occurred on June 29, 2001.
Year ended June 28, 2002 --------------- Net sales $ 589,045 Income from operations 75,863 --------- Loss before income taxes (2,895) =========
F-19 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) In November 2000, the Company purchased certain assets of Super Plastics Division ("Super Plastics") of RCR International, Inc., for approximately $10,226. The acquisition was recorded under the purchase method, whereby Super Plastics' net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. 4. INVENTORIES Inventories are summarized as follows:
JULY 2, 2004 June 27, 2003 ------------ ------------- Raw materials $ 58,881 $ 51,810 Work-in-process 12,668 10,219 Finished goods 82,258 99,304 ---------- --------- $ 153,807 $ 161,333 ========== =========
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
Estimated JULY 2, 2004 June 27, 2003 useful lives ------------ ------------- ------------ Land $ 15,663 $ 16,315 Building and improvements 57,097 54,072 25-40 years Machinery and equipment 221,552 199,645 5 - 10 years Furniture and fixtures 9,581 7,837 5 - 10 years Construction in progress 20,660 17,366 ---------- ---------- 324,553 295,235 Less accumulated depreciation 141,804 115,714 ---------- ---------- $ 182,749 $ 179,521 ========== ==========
F-20 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 6. INTANGIBLE ASSETS Intangible assets consist of the following:
JULY 2, 2004 June 27, 2003 ------------ ------------- Goodwill $ 276,182 $286,839 Customer list and non-compete agreement 9,680 3,900 Patents 1,966 1,745 --------- -------- 287,828 292,484 Less accumulated amortization 80,550 79,332 --------- -------- $ 207,278 $213,152 ========= ========
As a result of the adoption of SFAS 142, the Company discontinued amortizing goodwill effective June 29, 2002. Patents and customer list continue to be amortized. Amortization of customer list will be $780 annually through the first quarter of 2007. Patents will be amortized $439 annually. Amortization is expected to continue at this amount until 2010 when it will begin to decline. Accumulated amortization for Goodwill, customer list and Patents at July 2, 2004 and June 27, 2003 were $77,650, $2,144, $756 and $77,650, $1,365, and $317, respectively. During the Company's SFAS 142 impairment tests, it was noted that $10,000 of goodwill related to the Specialty Resin operation of our Other Segment was impaired due to this units recent performance. This amount was written off as of July 2, 2004. F-21 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 7. LONG-TERM DEBT Long-term debt consists of the following:
JULY 2, 2004 June 27, 2003 ------------ ------------- Senior Debt (a): Revolving line of credit $ 76,000 $ 91,000 Term notes 71,263 319,790 Senior Subordinated Notes issued June 21, 2000 at 12-3/4%, due June 15, 2010 (less unamortized discount of $2,260 and $2,637) (b). 272,740 272,363 Senior Subordinated Notes issued May 2002 at 12-3/4%, due June 15, 2010 (less unamortized premium of $437 and $512 (b). 40,437 40,512 Senior Secured Notes issued November 21, 2003 at 8-3/4 %, due November 15, 2013 (less unamortized discount of $7,121) 267,879 - Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2003 to 2010. 5,688 5,819 ------------ ------------ 734,007 729,484 Less: Current maturities 2,121 16,709 ------------ ------------ $ 731,886 $ 712,775 ============ ============
a) Senior Debt The Company has a Senior Debt agreement, which includes a $100,000 revolving credit agreement, and two term loans in the original aggregate amount of $344,000. These loans are senior to all other indebtedness and are collateralized by substantially all the assets of the Company. The amended debt agreement includes various covenants which include a limitation on capital expenditures and compliance with customary financial ratios. The Company paid off one of the term loans with the issuance of the Senior Secured Notes. The Company was in violation of certain financial covenants as of July 2, 2004 which were subsequently waived and amended for future periods. F-22 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Revolving Credit Agreement Borrowings under the agreement may be used for general corporate purposes with $24 million of additional borrowings available at July 2, 2004. Interest, at the Company's option, is charged at the Prime Rate (4.25% at July 2, 2004), plus the Applicable Base Rate Margin (currently 2.5%) or the Adjusted LIBOR Rate, as defined, plus the Applicable Euro-Dollar Margin (currently 3.5%). At July 2, 2004 the balance of $76,000 outstanding was borrowed at various rates ranging from 4.8% to 6.5%. At June 27, 2003, the rate charged was 4.875%. The Revolving Credit Agreement expires in June 2006. The Company also had approximately $2.2 million of outstanding letters of credit as of July 2, 2004. Term Loan A This loan, in the original amount of $100,000, with interest payable quarterly at the same rates and margins discussed above under the Revolving Credit Agreement, 4.4% at June 27, 2003, was repaid with proceeds from the issuance of the Senior Secured Notes. Term Loan B This loan, in the original amount of $244,000, bears interest payable quarterly at the same rate discussed above, except the Applicable Base Rate Margin is currently 3.0% and the Applicable Euro-Dollar Margin is currently 4.0%. Rates of 5.6% and 4.9% were charged at July 2, 2004 and June 27, 2003, respectively. This loan was paid down by $164,250 with the proceeds of the issuance of the Senior Secured Notes. Principal is currently payable in quarterly installments of $186. The quarterly installments subsequently increase with payments totaling $69,778 due in the final two