10-K 1 y14104e10vk.txt 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 1, 2005 [ ] 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. 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 of which has been funded. All members of management maintained 100% of their interests in the Company. Also, Tekni-Plex entered into a new credit agreement, issued $275 million in new senior subordinated notes, and repaid the debt that existed prior to the recapitalization. In October 2000, we acquired substantially all the assets of the Super Plastics division of RCR International Inc. Super Plastics is primarily a manufacturer of garden hose and has a manufacturing facility in Mississauga, Ontario, Canada. The Super Plastics operations have been integrated with and into our garden hose business. In October 2001, we acquired substantially all of the assets of the garden hose business of Mark IV Industries, Inc. which operates under the name Swan Hose. Swan, which has one manufacturing facility located in Bucyrus, Ohio, enhanced Tekni-Plex's geographic 2 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 food service markets. In July 2004, we acquired the egg carton business of Genpak and we have integrated this business into our packaging operations. RECENT DEVELOPMENTS As previously disclosed on Form 8-K filed September 21, 2005, Tekni-Plex has identified certain inventory overstatements at its American Gasket & Rubber Division which resulted in a $6.8 million overstatement of inventory. With the assistance of outside legal counsel as well as an independent registered public accounting firm other than BDO Seidman, LLP, the Audit Committee of the Board of Directors of Tekni-Plex has concluded an internal investigation into this matter. See Item 9a below. These inventory overstatements at American Gasket and Rubber Division has required a non-cash charge to results of operations as follows: Fiscal 2005 $(2.8) million Fiscal 2004 $(2.7) million Fiscal 2003 $(0.5) million Fiscal 2002 $(0.5) million Fiscal 2001 $(0.3) million
Results of operations for the periods prior to fiscal 2005 and fiscal 2005 quarterly results have been restated herein. Management has concluded that the impact of inventory overstatements on periods prior to the beginning of fiscal 2004 are not material in any one reporting period. In addition, management has concluded that the impact of these errors on interim reporting periods filed under Form 10-Q during fiscal 2004 and fiscal 2005 are also not material. Consequently investors can continue to rely on all financial statements issued prior to June 28, 2003 as well as the quarterly reports filed during fiscal 2004 and 2005 on Form 10-Q. Tekni-Plex has terminated the employment of the individual directly responsible for the inventory restatements at American Gasket & Rubber. It has also improved training for the accounting staff of this Division. In addition, Tekni-Plex has improved its internal financial systems and controls across all of its divisions to, among other things, increase both the frequency by which inventory is monitored as well as the number of managers responsible for monitoring inventory. Finally, Tekni-Plex will increase the frequency and depth by which the inventory of each of our divisions is tested by our independent registered public accountants during the course of our annual audit as additional audit procedures. In July, 2005 Tekni-Plex raised an additional $5.4 million through the issuance of additional shares of our Series A redeemable preferred stock with terms identical to the preferred stock issued in June, 2005. (See note 7 of the audited consolidated financial statements.) DESCRIPTION OF SEGMENTS See footnote 14 of our July 1, 2005 audited consolidated 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, Argentina 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: 3 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 market positions in core businesses. We have a strong market presence in the United States 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
- Significant barriers to entry. We believe there are significant barriers to entry to our packaging and tubing products businesses. In our pharmaceutical packaging business, we believe that pharmaceutical companies are generally reluctant to change or substitute packaging once a new drug offering has gained FDA approval. In our food packaging businesses, we believe that high capital costs and high technical competence required for manufacturing processes create barriers to entry. In our medical tubing and garden hose businesses, we utilize proprietary formulations and are a low cost market leader with technologically advanced processes that cannot be readily replicated. - Non-cyclical end markets. A majority of our packaging products and materials are sold into markets which are traditionally stable through economic cycles, including food and beverages, personal care products, pharmaceuticals, and medical tubing. We also believe that our garden hose business, while highly seasonal, is resistant to economic cyclicality. - 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. - 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. For example, we applied technologies that we utilize in the manufacturing of our aerosol packaging components to our garden hose business which significantly increased manufacturing throughput and product functionality while reducing material cost. - 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. - Experienced management team. Our Senior management team has an average of 25 years of experience in the industry. Since 1994, management has successfully integrated the acquisition of the operations and assets of 10 businesses. Management has substantially improved the competitive position of each of the acquired businesses by integrating the acquisitions, effecting turnarounds, providing strategic direction and leadership, increasing sales and market share, improving manufacturing efficiencies and productivity, and developing new technologies to enhance their competitive strengths. Current management owns more than 20% of the fully diluted common stock of the Company.. 4 EMPLOYEES We have approximately 3,250 employees. Approximately one-third of our employees are represented by labor unions; we believe our labor relations with those unions are satisfactory. 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. - Growth through product line extension and improvement. We continually seek to improve and extend our product lines and leverage our existing technological capabilities in order to increase market share in existing markets, effectively penetrate new markets and improve profitability. Our strategy is to emphasize our expertise in providing packaging, products and materials with specific high performance characteristics through the development of various unique proprietary materials and proprietary manufacturing process techniques. - Growth through international expansion. We believe that there is significant opportunity to expand our international sales, which currently represent approximately 14.6% of our total revenues. At present, we have manufacturing operations with attached sales offices in Europe, Canada and Argentina. We have a regional sales office in Asia and sales representatives in the Middle East. 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 $348.7 million (50.1% of total revenues) for the year ended July 1, 2005 and $306.1 million (48.2% of total revenues) for the year ended July 2, 2004. 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 5 We believe that we are a market leader for clear, high-barrier laminations for pharmaceutical blister packaging. These packaging materials are used for fast-acting pharmaceuticals that are generally highly reactive to moisture. Transparent, high-barrier blister packaging is primarily used to protect drugs from moisture vapor infiltration or desiccation. Blister packaging is the preferred packaging form when dispenser handling can affect shelf life or drug efficacy, or when unit dose packaging is needed. Unit dose packaging is being used to improve patient compliance with regard to dosage regimen, and has been identified as the packaging form of choice in addressing child safety aspects of drug packaging. The advantages of transparent blisters, as opposed to opaque foil-based materials manufactured by various competitors, include the ability to visually inspect the contents of the blister and to present the product with maximum confidence. We believe the flexible and semi-rigid packaging segment of the pharmaceutical packaging industry is growing at a faster rate than the non-plastics segments because of the generally lower package cost and broader range of functional characteristics of plastic packaging. As a result, the technologies used to manufacture plastic packaging materials continue to develop at a faster pace than those used in the more mature paper, glass, and metal products. Our high-barrier blister packaging is sold to major pharmaceutical companies (or their designated contract packagers). We market our full pharmaceutical product line directly on a worldwide basis, and have assembled a global network of sales and marketing personnel on six continents. In the clear blister packaging market, we have two principal competitors worldwide with resources equal to or greater than ours. However, we believe that neither of these competitors has the breadth of product offering to match ours, and that this differentiation is significant as viewed by the pharmaceutical industry. Also, the high manufacturing and 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. 6 Sales are primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments. These products are sold throughout the United States and Europe, as well as selected worldwide markets. Sales are made through our direct sales force. We believe that we are the leading supplier of aerosol valve and dispenser pump gaskets and dip tubes in the world. Our dip tubes and pen barrels are manufactured at extremely high speeds while holding to precise tolerances. The process enhancements that allow simultaneous high speed and precision are proprietary to us. The precision rubber gasket products, which we have manufactured for over fifty years, are produced using proprietary formulations. These formulations are designed to provide consistent functional performance throughout the entire shelf life of the product by incorporating chemical resistance characteristics appropriate to the fluid being packaged. For example, we have developed unique formulations that virtually eliminate contamination of the products packaged in spray dispensers. This has greatly expanded the use of these dispensers for personal hygiene products, foods, and fragrances. The Company has also developed proprietary methods for achieving extremely accurate thickness control, superior surface finish, and the elimination of internal imperfections prevalent in other processing methods. We are the single-source supplier to much of the industry. The principal competitive pressure in this product line, particularly the dip tube portion, is the possibility of customers switching to internal production, or vertical integration. To counteract this possibility, the Company focuses on product quality, cost reduction, prompt delivery, technical service and innovation. FOAM PLATES Our foam plate operations produce thermoformed foam polystyrene disposable plates, bowls, and hinged-lid containers as well as agricultural packaging products. Our sales are primarily to the consumer, agricultural and foodservice industries. We compete with numerous participants who use a variety of materials including foam polystyrene, pulp-based products and various plastic materials. TUBING SEGMENT The Tubing Products segment of our business had revenues of $213.1 million (30.6% of total revenues) for the year ended July 1, 2005 and $210.2 million (33.1% of total revenues) for the year ended July 2, 2004. 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. 7 Medical tubing is sold primarily to manufacturers of medical devices that are packaged specifically for such procedures and applications. These products are sold through our direct sales force. We remain competitive by focusing on product quality, performance and prompt delivery. ITEM 2. FACILITIES The Company believes that its facilities are suitable for their purposes and have sufficient productive capacity for its current and foreseeable operational and administrative needs. Set forth below is a list and brief description of all of the Company's offices and facilities, all of which are owned unless otherwise indicated.
APPROXIMATE LOCATION PRIMARY FUNCTION SQUARE FEET ---------------------------------- --------------------------- ----------- Auburn, Maine(1).................. Manufacturing 24,000 Belfast, Northern Ireland......... Manufacturing 47,580 Blauvelt, New York(5)............. Manufacturing 56,400 Burlington, New Jersey............ Manufacturing 124,000 Bucyrus, Ohio..................... Manufacturing 587,649 Buenos Aires, Argentina(3)........ Manufacturing and warehouse 12,900 Cambridge, Ontario, Canada........ Manufacturing and warehouse 40,000 City of Industry, California(6)... Manufacturing 110,000 Clayton, North Carolina........... Manufacturing 99,665 Clinton, Illinois................. Manufacturing 69,000 Columbus, Ohio(2)................. Sales Offices 3,761 Coppell, Texas(3)................. Executive Offices 3,125 Dallas, Texas..................... Manufacturing 139,000 Decatur, Indiana.................. Manufacturing 187,000 Decatur, Indiana(1)............... Warehouse 3,750 East Farmingdale, New York(3)..... Manufacturing 56,556 East Farmingdale, New York (3).... Warehouse 11,000 Erembodegem (Aalst), Belgium...... Manufacturing 125,667 Erembodegem (Aalst), Belgium(9)... Warehouse 64,070 Flemington, New Jersey............ Manufacturing 145,000 Fullerton, California (8)......... Manufacturing and warehouse 60,250 Harrison, New Jersey(4)........... Warehouse 135,501 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(5)............. Manufacturing and warehouse 149,800 Memphis, Tennessee(5)............. Warehouse 50,000 Milan (Gaggiano), Italy(3)........ Warehouse 12,920 Milan (Gaggiano), Italy........... Manufacturing 14,900 Milan (Gaggiano), Italy........... Manufacturing 25,800 Milan (Rosate), Italy(5).......... Manufacturing 24,000 Mississauga, Ontario, Canada(10)... Manufacturing 118,196 Mississauga, Ontario, Canada(4)... Manufacturing 100,000 Piscataway, New Jersey(4)......... Manufacturing 155,000 Ridgefield, New Jersey............ Manufacturing 330,000 Rockaway, New Jersey.............. Manufacturing 90,550 Schaumburg, Illinois(11).......... Manufacturing and warehouse 97,966 Schiller Park, Illinois........... Manufacturing 15,232 Shelby, Ohio(6)................... Warehouse 350,000 Singapore(1)...................... Sales Office 550 Somerville, New Jersey............ Manufacturing 172,000 Sparks, Nevada(7)................. Manufacturing 448,000 Tonawanda, New York(7)............ Manufacturing 32,000 Troy, Ohio(5)..................... Manufacturing and warehouse 200,000 Tustin, California(1)............. Sales Office 414 Waco, Texas....................... Manufacturing 104,600 Wenatchee, Washington............. Manufacturing 97,000 Wenatchee, Washington(5).......... Warehouse 26,200 Wenatchee, Washington(1).......... Warehouse 8,000
