-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WjuxMTtELMSnvCVa/exVUZKiWKA0eMmkbBRZYeLtxhbOm1pjJIHnPElEKQVdhE2i AgKpR/gtPSTTB1xv1my1gQ== 0000950123-98-008661.txt : 19981001 0000950123-98-008661.hdr.sgml : 19981001 ACCESSION NUMBER: 0000950123-98-008661 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980703 FILED AS OF DATE: 19980930 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKNI PLEX INC CENTRAL INDEX KEY: 0001039542 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 223286312 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-28157 FILM NUMBER: 98718550 BUSINESS ADDRESS: STREET 1: 201 INDUSTRIAL PKWY CITY: SOMERVILLE STATE: NJ ZIP: 08876 BUSINESS PHONE: 9087224800 MAIL ADDRESS: STREET 1: 201 INDUSTRIAL PKWY CITY: SOMERVILLE STATE: NJ ZIP: 08876 10-K 1 FORM 10-K RE: TEKNI-PLEX, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended July 3, 1998 [ ] 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 0-26508 Tekni-Plex, Inc. ---------------- (Exact name of registrant as specified in its charter) Delaware 22-3286312 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 201 Industrial Parkway, Somerville, New Jersey 08876 ---------------------------------------------------- (Address of principal executive offices and zip code) (908) 722-4800 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date. None Documents Incorporated by Reference: See Index to Exhibits. 1 2 Item 1. BUSINESS INTRODUCTION Tekni-Plex, Inc. was founded as a Delaware corporation in 1967 to acquire the General Felt Products division of Standard Packaging Corporation. The Company, then located in Brooklyn, NY, built a reputation for solving difficult packaging problems and providing customers with high quality, advanced packaging materials. In 1970, the Company built an additional manufacturing facility in Somerville, New Jersey, diversifying into the business of producing polystyrene foam trays for the poultry processing industry. The Somerville facility serves as the current headquarters of the Company. As used herein, "Tekni-Plex" or the "Company" means Tekni-Plex, Inc. and its subsidiaries, unless the context otherwise requires. In March 1994, Tekni-Plex was acquired by its current controlling shareholder and Dr. F. Patrick Smith who was elected Chief Executive Officer. Mr. Kenneth W.R. Baker, the Company's President and Chief Operating Officer, was appointed in April 1994. At that time, the principal product lines consisted of: clear, high-barrier laminations for pharmaceutical blister packaging; foam processor trays, primarily for the poultry industry; and closure (bottle cap) liners, primarily for pharmaceutical end-uses. In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and business of Hargro Flexible Packaging Corporation ("Hargro"). The Flemington plant produces packaging materials primarily for the pharmaceutical industry. In February 1996, Tekni-Plex completed its acquisition of Dolco Packaging Corporation ("Dolco"), a publicly-traded foam products company. With $81 million of annual sales, Dolco at the time 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. In August 1997, Dolco, which had been a wholly owned subsidiary of Tekni-Plex, was merged into Tekni-Plex. In March 1998, Tekni-Plex acquired PureTec Corporation ("PureTec"), a publicly-traded company with annual sales of $315 million. PureTec is a leading manufacturer of plastic packaging, products, and materials primarily for the healthcare and consumer markets. PureTec is a wholly-owned subsidiary of Tekni-Plex. DESCRIPTION OF BUSINESS Tekni-Plex is a global, diversified manufacturer of packaging, products, and materials for the healthcare, consumer, and food packaging industries. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under four primary business groups: Healthcare Packaging, Products, and Materials; Consumer Packaging and Products; Food Packaging; and Specialty Resins and Compounds. Representative product lines in each group are listed below:
- -------------------------------------------------------------------------------------------------------------------- HEALTHCARE PACKAGING, PRODUCTS, CONSUMER PACKAGING AND FOOD PACKAGING SPECIALTY RESINS AND AND MATERIALS PRODUCTS COMPOUNDS - -------------------------------------------------------------------------------------------------------------------- Pharmaceutical packaging Precision tubing and Foamed egg cartons Specialty PVC resins gaskets Medical tubing Garden and irrigation Meat and poultry Recycled PET resins hose products processor trays Medical device materials Pool hose products Agricultural foam General purpose PVC packaging compounds - --------------------------------------------------------------------------------------------------------------------
This end market and product line diversity has the effect of reducing Tekni-Plex's overall risk related to any one product line or customer. For fiscal year 1998, Tekni-Plex's largest customer, Wal-Mart Stores Inc., accounted for approximately 10% of sales, with no other individual customer accounting for 10% or more of sales. 2 3 The Company purchases raw materials from several sources that differ for each product line. This diversity of raw material suppliers, as well as the availability of alternative suppliers, has the effect of reducing Tekni-Plex's overall risk related to any one supplier. The single exception is a key raw material used in manufacturing the Company's clear, laminated PCTFE blister packaging materials. Allied Signal is currently the sole manufacturer and supplier of this proprietary raw material. There is no long-term supply contract with Allied Signal and any interruption in the supply of this material could disrupt production of the Company's clear, laminated blister packaging materials. To the extent that the Company's supply of this raw material is hindered, the Company would substitute coated or foil-based products. There has never been a significant disruption of the supply of this PCTFE material in the Company's 30 years of manufacturing this product line. The Company in the past has generally been able to pass on raw material price increases to customers on a relatively timely basis. The exception has been garden hose products, the prices for which are typically set in advance of each season. Raw material cost increases or decreases for garden hose products generally are not passed through during that season. The following sections provide further information regarding the four business groups, including descriptions of the major product lines within each group. Segment financial information for these groups is contained in the "Notes to Consolidated Financial Statements." HEALTHCARE PACKAGING, PRODUCTS, AND MATERIALS Pharmaceutical Packaging The Company's pharmaceutical packaging product line includes flexible, semi-rigid, and rigid packaging films, coated films, and laminations. The Company is the market leader for clear, high-barrier laminations for pharmaceutical blister packaging and believes, based upon its knowledge and experience in the industry, that it has a greater than 80% share of the market for such products. 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. The Company believes 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. From an environmental viewpoint, the flexible and semi-rigid segment leads the packaging industry in source reduction efforts. The term "source reduction" refers to the concept of accomplishing requisite packaging functions with a minimum of packaging materials. By using less material to perform the packaging function, the environmental impact is reduced: greater conservation of the Earth's resources, lower energy usage in both the production of packaging materials and product distribution costs, and fewer disposal issues. The Company believes that the resulting growth in the flexible and semi-rigid product line has come at the expense of the more mature non-plastic packaging materials. The Company's high-barrier, blister laminations are sold to major pharmaceutical companies (or their designated contract packagers). The Company has begun to market its full pharmaceutical product line directly on a worldwide basis, has assembled a global network of sales personnel (both direct and through outside manufacturer's representatives), and has established manufacturing liaisons in the United Kingdom, Switzerland, Germany, and the Philippines. 3 4 In the clear pharmaceutical blister films market, Tekni-Plex has two principal competitors worldwide that have resources equal to or greater than those of the Company. However, the Company believes that neither of these competitors has the breath of product offering to match that of the Company, and that this differentiation is significant as viewed by the pharmaceutical industry. Also, the high manufacturing and audit compliance standards imposed by the pharmaceutical companies on their suppliers provide a significant barrier to the entry of new competitors. Entry barriers also arise due to the lengthy and stringent approval process required by the FDA. 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. Medical Tubing Tekni-Plex is a leading producer of medical tubing, with approximately 25% of the non-captive market in North America and Europe. Tekni-Plex specializes 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. Medical tubing is sold primarily to manufacturers of medical devices that are packaged specifically for such procedures and applications. Products are sold through direct salespeople. The Company manufactures medical tubing using proprietary plastic extrusion processes. The primary raw materials are proprietary compounds, which are produced by the Company. The industry is fragmented with no single competitor having a dominant market share. New medical tubing products developed by the Company include microbore tubing, silicone substitute formulations, and trilayer tubing substitutes. Microbore tubing can be used to regulate the delivery of critical intravenous fluids without the need for more expensive drip control devices. Medical professionals can precisely control the drug delivery speed simply by selecting the proper (color-coded) diameter tube, thereby improving accuracy and reducing cost. More importantly, as home healthcare trends continue, the use of microbore tubing will help eliminate critical dosage errors on the part of the non-professional caregiver or the patient. Medical Device Materials The Company believes that it is the world's largest producer of high-quality vinyl compounds for use in the medical industry. These medical-grade materials are sold to leading manufacturers of medical devices and equipment. They are also sold to producers of tubing and, to some extent, to producers of closures for the food and beverage industry. The Company sells these compounds in worldwide markets. Products are sold directly through the Company's salespeople. The market for medical-grade vinyl compounds is highly specialized, with three significant competitors. For more than 30 years, the Company has been supplying these specialized vinyl compounds for FDA-regulated applications. The Company believes it competes effectively based on product quality and performance and prompt delivery, and that price is a secondary consideration for its customers. The Company's chemists work closely with customers to develop compounds that address their specific requirements. Through this custom work, the Company has introduced a number of breakthroughs to the medical device industry by developing formulations with unique physical characteristics. For example, the Company has recently developed a new family of flexible vinyl compounds designed to replace silicone rubber in a variety of medical tubing and commercial applications. CONSUMER PACKAGING AND PRODUCTS Precision Tubing and Gaskets Tekni-Plex's precision tubing and gaskets product line is sold 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 the Company's direct sales force. The Company believes that it is the largest tubing extruder in North America and is the leading supplier of aerosol valve and dispenser pump gaskets worldwide. 