years in the period ending in June 2008. F-23 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) b) Senior Subordinated Notes Issued June 2000 and May 2002 In June 2000, the Company issued $275,000 of 12-3/4% ten year Senior Subordinated Notes less a discount of $3,768. The discount is being amortized over the term of the notes on the straight line method. Interest is payable semi-annually and the notes are unsecured obligations and rank subordinate to existing and future senior debt, including the 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. Upon a change in control, the Company is required to make an offer to repurchase the notes at 101% of the principal amount. These notes also contain various covenants including a limitation on future indebtedness; limitation of payments, including prohibiting the payment of dividends; and limitations on mergers, consolidations and the sale of assets. On May 6, 2002, the Company issued an additional $40,000 of 12-3/4% Senior Subordinated Notes plus a premium of $600, the proceeds of which were used to repay borrowings under the revolving credit facility. The premium is being amortized over the term of the notes on the interest method. These notes have the same terms and maturity as the June 2000 notes discussed above. F-24 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Senior Secured Notes On November 21, 2003, the Company issued $275,000 of 8-3/4 % Senior Secured Notes less a discount of $7,563. The proceeds were used to pay off Term Loan A and pay down Term Loan B. The discount is being amortized over the term of the notes on the straight line method. Interest is payable semi-annually and the notes are secured obligations and rank subordinate to the Senior Debt. Up to 35% of the Notes are callable by the Company prior to November 15, 2006 at a premium of 8.75%. All the notes are callable by the Company after November 15, 2008 at a premium of 4.375% which decreases to par after November 2011. Upon a change in control, the holders have the right to require the Company 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. Scheduled principal payments on debt over the next five years and thereafter are as follows: 2005 $ 2,121 2006 77,076 2007 35,145 2008 35,161 2009 380 Thereafter 584,124
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-25 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 8. INCOME TAXES The provision for income taxes is summarized as follows:
JULY 2, June 27, June 28, Years ended 2004 2003 2002 --------- --------- ------- Current: Federal $ - $ - $ 259 Foreign 3,781 4,504 2,180 State and local 50 349 2,004 -------- --------- ------- 3,831 4,853 4,443 -------- --------- ------- Deferred: Federal 7,000 (2,072) 474 Foreign 290 (89) 676 State and local - (386) 84 -------- --------- ------- 7,290 (2,547) 1,234 -------- --------- ------- Provision (benefit) for income taxes $ 11,121 $ 2,306 $ 5,677 ======== ========= =======
The components of income (loss) before income taxes are as follows:
JULY 2, June 27, June 28, Years ended 2004 2003 2002 --------- --------- ------- Domestic $(51,586) $ (5,918) $(9,448) Foreign 8,246 11,614 8,538 -------- --------- ------- $(43,340) $ 5,696 $ (910) ======== ========= =======
F-26 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The provision (benefit) for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
JULY 2, June 27, June 28, Years ended 2004 2003 2002 ---------- -------- ------- Provision (benefit) for Federal income taxes at statutory rate $ (14,736) $ 1,937 $ (309) State and local income taxes, net of Federal benefit (1,655) (24) 1,427 Non-deductible goodwill impairment 3,400 - 3,647 Foreign tax rates in excess of Federal tax rate 1,262 406 874 Increase in Valuation Allowance 23,319 - - Other, net (469) (13) 38 ---------- -------- ------- Provision (benefit) for income taxes $ 11,121 $ 2,306 $ 5,677 ========== ======== =======
F-27 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Significant components of the Company's deferred tax assets and liabilities are as follows:
JULY 2, June 27, 2004 2003 ---------- ---------- Current deferred taxes: Allowance for doubtful accounts $ 1,961 $ 1,302 Inventory 2,103 1,877 Net operating loss carryforwards 1,009 557 Accrued expenses 1,365 2,999 ---------- ---------- Total current deferred tax assets $ 6,438 $ 6,735 ---------- ---------- Long-term deferred taxes: Net operating loss carryforwards $ 54,400 $ 33,983 Accrued pension and post-retirement 2,657 1,265 Unrealized loss on derivative contracts 4,965 9,013 Unrealized loss of pension plan 3,265 2,657 Difference in book and tax basis of assets (609) (848) Difference in depreciation (16,139) (18,720) Goodwill - deductible for tax purposes (5,202) (2,768) Other expenses 309 190 ---------- ---------- Total long-term net deferred tax assets 43,646 24,772 ---------- ---------- Total current and long term deferred tax assets 50,084 31,507 Valuation allowance (31,291) (5,600) ---------- ---------- Total long-term net deferred tax assets $ 18,793 $ 19,172 ========== ==========