8 (Years relate to calendar years) (1) Leased on a month-to-month basis. (2) Lease expires in 2005. (3) Lease expires in 2006. (4) Lease expires in 2007. (5) Lease expires in 2008. (6) Lease expires in 2009. (7) Lease expires in 2012. (8) Lease expires in 2013. (9) Lease expires in 2014. (10) Lease expires in 2015. (11) Lease expires in 2030. 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. 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. Our management includes a Director of Environmental Affairs who is responsible for compliance with all laws and regulations relating to the environment, and health and safety. In connection with this duty, this director performs internal auditing procedures, provides direction to local facility managers in the compliance areas and retains outside environmental counsel and outside environmental consulting firms to assist with environmental compliance. We are also subject to environmental laws requiring the investigation and cleanup of environmental contamination. In addition to remediation being undertaken by third parties at a limited number of our locations, we are currently 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. If any other events were to occur in the future that would be deemed to have effected a "change of control" of any of our New Jersey facilities as defined under New Jersey's Industrial Site Recovery Act, we would be required to take additional actions to comply with such statute, including possibly additional investigations and remediation. We also are conducting remediation at a formerly-owned New Jersey facility under a voluntary cleanup agreement with the state. We cannot assure you that any costs ultimately borne by us in connection with any of these remediation projects would not be material. We recently voluntarily self-disclosed to regulators certain non-compliances with the air permit for our Troy, OH facility. While discussions with the Ohio Regional Air Pollution Control Agency are ongoing, we expect that we will be required to install pollution controls at this facility in 2006, the cost of which we estimate should not exceed $1 million, based on current information. We may also be required to pay a fine, but based on the preliminary stage of discussions, we cannot predict whether such a fine will be imposed, or if so, in what amount. In 2004, the National Enforcement Investigation Center (NEIC), on behalf of the United States Environmental Protection Agency (EPA), conducted an environmental review of our Burlington, NJ site concerning federal Clean Air Act requirements. The EPA subsequently issued a request for further information regarding these air issues under Section 114 of the federal Clean Air Act. While we have not received any further communications from the EPA or NEIC, this matter could lead to findings of noncompliance and result in additional environmental costs and penalties, which could be substantial. In 2004, we also 9 received a similar request for information from the EPA concerning air emissions at our Wenatchee, Washington plant which we do not expect to result in significant costs or fines or penalties. 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, 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. 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 and previously filed. Acquisitions the Company made in certain years result in years not being comparable. As previously disclosed on Form 8-K as filed September 21, 2005, Tekni-Plex has identified certain overstated inventory at its American Gasket & Rubber Division which resulted in a $6.8 million overstatement of inventory. This inventory overstatement has required a non-cash charge to results of operations as follows: Fiscal 2005 $(2.8) million Fiscal 2004 $(2.7) million Fiscal 2003 $(0.5) million Fiscal 2002 $(0.5) million Fiscal 2001 $(0.3) million
Year Ended -------------------------------------------------------- June 29, June 28, June 27, July 2, 2001 2002 2003 2004 July 1, Restated Restated Restated Restated 2005 --------- -------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales........................................ $ 525,837 $577,749 $ 610,663 $ 635,642 $ 695,524 Cost of goods sold............................... 400,156 430,920 459,981 530,372 600,170 Gross profit..................................... 125,681 146,829 150,682 105,270 95,354 Integration Expense.............................. -- -- 11,164 7,775 10,478 Selling, general and administrative expenses..... 60,999 69,444 61,600 69,159 60,690 Income from operations........................... 64,682 77,385 77,918 28,336 24,186 Interest expense, net(a)......................... 76,569 70,934 71,266 84,451 89,899 Unrealized loss (gain) on derivative contracts... 13,891 7,830 1,997 (10,654) (8,287) Other expense (income)........................... 605 (6) (531) 605 (2,194) Pre-tax income (loss)............................ (26,383) (1,373) 5,186 (46,066) (55,232) Income tax provision (benefit)................... (7,069) 5,677 2,306 11,121 26,247 Net income (loss)................................ (19,314) (7,050) 2,880 (57,187) (81,479) BALANCE SHEET DATA (AT YEAR END): Working capital.................................. 198,809 $218,136 248,372 225,857 201,074 Total Assets..................................... 621,174 691,180 783,471 743,663 691,695 Total debt (including current portion)........... 678,150 692,821 729,484 734,007 800,517 Stockholders' (deficit).......................... (135,017) (91,894) (66,104) (105,054) (213,327) OTHER FINANCIAL DATA: Depreciation and amortization.................... 37,670 $ 39,863 28,342 32,304 32,653 Capital expenditures............................. 17,116 24,653 32,232 30,128 18,246 Cash flows: From (used in) operations........................ (3,266) 7,922 15,029 (7,364) (24,461) From (used in) investing......................... (26,777) (88,446) (49,994) (34,126) (19,000) From financing................................... 62,180 64,092 54,203 23,513 32,272
---------- (a) Interest expense included a $1,400 reduction in deferred financing costs and a $5,000 reduction in deferred financing costs in fiscal 2005 and fiscal 2004 respectively. (b) Income tax provision contains the write-off of deferred tax assets of $23.1 million and $7.0 million in 2005 and 2004, respectively. 10 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. Restated financial statements can be found elsewhere in this filing. The table below sets forth, for the periods indicated, selected operating data as a percentage of net sales. SELECTED FINANCIAL INFORMATION (PERCENTAGE OF NET SALES)
June 27 July 2, 2003 2004 July 1, Restated Restated 2005 --------- -------- --------- Net sales........................................ 100.0% 100.0% 100.0% Cost of sales.................................... 75.3 83.4 86.3 Gross profit..................................... 24.7 16.6 13.7 Integration Expense.............................. 1.8 1.2 1.5 Selling, general and administrative expenses..... 10.1 10.9 8.7 Income from operations........................... 12.8 4.5 3.5 Interest expense................................. 11.7 13.3 12.9 Provision (Benefit) for income taxes............. 0.4 1.7 3.8 Net income (loss)................................ 0.5 (9.0) (11.7) Depreciation and amortization.................... 4.6 5.1 4.7
YEAR ENDED JULY 1, 2005 COMPARED TO THE YEAR ENDED JULY 2, 2004 Net sales increased to $695.5 million in fiscal 2005 from $635.6 million in fiscal 2004, representing a 9.4% gain. Net sales in our Packaging Segment grew 13.9% to $348.7 million in the most recent period from $306.1 million in the comparable period of 2004 due to both higher selling prices and sales volumes. Net sales in our Tubing Products Segment increased 1.3% to $213.1 million in fiscal 2005 from $210.2 million in fiscal 2004 primarily due to a 3 to 6 percent increase in our garden hose prices that generally went into effect in January 2005. Higher garden hose prices were partially offset by lower, weather-related, garden hose sales volumes during fiscal 2005 compared to the previous year. Other net sales grew 12.2% to $133.8 million in fiscal 2005 compared to $119.3 million in the previous year due to both higher selling prices and higher volumes. Our accruals for rebates, discounts and sales allowances decreased to $43.0 million or 6.2% of net sales in fiscal 2005 compared to $49.1 million or 7.7% of net sales in fiscal 2004. The decrease was due to changes in our sales programs as well as changes in the volumes purchased by each of our customers during the year. Cost of goods sold increased to $600.2 million in fiscal 2005 from $530.4 million in fiscal 2004. Expressed as a percentage of net sales, cost of goods sold increased to 86.3% in the current period compared to 83.4% in the prior period, primarily due to higher raw 11 material costs. Tekni-Plex's primary raw materials are Polyvinyl Chloride (PVC), Polystyrene, Vinyl Chloride Monomer (VCM) and various plasticizers, all of which are petrochemical based. Generally higher oil and natural gas prices, coupled with strong global demand for commodity chemicals and tight supplies, have resulted in generally higher costs for all of our key raw materials. We expect this trend to continue for the foreseeable future. In most of our businesses we have been able to pass on higher material costs to our customers in a relatively short time period. However, like most seasonal retail products, we traditionally have sold garden hose under annual agreements, where prices are generally set in the fall and generally remain in effect for the calendar year. Consequently, in recent fiscal years, the increase in raw material costs at our garden hose operations during a 12-month time period has reduced our profitability. In fiscal 2005, the two primary raw materials for our garden hose business, PVC and plasticizers, rose an average of 12% and 38% respectively. To mitigate the impact of expected increases in the cost of our raw materials and in contrast to previous years, we have not guaranteed garden hose pricing for the 2006 selling season. As previously discussed, our cost of goods sold reflects a $2.8 million inventory write-down (0.5% of net sales) in fiscal 2005 and a $2.7 million inventory write-down (0.4% of net sales) in fiscal 2004 to correct inventory restatements at our American Gasket and Rubber Division. Gross profit, as a result of the above, decreased to $95.4 million in the current period compared to $105.3 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 13.7% in fiscal 2005 from 16.6% in comparable period of last year. Our Packaging Segment gross profit increased to $83.1 million in fiscal 2005 from $80.1 million for fiscal 2004 as we were largely able to pass on higher raw material costs to our Packaging Segment customers during the year. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 23.8% in the current period from 26.2% in the previous period. Our Tubing Products Segment gross profit decreased to $7.1 million in fiscal 2005 from $20.6 million in fiscal 2004. Expressed as a percentage of net sales, our Tubing Products Segment gross profit decreased to 3.3% in the current period from 9.8% in the previous period as significantly higher raw material cost, particularly for plasticizers, more than offset the 3 to 6 percent price increases that went into effect in January at our garden hose unit. Other gross profit increased to $5.2 million in fiscal 2005 from $4.5 million in fiscal 2004. Expressed as a percentage of net sales, other gross profit remained flat at 3.8%. Selling, general and administrative expenses decreased to $60.7 million in the most recent fiscal year from $69.2 million last year, primarily due to the inclusion of a $10 million reduction in goodwill in fiscal 2004. Measured as a percentage of net sales, selling, general and administrative expenses decreased to 8.7% in the current period from 10.9% in the previous period. Integration expenses increased to $10.5 million or 1.5% of net sales in fiscal 2005 from $7.8 million or 1.2% of net sales in fiscal 2004. The increase was largely related to the closing of our Rockaway, New Jersey facility and consolidating its operations at our Clinton, Illinois and Clayton, North Carolina facilities. Our integration expenses are typically cash expenses and relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards as well as the costs associated with consolidating facilities. These costs are comprised of the following:
2005 2004 ---- ---- Elm Packaging Material $ 3.8 $2.7 Labor 1.5 1.6 Overhead 2.5 2.6 Rockaway closing Material 1.5 0.1 Labor 0.1 0.1 Overhead 0.9 0.3 SG&A 0.2 0.2 ---- --- Total $10.5 $7.8 ==== ===
We expect the closing of our Rockaway facility to result in approximately $1 million of annual cost savings. We also expect the reconfiguring and realignment of our Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, decreased to $24.2 million in fiscal 2005 from $28.3 million in fiscal 2004. Expressed as a percentage of net sales, operating profit decreased to 3.5% in the most recent period from 4.5% in the comparable period of last year. Our Packaging Segment operating profit decreased to $49.0 million (14.0% of net sales) in the current period compared to $51.3 12 million (16.8% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($6.5) million or (3.0%) of net sales in the current period compared to profit of $6.5 million or 3.1% of net sales in the previous year. Other operating profit improved to a ($1.2) million loss or (0.9%) of net sales in the current period compared to a ($11.8) million loss or (9.9%) of net sales in the previous period. Interest expense increased to $89.9 million (12.9% of net sales) in fiscal 2005 from $84.5 million (13.3% of net sales) in fiscal 2004 due to an increase of $11.7 of debt as well as higher average interest rates. Interest expense also included a reduction in deferred financing costs of $1.4 million in fiscal 2005 and $5.0 million in fiscal 2004 resulting from repaying certain outstanding debt obligations through the issuance of new senior secured notes (see Note 7 of the audited consolidated financial statements). Unrealized gain on derivative transactions was $8.3 million or 1.2% of net sales in fiscal 2005 compared to $10.7 or 1.7% of net sales in the previous year due to the various movements of the interest rates embedded in our derivative contracts. Income (loss) before income taxes, as a result, was a loss of ($55.2) million or (7.9%) of net sales for fiscal 2005 compared to a loss of (46.1) million or (7.2%) of net sales for fiscal 2004. Income tax expense was $26.2 million for fiscal 2005 compared to $11.1 million for fiscal 2004 as we reserved $23.1 million against our deferred tax asset in fiscal 2005 and $15.0 million in fiscal 2004. Given our continued pre-tax losses in recent years, we decided to reserve fully against our deferred tax assets at the end of fiscal 2005. (See Note 8 of the audited consolidated financial statements.) Net income (loss), as a result, was a loss of ($81.5) million for fiscal 2005 or (11.7%) of net sales compared with a loss of ($57.2) million for fiscal 2004 or (9.0%) of net sales. 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. At the end of fiscal 2004, we increased by $8.0 million our accruals for rebates, discounts and sales allowances at our garden hose operations in order to properly reflect changes in our underlying sales programs. These accruals were $49.1 million or 7.7% of net sales in fiscal 2004 compared to $39.5 million or 6.5% of net sales in fiscal 2003. Cost of goods sold, increased to $530.4 million for the year ended July 2, 2004 from $460 million for the year ended June 27, 2003. Expressed as a percentage of net sales, cost of goods sold increased to 83.4% of net sales for the year ended July 2, 2004 compared to 75.3% for the year ended June 27, 2003, primarily due to significantly higher raw material costs. Generally higher oil and natural gas prices, coupled with strong global demand for commodity chemicals and tight supplies, have resulted in generally higher costs for all of our key raw material costs. In most of our business lines we have been able to pass along higher material costs to our customers in a relatively short time period, with one notable exception, garden hose, where we have traditionally agreed to hold prices constant for a 12 month period. In fiscal 2004, the two main raw materials for our garden hose business, PVC and plasticizers rose an average of 28% and 31% respectively. Due to our existing agreements with our garden hose customers, we were unable to pass along these increased costs during the fiscal year. As previously discussed, our cost of goods sold reflects a $2.7 million inventory write-down (0.4% of net sales) in fiscal 2004 and a $0.5 million inventory write-down (0.1% of net sales) in fiscal 2003 to correct inventory restatements at our American Gasket and Rubber Division. Gross profit, as a result, decreased to $105.3 million for the year ended July 2, 2004 from $150.7 million for the year ended June 27, 2003. The ratio of gross profit to net sales decreased to 16.6% for the year ended July 2, 2004 from 24.7% for the year ended June 27, 2003. Our Packaging Segment gross profit decreased by $7.6 million to $80.1 million from $87.1 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. Measured as a percentage of net sales our Packaging Segment gross profit decreased to 26.2% for the year ended July 2, 2004 from 30.1% 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, as discussed above, 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, as previously discussed, we adjusted our estimates of accruals for rebates, discounts and sales 13 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. Integration expense decreased to $7.8 million or 1.2% of net sales in fiscal 2004 from $11.2 million or 1.8% of net sales for the comparable period of fiscal 2003. These costs, which are typically cash expenses, relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards and are composed of the following.