4 5 Sales to the aerosol valve and dispenser pump industries consist primarily of dip tubes, which transmit the contents of a dispenser can to the nozzle, and specialized molded or punched rubber-based valve gaskets that serve to control the release of the product from the container. Writing instrument products include pen barrels and ink tubing as well as ink reservoirs for felt-tip pens. Tekni-Plex is the single-source supplier to much of the industry. The principal competitive pressure in this product line is the possibility of customers switching to internal production, or vertical integration. To counteract this possibility, the Company focuses on product quality, prompt delivery, technical service and innovation. The precision tubing products are manufactured at extremely high speeds while holding to precise tolerances. The process enhancements that allow simultaneous high speed and precision are proprietary to the Company. The precision gasket products, which the Company has 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, the Company has 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. Garden and Irrigation Hose Products Tekni-Plex believes that it is the leading producer of garden hose in the United States, with more than 40% of the market. The Company has produced garden hose products for nearly fifty years, and produces its primary components internally, including proprietary material formulations and brass couplings. There are two other principal competitors in the United States, and several smaller companies having substantially smaller market shares. Garden hose products are sold primarily to home centers, hardware cooperatives, food, automotive, drug and mass merchandising chains and catalog companies throughout the United States and Canada. Customers include some of the fastest growing and most widely respected retail chains in North America. The Company's market strategy is to provide a complete line of innovative, high-quality products along with superior customer service. Innovations have included the patented Colorite(R) Evenflow(R) design and the "drinking water safe" product lines. Tekni-Plex also manufactures specialty hose products such as air hose and irrigator "soaker hose". 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. Products are sold primarily through the Company's direct salespeople and also through independent representatives. Both private label and brand-name products are sold to the retail market. FOOD PACKAGING The Food Packaging group produces primarily thermoformed foam polystyrene packaging products such as egg cartons and processor trays that are sold to the poultry, meat, and egg industries. The Company believes that it produces about 80% of all foam egg cartons and has approximately 40% of the total egg carton market. The Company also has built a strong presence in the processor tray market, where it believes that it has an estimated market share of more than 20%. Thermoformed foam polystyrene packaging has been the material of choice for food packaging cartons and trays for many years. In terms of economic and functional characteristics, foamed polystyrene products offer a combination of high strength, minimum material content and superior moisture barrier performance. Foamed polystyrene products also offer greater dimensional consistency that enhances the high speed mechanical feeding of cartons and trays into automated package filling operations. 5 6 The Company's customer base includes most of the domestic egg packagers (including those owned by egg retailers) and many prominent poultry processors. The Company believes it competes effectively based on product quality and performance and prompt delivery. Within the polystyrene foam processor tray market, the Company competes principally with two large competitors, both of which have significantly greater financial resources than the Company and who, together, control the largest share of this market. In the egg packaging market, the Company's primary competitor manufactures pulp-based egg cartons. SPECIALTY RESINS AND COMPOUNDS Specialty PVC Resins Tekni-Plex manufactures specialty PVC resins, with an annual production capacity of 120 million pounds. The Company employs specialized technology to produce dispersion, blending, and copolymer suspension resins for a variety of industries, including floor covering, automotive sealants and adhesives, coil coatings, plastisol compounding and PVC packaging. The Company competes with a number of large chemical companies who offer a greater breadth of products. However, the Company believes that it has built a relatively unique position in the specialty resins market by offering customized products for niche markets that the larger commodity producers do not serve. The business strategy is built on individual customer service and the highest standards of quality. Although the Company's market share in the total PVC resin market is less than 1%, and in the overall specialty resins market is about 7%, the Company's share in its target markets exceeds 20%. PATENTS AND TRADEMARKS The Company seeks to protect its proprietary know-how through the application of patent and trademark laws. However, in the opinion of management, none of its patents or trademarks are material to its operations. RESEARCH AND DEVELOPMENT The Company employs certain professionals who, along with other responsibilities, are engaged in research relating to the development of new products and to the improvement of existing products and processes. The Company works closely with certain clients to develop and improve certain products and product lines. Much of this product development is either funded by clients or its cost is absorbed in the Company's manufacturing cost of sales, and therefore is not reflected as research and development expense. EMPLOYEES As of July 3, 1998, the Company employed approximately 2,800 full-time employees. Approximately 31% of all employees are represented by various collective bargaining agreements that expire between December 31, 1998 and July 31, 2001. The Company believes it has good relations with its employees. ENVIRONMENTAL MATTERS The Company is subject to ongoing environmental oversight in the ordinary course of business. Management is not aware of any environmental proceedings that are likely to have a material adverse effect on its consolidated financial position or results of operations. Additionally, in management's opinion, no such proceedings nor compliance with Federal, state and local environmental laws and regulations are believed to require any material estimated capital expenditures for environmental control facilities in the foreseeable future. 6 7 Item 2. PROPERTIES The Company believes that its facilities are suitable 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 FUNCTION SQUARE FEET - -------- -------- ----------- Somerville, New Jersey Corporate Headquarters; Manufactures 123,000 food and healthcare packaging Auburn, Maine (2) Specialty resins 24,000 Belfast, Ireland Healthcare materials 55,000 Burlington, New Jersey Specialty resins 107,000 Cambridge, Ontario Healthcare packaging 12,500 Cambridge, Ontario (2) Warehouse 14,000 City of Industry, Healthcare products 110,000 California (2) Clinton, Illinois Consumer packaging 62,500 Dallas, Texas (7) Food packaging 139,000 Dalton, Georgia Healthcare products 40,000 Decatur, Indiana Food packaging 187,000 Decatur, Indiana (1) Warehouse 3,750 East Farmingdale, New York (4) Specialty resins 50,000 Erembodegem Consumer packaging 88,200 (Aalst), Belgium Flemington, New Jersey Healthcare packaging 145,000 Huntington, West Virginia (8) Specialty resins (Under construction) 150,000 Lawrenceville, Georgia Food packaging 150,000 Lawrenceville, Georgia (1) Warehouse 31,700 Livonia, Michigan (2) Specialty resins 60,000 McKenzie, Tennessee (2) Consumer products 20,000 Milan (Gaggiano), Italy (3) Consumer packaging 14,100 Milan (Gaggiano), Italy Consumer packaging 25,800 Milan (Rosate), Italy (5) Consumer packaging 24,000 Mississauga, Ontario (6) Consumer products 150,000
7 8
APPROXIMATE LOCATION FUNCTION SQUARE FEET - -------- -------- ----------- Piscataway, New Jersey (5) Compounds 50,000 Ridgefield, New Jersey Consumer products and 328,000 healthcare materials Ridgefield, New Jersey (5) Warehouse 70,000 Rockaway, New Jersey Consumer packaging 98,600 Schaumburg, Illinois (9) Consumer packaging 58,000 Schiller Park, Illinois Consumer packaging 20,000 Sparks, Nevada (5) Consumer products and 248,000 healthcare materials Tonawanda, New York (4) Consumer products 31,000 Waco, Texas Consumer products 104,600 Wenatchee, Washington Food packaging 99,000 Wenatchee, Washington (2) Warehouse 26,400
(Years relate to calendar years) (1) Leased on a month-to-month basis. (2) Lease expires in 1999. (3) Lease expires in 2000. (4) Lease expires in 2001. (5) Lease expires in 2002. (6) Lease expires in 2005. (7) Lease expires in 2006. (8) Lease expires in 2008. (9) Lease expires in 2019. Item 3. LEGAL PROCEEDINGS The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Not Applicable. 8 9 Item 6. SELECTED FINANCIAL DATA (Dollars in thousands) The following table sets forth selected historical consolidated financial information of the Company, and has been derived from and should be read in conjunction with the Company's audited consolidated financial statements, including the notes thereto. In addition, on March 18, 1994, Tekni-Plex was acquired by the current owners, in a transaction accounted for under the purchase method of accounting. The financial statements for the periods prior to March 18, 1994 are presented on the predecessors' basis of accounting and accordingly, are not comparable to the periods subsequent to March 18, 1994.
FOR THE PERIODS YEARS ENDED YEAR ENDED --------------- ----------- DEC. 31, JAN. 1 TO MAR. 19 TO ---------- MAR. 18, JUL. 1, JUN. 30, JUN. 28, JUN. 27, JULY 3, 1993 1994 1994 1995 1996 1997 1998 -------- -------- -------- -------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Net sales $ 44,878 $ 9,418 $ 12,723 $ 44,688 $ 80,917 $ 144,736 $ 309,597 Cost of goods sold 36,604 7,924 9,961 34,941 62,335 107,007 232,499 Gross profit 8,274 1,494 2,762 9,747 18,582 37,729 77,098 Selling, general and administrative expenses 5,076 602 1,521 4,814 10,339 15,886 39,220 Income from operations 3,198 892 1,241 4,933 8,243 21,843 37,878 Interest expense 160 22 1,141 4,322 5,816 8,094 19,682 Other (income) expense 7 45 62 234 469 646 415 Pre-tax income before extraordinary item 3,031 825 38 377 1,958 13,103 17,781 Income tax provision(a) 267 56 17 211 982 4,675 9,112 Income before extraordinary item 2,764 769 21 166 976 8,428 8,669 Extraordinary item (loss)(c) -- -- -- -- -- (20,666) -- Net income (loss) $ 2,764 $ 769 $ 21 $ 166 $ 976 $ (12,238) $ 8,669 BALANCE SHEET DATA (at period end): Working capital $ 6,023 $ 4,565 $ 1,673 $ 3,173 $ 11,660 $ 25,950 $ 84,897 Total Assets 15,701 14,900 53,724 53,415 121,770 129,029 546,832 Total debt (including current portion) 1,616 588 36,396 35,004 70,436 75,000 401,905 Stockholders' equity 10,086 10,855 11,521 11,687 24,162 30,397 38,673 OTHER FINANCIAL DATA: EBITDA(b) $ 3,800 $ 985 $ 1,988 $ 7,922 $ 14,157 $ 30,223 $ 54,479 EBITDA margin(b) 8.5% 10.5% 15.6% 17.7% 17.5% 20.9% 17.6% Depreciation and amortization $ 608 $ 138 $ 879 $ 3,462 $ 6,821 $ 9,551 $ 17,249 Capital expenditures 1,423 420 157 614 2,275 3,934 7,283 Cash flows: From operations 3,512 (564) 1,147 2,354 6,568 19,537 29,009 From investing (1,871) 315 (45,567) (614) (49,522) (6,273) (310,672) From financing (570) (1,121) 44,465 (1,451) 43,669 (3,217) 299,926
(a) Prior to the acquisition of Tekni-Plex by the current owners, the previous owners elected to be taxed as an "S" corporation for federal income tax purposes. Accordingly, there was no provision for federal income taxes for periods prior to March 18, 1994 as such income was reported on the federal income tax returns of the shareholders. (b) EBITDA is defined as net income before interest, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of the Company's ability to incur and service debt. However, EBITDA should not be considered in isolation as a substitute for net income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. In addition, this measure of EBITDA may not be comparable to similar measures reported by other companies. EBITDA margin is calculated as the ratio of EBITDA to net sales for the period. For fiscal 1996, amortization included $522 related to the write off of prior unamortized debt costs. (c) Extraordinary loss is comprised of (i) a prepayment penalty of $1.2 million and the write-off of deferred financing costs and debt discount of $3.4 million, net of the combined tax benefit of $1.8 million, and (ii) a loss of $17.8 million on the repurchase of redeemable warrants. 