F-28 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Net Operating Losses The Company and its U.S. subsidiaries file a consolidated tax return. The Company and its U.S. subsidiaries have net operating loss ("NOL") carryforwards of approximately $150,000. These NOL's expire at various dates from 2009 through 2024. Approximately $82,000 of the NOL's are as a result of the acquisition of PureTec in 1997 (the "PureTec NOL's"). The PureTec NOL's are subject to IRC Section 382 change of ownership annual limitation of approximately $5,600. As a result of this limitation the Company can utilize a maximum of $79,600 of PureTec NOL's. The Company and its U.S. subsidiaries would need to generate income of $150,000 through 2023, of which $82,000 is limited as discussed above, in order to fully realize the benefit of the NOL carry forwards. The net long-term domestic deferred tax assets have been subjected to a valuation allowance of $21,300 which relates to Federal NOL's 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. Net deferred tax asset on the balance sheet has been recognized based on our projected usage of NOL's over the next three years. In addition to the domestic NOL balances, the Company has incurred losses relating to a subsidiary, taxable in Northern Ireland. Through fiscal 2004 losses aggregated $597 which have no expiration date. The Company believes that it is more likely than not that this deferred tax asset will not be realized and has recorded a full valuation allowance on these amounts. 9. EMPLOYEE BENEFIT PLANS (a) Savings Plans i. The Company maintains a discretionary 401(k) plan covering all eligible employees (excluding Elm employees) with at least one year of service. Contributions to the plan are determined annually by the Board of Directors. F-29 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The Company will determine matching contributions to the plan each year not to exceed 2% of the employee's eligible compensation. Contributions for the fiscal years ended July 2, 2004, June 27, 2003 and June 28, 2002, amounted to 1,043, $1,207, $1,130, respectively. ii. The Company maintains a 401(k) plan covering all eligible Elm employees with at least sixty days of service and who have attained the age of twenty-one. The Company matches 50% of employee contributions up to 6% of the employee's eligible compensation. Contributions for the fiscal year ended July 2, 2004 amounted to $94. (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. F-30 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The components of net periodic pension costs are as follows:
YEAR ENDED Year ended Year ended JULY 2, June 27, June 28, 2004 2003 2002 ------------ ------------ ------------ Service cost $ 127 $ 107 $ 105 Interest cost on projected benefit obligation 421 420 400 Expected actual return on plan assets (443) (451) (494) Amortization of unrecognized: Prior service cost 12 12 - Net loss 182 105 - ------------ ------------ ------------ Net pension cost $ 299 $ 193 $ 11 ============ ============ ============
YEAR ENDED Year ended JULY 2, June 27, 2004 2003 ------------ ------------ CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 6,835 $ 6,034 Service cost 127 107 Interest cost 421 420 Actuarial loss 71 612 Benefits paid (340) (338) ------------ ------------ Projected benefit obligation, end of period $ 7,114 $ 6,835 ============ ============ CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 5,013 $ 5,167 Actual return on plan assets 311 158 Company contributions 154 26 Benefits paid (340) (338) ------------ ------------ Plan assets at fair value, end of period $ 5,138 $ 5,013 ============ ============
F-31 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
JULY 2, 2004 June 27, 2003 ------------ ------------- Funded status of the plan $ (1,976) $ (1,822) Unrecognized prior service cost 87 99 Unrecognized net loss 2,316 2,294 ------------ ------------ Prepaid pension cost $ 427 $ 571 ============ ============
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate was 6.25% and 6.25% at July 2, 2004 and June 27, 2003. The Company recorded an unrecognized pension liability of $2,316 and $2,294 at July 2, 2004 and June 27, 2003, respectively, as an accumulated other comprehensive loss adjustment to stockholders' equity. These amounts represent a portion of the unrecognized net actuarial loss for the years ending July 2, 2004 and June 27, 2003 as a result of an investment return less than the actuarial assumption. The Company maintains a non-contributory defined benefit pension plan that covers substantially all non-collective bargaining unit employees of Plastics, Specialties and Technology ("PS&T") and Burlington, who have completed one year of service and are not participants in any other pension plan required by applicable regulations. The funding policy of the Company is to make contributions to the plan based on actuarial computations of the minimum required contribution for the plan year. On September 8, 1998, the Company approved a plan to freeze this defined benefit pension plan effective September 30, 1998. F-32 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The components of net periodic pension cost are as follows:
YEAR ENDED Year ended Year ended JULY 2, June 27, June 28, 2004 2003 2002 ------------ ------------ ------------ Service cost $ - $ - $ - Interest cost on projected benefit obligation 792 790 762 Expected actual return on plan assets (816) (839) (931) Amortization of unrecognized Net loss 280 178 25 ------------ ------------ ------------ Net pension cost $ 256 $ 129 $ (144) ============ ============ ============
YEAR ENDED Year ended JULY 2, June 27, 2004 2003 ------------ ------------ CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 12,932 $ 11,274 Interest cost 792 790 Actuarial loss (32) 1,370 Benefits paid (482) (502) ------------ ------------ Projected benefit obligation, end of period $ 13,210 $ 12,932 ============ ============ CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 9,303 $ 9,539 Actual return on plan assets 839 266 Benefits paid (482) (502) ------------ ------------ Plan assets at fair value, end of period $ 9,660 $ 9,303 ============ ============
F-33 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