2004 2003 ---- ---- Elm Packaging Material $2.7 $ 2.2 Labor 1.6 0.2 Overhead 2.6 2.8 Swan Hose Material -- 1.0 Labor -- 0.7 Overhead -- 4.2 Rockaway closing Material 0.1 -- Labor 0.1 -- Overhead 0.3 -- SG&A 0.2 -- ---- ----- Total $7.8 $11.2 ==== =====
We expect the closing of our Rockaway facility to result in approximately $1 million of annual cost savings. We also expect the reconfiguring and realignment of our Swan and Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products at our Elm locations; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, decreased to $28.3 million in the current fiscal year compared to $77.9 million in the previous year. Measured as a percentage of net sales, operating profit decreased to 4.5% in fiscal 2004 from 12.8% in fiscal 2003. Our Packaging Segment operating profit decreased to $51.3 million from $59.7 million last year. Measured as a percentage of net sales, Packaging Segment operating profit decreased to 16.8% in the year ended July 2, 2004 compared to 20.4% in the previous year. Our Tubing Products Segment operating profit decreased to $6.5 million from $36.4 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 17.3% 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 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. 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. (See Note 8 of the Audited Consolidated Financial Statements.) Net income (loss), as a result, was a loss of ($57.2) million or (9.0%) of net sales for the fiscal year ending July 2, 2004 compared to income of $2.9 million or 0.5% of net sales for the year ending June 27, 2003. LIQUIDITY AND CAPITAL RESOURCES 14 For the year ended July 1, 2005, net cash used in operating activities was $24.5 million compared to $7.4 million of cash used in operating activities in the prior year. The $17.1 million increase was due primarily to lower earnings caused by rapidly rising raw material costs that we were unable to fully pass along to our customers, particularly in our garden hose operations where historically we have sold our products under agreements which held prices constant for a 12 month period. Beginning with the 2006 selling season, we have discontinued the practice of guaranteeing garden hose prices for the entire season. While we believe raw material costs will continue to rise rapidly in fiscal 2006, we also believe the prices we have secured to date for our garden hose products will help restore our profitability. Furthermore, we believe that, subject to prevailing competitive pressures, we will generally be able to pass on future increases in raw material costs to primarily all of our customers, including our garden hose customers, albeit with a lag of one to three months. However, we can give you no assurance to that effect. In addition to lower earnings, a reduction in accounts payable and other liabilities contributed to the increase in cash used in operations . These uses of cash were partially offset by lower inventory levels across all of our businesses. Other various year-over-year changes in operating assets, accrued expenses, and liabilities are generally due to offsetting timing differences Significant increases in raw material costs, combined with soft demand in our garden hose business brought about by unfavorable weather conditions, have negatively impacted our financial performance in the last two fiscal years. As a result, we were not in compliance with the minimum consolidated EBITDA and minimum fixed charge coverage ratio covenants contained in our credit agreement for the fiscal quarters ended December 31, 2004 and April 1, 2005. In exchange for a waiver fee equaling 0.25% multiplied by the sum of the outstanding loans thereunder, the lenders under our credit agreement waived compliance with these covenants through June 10, 2005, by which time we were required to deliver to the lenders thereunder evidence that we have raised $30 million of equity financing. The waiver became permanent on June 10, 2005 when we issued $31.8 million of preferred stock. In addition, our liquidity position had been constrained, causing us to draw down substantially all of our revolving credit capacity. In response, we have entered into a series of transactions intended to improve our financial flexibility and address our covenant and liquidity constraints. In April, 2005, we received the consents required to amend certain covenants in the indenture governing our senior subordinated notes including our debt incurrence covenant. The amendments allow us, among other things, to incur incremental debt, not to exceed $90.0 million at any one time outstanding, in ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. Since that date, we have raised $37.2 million of additional equity through the issuance of our Series A redeemable preferred stock (See Note 7(e) of the audited Consolidated Financial Statements.) In June, 2005 we issued $150 million senior secured notes due 2012 and arranged a new $65 million asset backed credit facility. The proceeds from these offerings, combined with the new equity described above, were used to repay and cancel our previous credit agreement. As of July 1, 2005, we had an outstanding balance of $12.0 million under our new $65.0 million asset backed credit facility. As of November 1, 2005 our outstanding revolver balance has dropped to zero. Working capital at July 1, 2005 was $200.8 million compared to $225.9 million at July 2, 2004. The decrease was primarily caused by our operating loss offset by proceeds received from our issuance of new debt. Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the years ended July 1, 2005, July 2, 2004 and June 27, 2003 were $18.2 million and $29.5 million and $32.2 million, respectively. Management believes that we will be able to pass along expected higher raw material costs to our garden hose customers during fiscal 2006 and consequently, cash generated from operations plus funds available in the Company's new asset backed facility will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and other investments which management believes are prudent. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet all of our future cash needs. 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. At that time, Tekni-Plex had $344.0 million of term loans outstanding with variable rates of interest tied to US$ LIBOR. These loans, which originally had maturity dates ranging from June 2006 through June 2008, have been repaid. Concurrent with incurring this debt, Tekni-Plex entered into a series of interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on 3 month dollar LIBOR on an aggregate of $344.0 million amount of indebtedness. The swaps amortized on the same schedule as the original term loans. As of July 1, 2005 the notional amount of the swaps is $290.0 million. Portfolio theory and empirical evidence suggested that the change in value of a basket of LIBOR benchmarks would be less volatile than the change in value of a single benchmark. Since 2000, this has generally been our experience. In conjunction with its swap contracts Tekni-Plex also purchased an interest rate cap. Tekni-Plex believes the reduced volatility created by the interest rate swaps made the interest rate cap less expensive. We recorded an unrealized gain from derivative transactions of $8.3 million and $10.7 million in fiscal years 2005 and 2004, respectively. 15 Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which limit our incremental debt and capital expenditures. The availability of borrowings under our new asset based facility is subject to a borrowing base limitations equal to the lesser of the borrowing base as defined in the asset backed agreement and the then effective commitments under the new asset based facility minus such availability reserves as the administrative agent, in its sole discretion, deems appropriate. The late filing of our 10-K has caused us to be in violation of certain covenants contained in our debt agreements. These violations, which have either been waived or the applicable grace periods have not yet expired, have been remedied by virtue of this filing. At July 1, 2005, the Company's contractual obligations are as follows:
PENSION AND POST RETIREMENT INTEREST LONG-TERM PREFERRED (2) PREFERRED STOCK PAYMENTS DUE BY PERIOD HEALTHCARE EXPENSE DEBT DIVIDENDS ACCRETION (3) LEASES TOTAL ------------------------- ---------- -------- --------- ------------- ---------------- ------- ------- Less than 1 year......... $ 1.4 $ 83.1 $ 1.1 $0.0 $ 12.7 $ 8.3 $106.6 Year 2................... 1.5 83.1 0.2 0.5 12.7 7.7 105.7 Year 3................... 1.6 83.1 0.2 6.6 12.7 6.3 110.5 Year 4................... 2.0 79.1 12.3 6.6 12.7 4.7 117.4 Year 5................... 2.2 78.4 313.6 6.6 12.7 3.8 417.3 After 5 years............ 11.1 92.8 473.0 (4) 24.1 46.4 23.4 670.8
(1) Interest expense includes obligations under our interest rate swap agreement. (2) May be paid in kind (3) Non-cash increase in preferred stock. (4) Includes initial preferred stock value $54.8 million 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. 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 require 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 2005, the Company did not record an impairment charge. In fiscal 2004, an impairment charge of $10.0 million associated with its Specialty Resins operations was recorded. 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 16 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 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 2005 we increased our valuation allowance that reduced our deferred tax asset by approximately $21.3 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 sales rebates and allowances in any accounting period. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets," which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will become effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment," which established standards for transactions in which an entity exchanges its equity instruments for goods and services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowed under APB Opinion No. 25. SFAS No 123 (R) will be effective for fiscal years beginning after June 15, 2005. The statement does not require restatement of previously issued statements and can be applied on a prospective basis. The Company is in the process of evaluating the impact the adoption of this statement will have on its financial statements and believes the effect should be minimal. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), requiring that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for fiscal years beginning after June 15, 2005, with early application permitted. The Company is in the process of evaluating the impact the adoption of this statement will have on its financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3." This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle, in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. This Statement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on the Company's financial statements or results of operations. In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations." FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN No. 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than 17 the end of fiscal years ending after December 15, 2005. The Company does not believe the adoption of FIN No. 47 will have a material impact on the Company's financial statements or results of operations. INFLATION During fiscal 2005, 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 1, 2005 and July 2, 2004 the principal amount of the Company's aggregate outstanding variable rate indebtedness was $12.0 million and $153.0 million respectively. A hypothetical 1% adverse change in interest rates would have had an annualized unfavorable impact of approximately $0.1 million and $1.5 million respectively, on the Company's earnings and cash flows based upon these year-end debt levels.. 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. As previously disclosed on Form 8-K, in fiscal 2005, management identified certain overstated inventory valuations at its American Gasket & Rubber Division ("AGR"), totaling approximately $6.8 million, resulting in a $2.8 million reduction in fiscal 2005 operating profit, a $2.7 million reduction in fiscal 2004 operating profit and a restatement of Tekni-Plex's financial statements for those periods. Management promptly reported the inventory overstatement at AGR to the Board, the Audit Committee and BDO Seidman, LLP, our independent registered public accounting firm. The Audit Committee subsequently engaged counsel to supervise an internal investigation of the circumstances leading to the inventory overstatement. Counsel to the Audit Committee, in turn, engaged a forensic accounting firm to assist it in the investigation. The investigation determined that prior accounting management at AGR, from at least 2001 through fourth-quarter 2005, made unsupported adjustments to cost of goods sold that had the effect both of improving the appearance within Tekni-Plex of the financial performance of AGR and increasing the value of AGR's ending inventory. Tekni-Plex has terminated the employment of the accounting manager who made these adjustments and re-assigned his direct supervisor to functions that do not include accounting supervision. As part of the internal investigation, the investigative team made certain remedial recommendations to the Audit Committee, including that (1) a divisional controller or a manager delegated by a divisional controller be assigned responsibility, on a regular basis, to conduct a substantive review of AGR's financial statements, and that a similar structure of review be instituted with respect to other decentralized businesses of Tekni-Plex; (2) reporting by AGR accounting management be direct to Tekni-Plex corporate accounting; (3) notification be distributed to all Tekni-Plex accounting employees on a periodic basis instructing them that any difficulties in accounting or the use of the company's accounting systems be reported timely to Tekni-Plex corporate accounting; (4) in annual performance reviews of accounting and bookkeeping personnel, all reviewing personnel be required to inquire whether the reviewed employee has had or observed any problems in the use of approved accounting systems or in the accounting function generally, (5) Tekni-Plex apply additional resources to ensure that all of its site controllers and staff are trained properly in the use of company accounting systems, (6) in addition to establishing a hotline through which employees may report problems, Tekni-Plex publish to its employees a statement of ethics and periodically circulate written reminders to all employees that the company expects its employees (a) to perform all functions consistent with established accounting and legal standards and high ethics, and (b) to report any accounting difficulties to Tekni-Plex's corporate office. Lastly, the investigative team recommended that full consideration be given to establishing, or out-sourcing, an adequately staffed internal audit function. In fiscal 2006, the Audit Committee adopted these recommendations. In response to the findings above, Tekni-Plex has: (1) terminated the employment of an individual directly responsible for the inventory restatements (2) improved training for the accounting staff of its American Gasker & Rubber Division; (3) improved its internal financial reporting systems and related controls across all of its divisions to, among other things, increase both the frequency by which inventory is monitored as well as increasing the number of managers responsible for monitoring inventory; and (4) increased the frequency and depth by which the inventory and other financial transactions of each of divisions are reviewed by our independent registered public accountants during the course of our annual audit. 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 1, 2005, the Company's independent registered public accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that the following matters involving the Company's internal controls and operations were 18 considered to be "significant deficiencies", as defined under standards established by the Public Company Accounting Oversight Board: - Lack of quantity of staff which led to issues related to timeliness of financial reporting. - Lack of quantity of staff which led to issues related to the timely review of the financial statements of AGR and the calculation of inventory. As a result, accounting errors existed in the financial statements of this subsidiary resulted in a restatement of inventory and cost of sales for certain accounting periods as described within this filing. Significant deficiencies are matters coming to the attention of the independent auditors that in their judgment, relate to material weaknesses in the design or operation of internal controls that 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. Prior to the identification of the accounting overstatement at our American Gasket & Rubber Division, and in response to material weaknesses identified by BDO last year, Tekni-Plex has committed to increase and reorganize its finance staff with a strong emphasis on internal audit. This process is ongoing. 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 and internal controls over financial reporting as of October 15, 2005 as well as of July 1, 2005. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer determined that deficiencies in our internal control over financial reporting have caused the Company's disclosure controls and procedures to not have been effective as of July 1, 2005 and they are not effective today. 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 the accuracy and timeliness of financial reporting. 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. Except as disclosed above, in the fourth quarter of fiscal 2005 and thereafter, 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. 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.