9 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FOR THE YEAR ENDED JULY 3, 1998 COMPARED WITH THE YEAR ENDED JUNE 27, 1997 Net Sales increased to $309.6 million for the year ended July 3, 1998 from $144.7 million for the year ended June 27, 1997. This represents an increase of $164.9 million or 114.0%. The increased sales are primarily attributable to the acquisition of PureTec in March 1998, which amounted to $154.1 million, and to a lesser extent the increased demand for the Company's healthcare packaging products. The level of growth for the year ended July 3, 1998 may not be indicative of future operations. Cost of Goods Sold increased to $232.5 million for the year ended July 3, 1998, of which PureTec operations accounted for $118.4 million of the increase, from $107.0 million for the year ended June 27, 1997. Expressed as a percentage of net sales, cost of goods sold increased to 75.1% for the year ended July 3, 1998 from 73.9% for the same period in 1997. The increase in cost of goods sold as a percentage of net sales was due primarily to the different sales mix associated with the purchase of PureTec. This level of increase in costs and increase as a percent of sales may not be indicative of future operations. Gross Profit as a result, increased to $77.1 million or 24.9% of net sales for the year ended July 3, 1998, from $37.7 million or 26.1% of net sales for the same period in 1997. Selling, general and administrative expenses increased to $39.2 million or 12.7% of net sales for the year ended July 3, 1998 from $15.9 million or 11.0% of net sales for the same period in 1997. Selling, general and administrative expenses increased as a percentage of net sales due primarily to the acquisition of PureTec and related compensation increases, as well as increased administrative costs and higher selling expenses associated with the global expansion of the Company's healthcare packaging products. Operating profit increased to $37.9 million or 12.2% of net sales for the year ended July 3, 1998, from $21.8 million or 15.1% for the same period in 1997, for the reasons stated above. Interest expense increased to $19.7 million or 6.4% of net sales for the year ended July 3, 1998, from $8.1 million or 5.6% of net sales for the same period in 1997 due primarily to an issuance of new bonds and notes to acquire PureTec. Provision for income taxes increased to $9.1 million or 2.9% of net sales for the year ended July 3, 1998, from $4.7 million or 3.2% for the same period in 1997. The Company's effective tax rate was 51% for the year ended July 3, 1998 compared to 36% for the same period in 1997. The increase between periods is due primarily to non-deductible amortization and the depletion of tax carryover losses and credits. Net income before extraordinary loss increased to $8.7 million or 2.8% of net sales for the year ended July 3, 1998, from $8.4 million or 5.8% of net sales for the same period in 1997, for the reasons discussed above. 10 11 FOR THE YEAR ENDED JUNE 27, 1997 COMPARED WITH THE YEAR ENDED JUNE 28, 1996 Net Sales increased to $144.7 million for the year ended June 27, 1997 from $80.9 million for the year ended June 28, 1996. This represents an increase of $63.8 million or 78.9%. The increased sales are primarily attributable to the acquisition of Dolco in February 1996, which accounted for $55.2 million, and to a lesser extent to the acquisition of Hargro in December 1995. Cost of Goods Sold increased to $107.0 million for the year ended June 27, 1997, of which the Dolco operation accounted for $40.3 million of such increase, from $62.3 million for the same period in 1996. Expressed as a percentage of net sales, cost of goods sold fell to 73.9% for the year ended June 27, 1997 from 77.0% for the same period in 1996. The decline in cost of goods sold as a percentage of net sales were due primarily to a decline in raw material costs resulting from improved market conditions and the increased purchasing power of the Company. Gross Profit as a result, increased to $37.7 million or 26.1% of net sales for the year ended June 27, 1997, from $18.6 million or 23.0% of net sales for the same period in 1996. Selling, general and administrative expenses increased to $15.9 million or 11.0% of net sales for the year ended June 27, 1997 from $10.3 million or 12.8% of net sales for the same period in 1996. Selling, general and administrative expenses decreased as a percentage of net sales due primarily to the acquisition of Dolco with no relative comparable increase in the general and administrative staff of the Company. Operating profit increased to $21.8 million or 15.1% of net sales for the year ended June 27, 1997, from $8.2 million or 10.2% for the same period in 1996, for the reasons stated above. Interest expense increased to $8.1 million or 5.6% of net sales for the year ended June 27, 1997, from $5.8 million or 7.2% of net sales for the same period in 1996 due primarily to increased borrowings related to the Dolco acquisition which accounted for an increase of $2.4 million. Expressed as a percentage of net sales, interest expense for the 1997 period fell to 5.6% from 7.2% for the 1996 period as a result of the decreasing debt as a percentage of net sales following the Dolco and Hargro acquisitions. Provision for income taxes increased to $4.7 million or 3.2% of net sales for the year ended June 27, 1997, from $1.0 million or 1.2% for the same period in 1996. The Company's effective tax rate was 36% for the year ended June 27, 1997. The decrease from the Company's expected rate of 38% was a result of the realization of certain state tax benefits. Net income before extraordinary loss increased to $8.4 million or 5.8% of net sales for the year ended June 27, 1997, from $1.0 million or 1.2% of net sales for the same period in 1996, for the same reasons discussed above. Extraordinary loss on early extinguishment of debt was $20.7 million for the year ended June 27, 1997. On April 4, 1997, the Company issued $75.0 million of 11-1/4% Notes. Interest on the 11-1/4% Notes is payable semi-annually. The Company also received approximately $18.4 million in additional capital contribution. These proceeds were used to repay the balance of $36.8 million on the Company's then outstanding credit facility, repay the then existing subordinated notes for $25.2 million, including a prepayment penalty of $1.2 million, and repurchase the redeemable warrants for $20.0 million. The extraordinary loss was comprised of (i) the prepayment penalty of $1.2 million of the write-off of deferred financing costs and debt discount of $3.4 million, net of the combined tax benefit of $1.8 million, and (ii) the loss on the repurchase of the warrants of $17.8 million. Net income (loss) decreased to ($12.2 million) or (8.5%) of net sales for the year ended June 27, 1997, from a net income of $1.0 million or 1.2% of net sales for the same period in 1996, for the reasons stated above. 11 12 LIQUIDITY AND CAPITAL RESOURCES For the year ended July 3, 1998, net cash provided by operating activities was $29.0 million compared to $19.5 million for the same period in 1997. This was due primarily to the acquisition of PureTec and to increased earnings in 1998. Working capital at July 3, 1998 was $84.9 million compared to $26.0 million at the same period in 1997. The increase in working capital was due primarily to the acquisition of PureTec and to increased earnings in 1998. As of July 3, 1998 and June 27, 1997, there were no outstanding balances under the revolving credit line. The Company's capital expenditures for the year ended July 3, 1998 and June 26, 1997 were $7.3 million and $3.9 million, respectively. Management expects that annual capital expenditures will increase from historical levels during the next few years as the Company makes improvements in the recently acquired operations. Apart from acquisitions, the Company's principal uses of cash for the next several years will be debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds from the credit facility will be sufficient to meet the Company's expected debt service requirements, planned capital expenditures, and operating needs. However, there can be no assurance that sufficient funds will be available from operations or borrowings under the credit facility to meet the Company's cash needs to the extent management anticipates. The credit facility will provide the Company with the increased flexibility to make capital expenditures and acquisitions that management believes will provide an attractive return on investment. To the extent the Company pursues future acquisitions, the Company may be required to obtain additional financing. There can be no assurance that it will be able to obtain such financing in amounts and on terms acceptable to it. INFLATION During the past fiscal year the Company's operations have benefited from relatively stable or declining prices for raw materials. In the event significant inflationary trends were to resume, management believes that the Company will generally be able to offset the effects thereof through continuing improvements in operating efficiencies and increasing prices, to the extent permitted by competitive factors. However, there can be no assurance that all such cost increases can be passed through to customers. YEAR 2000 ISSUES Definition: "Year 2000 issues" refer to possible events resulting directly or indirectly from the inability of digital computer equipment or software to accurately and without interruption handle dates both before and after January 1, 2000 and to process the year 2000 as a leap year. Assessment: Tekni-Plex is currently evaluating the potential impact and remediation costs of Year 2000 issues. Although this assessment is not yet complete, the Company believes that, due to the nature of its manufacturing processes and procedures, the Year 2000 issues will not have a material impact on its business. Manufacturing Infrastructure: The Company's basic operations involve certain plastics converting processes. These processes involve primarily plastic extrusion and compounding equipment of various forms. For the most part, this equipment is controlled either manually or by means of mechanical and analog devices. For equipment that does include microprocessors, the applications being controlled are mechanical and not date-sensitive, and can be controlled manually if necessary. In its investigations thus far, the Company has identified no significant manufacturing processes that would be disabled by a total loss of digital computer components. Support Systems: The Company's assessment does indicate that there may be support systems, such as accounting systems, that may be affected by the Year 2000 issues. The Company believes that it has identified most of the major computers, software applications, and other equipment utilized by such support systems that must be modified, upgraded, or replaced to minimize the possibility of any disruption of business. The Company has 12 13 commenced the process of modifying, upgrading, and replacing major systems that may be adversely affected, and expects to complete this process before the occurrence of any significant disruption of business. However, to a large extent, this includes replacing systems of acquired businesses, which was previously planned as part of the Company's normal integration strategy. Therefore, additional costs that will be incurred solely due to Year 2000 issues are not expected to be significant. In addition, the Company does routine data backup of critical systems during the normal course of business. This backup provides the ability to recover data in the event of a catastrophic computer failure. It is the Company's belief that its customers and suppliers, for the most part, have similar data safeguards in place. Suppliers: The Company is in the process of contacting its suppliers to identify any potential disruption in the supply of raw materials. The Company expects to resolve any significant Year 2000 issues before the occurrence of any business disruptions, although the Company has limited or no control over the actions of these suppliers. However, the Company believes that the supply of basic chemicals and other raw materials used in its vertically integrated manufacturing processes is unlikely to be significantly disrupted. In addition, the Company, in the normal course of business, maintains adequate inventories of such raw materials to protect against short-term delivery interruptions. Customers: Tekni-Plex is committed to providing uninterrupted service to its customers. In a few cases, the Company has direct interfaces with the computer systems of its customers, primarily for "vendor managed inventory" applications. The Company expects to resolve any significant Year 2000 issues with such customers before the occurrence of any business disruptions, although the Company has limited or no control over the actions of these customers. The Company expects to maintain adequate finished goods inventories to protect customers against the possibility of temporary service interruptions, if any. Conclusion: Tekni-Plex expects to find and adequately prepare for all significant internal Year 2000 issues that could adversely affect its business operations. The Company does not anticipate that the cost of resolving such problems will be material to its financial results. However, the Company does not believe that it is possible to identify, with complete certainty, all potential Year 2000 issues that may in some way affect the Company, its suppliers, or its customers. The Company expects that any disputes arising as the result of such unidentified Year 2000 issues will be resolved in the normal course of business. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable Item 8. FINANCIAL STATEMENTS The financial statements commence on Page F-2. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 13 14 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of Tekni-Plex 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 its by-laws, Tekni-Plex indemnifies its officers and directors to the fullest extent permitted by the General Corporation Law of the State of Delaware and Tekni-Plex's certificate of incorporation.