JULY 2, 2004 June 27, 2003 ------------ ------------- Funded status of the plan $ (3,551) $ (3,628) Unrecognized net loss 4,912 5,245 ------------ ------------ Prepaid pension cost $ 1,361 $ 1,617 ============ ============
The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate 6.25% and 6.25% at July 2, 2004 and June 27, 2003. The Company recorded an unrecognized pension liability of $4,912 and $5,245 as of July 2, 2004 and June 27, 2003, respectively, as an accumulated other comprehensive loss adjustment to stockholders' equity. These amounts represent a portion of the unrecognized net actuarial loss for the years ending July 2, 2004 and June 27, 2003 as a result of an investment return less than the actuarial assumption. ii. The Company also has a defined benefit pension plan for the benefit of all employees having completed one year of service with Dolco. The funding policy of the Company is to make the minimum required contribution for the plan year required by applicable regulations. Dolco's Board of Directors approved a plan to freeze this defined benefit pension plan on June 30, 1987, at which time benefits ceased to accrue. The Company has not been required to contribute to the plan since 1990. F-34 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The components of net periodic pension costs are as follows:
YEAR ENDED Year ended Year ended JULY 2, June 27, June 28, 2004 2003 2002 ------------ ------------ ------------ Service cost $ - $ - $ - Interest cost on projected benefit obligation 251 261 257 Expected actual return on plan assets (234) (285) (301) Amortization of unrecognized net loss 111 79 28 ------------ ------------ ------------ Net pension cost $ 128 $ 55 $ (16) ============ ============ ============
YEAR ENDED Year ended JULY 2, June 27, 2004 2003 ------------ ------------ CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $ 4,205 $ 4,049 Interest cost 251 261 Actuarial loss (gain) (126) 365 Benefits paid (378) (470) ------------ ------------ Projected Benefit Obligation, end of period $ 3,952 $ 4,205 ============ ============ CHANGE IN PLAN ASSETS Plan assets at Fair Value, beginning of period $ 3,144 $ 3,388 Actual return on plan assets 271 226 Company contributions 343 Benefits paid (378) (470) ------------ ------------ Plan assets at Fair Value, end of period $ 3,380 $ 3,144 ============ ============
F-35 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The funded status of the Plan and amounts reconciled in the Company's balance sheets are as follows:
JULY 2, 2004 June 27, 2003 ------------ ------------- Funded status of the Plan $ (571) $ (1,061) Unrecognized net loss 1,367 1,642 ------------ ------------ Prepaid pension cost $ 796 $ 581 ============ ============
The expected long term rate of return on plan assets was 7.5% and the discount rate was 6.0% for the periods presented. The Company recorded an unrecognized pension liability of $1,367 and $1,642 as of July 2, 2004 and June 27, 2003, respectively, an accumulated other comprehensive loss and adjustment to stockholders equity. These amounts represent a portion of the unrecognized net loss for the years ending July 2, 2004 and June 27, 2003. (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 July 2, 2004, June 27, 2003 and June 28, 2002 amounted to $407, $337 and $177, respectively, net of retiree contributions. F-36 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Net periodic post-retirement benefit costs are as follows:
YEAR ENDED Year ended Year ended JULY 2, 2004 June 27, 2003 June 28, 2002 ------------ ------------- ------------- Service cost $ 154 $ 82 $ 55 Interest cost 409 247 206 Prior service cost 141 - - Net loss 246 91 34 ------------ ------------ ------------ Net post-retirement benefit cost $ 950 $ 420 $ 295 ============ ============ ============
YEAR ENDED Year ended CHANGE IN PROJECTED BENEFIT OBLIGATION JULY 2, 2004 June 27, 2003 ------------ ------------- Projected benefit obligation, beginning of period $ 6,699 $ 3,621 Service cost 154 82 Interest cost 409 247 Plan amendments - 1,198 Actuarial loss (1,267) 1,888 Benefits paid (407) (337) ------------ ------------ Projected benefit obligation, end of period $ 5,588 $ 6,699 ============ ============ CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ - $ - Company contributions 407 337 Benefits paid (407) (337) ------------ ------------ Plan assets at fair value, end of period $ - $ - ============ ============
F-37 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows:
YEAR ENDED Year ended JULY 2, 2004 June 27, 2003 ------------ ------------- Funded status of the plan $ (5,588) $ (6,699) Unrecognized loss 1,569 3,081 Unrecognized service cost 1,057 1,198 ------------ ------------ Accrued post retirement cost $ (2,962) $ (2,420) ============ ============
The accumulated post-retirement benefit obligation was determined using a 6.25% and 6.25% discount rate for the periods presented. The healthcare cost trend rate for medical benefits was changed from a flat 6.00% as of June 28, 2002 to a graded trend started at 12% for 2003 and decreasing 1% each year to 6.00% in 2009 and then to an ultimate rate of 5.50% for 2010 and beyond. 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 $378 and $518 and increase the service and interest components by $47 and $33 at July 2, 2004 and June 27, 2003, respectively. The Company's plan asset allocation at 2004 and 2003 and target allocations for 2005 are as follows:
Security Percentage of Target Type Plan Assets Allocation -------- --------------- ---------- 2004 2003 2005 ---- ---- ---- Guaranteed Investment Contract 6% 7% 5% Equity Securities 57% 52% 55% Debt Securities 37% 41% 40% ---- ---- ---- Total Plan Assets 100% 100% 100% ==== ==== ====