NAME AGE POSITION ---------------------------------------------- --- ----------------------------------------- Dr. F. Patrick Smith.......................... 57 Chairman of the Board, Chief Executive Officer and President James E. Condon............................... 44 Chief Financial Officer, Vice President, Secretary and Director Edward Goldberg............................... 56 Senior Vice President and Director John S. Geer.................................. 60 Director J. Andrew McWethy............................. 64 Director Michael F. Cronin............................. 51 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 19 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. James E. Condon is a Vice President, Secretary and Chief Financial Officer of Tekni-Plex, Inc. He joined Tekni-Plex in 2001 and became a Director in 2004. Prior to joining Tekni-Plex Mr. Condon was a Vice President at J.P. Morgan Securities Inc. Edward Goldberg is a Senior Vice President of the Company, and manages five of its divisions. He has been with the company since June, 2001, and as of March, 2005 was appointed to serve on the Board of Directors. He received his BS and MS degrees in Chemical Engineering from Rensselaer Polytechnic Institute in 1971. He worked for P&G and The Scott Paper Company for a total of 25 years, in diverse roles including Vice President of: Supply Systems; Business Development; and Strategic Planning. Prior to leaving Scott Paper he was the company's U.S. V.P. - Consumer Supply System. He subsequently worked for the Nice Pak and the Lander corporations in senior management positions. His most specific field of emphasis has been General Management for turn around situations. John S. Geer has served as a director of Tekni-Plex since June 2000. He also serves on the Executive Council of Century Park Capital Partners and on the Board of the Robb Report. He is a former Partner of Mellon Ventures, Inc. and former Senior Vice President of Security Pacific Capital Corp. He has served on 20 boards of directors of emerging growth and middle market companies. J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He co-founded and managed MST Partners L.P., a private equity investment fund, from 1989 to 2000. In 2000, Mr. McWethy co-founded Eastport Operating Partners, L.P., a private equity investment fund that he continues to manage. Prior to 1989, Mr. McWethy was employed by Irving Trust Company for 12 years. Michael F. Cronin has served as a director of Tekni-Plex since March 1994. He has invested in emerging growth companies and various industrial and service businesses since 1978. Since June 1991, Mr. Cronin has been a general partner of Weston Presidio Capital. COMPENSATION OF DIRECTORS Tekni-Plex reimburses directors for any reasonable out-of-pocket expenses incurred by them in connection with services provided in such capacity. In addition, each outside 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 other 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............................... 2005 $7,040,000(b) $ -- -- $51,822 Chairman, Chief Executive Officer and President 2004 6,655,000 -- -- 54,941 2003 6,050,000 -- -- 46,384 Mr. James E. Condon................................ 2005 $ 558,000 $ -- -- $ 7,200 Vice President and Chief Financial Officer 2004 540,000 -- -- 7,200 2003 500,000 175,000 -- 7,200 Mr. Edward Goldberg 2005 260,000 -- -- 6,900 Senior Vice President & Director 2004 215,000 27,313 -- 6,900 2003 191,000 50,000 -- 6,900
(a) Includes amounts reimbursed during the fiscal year for payment of auto expense, membership fees, etc. (b) In fiscal 2005, Dr. Smith's employment agreement was amended to provide a $4,000,000 annual salary for two years. OPTION/SAR GRANTS IN LAST FISCAL YEAR 20
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...... -- --% -- -- -- -- Mr. James E. Condon....... -- --% -- -- -- -- Mr. Edward Goldberg....... -- --% -- -- -- --
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...... -- -- -- --/-- Mr. James E. Condon....... -- -- -- --/-- Mr. Edward Goldberg....... -- -- -- --/--
EMPLOYMENT AGREEMENTS In May 2005, Dr. Smith entered into amended and restated employment agreement. The two year agreement provides for a $4,000,000 annual salary. The employment agreement provides that the executive may be terminated for cause or upon death or disability. Dr. Smith is entitled to severance benefits if he is terminated. The employment agreement also contain certain non-compete provisions. COMPENSATION COMMITTEE The board of directors maintains a two-member compensation committee comprised of Dr. Smith, and Mr. Cronin. The compensation committee's duties include the annual review and approval of the compensation for our Chief Executive Officer, 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. Changes in Mr. Condon's compensation are subject to approval by Mr. Cronin. Compensation levels and bonus awards for all other employees are controlled by Dr. Smith. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Tekni-Plex Partners LLC holds approximately 96.3% and MST/TP Partners LLC holds approximately 3.6% 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 21 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 1, 2005 and July 2, 2004 totaled approximately $882,000 and $200,000 and $780,000 and $65,000, respectively. Audit related fees include reviews of offerings, SEC comment letters, and employee benefit plan audits. Tax preparation, review, and advisory services billed or expected to be billed to us by BDO for the fiscal years ended July 1, 2005 and July 2, 2004 totaled approximately $477,000 and $411,000, respectively. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (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. 22 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: November 2, 2005 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: November 2, 2005 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 November 2, 2005.
SIGNATURE TITLE --------------------------- -------------------------------------------------- /s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer --------------------------- F. Patrick Smith /s/ JAMES E. CONDON Vice President and Secretary and Director --------------------------- James E. Condon /s/ EDWARD GOLDBERG Senior Vice President and Director --------------------------- Edward Goldberg /s/ JOHN S. GEER Director --------------------------- John S. Geer /s/ J. ANDREW MCWETHY Director --------------------------- J. Andrew McWethy /s/ MICHAEL F. CRONIN Director --------------------------- Michael F. Cronin
23 Exhibit Index Exhibit No. Description ----------- ----------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Tekni-Plex, Inc.****** 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.* 3.3 Certificate of Incorporation of PureTec Corporation.* 3.4 By-laws of PureTec Corporation* 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.* 3.6 By-laws of Tri-Seal Holding, Inc.* 3.7 Certificate of Incorporation of Natvar Holdings, Inc.* 3.8 By-laws of Natvar Holdings.* 3.9 Certificate of Incorporation of Plastic 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 TPI Acquisition Subsidiary, Inc.** 3.16 By-laws of TPI Acquisition Subsidiary, Inc.** 3.17 Certificate of Incorporation of Distributors Recycling, Inc.* 3.18 By-laws of Distributors Recycling, Inc.* 3.19 Certificate of Incorporation of TP-Elm Acquisition Subsidiary, Inc.** 3.20 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** Exhibit No. Description ----------- ----------------------------------------------------------------- 4.4 Third Supplemental Indenture, dated as of April 25, 2005 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, National Association, as Trustee***** 4.5 Purchase Agreement, dated as of November 12, 2003 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc. and Citigroup Global Markets Inc.*** 4.6 Registration Right Agreement, dated as of November 21, 2003 among Tekni-Plex, Inc., the Guarantors listed therein, and Lehman Brothers Inc. and Citigroup Global Markets Inc.*** 4.7 Indenture, dated as of November 21, 2003 among Tekni-Plex, Inc., the Guarantors listed therein and HSBC Bank USA, as Trustee.*** 4.8 Purchase Agreement, dated as of June 7, 2005 among Tekni-Plex, Inc., the Guarantors listed therein, and Citigroup Global Markets Inc. and Lehman Brothers Inc.******* 4.9 Registration Right Agreement, dated as of June 10, 2005 among Tekni-Plex, Inc., the Guarantors listed therein, and Citigroup Global Markets Inc. and Lehman Brothers Inc.******* 4.10 Indenture, dated as of June 10, 2005 among Tekni-Plex, Inc., the guarantors party thereto and HSBC Bank USA, National Association, as Trustee***** 10.1 Credit Agreement, dated as of June 21, 2000, among Tekni-Plex, Inc., the Guarantors party thereto, the Lenders party thereto, the LC Issuing Banks referred to therein and Morgan Guaranty Trust Company of New York.* 10.1.1 First Amendment to the Credit Agreement dated September 26, 2001*** 10.1.2 Second Amendment to the Credit Agreement dated November 1, 2001*** 10.1.3 Third Amendment to the Credit Agreement dated September 22, 2003*** 10.2 Second Amended and Restated Employment Agreement dated May 13, 2005**** 10.3 Credit Agreement, dated as of June 10, 2005 among the Company, the lenders and issuers party thereto, Citicorp USA, Inc., as Administrative Agent and General Electric Capital Corporation, as Syndication Agent.***** 31.1 Certification of Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002******** 31.2 Certification of Chief Financial Officer, as required by Section 302 of the Sarbanes-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 our Registration Statement on Form S-4 (File No. 333-43800) filed on August 15, 2000. ** Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-98561) filed on August 22, 2002. *** Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-111778) filed on January 8, 2004. **** Filed previously as an Exhibit to our Form 8-K filed on May 19, 2005. ***** Filed previously as an Exhibit to our Form 8-K filed on June 16, 2005. ****** Filed previously as an Exhibit to our Registration Statement on Form S-4/A (File No. 333-111778) filed on July 13, 2005. ******* Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-127404) filed on August 10, 2005. ******** Filed herewith. TEKNI-PLEX, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JULY 1, 2005, JULY 2, 2004, JUNE 27, 2003 29 TEKNI-PLEX, INC. CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets Statements of operations Statements of stockholders' deficit Statements of cash flows Notes to financial statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL SCHEDULE SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves 30 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 1, 2005 and July 2, 2004, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended July 1, 2005. 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 1, 2005 and July 2, 2004, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2005, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements as of July 2, 2004 and for each of the two years then ended have been restated as discussed in Note 1. /s/ BDO Seidman, LLP Woodbridge, New Jersey October 24, 2005 31 TEKNI-PLEX, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
July 2, 2004 Restated July 1, 2005 (See Note 1) ------------ ------------ ASSETS CURRENT: Cash and cash equivalents $ 18,584 $ 29,735 Accounts receivable, net of an allowance of $9,144 and $8,408 for possible losses and sales allowances 138,383 138,109 Inventories 129,617 149,788 Prepaid expenses and other current assets 5,845 6,355 --------- --------- TOTAL CURRENT ASSETS 292,429 323,987 PROPERTY, PLANT AND EQUIPMENT, NET 176,182 182,749 INTANGIBLE ASSETS, PRIMARILY GOODWILL, NET 204,642 207,278 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $12,817 AND $9,122 16,677 9,652 DEFERRED INCOME TAXES -- 18,793 OTHER ASSETS 1,765 1,204 --------- --------- $ 691,695 $ 743,663 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long term debt $ 1,082 $ 2,121 Accounts payable 48,060 54,312 Accrued payroll and benefits 12,185 10,945 Accrued interest 6,385 6,763 Accrued integration reserve 2,109 2,444 Accrued liabilities - other 15,399 19,692 Income taxes payable 6,391 1,853 --------- --------- TOTAL CURRENT LIABILITIES 91,611 98,130 LONG-TERM DEBT, LESS CURRENT PORTION 744,613 731,886 SERIES A REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE, AUTHORIZED 82,500 SHARES, ISSUED 54,300 54,822 -- OTHER NON-CURRENT LIABILITIES 13,976 18,701 --------- --------- TOTAL LIABILITIES 905,022 848,717 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, $.01 par value, authorized 20,000 shares, issued 1,008 at July 1, 2005 and July 2, 2004 -- -- Additional paid-in capital 188,018 210,518 Accumulated other comprehensive loss (10,294) (6,000) Accumulated deficit (170,528) (89,049) Less treasury stock at cost, 431 shares (220,523) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (213,327) (105,054) --------- --------- $ 691,695 $ 743,663 ========= =========
See accompanying notes to consolidated financial statements. 32 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
July 2, 2004 June 27, 2003 Restated Restated Years ended July 1 2005 (See Note 1) (See Note 1) ------------------------------------------------------ ----------- ------------ ------------- NET SALES $695,524 $635,642 $610,663 COST OF SALES 600,170 530,372 459,981 -------- -------- -------- GROSS PROFIT 95,354 105,270 150,682 OPERATING EXPENSES: Selling, general and administrative 60,690 69,159 61,600 Integration expenses 10,478 7,775 11,164 -------- -------- -------- INCOME FROM OPERATIONS 24,186 28,336 77,918 OTHER (INCOME) EXPENSES: Interest, net 89,899 84,451 71,266 Unrealized loss (gain) on derivative contracts (8,287) (10,654) 1,997 Other (2,194) 605 (531) --------- -------- -------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (55,232) (46,066) 5,186 PROVISION FOR INCOME TAXES 26,247 11,121 2,306 -------- -------- -------- NET INCOME (LOSS) $(81,479) $(57,187) $ 2,880 ========= ======== ========
See accompanying notes to consolidated financial statements. 33 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 28, 2002 (as originally reported) $ -- $ 170,176 $ (6,805) $ (33,959) $(220,523) $ (91,111) Restatement for inventory errors (See note 1) -- -- -- (783) -- (783) --- -------- -------- --------- --------- --------- Balance, June 28, 2002, restated -- 170,176 (6,805) (34,742) (220,523) (91,894) Net income, restated -- -- -- 2,880 -- 2,880 Foreign currency translation -- -- 6,320 -- -- 6,320 Unrealized loss on pension plan, net of tax -- -- (1,252) -- -- (1,252) --------- Comprehensive income -- -- -- -- -- 7,948 Capital contributions -- 17,842 -- -- -- 17,842 --- -------- -------- --------- --------- --------- BALANCE, JUNE 27, 2003 -- 188,018 (1,737) (31,862) (220,523) (66,104) Net loss, restated -- -- -- (57,187) -- (57,187) Foreign currency translation -- -- (771) -- -- (771) Unrealized loss on pension plan, -- -- (3,492) -- -- (3,492) net of tax --------- Comprehensive (loss) -- -- -- -- -- (61,450) Capital Contributions -- 22,500 -- -- -- 22,500 --- -------- -------- --------- --------- --------- BALANCE, JULY 2, 2004 -- 210,518 (6,000) (89,049) (220,523) (105,054) Net loss -- -- -- (81,479) -- (81,479) Foreign currency translation -- -- (4) -- -- (4) Unrealized loss on pension plan, net of tax -- -- (4,290) -- -- (4,290) --------- Comprehensive loss -- -- -- -- -- (85,773) Exchange of Capital for Series A redeemable preferred stock (see Note 7E) -- (22,500) -- -- -- (22,500) --- -------- -------- --------- --------- --------- BALANCE, JULY 1, 2005 $ -- $ 188,018 $(10,294) $(170,528) $(220,523) $(213,327) ===== ========= ======== ========= ========= =========