NAME AGE POSITION Dr. F. Patrick Smith 50 Chairman of the Board and Chief Executive Officer Kenneth W.R. Baker 54 President, Chief Operating Officer and Principal Accounting and Financial Officer Arthur P. Witt 68 Corporate Secretary and Director J. Andrew McWethy 57 Director Barry A. Solomon 50 Director Stephen A. Tuttle 57 Director Michael F. Cronin 44 Director
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive Officer of Tekni-Plex since March 1994. He received his doctorate degree in chemical engineering from Texas A&M University in 1975. He served as Senior Chemical Engineer to Texas Eastman Company, a wholly owned chemical and plastics subsidiary of Eastman Kodak, where he developed new grades of polyolefin resins and hot melt and pressure sensitive adhesives. In 1979, he became Technical Manager of the Petrochemicals and Plastics Division of Cities Service Company, and a Member of the Business Steering Committee of that division. From 1982 to 1984, Dr. Smith was Vice President of R&D and Marketing for Guardian Packaging Corporation, a diversified flexible packaging company. Thereafter, he joined Lily-Tulip, Inc. and managed their research and marketing functions before becoming Senior Vice President of Manufacturing and Technology. Following the acquisition of Lily-Tulip by Fort Howard Corporation in 1986, he became the Corporate Vice President of Fort Howard, responsible for the manufacturing and technical functions of the combined Sweetheart Products and Lily-Tulip operations. From 1987 to 1990, Dr. Smith was Chairman and Chief Executive Officer of WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos Financial Group, a business consulting firm. Dr. Smith is a limited partner of Tekni-Plex Partnership. Kenneth W.R. Baker has served as Tekni-Plex Chief Operating Officer since April 1994 and as President since July 1995. Mr. Baker served in various management roles including systems development, finance, industrial engineering, research and development, and manufacturing operations at Owens-Illinois, Inc. and Lily-Tulip, Inc. from 1965 to 1985. From 1986 to 1987, he served as Vice President, Operations at Fort Howard Cup Corporation. In 1987, Mr. Baker joined WFP Corporation, Inc. as Senior Vice President, Operations and eventually became the company's President and CEO before leaving the company in 1992. Thereafter, Mr. Baker became Vice President, Research and Development at the Molded Products Division of Carlisle Plastics, Inc. until joining the Company. Mr. Baker is a limited partner of Tekni-Plex Partnership. Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was appointed Secretary in January 1997. Since July 1989, he has been president of PAJ Investments which is involved in financial consulting and property management. Over the same period, Mr. Witt also served as a temporary chief financial officer for WFP Corporation and Flexible Technology. Prior to 1989, Mr. Witt served in a number of senior management positions for companies such as Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. Mr. Witt is a limited partner of Tekni-Plex Partnership. J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He is a co-founder of MST Partners L.P. ("MST L.P.") and MST Offshore Partners, C.V. (together with MST L.P., the "MST Investment Partnerships"), each of which was formed in 1989, and is a general partner of MST Management, L.P., a general partner of MST Investment Partnerships. Prior to 1989, Mr. McWethy was employed by Irving Trust Company for twelve years. Barry A. Solomon has served as a director of Tekni-Plex since March 1994. He is a co-founder of the MST Investment Partnerships and is a general partner of MST Management, L.P. Prior to 1989, Mr. Solomon was employed by Irving Trust Company for ten years. 14 15 Stephen A. Tuttle has served as a director of Tekni-Plex since March 1994. He is a co-founder of the MST Investment Partnerships and is a general partner of MST Management, L.P. Prior to 1989, Mr. Tuttle was employed by Irving Trust Company for four 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, Tekni-Plex compensates outside directors for services provided in such capacity in the amount of $30,000 or less per fiscal year for each such director. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth the remuneration paid by Tekni-Plex to the Chief Executive Officer and the next most highly compensated executive officer of Tekni-Plex whose salary and bonus exceeded $100,000 for the years indicated in connection with his position with Tekni-Plex: SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a) - ------------------------- ---- ------ ----- ------- --------------- Dr. F. Patrick Smith, 1998 $770,577 $5,072,134 9.15041 $150,283 Chief Executive Officer 1997 490,385 1,921,291 -- 15,417 1996 351,923 859,248 -- 21,245 Mr. Kenneth W.R. Baker, 1998 $385,289 $2,536,062 13.72562 $ 6,315 President, Chief Operating 1997 260,096 960,645 -- 32,136 Officer and Principal 1996 217,308 429,624 -- 13,870 Accounting Officer
(a) Includes amounts reimbursed during the fiscal year for payment of taxes, auto expense, membership fees, relocation expenses, etc. Option/SAR Grants in Last Fiscal Year
Potential Potential Percent of Realizable Realizable Total Value at Value at Number of Options/ Exer- Assumed Assumed Securities SARs cise or Annual Rates Annual Rates Under- Granted Base of Stock Price of Stock Price lying to Price Appreciation Appreciation Options/ Employees per Expi- for Option for Option SARs in Fiscal Share ration Term 5% Term 10% Name Granted Year ($000) Date ($000) ($000) Dr. F. Patric Smith 9.15 32.3% $154.5 4/01/2008 $2,302 $3,666 Kenneth W.R. Baker 13.73 48.4% $154.5 4/01/2008 $3,453 $5,499
15 16 Aggregated Option/SAR Exerceses in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value ($000) of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End FY-end Name Shares Acquired Exercisable/ Exercisable/ on Exercise Value Realized Unexercisable Unexercisable Dr. F. Patrick Smith --- --- ---/9.15 ---/--- Kenneth W.R. Baker --- --- 21.73/13.73 $3,356/---
EMPLOYMENT AGREEMENTS Tekni-Plex recently renewed its employment agreements with Dr. F. Patrick Smith and Mr. Kenneth W.R. Baker. Both Dr. Smith and Mr. Baker's employment agreements expire June 29, 2001 and have renewal provisions. The employment agreements provide, among other things, for (i) payment of a base annual salary in the amount of $1,200,000 in the case of Dr. Smith and $600,000 in the case of Mr. Baker, and that these salaries may be increased (but not decreased) at the sole discretion of Tekni-Plex's Board of Directors, (ii) payment of bonuses based on Tekni-Plex's performance, and (iii) certain fringe benefits. Each employment agreement provides that the executive may be terminated by Tekni-Plex upon the following bases: (i) for cause or (ii) death or disability of the executive. Each of Dr. Smith and Mr. Baker are entitled to severance benefits if he is terminated due to the occurrence of an event specified in the preceding sentence. The employment agreements also contain certain non-compete provisions. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee for the Board of Directors of Tekni-Plex, Inc. consists of Michael F. Cronin and Arthur P. Witt. Their duties are to recommend to the Board of Directors excluding the Chief Executive Officer, salary changes and bonus awards for the Company's Chief Executive Officer. The Compensation Committee and the Chief Executive Officer together recommend salary changes and bonus awards for the Chief Operating Officer. The Board of Directors then votes on the recommendations (excluding the Chief Executive Officer in the case of his own compensation) with a simple majority required for approvals. The salary for Dr. F. Patrick Smith, the Company's Chief Executive Officer was raised from $650,000 per year to $1,200,000 per year effective March 3, 1998 to reflect expanded responsibilities as the result of the acquisition of PureTec. The acquisition of PureTec increased the Company's size as measured by annual sales by a factor of about 325% and the number of business units from one to four. The bonus award for fiscal 1998 for Dr. Smith was based upon his employment contract as amended in January of 1998, and is performance based. Mr. Baker's salary was raised from $325,000 per year to $600,000 per year effective March 3, 1998 to reflect expanded responsibilities resulting from the PureTec acquisition. Mr. Baker's bonus award was based upon his employment contract as revised in January, 1998, and is performance based. Compensation levels and bonus awards for all other employees are controlled by Dr. Smith and Mr. Baker. Stock options were granted to Dr. Smith and Mr. Baker in fiscal 1998 under a stock option plan approved by the Board of Directors effective December 31, 1997. Dr. Smith recommended, and the Board approved, stock options to three other employees and to one Board member under this same stock option plan in fiscal 1998. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Witt, who is also the corporate Secretary of Tekni-Plex, serves as a member of the compensation committee of Tekni-Plex's board of directors. In addition, as Chief Executive Officer of Tekni-Plex, Dr. Smith participated in deliberations concerning the compensation of the Chief Operating Officer of Tekni-Plex (but not the compensation for himself or Mr. Witt). 16 17 SECURITY OWNERSHIP Tekni-Plex Partnership owns 100% of the outstanding shares of Tekni-Plex and 92.625% of Tekni-Plex on a fully diluted basis. Tekni-Plex Partnership has one general partner and six limited partners. Messrs. McWethy, Solomon and Tuttle are affiliated with the general partner of Tekni-Plex Partnership which owns an aggregate interest in the net profits of Tekni-Plex Partnership equal to approximately 55% and Dr. Smith owns an interest in the net profits of Tekni-Plex Partnership equal to approximately 18%, in each case, subject to certain conditions contained in Tekni-Plex Partnership's agreement of limited partnership. In 1994, Kenneth W.R. Baker was granted options on 2.5% of Tekni-Plex's common stock, with anti-dilution provisions. Mr. Baker's option has a term of fifteen years from the date of the grant. The option terminates immediately upon Mr. Baker's termination for cause from Tekni-Plex. If Mr. Baker for any other reason ceases to be employed by Tekni-Plex or is terminated by reason of a disability, the option may be exercised for a period of six months following Mr. Baker's cessation of employment. The option may be exercised by Mr. Baker's estate for a year following Mr. Baker's death. In April, 1997, Tekni-Plex, Tekni-Plex Partnership and Dr. F. Patrick Smith entered into an agreement pursuant to which: (i) so long as Tekni-Plex Partnership continues, Dr. Smith has an option to acquire an interest in Tekni-Plex Partnership representing up to 1.4% of the outstanding equity interest in Tekni-Plex Partnership; and (ii) if Tekni-Plex Partnership has been dissolved, Dr. Smith has an option to acquire shares of common stock of Tekni-Plex representing up to 1.4% (less any options exercised pursuant to clause (i) above) of the outstanding common stock. These options have a term of five years from the date of the grant. CERTAIN TRANSACTIONS Tekni-Plex has a management consulting agreement with MST Management Company and MST/TP Holding, Inc., both of whom are affiliated with Tekni-Plex's controlling shareholder. Pursuant to their respective agreements, MST Management Company and MST/TP Holding, Inc. provide regular and customary management consulting services to Tekni-Plex. The terms of each agreement require Tekni-Plex to pay a monthly management fee to MST Management Company and MST/TP Holding, Inc. for a period of ten years from March 18, 1994. Consulting service fees were in the aggregate approximately $400,000 for fiscal year 1998. The Company's policy is not to enter into any significant transaction with an affiliate of the Company unless a majority of the disinterested directors of the board of directors of the Company determines, in such majority's sole discretion (making such assumptions and determinations of fact as such majority sees fit), that the terms of such transaction are, in all material respects or taken as a whole, at least as favorable as the terms that could be obtained by the Company in a comparable transaction made on an arm's-length basis between unaffiliated parties. Tekni-Plex has an arrangement with Arthur P. Witt, a director and Secretary of Tekni-Plex, whereby Mr. Witt provides customary management consulting services to Tekni-Plex on an "as needed" basis. Compensation to Mr. Witt for consulting services rendered on behalf of Tekni-Plex was approximately $137,000 for fiscal year 1998. 