The Company's investment policy is to invest in stock and balanced funds of mutual fund and insurance companies to preserve principal while at the same time establish a minimum rate of return of approximately 5%. No more than one-third of the total plan assets are placed in any one fund. The expected long-term rate-of-return-on-assets is 8.5%. This return is based upon the historical performance of the currently invested funds. The benefits expected to be paid for each of the next five years and in the aggregate for the following five years are: 2005 $1,239 2006 1,324 2007 1,418 2008 1,512 2009 1,589 2010-2014 8,616 10. STOCK OPTIONS In January 1998, the Company adopted an incentive stock plan (the "Stock Incentive Plan"). Under the Stock Incentive Plan, 45.75206 shares are available for awards to employees of the Company. Options are granted at fair market value on the date of grant. As of July 2, 1999 options to purchase 38.17 shares of common stock were outstanding at weighted-average exercise price of $177. During 2001 options were granted to purchase 4.02 shares of common stock at weighted average exercise prices of $559 per share. During 2003 options to purchase 2.01 shares of common stock at a weighted average exercise price of $177 were forfeited and options to purchase 2.01 shares of common stock at a weighted average exercise price of $680 were issued. The options are subject to vesting provisions, as determined by the Board of Directors, and generally vest 100% five years from grant date and expire 10 years from date of grant. F-38 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) At July 2, 2004, 18.29 options were outstanding, 5.49 options were exercisable and no options have been exercised. 11. COMMITMENTS AND Commitments CONTINGENCIES (a) The Company leases building space and certain equipment in approximately 20 locations throughout the United States, Canada and Europe. At July 2, 2004, the Company's future minimum lease payments are as follows: 2005 $ 8,037 2006 7,844 2007 7,411 2008 6,028 2009 4,577 Thereafter 16,822 -------- $ 50,719 ========
Rent expense, including escalation charges, amounted to approximately $10,964, $10,941 and $8,259 for the years ended July 2, 2004, June 27, 2003 and June 28, 2002, respectively. (b) The Company has employment contracts with two officers, providing minimum annual salaries of $7,500 with no mandatory bonuses. The salaries will increase 10% annually until the agreements expire on June 29, 2007. Salaries and bonuses to these officers for the years ended July 2, 2004, June 27, 2003 and June 28, 2002 amounted to $9,983, $9,075 and $8,250. Contingencies (a) The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. F-39 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 12. CONCENTRATIONS OF Financial instruments that potentially subject the of CREDIT RISKS Company to significant concentrations of credit risk consist principally cash deposits and trade accounts receivable. The Company provides credit to customers on an unsecured basis after evaluating customer credit worthiness. Since the Company sells to a broad range of customers, concentrations of credit risk are limited. The Company provides an allowance for bad debts where there is a possibility for loss. The Company maintains demand deposits at several major banks throughout the United States, Canada and Europe. As part of its cash management process, the Company periodically reviews the credit standing of these banks. 13. SUPPLEMENTAL CASH (a) Cash Paid FLOW INFORMATION
JULY 2, June 27, June 28, Years ended 2004 2003 2002 ----------- ------------ ------------ ------------ Interest $ 78,547 $ 69,642 $ 65,831 ============ ============ ============ Income taxes $ 3,880 $ 1,027 $ 2,771 ============ ============ ============
(b) Non-Cash Financing and Investing Activities The Company purchased certain customer lists of GenPak effective July 2, 2004, for $5,780 in cash. In conjunction with the acquisition, a non-compete agreement was executed. The Company purchased certain assets of ELM effective July 2002, for $16,762 in cash. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 19,794 Goodwill 10,051 Purchase price (16,762) -------- Liabilities assumed $ 13,083 ========
F-40 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The Company purchased certain assets of Swan effective October 2001, for $63,600 in cash. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 48,728 Goodwill 36,228 Purchase price (63,600) -------- Liabilities assumed $ 21,356 ========
The Company purchased certain assets of RCR International, Inc. effective November 2000, for approximately $10,226 in cash. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 7,314 Goodwill 5,558 Purchase price (10,226) --------- Liabilities assumed $ 2,646 =========
14. SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. Tekni-Plex has aggregated its operating plants into three primary industry segments: Tubing Products, Packaging and Other. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins, have been reflected in Other. The Tubing Products and Packaging segments have operations in the United States, Europe and Canada. The Other segment has operations in the United States. F-41 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:
Year end July 2, 2004 Tubing Products Packaging Other TOTALS --------------------- --------------- --------- -------- -------- Revenues from external customers $210,239 $306,131 $119,272 $635,642 Interest expense 39,633 26,889 17,929 84,451 Depreciation and amortization 9,426 15,021 6,833 31,280 Segment income (loss) from operations 6,489 54,044 (11,798) 48,735 Segment assets 326,882 271,432 138,705 737,019 Expenditures for segment fixed assets 4,878 17,226 7,323 29,427