See accompanying notes to consolidated financial statements. 34 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
July 2, 2004 June 27, 2003 Years ended Restated Restated July 1, 2005 (See Note 1) (See Note 1) --------------------------------------------------------------- ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(81,479) $ (57,187) $ 2,880 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 25,857 25,377 24,615 Amortization 6,796 6,927 3,727 Goodwill impairment -- 10,000 -- Unrealized (gain) loss on derivative contracts (8,287) (10,654) 1,997 Provision for bad debts 1,970 2,316 2,350 Deferred income taxes 21,247 7,290 (2,547) Loss on sale of assets -- 177 -- Changes in assets and liabilities, net of acquisitions: Accounts receivable (2,328) (4,806) 4,388 Inventories 20,601 10,031 (39,862) Prepaid expenses and other current assets 960 129 (567) Other assets (561) 76 (202) Accounts payable and other current liabilities (6,491) 2,600 13,630 Income taxes payable 4,538 (2,318) 4,625 Other liabilities (7,284) 2,678 (5) -------- --------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (24,461) (7,364) 15,029 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (93) (5,780) (16,762) Capital expenditures (18,246) (29,472) (32,232) Cash proceeds from sale of assets -- 1,346 -- Additions to intangibles (661) (220) (1,000) -------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (19,000) (34,126) (49,994) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (64,000) (15,000) 45,000 Proceeds from long-term debt 146,318 267,438 1,116 Proceeds from issue of Series A redeemable preferred stock 32,322 -- -- Repayments of long-term debt (71,648) (248,658) (9,755) Proceeds from capital contributions -- 22,500 17,842 Debt financing costs (10,720) (2,767) -- -------- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 32,272 23,513 54,203 -------- --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 38 (350) 625 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,151) (18,327) 19,863 CASH, BEGINNING OF YEAR AND CASH EQUIVALENTS 29,735 48,062 28,199 -------- --------- -------- CASH, END OF YEAR AND CASH EQUIVALENTS $ 18,584 $ 29,735 $ 48,062 ======== ========= ======== -- --
See accompanying notes to consolidated financial statements. 35 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. Restatement The Company identified a $6.8 million overstatement of inventory at its American Gasket and Rubber Division. The Company restated the interim periods in fiscal 2005 (See Note 16) and its consolidated financial statements as of July 2, 2004 and for each of the two previous years then ended. The effect of these adjustments on the financial statements of the Company are summarized below. The tax effect of these adjustments has not been reflected as the amount would be either immaterial or would have been offset by an increase in the deferred tax valuation reserve. The following table sets forth selected line items from the Company's historical consolidated statements of operations that are affected by the restatement on a restated basis and as previously reported. Year-end July 2, 2004 Year-end June 27, 2003 Year-end June 28, 2002 As restated As reported As restated As reported As restated As reported
Cost of Sales.......... $530,372 $527,646 $459,981 $459,471 $430,920 $430,457 Net (Loss) income...... $(57,187) $(54,461) $ 2,880 $ 3,390 $ (7,050) $ (6,587) The following table sets forth selected line items from the Company's historical consolidated balance sheets that are affected by the restatement on a restated basis and as previously reported. Year-end July 2, 2004 Year-end June 27, 2003 Year-end June 28, 2002 As restated As reported As restated As reported As restated As reported Inventory.............. $149,788 $153,807 $160,040 $161,333 $116,849 $117,632 Accumulated deficit.... $(89,049) $(85,030) $(31,862) $(30,569) $(34,742) $(33,959) 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 1, 2005 is adequate. However, actual write-offs might exceed the recorded allowance. Inventories Inventories are stated at the lower of cost (weighted average) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed over the estimated useful lives of the assets primarily on the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Repairs and maintenance are charged to expense as incurred. Intangible Assets (other than goodwill) The cost of acquiring certain patents, trademarks, and customer lists is amortized over their estimated useful lives.
36 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Deferred Financing Costs The Company amortizes the deferred financing costs incurred in connection with the Company's borrowings over the life of the related indebtedness (4-10 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 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. 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 July 1, 2005 each contained 52 weeks, and July 2, 2004 contained 53 weeks.
37 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 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 each fiscal year-end for impairment or 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 1, 2005. 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 1, 2005 July 2, 2004 June 27, 2003 Restated Restated ------------------------------- ------------ ------------ ------------- Net income (loss): As reported $(81,222) $(57,187) $2,880 Adjustment for fair value of stock options, $ (12) $ (88) $ (124) -------- -------- ------ Pro forma $(81,234) $(57,275) $2,756 ======== ======== ======
38 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 1, 2005. The fair value of derivative contracts are determined based on quoted market values obtained from a third party. In June 2000, Tekni-Plex had $344,000 of term loans outstanding with variable rates of interest tied to US$ LIBOR. These loans, which originally had maturity dates ranging from June 2006 through June 2008, have been repaid. Concurrent with incurring this debt, Tekni-Plex entered into a series of 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 $344,000 amount of indebtedness. The amortization schedule on the term loans was the same as the amortization schedule on the swaps. As of July 1, 2005 the notional amount of the swaps is $290,000. Portfolio theory and empirical evidence suggested that the change in value of a basket of LIBOR benchmarks would be less volatile than the change in value of a single benchmark. Since 2000, this has generally been our experience. In conjunction with its swap contracts Tekni-Plex also purchased an interest rate cap. Tekni-Plex believes the reduced volatility created by the interest rate swaps made the interest rate cap less expensive. The aggregate fair market value of these interest rate swap and cap contracts was $(4,779), $(13,065) and $(23,719) on July 1, 2005, July 2, 2004 and June 27, 2003, respectively, and is included in other liabilities on the Consolidated Balance Sheet. For the years ended July 1, 2005, July 2, 2004 and June 27, 2003, Tekni-Plex incurred realized gain (losses) of $8,287, $10,654, and $(8,677), respectively, which have been reflected in interest expense.
39 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. This test was performed every year as of our fiscal year-end. 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. TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The Company completed its year-end analysis of goodwill in accordance with SFAS 142 and has concluded that there is no impairment charge for the year ended July 1, 2005. An impairment charge of $10.0 million was required for the year ended July 2, 2004. The impaired goodwill resulted from the recent losses of our Specialty Resin operations of our Other Segment. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchanges of Nonmonetary Assets," which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will become effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on the Company's financial statements. In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payment," which established standards for transactions in which an entity exchanges its equity instruments for goods and services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowed under APB Opinion No. 25. SFAS No 123 (R) will be effective for fiscal years beginning after June 15, 2005. The statement does not require restatement of previously issued statements and can be applied on a prospective basis. The Company is in the process of evaluating the impact the adoption of this statement will have on its financial statements and believes its impact to be minimal. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." This Statement amends the guidance in
40 ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage), requiring that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are effective for fiscal years beginning after June 15, 2005, with early application permitted. The Company is in the process of evaluating the impact the adoption of this statement will have on its financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3." This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle, in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. This Statement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on the Company's financial statements or results of operations. In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,"Accounting for Conditional Asset Retirement Obligations." FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN No. 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not believe the adoption of FIN No. 47 will have a material impact on the Company's financial statements or results of operations. 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.
41 These transactions were funded by $43,101 of new equity, $275,000 12 3/4% Senior Subordinated Notes (see Note 7(b)) and initial borrowings of $374,000 on a $444,000 Senior Credit Facility (see Note 7(a)). 3. ACQUISITIONS 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 ======
42 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. In connection with the acquisition, the Company incurred an integration reserve of $4.5 million. The components of the Integration reserve and activity through July 1, 2005 was as follows: Costs Costs Costs Balance Balance charged to Balance charged to Balance charged to July 1, July 2002 reserve July 2003 reserve July 2, 2004 reserve 2005 --------- ---------- --------- ---------- ------------ ---------- ------- Reduction in personnel and related costs $1,000 1,000 $ -- $ -- $ -- $-- $ -- Legal and environmental liability $3,500 1,000 2,500 1,337 1,163 19 1,144 ------ ------ ------ ------ ------ --- ------ $4,500 $2,000 $2,500 $1,337 $1,163 $19 $1,144 ====== ====== ====== ====== ======= === ====== The remaining legal and environmental costs are expected to extend over the next four years. 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. In connection with the acquisition, the Company incurred an integration reserve of $10 million. The components of the Integration reserve and activity through July 1, 2005 was as follows: Costs Cost Costs Costs charged Balance charged Balance charged Balance charged Balance October to June 28, to Adjustments June 27, to July 2, to July 1, 2001 Reserve 2002 Reserve to Reserve 2003 Reserve 2004 Reserve 2005 ------- ------- -------- ------- ----------- -------- ------- ------- ------- ------- 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 1,281 316 965 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 $316 $965 ======= ====== ====== ====== ======= ====== ====== ====== ==== ====
43 *$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. TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 4. INVENTORIES Inventories are summarized as follows: July 1, 2005 July 2, 2004 (restated) ------------ ------------ Raw materials $ 53,450 $ 57,012 Work-in-process 12,466 12,668 Finished goods 63,701 80,108 -------- -------- $129,617 $149,788 ======== ======== 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Estimated July 1, 2005 July 2, 2004 useful lives ------------ ------------ ------------ Land $ 15,870 $ 15,663 Building and improvements 59,258 57,097 25-40 years Machinery and equipment 238,929 221,552 5 - 10 years Furniture and fixtures 9,482 9,581 5 - 10 years Construction in progress 18,048 20,660 -------- -------- 341,587 324,553 Less accumulated depreciation 165,405 141,804 -------- -------- $176,182 $182,749 ======== ======== 6. INTANGIBLE ASSETS Intangible assets consist of the following: July 1, 2005 July 2, 2004 ------------ ------------ Goodwill $198,532 $198,532 Customer list and non-compete agreement 8,756 9,680 Patents 2,297 1,966 -------- -------- 209,585 210,178 Less accumulated amortization 4,943 2,900 -------- -------- $204,642 $207,278 ======== ======== Amortization of customer list and non-compete agreement will be $1,685 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 customer
44 list and Patents at July 1, 2005 and July 2, 2004 were $3,829, $1,114 and $2,144, and $756, 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 unit's recent performance. This amount was written off as of July 2, 2004. 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 1, 2005 July 2, 2004 ------------ ------------ Senior Debt (A): Revolving line of credit $ 12,000 $ 76,000 Term notes -- 71,263 Senior Subordinated Notes issued June 21, 2000 at 12-3/4%, due June 15, 2010 (less unamortized discount of $1,883 and $2,260) (B). 273,117 272,740 Senior Subordinated Notes issued May 2002 at 12-3/4%, due June 15, 2010 (less unamortized premium of $362 and $437 (B). 40,362 40,437 Senior Secured Notes issued November 21, 2003 at 8-3/4 %, due November 15, 2013 (less unamortized discount of $6,365 and $7,121) (C). 268,635 267,879 Senior Secured Notes issued June 10, 2005 at 10.875% due August 15, 2012 (less unamortized discount of $3,375) (D). 146,625 -- Series A Redeemable Preferred Stock (E). 54,822 -- Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2005 to 2010. 4,956 5,688 -------- -------- 800,517 734,007 Less: Current maturities 1,082 2,121 -------- -------- $799,435 $731,886 ======== ========