17 18 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements and Schedules The financial statements listed in the Index to Financial Statements under Part II, Item 8 and the financial statement schedules listed under Exhibit 27 are filed as part of this annual report. (a)(2) Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits The exhibits listed on the Index to Exhibits following the Signature Page herein are filed as part of this annual report or by incorporation by reference from the documents there listed. (b) Reports on Form 8-K None. 18 19 TEKNI-PLEX, INC. FINANCIAL STATEMENT CONTENTS INDEPENDENT AUDITORS' REPORT F-3 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets F-4 Statements of operations F-5 Statements of stockholders' equity F-6 Statements of cash flows F-7 Notes to financial statements F-8-35 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F-36 SUPPLEMENTAL SCHEDULE: Valuation and qualifying accounts and reserves F-37 F-2 20 INDEPENDENT AUDITORS' REPORT The Board of Directors Tekni-Plex, Inc. Somerville, New Jersey We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc. and its wholly owned subsidiaries (the "Company") as of July 3, 1998 and June 27, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 3, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tekni-Plex, Inc. and its wholly owned subsidiaries as of July 3, 1998 and June 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended July 3, 1998, in conformity with generally accepted accounting principles. BDO Seidman, LLP Woodbridge, New Jersey September 11, 1998 F-3 21 TEKNI-PLEX, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 3, 1998 June 27, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS (Note 5) CURRENT: Cash $ 29,363 $ 11,095 Accounts receivable, net of an allowance of $1,326 and $313 for possible losses 88,778 12,688 Inventories (Note 3) 57,929 13,315 Refundable income taxes - 1,083 Deferred income taxes (Note 6) 5,565 1,500 Prepaid expenses and other current assets 9,642 2,030 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 191,277 41,711 PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 4) 128,234 42,389 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $15,030 AND $7,700 193,849 36,967 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $1,768 AND $77 22,791 5,204 DEFERRED INCOME TAXES (NOTE 6) 7,065 - OTHER ASSETS 3,616 2,758 - ----------------------------------------------------------------------------------------------------------------------------------- $546,832 $129,029 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long term debt (Note 5) $ 5,147 $ - Line of credit (Note 5) 307 - Accounts payable trade 32,986 6,139 Accrued payroll and benefits 12,074 5,189 Accrued interest 8,884 - Accrued liabilities - other (Note 2) 44,539 4,433 Income taxes payable 2,443 - - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 106,380 15,761 Long-term debt (Note 5) 396,451 75,000 Deferred income taxes (Note 6) - 7,255 Other liabilities 5,328 616 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 508,159 98,632 - ----------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 10) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, authorized 20,000 shares, issued and - - outstanding 1,700 shares at June 27, 1997 and 848 at July 3, 1998 Additional paid-in capital 41,075 41,473 Cumulative currency translation adjustment 5 - Retained (deficit) (2,407) (11,076) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 38,673 30,397 - ----------------------------------------------------------------------------------------------------------------------------------- $546,832 $129,029 ===================================================================================================================================
See accompanying notes to consolidated financial statements. F-4 22 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Years ended July 3, 1998 June 27, 1997 June 28, 1996 - ---------------------------------------------------------------------------------------------------------------------------- NET SALES $309,597 $144,736 $80,917 COST OF SALES 232,499 107,007 62,335 - ---------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 77,098 37,729 18,582 OPERATING EXPENSES: Selling, general and administrative 39,220 15,886 10,339 - ---------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 37,878 21,843 8,243 OTHER EXPENSES: Interest, net 19,682 8,094 5,816 Other 415 646 469 - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE PROVISION FOR INCOME 17,781 13,103 1,958 TAXES AND EXTRAORDINARY ITEM PROVISION FOR INCOME TAXES (Note 6): Current 7,232 3,675 918 Deferred 1,880 1,000 64 - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 8,669 8,428 976 EXTRAORDINARY ITEM, NET OF TAXES - (20,666) - - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 8,669 $(12,238) $ 976 ============================================================================================================================
See accompanying notes to consolidated financial statements. F-5 23 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Cumulative Additional Currency Common Paid-In Translation Retained Stock Capital Adjustment Earnings Total - ------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1995 $-- $ 11,500 $ -- $ 186 $ 11,686 Proceeds from capital contributions -- 11,500 -- -- 11,500 Net income -- -- -- 976 976 - ------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 28, 1996 -- 23,000 -- 1,162 24,162 Issuance of common stock -- 18,473 -- -- 18,473 Net loss -- -- -- (12,238) (12,238) - ------------------------------------------------------------------------------------------------------------- BALANCE, JUNE 27, 1997 -- 41,473 -- (11,076) 30,397 Repurchase and cancellation of shares -- (398) -- -- (398) Foreign currency translation -- -- 5 -- 5 Net income -- -- -- 8,669 8,669 - ------------------------------------------------------------------------------------------------------------- BALANCE, JULY 3, 1998 $-- $ 41,075 $ 5 $ (2,407) $ 38,673 =============================================================================================================
See accompanying notes to consolidated financial statements. F-6 24 TEKNI-PLEX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Years ended July 3, 1998 June 27, 1997 June 28, 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 8,669 $ (12,238) $ 976 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,856 6,051 3,247 Amortization 8,393 3,500 3,574 Provision for bad debts 705 200 121 Deferred income taxes 1,880 1,000 64 Amortization of redeemable warrants -- 556 379 Extraordinary loss on extinguishment of debt -- 20,666 -- Changes in assets and liabilities, net of acquisitions: Accounts receivable (22,269) 67 1,161 Inventories 24,730 (360) 1,395 Prepaid expenses and other current assets (5,635) (292) (792) Deferred financing costs and other assets 534 12 163 Accounts payable and other current liabilities 3,218 496 (4,516) Income taxes 4,262 (121) 796 Other liabilities (4,334) -- -- - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,009 19,537 6,568 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of net assets including acquisition costs, net of cash acquired (303,389) -- (47,247) Capital expenditures (7,283) (3,934) (2,275) Increase in deposits -- (2,339) -- - ------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (310,672) (6,273) (49,522) - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit 7 (6,857) 3,460 Proceeds from long-term debt 319,156 75,000 51,615 Repayments of long-term debt (787) (64,551) (19,642) Proceeds from capital contribution -- 18,473 11,500 Debt financing costs (18,052) (5,282) (3,714) Redemption of capital (398) -- -- Redemption of warrants -- (20,000) -- Proceeds from issuance of warrants -- -- 450 - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 299,926 (3,217) 43,669 - ------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 5 -- -- - ------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH 18,268 10,047 715 CASH, BEGINNING OF PERIOD 11,095 1,048 333 - ------------------------------------------------------------------------------------------------------------------- CASH, END OF PERIOD $ 29,363 $ 11,095 $ 1,048 ===================================================================================================================
See accompanying notes to consolidated financial statements. F-7 25 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. SUMMARY OF Nature of Business ACCOUNTING POLICIES Tekni-Plex, Inc. is a global, diversified manufacturer of packaging, products, and materials for the healthcare, consumer, and food packaging industries. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under four primary business groups: Healthcare Packaging, Products, and Materials; Consumer Packaging and Products; Food Packaging; and Specialty Resins and Compounds. Consolidation Policy The consolidated financial statements include the financial statements of Tekni-Plex, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost (weighted average) or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed over the estimated useful lives of the assets by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Repairs and maintenance are charged to expense as incurred. Intangible Assets The Company amortizes the excess of cost over the fair value of net assets acquired on a straight-line basis over 15 years, and the cost of acquiring certain patents and trademarks, over seventeen and ten years, respectively. Recoverability is evaluated periodically based on the expected undiscounted net cash flows of the related businesses. Deferred Financing Costs The Company amortizes the deferred financing costs incurred in connection with the Company's borrowings over the life of the related indebtedness (5-10 years). F-8 26 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Deferred income tax assets and liabilities are recognized for differences between the financial statement and income tax basis of assets and liabilities based upon statutory rates enacted for future periods. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Revenue Recognition The Company recognizes revenue when goods are shipped to customers. The Company provides for returned goods and volume rebates on an estimated basis. Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Fiscal Year-End The Company utilizes a 52/53 week fiscal year ending on the Friday closest to June 30. The year ended July 3, 1998 contained 53 weeks, the years ended June 27, 1997 and June 28, 1996 contained 52 weeks each. Significant Risks and Uncertainties 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. Foreign Currency Translation Assets and liabilities of international subsidiaries are translated at current exchange rates and related translation adjustments are reported as a component of stockholders' equity. Income statement accounts are translated at the average rates during the period. F-9 27 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Long-Lived Assets Effective June 29, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets Being Disposed of," which provides guidance on how and when impairment losses are recognized on long-lived assets. No impairment losses have been recorded through July 3, 1998. Stock Based Compensation Effective June 29, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company chose 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. As a result, this statement did not have an effect on the financial position or results of operations of the Company. New Accounting Pronouncements In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued which addresses standards for reporting and display of comprehensive income and its components. Also, in June 1997, SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," was issued which revises the standards for segment reporting. In February 1998, SFAS 132, "Employer's Disclosures About Pensions and Other Post Retirement Benefits," was issued. This statement standardizes certain pension disclosures. In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS 130, 131 and 132 are effective for the Company's 1999 fiscal year and SFAS 133 is effective for the Company's 2000 fiscal year. The Company will be implementing SFAS 130, 131 and 132 in its 1999 financial statements. Since these statements relate to disclosures, which are not expected to be significant, there will be no impact on financial condition or results of operations as a result of the adoption of these statements. SFAS 133 is not currently applicable to the Company. F-10 28 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2. ACQUISITIONS On March 3, 1998, Tekni-Plex acquired PureTec Corporation ("PureTec"), a publicly traded company with annual sales of $315,000, for $312,000. PureTec is a leading manufacturer of plastic packaging, products, and materials primarily for the healthcare and consumer markets. PureTec is a wholly-owned subsidiary of Tekni-Plex. This acquisition was financed by the issuance of $200,000 of Senior Subordinated Debt (Note 5(a)) and $115,000 of Senior Term Debt (Note 5(c)). The acquisition was recorded under the purchase method, whereby PureTec's net assets were recorded at their fair value and its operations have been reflected in the statement of operations since the acquisition date. As a result of the acquisition, goodwill of approximately $162,000 has been recorded, which is being amortized over 15 years. In connection with the acquisition of PureTec, a reserve of $24,000 has been established. The reserve is comprised of the costs to close or sell incompatible and duplicate facilities, terminate employees and provide for existing litigation. The employees are expected to be terminated within six months of the acquisition. The plans to close the facilities have been put in place, however, certain related lease costs will extend for the next five years. At July 3, 1998, approximately $21,000 was remaining in this reserve, which is included in accrued expenses. The following table presents the unaudited pro forma results of operations as though the acquisition of PureTec occurred on June 29, 1996:
Year ended Year ended July 3, 1998 June 27, 1997 - ------------------------------------------------------------------------------------- Net sales $507,482 $460,070 Operating profit 45,858 40,703 Income (loss) from continuing operations 3,494 (3,938) =====================================================================================
Proforma adjustments were made to the related historical results to reflect changes in interest expense and goodwill amortization. F-11 29 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. On July 3, 1997, the Company purchased 100% of the stock of PurePlast, Inc. ("PurePlast") for $2,292. Pro forma results of operations, assuming the PurePlast acquisition had occurred on June 29, 1996, would not be materially different from the results presented. On February 22, 1996, the Company purchased 100% of the common stock of Dolco Packaging Corp. ("Dolco") for approximately $40,000. Dolco is the nation's leading producer of foamed egg cartons and various grocery store containers for meat, poultry, baked goods and produce. The acquisition was recorded under the purchase method and Dolco's operations have been reflected in the statement of operations since that date. As a result of the acquisition, goodwill of approximately $14,044 has been recorded, which is being amortized over 15 years. In connection with this acquisition, a reserve of $5,000 was established for the costs to integrate Dolco's operations with the Company and to eliminate duplicate personnel. During the year ended June 27, 1997, the Company reduced its estimate of these costs and, accordingly, reduced this reserve and goodwill by $790. At July 3, 1998, there was no balance remaining in this reserve. The following table presents the unaudited pro forma results of operations as though the acquisition of Dolco occurred on June 27, 1995:
June 28, 1996 - ---------------------------------------------------------------------------- Net sales $135,800 Income from operations 11,753 Net income 1,848 ============================================================================
F-12 30 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) On December 22, 1995, the Company purchased certain assets and assumed certain liabilities of Hargro Flexible Packaging Corporation in Flemington, NJ, for approximately $7,500, which approximated the fair value of the net assets acquired. The acquisition was recorded under the purchase method. As a result of this acquisition, the former Brooklyn, New York Closure Liners Operation of Tekni-Plex was closed on May 31, 1996. The machinery and equipment along with many of the employees have been relocated to the Flemington facility. 3 INVENTORIES Inventories are summarized as follows:
July 3, June 27, 1998 1997 - ----------------------------------------------------------------------------------- Raw materials $24,427 $5,943 Work-in-process 5,136 3,362 Finished goods 28,366 4,010 - ----------------------------------------------------------------------------------- $57,929 $13,315 ===================================================================================
4. PROPERTY, PLANT AND Property, plant and equipment consists EQUIPMENT of the following:
July 3, June 27, Estimated 1998 1997 useful lives - ------------------------------------------------------------------------------------- Land $ 14,764 $ 1,901 Building and improvements 26,411 10,450 30 - 40 years Machinery and equipment 97,256 38,375 5 - 10 years Furniture and fixtures 2,256 451 5 - 10 years Construction in progress, primarily machinery and equipment 6,885 2,138 - ------------------------------------------------------------------------------------- 147,572 53,315 Less: Accumulated depreciation 19,338 10,926 - ------------------------------------------------------------------------------------- $128,234 $42,389 =====================================================================================
F-13 31 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 5. LONG-TERM DEBT Long-term debt consists of the following:
July 3, June 27, 1998 1997 - ------------------------------------------------------------------------------------------------------------- Senior Subordinated Notes issued March 3, 1998 at 9 1/4%, due March 1, 2008. Interest payable semi-annually. (a) $200,000 $ -- Senior Subordinated Notes issued April 4, 1997 at 11 1/4%, due April 1, 2007. Interest payable semi-annually (b) 75,000 75,000 Senior Debt (c) Revolving line of credit -- -- Term notes 114,213 -- PS&T term notes at 11 1/4%, senior secured notes due December 1, 2003 (d) 1,550 -- Mortgage payable, bearing interest at prime (8.5% at July 3, 1998), plus 1 1/2%, payable in monthly installments of $4, due January 2000, collateralized by a building in Newark, NJ 211 -- 7% Subordinated Notes issued in connection with an acquisition by PureTec, due July 1, 2005. Interest is payable semi-annually and principal is payable at maturity 662 -- 6.10% Foreign Term Loan payable in Belgium Francs, with interest in twenty quarterly installments through September 2000 630 -- 4 1/4% Foreign Term Loan payable in Belgium Francs, with five equal yearly installments with first payment commencing December 1997 635 -- 8.40% Foreign Term Loan payable in Italian Lira, repayable semi-annually including principal and interest through 2001 1,118 -- 5.30% Foreign Term Loan payable in Italian Lira, with five equal yearly installments with first payment commencing May 1998 Interest is payable quarterly 914 --
F-14 32 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Foreign Term Loan payable in British Pounds, in 13 equal semi-annual installments, commencing June 1998, with a final payment due December 2004 at LIBOR, plus 1 3/4% (approximately 7 3/4% at July 3, 1998) 6,055 Foreign Line of Credit in British Pounds, due on demand and unsecured 492 PurePlast Line of Credit for $722 (CDN $1,000) at the prime rate, plus 1/4%. The line is due on demand and is unsecured. 307 - PurePlast Term Loan in the amount of $93 (CDN $133). The loan is due in monthly payments of $4 (CDN $6), plus interest at prime, plus 1 1/4%. 67 - Other, primarily equipment financing 51 - - ----------------------------------------------------------------------------------------- 401,905 75,000 Less: Current maturities 5,454 - - ----------------------------------------------------------------------------------------- $396,451 $75,000 =========================================================================================
(a) In February 1998, the Company issued $200,000 of 9 1/4%, ten year Senior Subordinated Notes, the net proceeds of which were used in connection with the PureTec acquisition (Note 2). Interest is payable semi-annually. The notes are uncollateralized and rank equally to the $75,000 Senior Subordinated Notes discussed below and will be subordinate to all current and future senior indebtedness of the Company. The notes are callable by the Company after March 1, 2003 at a premium which decreases to par after March 2006. These notes also contain various covenants including a limitation on future indebtedness; limitation of payments, including dividends; and limitations on mergers, consolidations and sale of assets. F-15 33 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (b) In April 1997, the Company issued $75,000 of 11 1/4% ten year notes. Interest on the notes is payable semi-annually. These notes are uncollateralized and rank equally with the $200,000 Senior Subordinated Notes discussed above and will be subordinate to all current and future senior indebtedness of the Company. The notes are callable by the Company after April 1, 2002 at a premium which decreases to par after April 2005. These notes also contain various covenants including a limitation on future indebtedness; limitation of payments, including dividends; and limitations on mergers, consolidations and sale of assets. The net proceeds of these bonds along with a capital contribution of $18,473 were used to repay the balance of $36,800 on a prior credit facility, repay prior subordinated notes of $25,200, including a prepayment penalty of $1,200 and repurchase the redeemable warrants for $20,000 with the balance being used for general corporate purposes. These transactions resulted in an extraordinary loss of approximately $20,666. The extraordinary loss was comprised of (i) the prepayment penalty of $1,200 and the write-off of deferred financing costs and debt discount of $3,449 net of the combined tax benefit of $1,757, and (ii) the loss on the repurchase of the warrant of $17,773 and has been reflected in the 1997 statements of operations. (c) Senior Debt The Company has a Senior Debt agreement, which includes a $90,000 revolving credit agreement, and two term loans in the aggregate amount of $115,000. The proceeds of the term loans were used as part of the financing for the PureTec acquisition (Note 2). These loans are senior to all other indebtedness and are collateralized by substantially all the assets of the Company. The debt agreement includes various covenants including a limitation on capital expenditures and compliance with customary financial ratios. At July 3, 1998, the Company is in compliance with these covenants. F-16 34 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Revolving Credit Agreement Borrowings under the agreement may be used for general corporate purposes and at July 3, 1998, $90,000 is available for borrowing. Interest, at the Company's option, is charged at the Prime Rate, plus the Applicable Base Rate (initially 1.25%) or the Adjusted LIBOR Rate, as defined, plus the Applicable Euro-Dollar Margin (initially 2.25%). The Applicable Base Rate and Applicable Euro-Dollar Margin can be reduced by up to 1.25% based on the maintenance of certain leverage ratios. This agreement matures on March 31, 2004. Term Loan A Borrowings under this loan in the amount of $50,000, were to be used solely in connection with the acquisition of PureTec. Interest is payable quarterly at the same rate discussed above under the Revolving Credit Agreement, 7.938% at July 3, 1998. Principal is payable $625 quarterly, beginning June 30, 1998, increasing to $5,000 at June 30, 2003 through the maturity date of March 31, 2004. Term Loan B Borrowings under this loan in the amount of $65,000, were to be used solely in connection with the acquisition of PureTec. Interest is payable quarterly at the same rate discussed above, except the Applicable Base Rate is initially 1.75% and the Applicable Euro-Dollar Margin is initially 2.75%. The rate at July 3, 1998 is 8.438%. In addition, the Applicable Base Rate and Applicable Euro-Dollar Margin can be reduced .5% based on the maintenance of certain leverage ratios. Principal is payable $162.5 quarterly, beginning June 30, 1998, increasing to $7,150 on June 30, 2004 and to $8,125 on June 30, 2005 through the maturity date of March 31, 2006. F-17 35 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (d) PureTec Senior Secured Notes In November 1993, PST, a subsidiary of PureTec, issued $125,000 11.25% Senior Secured Notes which were to mature in 2003. In connection with the acquisition of PureTec by the Company, $123,450 of these notes were redeemed. Interest is payable quarterly and principal is payable at maturity. Principal payments on long-term debt over the next five years and thereafter are as follows: - ----------------------------------------------------------------------------------------- 1999 $ 5,454 2000 5,477 2001 6,859 2002 8,935 2003 17,136 Thereafter 358,044 - ----------------------------------------------------------------------------------------- $401,905 =========================================================================================
The Company believes the recorded value of long-term debt approximates fair value based on current rates available to the Company for similar debt. F-18 36 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 6. INCOME TAXES The provision for income taxes is summarized as follows:
July 3, June 27, June 28, Years ended 1998 1997 1996 - ----------------------------------------------------------------------------------------- Current: Federal $ 4,492 $3,425 $735 Foreign 1,345 - - State and local 1,395 250 183 - ----------------------------------------------------------------------------------------- 7,232 3,675 918 - ----------------------------------------------------------------------------------------- Deferred: Federal 1,656 932 60 Foreign 182 - - State and local 42 68 4 - ----------------------------------------------------------------------------------------- 1,880 1,000 64 - ----------------------------------------------------------------------------------------- Provision for income taxes $ 9,112 $4,675 $982 =========================================================================================
For the year ended July 3, 1998, pre-tax income is comprised of $14,754 from domestic operations and $3,027 from foreign operations. The provision for income taxes differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