Year end June 27, 2003 Tubing Products Packaging Other TOTALS ---------------------- --------------- --------- -------- ------- Revenues from external customers $209,655 $291,794 $109,214 $610,663 Interest expense 33,420 22,698 15,148 71,266 Depreciation and amortization 6,769 14,243 6,482 27,494 Segment income from operations 35,361 60,175 3,540 99,076 Segment assets 322,822 297,303 141,638 761,763 Expenditures for segment fixed assets 5,371 18,603 7,460 31,434
Year end June 28, 2002 Tubing Products Packaging Other TOTALS ---------------------- --------------- --------- ------- -------- Revenues from external customers $216,564 $253,624 $107,561 $577,749 Interest expense 31,851 24,703 14,380 70,934 Depreciation and amortization 11,674 20,097 7,046 38,817 Segment income from operations 44,802 47,277 6,622 98,701 Segment assets 326,520 222,798 130,050 679,368 Expenditures for segment fixed assets 5,669 13,717 4,473 23,859
F-42 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Years ending JULY 2, 2004 June 27, 2003 June 28, 2002 ------------ ------------ ------------- ------------- OPERATING PROFIT Total operating profit for reportable segments before income taxes $ 48,735 $ 99,076 $ 98,701 Corporate and eliminations (17,673) (20,648) (20,853) ---------- --------- --------- Consolidated total $ 31,062 $ 78,428 $ 77,848 ========== ========= ========= ASSETS Total assets from reportable segments $ 737,019 $ 761,763 $ 679,368 Other unallocated amounts 10,663 23,001 12,595 ---------- --------- --------- Consolidated total $ 747,682 $ 784,764 $ 691,963 ========== ========= ========= DEPRECIATION AND AMORTIZATION Segment totals $ 31,280 $ 27,494 $ 38,817 Corporate 1,024 848 1,046 ---------- --------- --------- Consolidated total $ 32,304 $ 28,342 $ 39,863 ========== ========= ========= EXPENDITURES FOR SEGMENT FIXED ASSETS Segment totals $ 29,427 $ 31,434 $ 23,859 Other unallocated expenditures 701 798 794 ---------- --------- --------- Consolidated total $ 30,128 $ 32,232 $ 24,653 ========== ========= ========= REVENUES GEOGRAPHIC INFORMATION United States $ 545,597 $ 531,556 $ 516,873 Canada 17,991 12,361 10,078 Europe, primarily Belgium 72,054 66,746 50,798 ---------- --------- --------- Total $ 635,642 $ 610,663 $ 577,749 ========== ========= ========= LONG-LIVED ASSETS GEOGRAPHIC INFORMATION United States $ 385,120 $ 390,099 $ 361,487 Canada 10,469 11,555 9,876 Europe 24,087 23,322 22,706 ---------- --------- --------- Total $ 419,676 $ 424,976 $ 394,069 ========== ========= =========
F-43 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND 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 each of the three years in the period ended July 2, 2004 no single customer represented at least 10% of sales. Garden hose products represented 30%, 33%, 33% of sales in fiscal years 2004, 2003 and 2002, respectively. Foam egg cartons represented 13%, 17% and 18% of sales in fiscal year 2004, 2003 and 2002, respectively. It is impractical for the Company to provide further product line information. However, no other product lines represented 10% or more of revenues in any years presented. 15. SUPPLEMENTAL Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated CONDENSED Notes in June 2000 and May 2002 and 8 3/4% Senior CONSOLIDATING Secured Notes in November 2003. These notes are FINANCIAL guaranteed by all domestic subsidiaries of Tekni-Plex. STATEMENTS The guarantor subsidiaries are 100% owned by the issuer. The guaranties are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). F-44 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Statement of Operations - For the year ended July 2, 2004
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Sales, net $ 147,923 $ 397,674 $ 90,045 $ 635,642 Cost of sales 109,294 350,831 67,521 527,646 ---------- ---------- ---------- ---------- Gross profit 38,629 46,843 22,524 107,996 Selling, general and administrative 36,056 24,552 8,551 69,159 Integration expense 1,717 6,058 -- 7,775 ---------- ---------- ---------- ---------- Income from operations 856 16,233 13,973 31,062 Interest expense, net 84,363 (36) 124 84,451 Unrealized loss (gain) on derivative contract (10,654) -- -- (10,654) Other expense (income) (847) (1,734) 3,186 605 ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes (72,006) 18,003 10,663 (43,340) Provision for income taxes 6,417 1,605 3,099 11,121 ---------- ---------- ---------- ---------- Net income (loss) $ (78,423) $ 16,398 $ 7,564 $ (54,461) ========== ========== ========== ==========
F-45 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Balance Sheet - at July 2, 2004
Non- Issuer Guarantors Guarantors Eliminations TOTAL ------------ ------------ ------------ ------------ ------------ CURRENT ASSETS $ 38,357 $ 218,542 $ 71,107 $ - $ 328,006 Property, plant and equipment, net 43,178 113,335 26,236 - 182,749 Intangible assets (19,936) 216,404 10,810 - 207,278 Investment in subsidiaries 560,638 - - (560,638) - Deferred financing costs, net 9,536 116 - - 9,652 Deferred taxes 30,032 (9,205) (2,034) - 18,793 Other long-term assets 339,165 257,456 (456) (594,961) 1,204 ------------ ------------ ------------ ------------ ------------ TOTAL ASSETS $ 1,000,970 $ 796,648 $ 105,663 $ (1,155,599) $ 747,682 ============ ============ ============ ============ ============ CURRENT LIABILITIES 26,277 47,577 24,276 - 98,130 Long-term debt 727,577 - 4,309 - 731,886 Other long-term liabilities 343,537 247,947 22,178 (594,961) 18,701 ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES 1,097,391 295,524 50,763 (594,961) 848,717 ------------ ------------ ------------ ------------ ------------ Additional paid-in capital 210,499 296,783 16,765 (313,529) 210,518 Retained earnings (accumulated deficit) (85,030) 211,569 35,540 (247,109) (85,030) Accumulated other comprehensive loss (1,367) (7,228) 2,595 - (6,000) Treasury stock (220,523) - - - (220,523) ------------ ------------ ------------ ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (96,421) 501,124 54,900 (560,638) (101,035) ------------ ------------ ------------ ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,000,970 $ 796,648 $ 105,663 $ (1,155,599) $ 747,682 ============ ============ ============ ============ ============