Subsequent to year-end, Tekni-Plex raised an additional $5.4 million from the issuance of preferred stock. The late filing of our 10-K has caused us to be in violation of certain covenants in our debt agreements. These violations, which have either been waived or the applicable grace periods have not yet expired, have been remedied by virtue of this filing. (A) SENIOR DEBT In June 2005, we entered into a new asset based facility with Citicorp USA, Inc., as administrative agent, and the other agents and lenders named therein. Our new asset based facility consists of a four-year, asset-based revolving credit facility in the maximum amount of $65,000. Availability under the asset based facility equals (i) the lesser of (A) the borrowing base (as defined in the new asset based facility) and (B) the then effective commitments under the new asset based facility minus (ii) such availability reserves as the administrative agent, in its sole discretion, deems appropriate. The asset based facility includes a $25,000 letter of credit sub facility. Amounts borrowed under our new asset based facility will be used for general corporate and working capital purposes. The commitments under our asset based facility will terminate on the fourth anniversary of the closing date, at which time all loans outstanding under the new asset based facility will become due and payable. Loans under the asset based facility are guaranteed by each of our domestic subsidiaries. Loans under the new asset based facility are secured on a first priority basis by all of our domestic subsidiaries' asset based facility. Loans under our asset based facility bear interest by reference to a base rate or a reserve adjusted Eurodollar rate, at our option, in each case, plus an applicable margin, as each such term is defined in the new asset based facility. In addition, the asset based facility includes a provision permitting, at our option, an increase in the aggregate amount of the new asset based facility by up to an additional $60,000, subject to certain conditions. The asset based facility imposes certain restrictions on us and our subsidiaries. As part of these covenants, we are restricted or limited in our ability to, among other things: - incur and voluntarily prepay certain of our and our subsidiaries' debt; - grant liens on our and our subsidiaries' assets; 45 - undertake certain mergers, consolidations and sales / purchases of assets; - pay certain dividends or distributions and redeem, purchase, retire or make other acquisitions of our equity interests; - make certain investments and acquisitions; - transact with our affiliates; and - make capital expenditures. The new asset based facility provides that certain events will constitute events of default under the new asset based facility. These events include, among other things; - our failure to pay when due amounts owed under the new asset based facility; - our or our subsidiaries' failure to observe or perform the covenants set forth in the new asset based facility; - the inaccuracy of the representations and warranties set forth in the new asset based facility; - the imposition of certain judgments against us or our subsidiaries; - our or our subsidiaries' failure to pay certain other of our or our subsidiaries' debt; - the acceleration of the maturity of material debt; - the occurrence of certain bankruptcy or insolvency proceedings or events; - the invalidity or unenforceability of any lien or guarantee securing our obligations under the new asset based facility; and - the occurrence of a change of control. (B) SENIOR SUBORDINATED NOTES In June 2000 and May 2002, we respectively issued $275.0 million and $40.0 million aggregate principal amount of the 12 3/4 % senior subordinated notes due June 15, 2010. These notes are our senior subordinated unsecured obligations and are guaranteed by each of our existing and future domestic restricted subsidiaries with assets or stockholders' equity in excess $25,000. The senior subordinated notes bear interest at an annual rate of 12 3/4 %, payable semiannually on each June 15 and December 15. The senior subordinated notes are subject to redemption, in whole or in part, at our option, at any time on or after June 15, 2005 at the redemption prices described below if redeemed during the twelve month period commencing June 15 in the years set forth below:
PERIOD REDEMPTION PRICE ------ ---------------- 2005......................................................... 106.375% 2006......................................................... 104.250% 2007......................................................... 102.125% 2008 and thereafter.......................................... 100.000%
Holders of the senior subordinated notes have the option of requiring us to repurchase their notes in cash upon a change of control at a repurchase price equal to 101% of the principal amount of the notes plus accrued interest, if any, to the date of the repurchase. The indenture governing the senior subordinated notes restricts our ability and the ability of our restricted subsidiaries to: 46 - incur additional indebtedness and issue preferred stock; - pay dividends or make other distributions; - create liens; - incur restrictions on the ability of our restricted subsidiaries to pay dividends or other payments to us; - sell assets; - merge or consolidate with other entities; - enter into transactions with affiliates; - issue capital stock of restricted subsidiaries; and - effect acquisitions. However, these limitations are subject to a variety of exceptions and qualifications. The senior subordinated notes include customary events of default, including failure to pay principal and interest on the notes, a failure to comply with covenants, a failure by us or our subsidiaries to pay material judgments or indebtedness and bankruptcy and insolvency events with respect to us and our material subsidiaries. In April, 2005, we received the consents required to amend certain covenants in the indenture governing our senior subordinated notes including our debt incurrence covenant. The amendments allow us, among other things, to incur incremental debt, not to exceed $90.0 million at any one time outstanding, in ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. Since that date, we have raised $37.2 million of additional equity through the issuance of our Series A redeemable preferred stock. (C) SENIOR SECURED NOTES DUE 2013 We issued $275,000 senior secured notes on November 21, 2003. Interest on those senior secured notes accrues at the rate of 8 3/4 % per annum and are payable semi-annually in arrears on May 15 and November 15 of each year, beginning May 15, 2004. The 2013 Notes will mature on November 15, 2013. We may redeem all or part of those senior secured notes on or after November 15, 2008. Prior to November 15, 2006, we may redeem up to 35% of the aggregate principal amount of the senior secured notes at a premium of 8.75% with the proceeds of certain equity offerings. The senior secured notes are secured by second priority liens on the collateral securing our existing credit facility. The collateral includes, but is not limited to, the following property of us and the guarantors party to the indenture: - all of the stock and equity interests of certain of our domestic subsidiaries and 65% of the capital stock and equity interests of certain of the our foreign subsidiaries; - all accounts, inventory, general intangibles, equipment and insurance policies; - all documents of title covering, evidencing or representing goods; - all instruments and chattel paper; - commercial tort claims; - certain Company-owned real property; - rights under certain railcar leases; - patents, trademarks, copyrights and other intellectual property; 47 - all letter of credit rights; - all supporting obligations; - certain deposit accounts; and - all proceeds of, and all other profits, products, rents or receipts, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition or realization upon the collateral described in (1) through (11) above. Pursuant to a registration rights agreement that we and our subsidiary guarantors entered into in connection with our existing senior secured notes, we and our subsidiary guarantors agreed to file a registration agreement with the SEC relating to an offer to exchange or register the senior secured notes and guarantees for publicly tradable notes and guarantees having substantially identical terms. We and the guarantors also agreed to use all commercially reasonable efforts to cause the registration statement to be declared effective by the SEC on or prior to the date specified in the registration rights agreement. We have not been able to cause the registration statement to be declared effective by the SEC on or prior to the date specified in the registration rights agreement, as a result, we have been paying liquidated damages in an amount equal to 1.0% of the principal amount of the senior secured notes per annum to holders of the existing senior secured notes as required by the registration rights agreement. (D) SENIOR SECURED NOTES DUE 2012 We issued $150,000 senior secured notes on June 7, 2005. Interest on those senior secured notes accrues at the rate of 10 7/8% per annum and are payable semi-annually in arrears on August 15 and February 15 of each year, beginning February 15, 2006. The 2013 Notes will mature on August 15, 2012. The proceeds were used primarily to refinance existing bank debt. We may redeem all or part of those senior secured notes on or after August 15, 2009. Prior to August 15, 2008, we may redeem up to 35% of the aggregate principal amount of the senior secured notes with the proceeds of certain equity offerings. The senior secured notes are secured by second priority liens on the collateral securing our existing credit facility. The collateral includes, but is not limited to, the following property of us and the guarantors party to the indenture: - all of the stock and equity interests of certain of our domestic subsidiaries and 65% of the capital stock and equity interests of certain of the our foreign subsidiaries; - all accounts, inventory, general intangibles, equipment and insurance policies; - all documents of title covering, evidencing or representing goods; - all instruments and chattel paper; - commercial tort claims; - certain Company-owned real property; - rights under certain railcar leases; - patents, trademarks, copyrights and other intellectual property; - all letter of credit rights; - all supporting obligations; - certain deposit accounts; and - all proceeds of, and all other profits, products, rents or receipts, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition or realization upon the 48 collateral described in (1) through (11) above. (E) SERIES A REDEEMABLE PREFERRED STOCK On May 13, 2005 we issued 31,800 shares of Series A redeemable Preferred Stock for $1 per share. In addition, we issued 22,500 shares to certain investors in consideration for capital contributions made in 2004. (In accordance with SFAS 150, the Series A preferred stock is being characterized as a liability. Dividends and accretion to maturity will be classified as interest expense.) The following summary of certain provisions of our Series A Redeemable Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, our Amended and Restated Certificate of Incorporation. Liquidation Event. Upon the occurrence of a sale of the Company or its subsidiaries, whether by merger, asset sale or change in equity control, or a liquidation of the Company, the Series A Preferred Stock shall be redeemed at an amount per share equal to (i) 115% of the purchase price of the Series A Preferred Stock prior to October 31, 2005, and (ii) three times the purchase price thereafter (such amount determined in (i) or (ii) hereinafter referred to as the "Liquidation Value"). Mandatory Redemption. Upon the earlier of (i) February 15, 2014 or (ii) to the extent such redemption is permitted under the Company's new asset based facility, the payment in full of the Company's senior subordinated notes and existing senior secured notes, the Series A Redeemable Preferred Stock shall be redeemed in full in cash at the price equal to 115% of the purchase price of the Series A Preferred Stock prior to October 31, 2005 and three times the purchase price thereafter. Dividends. From and after Trigger Event, the Series A Preferred Stock shall be entitled to receive out of any assets legally available cumulative dividends at a rate of 12% per annum, compounded quarterly, on the original purchase price. The dividends shall begin to accrue on the Trigger Event and shall be paid quarterly in arrears. However, if the Company is prevented from paying such dividends in cash for certain reasons, the dividend will accumulate at the rate of 12% per annum, compounded quarterly. Trigger Event. A Trigger Event shall mean: (i) the failure of the Company to redeem any shares of the Series A Preferred Stock in cash when required to do so; (ii) the failure by the Company or Dr. Smith to perform or observe any other covenant in the Series A Preferred Stock Purchase Agreement or any ancillary documents that is continued for more than sixty (60) days and that reasonably expected to have a material adverse effect on the Company or the holders of the Series A Preferred Stock; (iii) any false or misleading representations or warranty by the Company in the Series A Preferred Stock Purchase Agreement that is reasonably expected to have a material adverse effect on the Company or the holders of the Series A Preferred Stock; (iv) the failure by the Company or any Significant Subsidiary (as defined in Rule 1-02(w) of Regulation S-X) to make payments when due (which failure is continued beyond the cure period contained in the documents governing such payments or which has not been waived by the Lender): (A) of the principal amount of any indebtedness or other security (whether at maturity, upon a scheduled amortization date or any other mandatory prepayment date) having an aggregate principal amount in Excess of $10 million; or (B) which failure results in the acceleration of indebtedness which aggregates in excess of $10 million; (v) the Company or any Significant Subsidiary pursuant to or within the meaning of Title 11 of the United States Code or any other Federal, state or foreign bankruptcy, insolvency or similar law ("Bankruptcy Law") (A) commences a voluntary case or proceeding, (B) consents to the entry of an order for relief against it in an involuntary case or proceeding, (C) consents to the appointment of a custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) generally is not paying its debts as they become due; 49 (v) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case, appoints a custodian of the Company or any of its Significant Subsidiaries or for all or substantially all of the property of the Company or any of its Significant Subsidiaries, or (C) orders the liquidation of the Company or any of its Significant Subsidiaries, and in each case, the order or decree remains unstayed and in effect for sixty (60) consecutive days; TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) (vii) an unsatisfied judgment against the Company or any of its Significant Subsidiaries in excess of $10,000 which remains undischarged or unstayed (including stays pending appeal) for a period of 60 days; (viii) the failure of Dr. Smith to serve as Chief Executive Officer as a result of his death or disability or for any other reason except voluntary resignation if a replacement, acceptable to the holders of a majority of the Series A Preferred Stock in their sole and absolute discretion, is not found within six months after such death or disability; (ix) the failure of Dr. Smith to serve as Chief Executive Officer as a result of a voluntary resignation of employment; (x) April 30, 2007; or (xi) closing of an underwritten registered initial offering of the Company's equity any Liquidation Event or any repayment in full of the Notes, in each case upon which the Company does not redeem the Series A Preferred Stock in