July 3, June 27, June 28, Years ended 1998 1997 1996 - ------------------------------------------------------------------------------------------ Provision for Federal income taxes at statutory rate $ 6,046 $4,455 $666 State and local income taxes, net of Federal benefit 921 165 305 Non-deductible goodwill amortization 1,838 - - Foreign tax rates in excess of Federal tax rate 328 - - Other, net (21) 55 11 - ------------------------------------------------------------------------------------------ Provision for income taxes $ 9,112 $4,675 $982 ==========================================================================================
F- 19 37 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Significant components of the Company's deferred tax assets and liabilities are as follows:
July 3, June 27, 1998 1997 - -------------------------------------------------------------------------------- Current deferred taxes: Allowance for doubtful accounts $ 565 $ 125 Inventory 818 360 Tax credit and net operating loss carryforwards -- 298 Accrued expenses 4,182 717 - -------------------------------------------------------------------------------- Total current deferred tax assets $ 5,565 $ 1,500 ================================================================================ Long-term deferred taxes: Net operating loss carryforwards $ 29,359 $ -- Accrued pension and postretirement 1,375 -- Accrued expenses 464 -- Difference in book vs tax basis of assets (19,133) (7,255) - -------------------------------------------------------------------------------- Total deferred tax assets (liabilities) 12,065 (7,255) Valuation allowance (5,000) -- - -------------------------------------------------------------------------------- Total long-term deferred tax assets (liabilities) $ 7,065 $ (7,255) ================================================================================
The net long-term deferred tax assets have been subjected to a valuation allowance since management believes it is more likely than not that this portion of the net operating loss carryforwards (NOL) balance will not be realized as a result of the various limitations on their usage, discussed below. The domestic net operating losses are subject to matters discussed below and are subject to change due to the restructuring occurring at the corporate subsidiary level, as well as adjustment for the timing of inclusion of expenses and losses in the federal returns as compared to amounts included for financial statement purposes. F-20 38 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net Operating Losses The Company and its U.S. subsidiaries file a consolidated tax return. The NOL carryforwards involve complex issues of federal tax law and are subject to various limitations as follows: - - $68,400 - Subject to IRC Section 382 change in ownership annual limitation of approximately $3,900; this includes $4,700 of losses incurred prior to 1992, which are subject to additional limitations. Approximately $27,700 of these losses were incurred after the change of ownership occurred and are not subject to Section 382 limitations except as discussed below; expire 2001-2013. - - $17,700 - Subject to IRC Section 382 annual limitation of approximately $3,100, Separate Return Limitation Year ("SRLY") as to a PureTec subsidiary, expire 1999 - 2005. - - $4,000 - Subject to IRC Section 382 annual limitation of approximately $3,100. (This is part of, and not in addition to, $3,100 IRC Section 382 limitation discussed immediately above). SRLY as to a Puretec subsidiary, expires 2009. In addition, as a result of the acquisition of PureTec by the Company, the NOL carryforwards are subject to a total annual IRC Section 382 Separate Return limitation of $5,900. To the extent the amounts of NOL's reserved are subsequently recognized, they will cause changes in the goodwill arising from the transaction. In addition to the domestic NOL balances, the Company has incurred losses relating to a subsidiary, taxable in Northern Ireland. Fiscal 1998 and 1997 losses aggregated $1,818 which have no expiration date. The Company believes that it is more likely than not that this deferred tax asset will not be realized and has recorded a full valuation allowance on these amounts. F-21 39 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 7. EMPLOYEE BENEFIT (a) Savings Plans PLANS The Company maintains a discretionary 401(k) plan covering all eligible employees, excluding those employed by Dolco and PureTec, with at least one year of service. Contributions to the plan are determined annually by the Board of Directors. There were no contributions for years ended July 3, 1998, June 27, 1997 and June 28, 1996. The Company has a defined contribution profit sharing plan for the benefit of all employees having completed one year of service with Dolco. The Company contributes 3% of compensation for each participant and a matching contribution of up to 1% when an employee contributes 3% compensation. Contributions totaled approximately $653 and $475 for the years ended July 3, 1998 and June 27, 1997 and approximately $188 for the period February 22, 1996 to June 28, 1996. Additionally, the Company has a savings plan for all employees of three wholly-owned subsidiaries who are not covered under a collective bargaining agreement. The three subsidiaries are Plastic Specialties & Technologies Inc (PST); Burlington Resins, Inc (Burlington); and PTI Plastics, Inc. (PTI). Under the savings plan, the Company will match each eligible employee's contribution up to 3% of the employee's earnings. Such contribution amounted to approximately $215 for the period March 3 through July 3, 1998. (b) Pension Plans The Company maintains a non-contributory defined benefit pension plan that covers substantially all non-collective bargaining unit employees of PST and of Burlington, who have completed one year of service and are not participants in any other pension plan. The funding policy of the Company is to make contributions to the plan based on actuarial computations of the minimum required contribution for the plan year. The plan's assets are invested primarily in the Master Trust Fund of PST in accordance with the investment agreements of the plan. On September 8, 1998, the Company approved a plan to freeze this defined benefit pension plan effective September 30, 1998. F-22 40 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net pension costs for the period March 3 through July 3, 1998 consist of the following: - ---------------------------------------------------------------------------- Service cost $ 290 Interest cost on projected benefit obligations 202 Actual return on plan assets (233) - ---------------------------------------------------------------------------- $ 259 ============================================================================ The funded status of the Plan at July 3, 1998 is as follows: - ---------------------------------------------------------------------------- Vested benefit obligation $ 8,275 ============================================================================ Accumulated benefit obligation $ 8,636 ============================================================================ Projected benefit obligation $ 10,127 Plan assets at fair value 9,258 - ---------------------------------------------------------------------------- Projected benefit obligation in excess of $ 869 plan assets/accrued pension costs ============================================================================
The expected long-term rate of return on plan assets was 9% for the period presented and the discount rate was 7 1/2% at July 3, 1998. 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 plan's assets are invested primarily in the Master Trust Fund of PST. F-23 41 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net pension costs and funded status of the Plan for the period March 3 through July 3, 1998 and as of July 3, 1998 consist of the following: - ---------------------------------------------------------- Service cost $ 40 Interest cost on projected benefit obligations 136 Actual return on plan assets (140) - ---------------------------------------------------------- Net pension cost $ 36 ========================================================== Vested benefit obligation $ 4,686 ========================================================== Accumulated benefit obligation $ 4,974 ========================================================== Projected benefit obligation $ 4,974 Plan assets at fair value 4,978 - ---------------------------------------------------------- Projected benefit obligation less than plan $ 4 assets ==========================================================
The expected long-term rate of return on plan assets was 9% and the discount rate was 7 1/2% for the period. The Company also has a defined benefit pension plan for the benefit of all employees having completed one year of service with Dolco. The Company's policy is to fund the minimum amounts required by applicable regulations. Dolco's Board of Directors approved a plan to freeze the pension plan on June 30, 1987, at which time benefits ceased to accrue. The Company has not been required to contribute to the plan since 1990. F-24 42 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) (c) Post-retirement Benefits In addition to providing pension benefits, the Company also sponsors the Burlington Retiree Welfare Plan, which provides certain healthcare benefits for retired employees of the Burlington division who were employed on an hourly basis, covered under a collective bargaining agreement and retired prior to July 31, 1997. Those employees and their families became eligible for these benefits after the employee completed five years of service, if retiring at age fifty-five, or at age sixty-five, the normal retirement age. Post retirement healthcare benefits paid during the period March 3, through July 3, 1998 amounted to $139. Net periodic post-retirement benefit cost for the period March 3 through July 3, 1998 was $110 and was comprised of $10 of service cost and $100 of interest cost. The status of the plan is as follows: - ---------------------------------------------------------------------------------- Accumulated post-retirement benefit obligation: Retirees $1,199 Fully eligible active plan participants 451 Other active participants 347 - ---------------------------------------------------------------------------------- Total accrued post-retirement costs $1,997 ==================================================================================
The accumulated post-retirement benefit obligation was determined using a 7% discount rate for the period March 3 through July 3, 1998. The healthcare cost trend rate for medical benefits was assumed to be 6% for 1998, gradually declining until it reaches a constant annual rate of 5% in 2002. The healthcare cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in healthcare trend rate would increase the accumulated post-retirement benefit obligation by $214 and increase the service and interest components by $5 at July 3, 1998. F-25 43 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 8. RELATED PARTY The Company has a management consulting TRANSACTIONS agreement with an affiliate of a stockholder. The terms of the agreement require the Company to pay a fee of Approximately $30 per month for a period of Ten years. Consulting service fees were approximately $400, $390 and $274 for the years ending July 3, 1998, June 27, 1997 and June 28, 1996, respectively. 9. STOCK OPTIONS In April 1994, the Company granted options to an employee to acquire 2 1/2% of the outstanding common stock for $13.5 per share, with anti-dilution provisions. The options are exercisable as to 33 1/3% of the shares on the first, second and third anniversary dates of the original grant and expire fifteen years from the date of the grant. In January 1998, the Company adopted an incentive stock plan (the "Stock Incentive Plan"). Under the Stock Incentive Plan, 45.75206 shares are available for awards to employees of the Company. Options will be granted at fair market value on the date of grant. During 1998, options were granted to purchase 28.37 shares of common stock at an exercise price of $154.5 per share. The options are subject to vesting provisions determined at date of grant and expire 10 years from date of grant. In addition, an option to purchase 2.288 shares of common stock was granted to a member of the Board of Directors, in April 1998, at an exercise price of $154.5 per share. The options vest 100% after 3 years and expire 10 years from date of grant. At July 3, 1998, options for 21.73 shares are exercisable and no options have been exercised or forfeited as of July 3, 1998. F-26 44 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) The Company applies APB Opinion 25 and related interpretations in accounting for these options. Accordingly, no compensation cost has been recognized. Had compensation cost been determined based on the fair value at the grant dates for these awards consistent with the method of SFAS Statement 123, the Company's net income would have been reduced to the pro forma amounts indicated below. The calculations were based on a risk free interest rate of 5.28%, 6 3/4% and 6.24% in 1998, 1997 and 1996, respectively, expected volatility of zero, a dividend yield of zero and expected lives of 8 years.