F-46 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Cash Flows - For the year ended July 2, 2004
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities: $ (13,327) $ (942) $ 6,905 $ (7,364) ---------- ---------- ---------- ---------- Cash flows from investing activities: Acquisitions - (5,780) - (5,780) Capital expenditures (7,459) (16,851) (5,162) (29,472) Cash proceeds on sale of assets - 1,222 124 1,346 Additions to intangibles (220) - - (220) ---------- ---------- ---------- ---------- Net cash used in investing activities (7,679) (21,409) (5,038) (34,126) ---------- ---------- ---------- ---------- Cash flows from financing activities: Net borrowings (repayment) under line of credit (15,000) - - (15,000) Proceeds from long-term debt 267,438 - - 267,438 Repayment of long-term debt (248,511) - (147) (248,658) Proceeds from capital contribution 22,500 - - 22,500 Debt financing (2,767) - - (2,767) Change in intercompany accounts (11,664) 11,624 40 - ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 11,996 11,624 (107) 23,513 ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash - - (350) (350) ---------- ---------- ---------- ---------- Net increase (decrease) in cash (9,010) (10,727) 1,410 (18,327) Cash, beginning of year 20,900 19,650 7,512 48,062 ---------- ---------- ---------- ---------- Cash, end of year $ 11,890 $ 8,923 $ 8,922 $ 29,735 ========== ========== ========== ==========
F-47 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Statement of Operations - For the year ended June 27, 2003
Non- Issuer Guarantors Guarantors TOTAL ---------- ---------- ---------- ---------- Sales, net $ 149,202 $ 382,354 $ 79,107 $ 610,663 Cost of sales 104,251 296,519 58,701 459,471 ---------- ---------- ---------- ---------- Gross profit 44,951 85,835 20,406 151,192 Selling, general and administrative 28,709 25,835 7,056 61,600 Integration expense - 11,164 - 11,164 ---------- ---------- ---------- ---------- Income from operations 16,242 48,836 13,350 78,428 Interest expense, net 71,168 (61) 159 71,266 Unrealized loss on derivative contract 1,997 - - 1,997 Other expense (income) (825) (1,851) 2,145 (531) ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes (56,098) 50,748 11,046 5,696 Provision (benefit) for income taxes (22,439) 20,330 4,415 2,306 ---------- ---------- ---------- ---------- Net income (loss) $ (33,659) $ 30,418 $ 6,631 $ 3,390 ========== ========== ========== ==========
F-48 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Balance Sheet - at June 27, 2003
Non- Issuer Guarantors Guarantor Eliminations TOTAL ---------- ---------- ---------- ------------ -------- CURRENT ASSETS $ 56,727 $241,910 $ 61,151 $ - $359,788 Property, plant and equipment, net 42,411 111,880 25,230 - 179,521 Intangible assets 8,713 192,049 12,390 - 213,152 Investment in subsidiaries 535,567 - - (535,567) - Deferred financing costs, net 11,735 116 - - 11,851 Deferred taxes 21,204 64 (2,096) - 19,172 Other long-term assets 81,667 279,227 (647) (358,967) 1,280 ---------- -------- ---------- ---------- -------- TOTAL ASSETS $ 758,024 825,246 $ 96,028 $ (894,534) $784,764 ========== ======== ========== ========== ======== CURRENT LIABILITIES $ 46,758 $ 43,487 $ 19,878 $ - $110,123 Long-term debt 708,115 - 4,660 - 712,775 Other long-term liabilities 67,886 292,499 25,259 (358,967) 26,677 ---------- -------- ---------- ---------- -------- TOTAL LIABILITIES 822,759 335,986 49,797 (358,967) 849,575 ---------- -------- ---------- ---------- -------- Additional paid-in capital 187,999 296,783 15,656 (312,420) 188,018 Retained earnings (accumulated deficit) (30,569) 195,171 27,976 (223,147) (30,569) Accumulated other comprehensive loss (1,642) (2,694) 2,599 - (1,737) Treasury stock (220,523) - - - (220,523) ---------- -------- ---------- ---------- -------- TOTAL STOCKHOLDERS' DEFICIT (64,735) 489,260 46,231 (535,567) (64,811) ---------- -------- ---------- ---------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 758,024 $825,246 $ 96,028 $ (894,534) $784,764 ========== ======== ========== ========== ========
F-49 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Cash Flows - For the year ended June 27, 2003
Non- Issuer Guarantors Guarantors TOTAL ------ ---------- ---------- ----- Net cash provided by (used in) operating activities: $(33,777) $42,558 $6,248 $15,029 -------- ------- ------ ------- Cash flows from investing activities: Acquisitions - (16,762) - (16,762) Capital expenditures (11,726) (15,865) (4,641) (32,232) Additions to intangibles (149) - (851) (1,000) -------- ------- ------ ------- Net cash used in investing activities (11,875) (32,627) (5,492) (49,994) -------- ------- ------ ------- Cash flows from financing activities: Net borrowings (repayment) under line of credit 45,000 - - 45,000 Proceeds from long-term debt - - 1,116 1,116 Repayment of long-term debt (9,330) - (425) (9,755) Proceeds from capital contribution 17,842 - - 17,842 Change in intercompany accounts 4,229 (941) (3,288) - -------- ------- ------ ------- Net cash provided by financing activities 57,741 (941) (2,597) 54,203 -------- ------- ------ ------- Effect of exchange rate changes on cash - - 625 625 -------- ------- ------ ------- Net increase (decrease) in cash 12,089 8,990 (1,216) 19,863 Cash, beginning of period 9,035 10,660 8,504 28,199 -------- ------- ------ ------- Cash, end of period $21,124 $19,650 $ 7,288 $48,062 ======= ======= ======= =======