full in cash in an amount equal to the Liquidation Value. Voting Rights. Holders of shares of Series A Preferred Stock will have no voting rights except as described below. In such case, each such holder shall be entitled to one vote for each share held. The board of directors of the Company consists of six directors, one of whom shall be elected by the holders of the Series A Preferred Stock. After the occurrence of certain Trigger Events (as defined in the Company's Amended and Restated Certificate of Incorporation) the Series A Preferred Stockholders shall have the right to increase the vote of the director elected by Series A Preferred Stockholders from one vote to six votes for all matters considered by the Company's board of directors. Protective Provisions. As long as shares of Series A Preferred Stock are issued and outstanding, without first obtaining the approval of the Series A Preferred Stockholders, the Company Shall not, and shall not permit its subsidiaries to, either directly or indirectly, through a merger, consolidation or otherwise: - Create, authorize or issue any securities of the Company or any significant subsidiary other than common stock or options to purchase common stock not to exceed 45.75206 shares of common stock and (ii) certain refinancing securities as defined in the Amended and Restated Certificate of Incorporation; - Amend the Amended and Restated Certificate of Incorporation or the by-laws of the Company; - Except where the proceeds are used to redeem the Series A Preferred Stock, consummate any sale of the Company or any significant subsidiary or sale of substantially all of the assets of the Company or any significant subsidiary; - Liquidate or dissolve the Company or any significant subsidiary; 50 - Declare or pay any dividend or other distribution of the Company or its significant subsidiaries' securities or redeem or repurchase any securities of the Company or any significant subsidiaries other than Series A Preferred Stock; - Increase or decrease the authorized number of directors of the Company; - Enter into any related party transactions in excess of $1,000 in the aggregate; - Incur any indebtedness other than indebtedness the terms of which do not prohibit the Redemption of the Series A Preferred Stock in full in cash on February 15, 2014; - Amend the Company's agreements relating to indebtedness that would prohibit the redemption of the Series A Preferred Stock in full in cash on February 15, 2014; - Hire or terminate the Chief Executive Officer, the Chief Financial Officer or the Chief Operating Officer or making any modifications to their compensation arrangements; or - Report a distribution on the Series A Preferred Stock for tax purposes except to the extent such Distribution is paid in cash or to the extent that the Company has received consent from the Representative chosen by a majority of the Series A Preferred Stockholder, which consent shall not be unreasonably withheld. Scheduled principal payments on debt over the next five years and thereafter are as follows: 2006 $ 1,082 2007 246 2008 252 2009 12,259 2010 313,647 Thereafter 473,031
The Company believes the recorded value of long-term debt approximates fair value based on current rates available to the Company for similar debt. 51 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 1, July 2, June 27, Years ended 2005 2004 2003 ------------------------------------------------ ------- ------- -------- Current: Federal $ -- $ -- $ -- Foreign 4,652 3,781 4,504 State and local 348 50 349 ------- ------- ------- 5,000 3,831 4,853 ------- ------- ------- Deferred: Federal 21,530 7,000 (2,072) Foreign (283) 290 (89) State and local -- -- (386) ------- ------- ------- 21,247 7,290 (2,547) ------- ------- ------- Provision (benefit) for income taxes $26,247 $11,121 $ 2,306 ======= ======= ======= The components of income (loss) before income taxes are as follows: July 1, July 2, June 27, Years ended 2005 2004 2003 ---------------------------------------------- ------- -------- -------- Domestic $(66,900) $(51,586) $(5,918) Foreign 11,668 8,246 11,614 -------- -------- ------- $(55,232) $(43,340) $ 5,696 ======== ======== ======= The provision (benefit) for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following: July 1, July 2, June 27, Years ended 2005 2004 2003 ------------------------------------------------------------------ ------- -------- -------- Provision (benefit) for Federal income taxes at statutory rate $(18,779) $(14,736) $1,937 State and local income taxes, net of Federal benefit (2,187) (1,655) (24) Non-deductible goodwill impairment -- 3,400 -- Foreign tax rates in excess of Federal tax rate 402 1,262 406 Increase in Valuation Allowance 47,459 23,319 -- Other, net (648) (469) (13) -------- -------- ------ Provision (benefit) for income taxes $ 26,247 $ 11,121 $2,306 ======== ======== ======
52 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 1, July 2, 2005 2004 -------- -------- Current deferred taxes: Allowance for doubtful accounts $ 2,820 $ 1,961 Inventory 764 2,103 Net operating loss carryforwards 2,216 1,009 Accrued expenses 3,264 1,365 -------- -------- Total current deferred tax assets $ 9,064 $ 6,438 -------- -------- Long-term deferred taxes: Net operating loss carryforwards $ 86,415 $ 54,400 Accrued pension and post-retirement 1,904 2,657 Unrealized loss on derivative contracts 1,816 4,965 Unrealized loss of pension plan 4,896 3,265 Difference in book and tax basis of assets (609) (609) Difference in depreciation (17,499) (16,139) Goodwill - deductible for tax purposes (7,427) (5,202) Other expenses 190 309 Other foreign (2,454) -- -------- -------- Total long-term net deferred tax assets 67,232 43,646 -------- -------- Total current and long term deferred tax assets 76,296 50,084 Valuation allowance (78,750) (31,291) -------- -------- Total long-term net deferred tax assets/(liabilities) $ (2,454) $ 18,793 ======== ======== 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 $239,000. These NOL's expire at various dates from 2009 through 2025. 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. 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. During fiscal 2005, 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. No provision was made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Such earnings have been and will continue to be reinvested but could become subject to additional tax if they were remitted as dividends, or were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on the undistributed foreign earnings.
53 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 9. EMPLOYEE BENEFIT PLANS (a) Savings Plans i. The Company maintains a discretionary 401(k) plan covering all eligible employees (excluding Elm employees from July, 2004 to mid-December, 2004) with at least one year of service. As of mid-December, 2004 the plan included all eligible ELM employees. Contributions to the plan are determined annually by the Board of Directors. The Company will determine matching contributions to the plan each year not to exceed 2% of the employee's eligible compensation. Contributions for the fiscal years ended July 1, 2005, July 2, 2004 and June 27, 2003, amounted to $1,081, $1,043, $1,207, respectively. ii. The plan which was discontinued as of mid-December, 2004 covered all eligible Elm employees with at least sixty days of service and who have attained the age of twenty-one. The Company matched 50% of employee contributions up to 6% of the employee's eligible compensation. Contributions for the fiscal year ended July 1, 2005 and July 2, 2004 amounted to $46 and $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. The components of net periodic pension costs are as follows: Year ended Year ended Year ended July 1, July 2, June 27, 2005 2004 2003 ---------- ---------- ---------- Service cost $ 125 $ 127 $ 107 Interest cost on projected benefit obligation 434 421 420 Expected actual return on plan assets (469) (443) (451) Amortization of unrecognized: Prior service cost 12 12 12 Net loss 187 182 105 ----- ----- ----- Net pension cost $ 289 $ 299 $ 193 ===== ===== =====
54 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Year ended Year ended July 1, July 2, 2005 2004 ---------- ---------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $7,114 $6,835 Service cost 126 127 Interest cost 434 421 Actuarial loss 988 71 Benefits paid (375) (340) ------ ------ Projected benefit obligation, end of period $8,287 $7,114 ====== ====== CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $5,138 $5,013 Actual return on plan assets 184 311 Company contributions 398 154 Benefits paid (375) (340) ------ ------ Plan assets at fair value, end of period $5,345 $5,138 ====== ====== The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows: July 1, 2005 July 2, 2004 ------------ ------------ Funded status of the plan $(2,942) $(1,976) Unrecognized prior service cost 76 87 Unrecognized net loss 3,402 2,316 ------- ------- Prepaid pension cost $ 536 $ 427 ======= ======= The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rates were 5.00% and 6.25% at July 1, 2005 and July 2, 2004. The Company recorded an unrecognized pension liability of $3,402 and $2,316 at July 1, 2005 and July 2, 2004, 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 1, 2005 and July 2, 2004 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.
55 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 1, July 2, June 27, 2005 2004 2003 ---------- ---------- ---------- Service cost $ -- $ -- $ -- Interest cost on projected benefit obligation 800 792 790 Expected actual return on plan assets (848) (816) (839) Amortization of unrecognized Net loss 249 280 178 ----- ----- ----- Net pension cost $ 201 $ 256 $ 129 ===== ===== ===== Year ended Year ended July 1, July 2, 2005 2004 ---------- ---------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $13,210 $12,932 Interest cost 800 792 Actuarial loss 2,070 (32) Benefits paid (518) (482) ------- ------- Projected benefit obligation, end of period $15,562 $13,210 ======= ======= CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ 9,660 $ 9,303 Actual return on plan assets 314 839 Benefits paid (518) (482) ------- ------- Plan assets at fair value, end of period $ 9,456 $ 9,660 ======= ======= The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows: July 1, 2005 July 2, 2004 ------------ ------------ Funded status of the plan $(6,107) $(3,551) Unrecognized net loss 7,267 4,912 ------- ------- Prepaid pension cost $ 1,160 $ 1,361 ======= ======= The expected long-term rate of return on plan assets was 9% for the periods presented and the discount rate used to determine the benefit obligation was 5.00% and 6.25% at July 1, 2005 and July 2, 2004. The Company recorded an unrecognized pension liability of $7,267 and $4,912 as of July 1, 2005 and July 2, 2004, 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 1, 2005 and July 2, 2004 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.
56 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 1, July 2, June 27, 2005 2004 2003 ---------- ---------- ---------- Service cost $ -- $ -- $ -- Interest cost on projected benefit obligation 245 251 261 Expected actual return on plan assets (264) (234) (285) Amortization of unrecognized net loss 91 111 79 ----- ----- ----- Net pension cost $ 72 $ 128 $ 55 ===== ===== ===== Year ended Year ended July 1, July 2, 2005 2004 ---------- ---------- CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation, beginning of period $3,952 $4,205 Interest cost 245 251 Actuarial loss (gain) 990 (126) Benefits paid (238) (378) ------ ------ Projected Benefit Obligation, end of period $4,949 $3,952 ====== ====== CHANGE IN PLAN ASSETS Plan assets at Fair Value, beginning of period $3,380 $3,144 Actual return on plan assets 314 271 Company contributions 220 343 Benefits paid (237) (378) ------ ------ Plan assets at Fair Value, end of period $3,677 $3,380 ====== ====== The funded status of the Plan and amounts reconciled in the Company's balance sheets are as follows: July 1, 2005 July 2, 2004 ------------ ------------ Funded status of the Plan $(1,272) $ (571) Unrecognized net loss 2,216 1,367 ------- ------ Prepaid pension cost $ 944 $ 796 ======= ====== The expected long term rate of return on plan assets was 7.5% for the periods presented. The discount rate used to determine the benefit obligation was 5.00% for the fiscal year ended July 1, 2005 and 6.25% for the fiscal year ended July 2, 2004. The Company recorded an unrecognized pension liability of $2,216 and $1,367 as of July 1, 2005 and July 2, 2004, 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 1, 2005 and July 2, 2004. (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
57 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) years ended July 1, 2005, July 2, 2004 and June 27, 2003 amounted to $369, $407 and $337, respectively, net of retiree contributions. Net periodic post-retirement benefit costs are as follows: Year ended Year ended Year ended July 1, 2005 July 2, 2004 June 27, 2003 ------------ ------------ ------------- Service cost $139 $154 $ 82 Interest cost 338 409 247 Prior service cost 141 141 -- Net loss 103 246 91 ---- ---- ---- Net post-retirement benefit cost $721 $950 $420 ==== ==== ==== Year ended Year ended CHANGE IN PROJECTED BENEFIT OBLIGATION July 1, 2005 July 2, 2004 ------------------------------------------------- ------------ ------------ Projected benefit obligation, beginning of period $5,588 $ 6,699 Service cost 139 154 Interest cost 339 409 Plan amendments (787) - Actuarial loss (gain) 674 (1,267) Benefits paid (369) (407) ------ ------- Projected benefit obligation, end of period $5,584 $ 5,588 ====== ======= CHANGE IN PLAN ASSETS Plan assets at fair value, beginning of period $ -- $ -- Company contributions 369 407 Benefits paid (369) (407) ------ ------- Plan assets at fair value, end of period $ -- $ -- ====== ======= The funded status of the Plan and amounts recorded in the Company's balance sheets are as follows: Year ended Year ended July 1, 2005 July 2, 2004 ------------ ------------ Funded status of the plan $(5,584) $(5,588) Unrecognized loss 2,140 1,569 Unrecognized service cost 129 1,057 ------- ------- Accrued post retirement cost $(3,315) $(2,962) ======= ======= The accumulated post-retirement benefit obligation was determined using a 5.00% 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 5.00% for 2012 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 $600 and $378 and increase the service and interest components by $37 and $47 at July 1, 2005 and July 2, 2004, respectively.
58 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) The Company's plan asset allocation at 2005 and 2004 and target allocations for 2006 are as follows: Percentage of Target Plan Assets Allocation ------------- ---------- Security Type 2005 2004 2006 ------------------------------ ---- ---- ---------- Guaranteed Investment Contract 6% 6% 5% Equity Securities 58% 57% 55% Debt Securities 36% 37% 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 each of the plans over the following five years are: 2006 $ 1,432 2007 1,522 2008 1,622 2009 2,020 2010 2,150 2011-2015 11,098 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. At July 1, 2005, 18.29 options were outstanding, 5.49 options were exercisable and no options have been exercised.