F-50 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Statement of Operations - For the year ended June 28, 2002
Non- Issuer Guarantors Guarantors TOTAL ------ ---------- ---------- ----- Sales, net $ 160,252 $ 356,621 $ 60,876 $ 577,749 Cost of sales 116,130 270,380 43,947 430,457 --------- --------- -------- --------- Gross profit 44,122 86,241 16,929 147,292 Selling, general and administrative 39,610 23,464 6,370 69,444 --------- --------- -------- --------- Income from operations 4,512 62,777 10,559 77,848 Interest expense, net 70,881 (101) 154 70,934 Unrealized loss on derivative contract 7,830 - - 7,830 Other expense (income) (756) (1,155) 1,905 (6) --------- --------- -------- --------- Income (loss) before provision for income taxes (73,443) 64,033 8,500 (910) Provision (benefit) for income taxes (25,979) 28,597 3,059 5,677 --------- --------- -------- --------- Net income (loss) $ (47,464) $ 35,436 $ 5,441 $ (6,587) ========= ========= ======== =========
F-51 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Cash Flows - For the year ended June 28, 2002
Non- Issuer Guarantors Guarantors TOTAL ------ ---------- ---------- ----- Net cash provided by (used in) operating activities: $(31,450) $ 35,167 $ 4,205 $ 7,922 -------- -------- -------- -------- Cash flows from investing activities: Acquisitions - (63,624) - (63,624) Capital expenditures (11,147) (11,421) (2,085) (24,653) Additions to intangibles (169) - - (169) -------- -------- -------- -------- Net cash used in investing activities (11,316) (75,045) (2,085) (88,446) -------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayment) under line of credit (19,000) - - (19,000) Proceeds from long-term debt 40,600 - 147 40,747 Repayment of long-term debt (7,440) - - (7,440) Proceeds from capital contribution 50,000 - - 50,000 Deferred financing costs (154) - - (154) Purchase of Treasury Stock (61) - - (61) Change in intercompany accounts (45,034) 45,217 (183) - -------- -------- -------- -------- Net cash provided by financing activities 18,911 45,217 (36) 64,092 -------- -------- -------- -------- Effect of exchange rate changes on cash - - (14) (14) -------- -------- -------- -------- Net increase (decrease) in cash (23,855) 5,339 2,070 (16,446) Cash, beginning of year 32,890 5,321 6,434 44,645 -------- -------- -------- -------- Cash, end of year $ 9,035 $ 10,660 $ 8,504 $ 28,199 ======== ======== ======== ========
F-52 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Quarter Quarter Third Quarter Fourth Quarter ------- ------- ------------- -------------- 2004 Net sales $ 136,058 $122,712 $ 169,133 $ 207,739 Gross profit 29,828 29,030 44,456 4,682 Income (loss) from operations 13,286 13,506 25,590 (21,320) Net income (loss) (1,141) (5,512) 3,226 (51,034)(1) 2003 Net sales $ 140,583 $118,584 $ 166,091 $ 185,405 Gross profit 29,892 31,370 44,125 45,805 Income from operations 15,981 14,897 23,199 24,351 Net income (loss) (4,768) 279 4,352 3,527 ========= ======== ========== ==========
Fluctuations in net sales are due primarily to seasonality in a number of product lines, particularly garden hose and irrigation hose products. Income from operations in the fourth quarter was adversely impacted by rapidly rising raw material costs, particularly at our garden hose operations where we could not pass these increased costs through to our customers. As a result, we recorded a $4.6 million write-off of garden hose inventory to reflect market values that were below cost at year-end. In addition, the Company increased its reserve on deferred taxes by approximately $15,000 to reserve for deferred taxes generated by 4th quarter losses of 2004. (1) The fourth quarter of 2004 includes certain fourth quarter adjustments including the following; (a) a $10.0 million impairment of goodwill associated with our other operations; and (b) a change in our estimates of our sales allowances that increased our allowances by $8.0 million; (c) a $7.0 million reduction in our deferred tax asset. F-53 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL SCHEDULE Board of Directors Tekni-Plex, Inc. Somerville, New Jersey The audits referred to in our report dated October 3, 2004 relating to the consolidated financial statements of Tekni-Plex, Inc. and its subsidiaries (the "Company"), included the audits of the financial statement schedule for the years ended July 2, 2004, June 27, 2003, and June 28, 2002 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. /s/ BDO Seidman, LLP Woodbridge, New Jersey October 3, 2004 F-54 TEKNI-PLEX, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS)
Charged to Balance at Costs and BALANCE AT END Beginning of Period Expenses (1) Deductions (2) OF PERIOD(3) --------------------- ------------ -------------- -------------- YEAR ENDED JUNE 28, 2002 Accounts receivable allowance for possible losses $1,500 $ 484 $313 $1,671 ====== ====== ==== ====== YEAR ENDED JUNE 27, 2003 Accounts receivable allowance for possible losses $1,671 $2,350 $223 $3,798 ====== ====== ==== ====== YEAR ENDED JULY 2, 2004 Accounts receivable allowance for possible losses $3,798 $2,316 $786 $5,328 ====== ====== ==== ======
(1) To increase accounts receivable allowance. (2) Uncollectible accounts written off, net of recoveries. (3) Amounts do not include certain accounts receivable reserves that are disclosed as "allowances" on the Consolidated Balance Sheets since they are not valuation reserves. F-55