59 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 11. COMMITMENTS AND CONTINGENCIES Commitments (a) The Company leases building space and certain equipment in approximately 20 locations throughout the United States, Canada and Europe. At July 1, 2005, the Company's future minimum lease payments are as follows: 2006 $ 8,261 2007 7,697 2008 6,293 2009 4,742 2010 3,762 Thereafter 23,400 ------- $54,155 Rent expense, including escalation charges, amounted to approximately $9,798, $9,830 and $7,247 for the years ended July 1, 2005, July 2, 2004 and June 27, 2003, respectively. (b) The Company has an employment contract with one officer, providing a minimum annual salary of $4,000 with no mandatory bonuses. The two year agreement expires in 2007. Contingencies (a) The Company is a party to various legal proceedings arising in the normal conduct of business, including compliance with environmental regulations. 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. 12. CONCENTRATIONS OF CREDIT Financial instruments that potentially subject RISKS the of 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.
60 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) 13. SUPPLEMENTAL CASH FLOW (a) Cash Paid INFORMATION July 1, July 2, June 27, Years ended 2005 2004 2003 ----------------------------- ------- ------- -------- Interest $86,406 $78,547 $69,642 ------- ------- ------- Income taxes $ 4,546 $ 3,880 $ 1,027 ======= ======= ======= Non-Cash Financing Activities: Exchange of Capital for Series A Redeemable Preferred Stock $22,500 -- -- 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.
61 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 1, 2005 Tubing Products Packaging Other TOTALS ------------------------------------- --------------- --------- -------- -------- Revenues from external customers $213,052 $348,675 $133,797 $695,524 Interest expense 42,188 28,662 19,049 89,899 Depreciation and amortization 9,311 15,255 7,063 31,629 Segment income (loss) from operations (6,473) 48,967 (1,239) 41,255 Goodwill 108,593 63,943 25,996 198,532 Segment assets 295,176 255,827 132,166 683,169 Expenditures for segment fixed assets 2,481 10,886 4,219 17,586 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 51,318 (11,798) 46,009 Goodwill 108,593 63,943 25,996 198,532 Segment assets 326,882 267,413 138,705 733,000 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 59,665 3,540 98,566 Goodwill 108,593 64,600 35,996 209,189 Segment assets 338,432 280,400 141,638 760,470 Expenditures for segment fixed assets 5,371 18,603 7,460 31,434 Years ended July 1, 2005 July 2, 2004 June 27, 2003 ------------------------------------- ------------ ------------ ------------- OPERATING PROFIT Total operating profit for reportable segments before income taxes $ 41,255 $ 46,009 $ 98,566 Corporate and eliminations (17,069) (17,673) (20,648) -------- --------- -------- Consolidated total $ 24,186 $ 28,336 $ 77,918 ======== ========= ======== ASSETS Total assets from reportable segments $683,169 $ 733,000 $760,470 Other unallocated amounts 8,526 10,663 23,001 -------- --------- -------- Consolidated total $691,695 $ 743,663 $783,471 ======== ========= ======== DEPRECIATION AND AMORTIZATION Segment totals $ 31,629 $ 31,280 $ 27,494 Corporate 1,024 1,024 848 -------- --------- -------- Consolidated total $ 32,653 $ 32,304 $ 28,342 ======== ========= ======== EXPENDITURES FOR SEGMENT FIXED ASSETS Segment totals $ 17,586 $ 29,427 $ 31,434 Other unallocated expenditures 660 701 798 -------- --------- -------- Consolidated total $ 18,246 $ 30,128 $ 32,232 ======== ========= ======== REVENUES GEOGRAPHIC INFORMATION United States $594,089 $ 545,597 $531,556 Canada 18,888 17,991 12,361 Europe, primarily Belgium 82,547 72,054 66,746 -------- --------- -------- Total $695,524 $ 635,642 $610,663 ======== ========= ======== LONG-LIVED ASSETS GEOGRAPHIC INFORMATION United States $364,864 $ 385,120 $390,099 Canada 9,552 10,469 11,555 Europe 24,850 24,087 23,322 -------- --------- -------- Total $399,266 $ 419,676 $424,976 ======== ========= ========
62 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 1, 2005 no single customer represented at least 10% of sales. Garden hose products represented 25%, 30% and 33% of sales in fiscal years 2005, 2004 and 2003, respectively. Foam egg cartons represented 15%, 12% and 13% of sales in fiscal year 2005, 2004 and 2003, 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 CONDENSED Tekni-Plex, Inc. issued 12 3/4% Senior CONSOLIDATING FINANCIAL Subordinated Notes in June 2000 and May 2002 STATEMENTS and 8 3/4% Senior Secured Notes in November 2003. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor subsidiaries are 100% owned by the issuer. The guaranties are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). Condensed Consolidating Statement of Operations - For the year ended July 1, 2005 Non- Issuer Guarantors Guarantors TOTAL -------- ---------- ---------- -------- Sales, net $180,687 $413,458 $101,379 $695,524 Cost of sales 136,358 387,452 76,360 600,170 -------- -------- -------- -------- Gross profit 44,329 26,006 25,019 95,354 Selling, general and administrative 25,872 25,289 9,529 60,690 Integration expense 2,399 8,079 -- 10,478 -------- -------- -------- -------- Income (loss) from operations 16,058 (7,362) 15,490 24,186 Interest expense, net 89,762 -- 137 89,899 Unrealized loss (gain) on derivative contract (8,287) -- -- (8,287) Other expense (income) (4,021) (1,858) 3,685 (2,194) -------- -------- -------- -------- Income (loss) before provision for income taxes (61,396) (5,504) 11,668 (55,232) Provision for income taxes 21,820 58 4,369 26,247 -------- -------- -------- -------- Net income (loss) $(83,216) $ (5,562) $ 7,299 $(81,479) ======== ======== ======== ========
63 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS) Condensed Consolidating Balance Sheet - at July 1, 2005
Non- Issuer Guarantors Guarantors Eliminations TOTAL ---------- ---------- ---------- ------------ --------- CURRENT ASSETS $ 38,998 $192,614 $60,817 $ -- $ 292,429 Property, plant and equipment, net 42,397 109,750 24,035 -- 176,182 Intangible assets 15,268 179,210 10,164 -- 204,642 Investment in subsidiaries 562,374 -- -- (562,374) -- Deferred financing costs, net 16,561 116 -- -- 16,677 Other long-term assets 379,589 214,261 203 (592,288) 1,765 ---------- -------- ------- ----------- --------- TOTAL ASSETS $1,055,187 $695,951 $95,219 $(1,154,662) $ 691,695 ========== ======== ======= =========== ========= CURRENT LIABILITIES 27,709 39,040 24,862 91,611 Long-term debt 740,739 -- 3,874 744,613 Preferred stock 54,822 -- 54,822 Other long-term liabilities 437,185 148,101 20,978 (592,288) 13,976 ---------- -------- ------- ----------- --------- TOTAL LIABILITIES 1,260,455 187,141 49,714 (592,288) 905,022 ---------- -------- ------- ----------- --------- Additional paid-in capital 187,999 296,783 16,765 (313,529) 188,018 Retained earnings (accumulated deficit) (170,528) 222,736 26,109 (248,845) (170,528) Accumulated other comprehensive (income) loss (2,216) (11,005) 2,927 -- (10,294) Treasury stock (220,523) -- -- -- (220,523) ---------- -------- ------- ----------- --------- TOTAL STOCKHOLDERS' DEFICIT (205,268) 508,810 45,505 (562,374) (213,327) ---------- -------- ------- ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,055,187 $695,951 $95,219 $(1,154,662) $ 691,695 ========== ======== ======= =========== =========
Condensed Consolidating Cash Flows - For the year ended July 1, 2005
Non- Issuer Guarantors Guarantors TOTAL -------- ---------- ---------- -------- Net cash provided by (used in) operating activities: $(74,070) $ 42,357 $ 7,252 $(24,461) -------- -------- -------- -------- Cash flows from investing activities: Acquisitions (93) -- -- (93) Capital expenditures (3,826) (13,027) (1,393) (18,246) Additions to intangibles (331) (241) (89) (661) -------- -------- -------- -------- Net cash used in investing activities (4,250) (13,268) (1,482) (19,000) -------- -------- -------- -------- Cash flows from financing activities: Net borrowings (repayment) under line of credit (64,000) -- -- (64,000) Proceeds from long-term debt 178,640 -- -- 178,640 Repayment of long-term debt (70,943) -- (705) (71,648) Debt financing (10,720) -- -- (10,720) Change in intercompany accounts 40,424 (30,280) (10,144) -- -------- -------- -------- -------- Net cash flows provided by (used in) financing activities 73,401 (30,280) (10,849) 32,272 -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- 38 38 -------- -------- -------- -------- Net increase (decrease) in cash (4,919) (1,191) (5,041) (11,151) Cash, beginning of year 11,890 8,923 8,922 29,735 -------- -------- -------- -------- Cash, end of year $ 6,971 $ 7,732 $ 3,881 $ 18,584 ======== ======== ======== ========
64 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, restated
Non- Issuer Guarantors Guarantors TOTAL -------- ---------- ---------- -------- Sales, net $147,923 $397,674 $90,045 $635,642 Cost of sales 109,294 353,557 67,521 530,372 -------- -------- ------- -------- Gross profit 38,629 44,117 22,524 105,270 Selling, general and administrative 36,056 24,552 8,551 69,159 Integration expense 1,717 6,058 -- 7,775 -------- -------- ------- -------- Income from operations 856 13,507 13,973 28,336 Interest expense, net 84,363 (36) 124 84,451 Unrealized loss 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) 15,277 10,663 (46,066) Provision (benefit) for income taxes 6,417 1,605 3,099 11,121 -------- -------- ------- -------- Net income (loss) $(78,423) $ 13,672 $ 7,564 $(57,187) ======== ======== ======= ========
Condensed Consolidating Balance Sheet - at July 2, 2004, restated
Non- Issuer Guarantors Guarantor Eliminations TOTAL ---------- ---------- --------- ------------- --------- CURRENT ASSETS $ 214,523 $214,523 $ 71,107 $ -- $ 323,987 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 $792,629 $105,663 $(1,155,599) $ 743,663 ========== ======== ======== =========== ========= 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) 207,550 35,540 (247,109) (89,049) Accumulated other comprehensive loss (1,367) (7,228) 2,595 -- (6,000) Treasury stock (220,523) -- -- -- (220,523) ---------- -------- -------- ----------- --------- TOTAL STOCKHOLDERS' DEFICIT (96,421) 497,105 54,900 (560,638) (105,054) ---------- -------- -------- ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $1,000,970 $792,629 $105,663 $(1,155,599) $ 743,663 ========== ======== ======== =========== =========
65 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, restated
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) Additions to intangibles -- 1,222 124 1,346 Cash proceeds on sale of assets (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 (used in) by 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 period 20,900 19,650 7,512 48,062 --------- -------- ------- --------- Cash, end of period $ 11,890 $ 8,923 $ 8,922 $ 29,735 ========= ======== ======= =========
Condensed Consolidating Statement of Operations - For the year ended June 27, 2003, restated
Non- Issuer Guarantors Guarantors TOTAL -------- ---------- ---------- -------- Sales, net $149,202 $382,354 $79,107 $610,663 Cost of sales 104,251 297,029 58,701 459,981 -------- -------- ------- -------- Gross profit 44,951 85,325 20,406 150,682 Selling, general and administrative 28,709 25,835 7,056 61,600 Integration expense -- 11,164 -- 11,164 -------- -------- ------- -------- Income from operations 16,242 48,326 13,350 77,918 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) 50,238 11,046 5,186 Provision (benefit) for income taxes (22,439) 20,330 4,415 2,306 -------- -------- ------- -------- Net income (loss) $(33,659) $ 29,908 $ 6,631 $ 2,880 ======== ======== ======= ========
66 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, restated
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 year 9,035 10,660 8,504 28,199 -------- -------- ------- -------- Cash, end of year $ 21,124 $ 19,650 $ 7,288 $ 48,062 ======== ======== ======= ========
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) In the fourth quarter of 2005, the Company identified certain overstated inventory at its American Gasket and Rubber Division which resulted in a non-cash charge to operations of $2.8 million in 2005 and $2.7 million in 2004. The table below reflects the restatement of the interim periods for these accounting errors, none of which were material to any specific period.
Fourth First Second Third Quarter Quarter Quarter Quarter (2004 restated restated restated restated) -------- -------- -------- --------- 2005 Net sales $143,461 $138,247 $194,215 $219,601 Gross profit 28,415 25,123 27,257 14,559 Income (loss) from operations 9,969 8,704 9,750 (4,237) Net income (loss) (9,884) (11,722) (10,223) (49,650)(2) 2004 Net sales $136,058 $122,712 $169,133 $207,739 Gross profit restated 29,100 28,476 43,774 3,920 Income (loss) from operations restated 12,558 12,952 24,908 (22,082) Net income (loss) restated (1,869) (6,066) 2,544 (51,796)(1) ======== ======== ======== ========
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 of 2004 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 in 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. (2) The fourth quarter of 2005 includes a $23.1 million reduction in our deferred tax asset.
67 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 24, 2005 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 1, 2005, July 2, 2004, and June 27, 2003 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 24, 2005 68 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 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 ====== ====== ====== ====== YEAR ENDED JULY 1, 2005 Accounts receivable allowance for possible losses $5,328 $1,970 $1,234 $6,064 ====== ====== ====== ======
(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. 69