July 3, June 27, June 28, Years ended 1998 1997 1996 - ----------------------------------------------------------------------------------------- Income before extraordinary item: As reported $8,669 $8,428 $976 ========================================================================================= Pro forma $8,618 $8,324 $904 =========================================================================================
10. COMMITMENTS AND Commitments CONTINGENCIES The Company leases building space in 23 locations throughout the United States, Canada and Europe. At July 3, 1998, the Company's future minimum lease payments are as follows: - ----------------------------------------------------------------------------------------- 1999 $ 4,801 2000 4,401 2001 4,270 2002 4,161 2003 2,474 Thereafter 9,541 - ----------------------------------------------------------------------------------------- $ 29,648 =========================================================================================
Rent expense, including escalation charges, amounted to approximately $2,802, $676 and $614 for the years ended July 3, 1998, June 27, 1997 and June 28, 1996, respectively. The Company has employment contracts with two employees which provide for minimum salaries of $1,800 and bonuses based on performance and expire in June 2001. Salaries and bonuses for the year ended July 3, 1998 under these contracts were $1,157 and $7,608, respectively. These contracts provide aggregate minimum annual compensation for the fiscal years ended as follows: 1998--$1,800; 1999--$1,800; 2000--$1,800; 2001-$1,800. F-27 45 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Contingencies (a) In January 1993 and 1994, the Company's Belgian subsidiary received income tax assessments aggregating approximately $2,114 (75,247 Belgian Francs) for the disallowance of certain foreign tax credits and investment losses claimed for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the subsidiary received an income tax assessment of approximately $902 (32,083 Belgian francs) for the year ended July 31, 1992. By Belgian law, these assessments are capped at the values above and do not continue to accrue additional penalties or interest. Although the future outcome of these matters are uncertain, the Company believes that its tax position was appropriate and that the assessments are without merit. Therefore, the Company has appealed the assessments. Based on advice of legal counsel in Belgium, the Company believes that the assessment appeals will be accepted by the tax authorities in Belgium, although there can be no assurance whether or when such appeals will be accepted. (b) The Company is a party to various other legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. 11. CONCENTRATIONS OF Financial instruments that potentially CREDIT RISKS subject the Company to significant concentrations of credit risk consist principally of cash deposits and trade accounts receivable. The Company provides credit to customers on an unsecured basis after evaluating customer credit worthiness. Since the Company sells to a broad range of customers, concentrations of credit risk are limited. The Company provides an allowance for bad debts where there is a possibility for loss. The Company maintains demand deposits at several major banks throughout the United States. As part of its cash management process, the Company periodically reviews the credit standing of these banks. F-28 46 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 12. SUPPLEMENTAL CASH (a) Cash Paid FLOW INFORMATION
July 3, June 27, June 28, Years ended 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Interest $15,776 $ 5,317 $ 4,730 ================================================================================================= Income taxes $ 5,832 $ 3,747 $ 188 =================================================================================================
(b) Non-Cash Financing and Investing Activities The Company purchased the outstanding stock of PureTec Corporation on March 3, 1998 for approximately $312,047. In conjunction with the acquisition, liabilities were assumed as follows: - ---------------------------------------------------------------------------------- Fair value of assets acquired $ 246,160 Goodwill 161,722 Cash paid (312,047) - ---------------------------------------------------------------------------------- Liabilities assumed $ 95,835 ==================================================================================
The Company purchased certain assets and assumed certain liabilities of PurePlast, Inc., effective July 3, 1997, for approximately $2,292 in cash. In conjunction with the acquisition, liabilities were assumed as follows: - -------------------------------------------------------------------------------- Fair value of assets acquired $ 1,802 Goodwill 1,734 Cash paid (2,292) - -------------------------------------------------------------------------------- Liabilities assumed $ 1,244 ================================================================================
F-29 47 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) The Company purchased all of the outstanding common and preferred stock of Dolco Packaging Corp, effective February 22, 1996, for approximately $40,000 in cash. In conjunction with the acquisition, liabilities were assumed as follows: - -------------------------------------------------------------------------------- Fair value of assets acquired $ 46,293 Goodwill 14,044 Cash paid (39,434) - -------------------------------------------------------------------------------- Liabilities assumed $ 20,903 ================================================================================
The Company purchased certain assets and assumed certain liabilities of Hargro Flexible Packaging Corporation, effective December 22, 1995, for approximately $7,500 in cash. In conjunction with the acquisition, liabilities were assumed as follows: - -------------------------------------------------------------------------------- Fair value of assets acquired $ 10,592 Cash paid (7,543) - -------------------------------------------------------------------------------- Liabilities assumed $ 3,049 ================================================================================
13. SEGMENT INFORMATION The Company operates in four industry segments: healthcare packaging, products, and materials; consumer packaging and products; food packaging; and specialty resins and compounds. The healthcare packaging, products, and materials segment principally produces pharmaceutical packaging, medical tubing and medical device materials. The consumer packaging and products segment principally produces precision tubing and gaskets, and garden and irrigation hose products. The food packaging segment produces foamed polystyrene packaging products for the poultry, meat and egg industries. The specialty resins and compounds segment produces specialty PVC resins. The healthcare packaging, products, and materials and consumer packaging and products segments have operations in the United States, Europe and Canada (Canadian operations are included in the domestic amounts below). Prior to 1998, the Company operated principally in the food packaging segment. F-30 48 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Financial information concerning the Company's business segments and the geographic areas in which it operated for the year ended July 3, 1998 is as follows: - -------------------------------------------------------------------------------- NET SALES: Healthcare Packaging, Products, and Materials: Domestic $ 88,749 Europe 1,959 Consumer Packaging and Products: Domestic 90,329 Europe 13,415 Food packaging 99,336 Specialty Resins and Compounds 32,405 Corporate & eliminations (16,596) - -------------------------------------------------------------------------------- TOTAL NET SALES $ 309,597 ================================================================================ OPERATING INCOME (LOSS): Healthcare Packaging, Products, and Materials: Domestic $ 13,951 Europe (388) Consumer Packaging and Products: Domestic 11,293 Europe 3,573 Food packaging 18,321 Specialty Resins and Compounds 2,955 Corporate & eliminations (11,827) - -------------------------------------------------------------------------------- TOTAL INCOME FROM OPERATIONS $ 37,878 ================================================================================ DEPRECIATION AND AMORTIZATION: Healthcare Packaging, Products, and Materials: Domestic $ 1,596 Europe 109 Consumer Packaging and Products: Domestic 3,395 Europe 459 Food packaging 9,320 Specialty Resins and Compounds 1,952 Corporate & eliminations 418 - -------------------------------------------------------------------------------- TOTAL DEPRECIATION AND AMORTIZATION $ 17,249 ================================================================================
F-31 49 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) CAPITAL EXPENDITURES: Healthcare Packaging, Products, and Materials: Domestic $ 1,318 Europe 29 Consumer Packaging and Products: Domestic 1,276 Europe 111 Food packaging 4,326 Specialty Resins and Compounds 233 - -------------------------------------------------------------------------------- TOTAL CAPITAL EXPENDITURES $ 7,283 ================================================================================ IDENTIFIABLE ASSETS: Healthcare Packaging, Products, and Materials: Domestic $ 70,816 Europe 11,487 Consumer Packaging and Products: Domestic 178,636 Europe 39,368 Food packaging 135,064 Specialty Resins and Compounds 89,355 Corporate & eliminations 22,106 - -------------------------------------------------------------------------------- TOTAL IDENTIFIABLE ASSETS $546,832 ================================================================================
Income (loss) 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. In computing operating income (loss) from operations, the following items have not been included: interest expense and income tax provision. 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 and fixed assets offset by elimination of intersegment profit in ending inventories. For the year ended July 3, 1998, one customer represented 10% of sales and two customers each represented 11% of accounts receivable at July 3, 1998. F-32 50 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 14. SUPPLEMENTAL CON- Tekni-Plex, Inc. issued 11 1/4% Senior DENSED CONSOLIDATING Subordinated Notes in April 1997 and 9 1/4% FINANCIAL STATEMENTS Series B Senior Subordinated Notes in February 1998. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. At June 27, 1997, there were no non-guarantor subsidiaries. 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 3, 1998
Non- Issuer Guarantors Guarantors Total - ----------------------------------------------------------------------------------------- Sales, net $151,507 $137,013 $21,077 $309,597 Cost of sales 110,886 106,543 15,070 232,499 - ----------------------------------------------------------------------------------------- Gross profit 40,621 30,470 6,007 77,098 Selling, general and administrative 24,218 12,581 2,421 39,220 - ----------------------------------------------------------------------------------------- Income from operations 16,403 17,889 3,586 37,878 Interest expense, net 18,996 477 209 19,682 Other expense (income) 346 (281) 350 415 - ----------------------------------------------------------------------------------------- Income (loss) before provision for income taxes (2,939) 17,693 3,027 17,781 Provision for income taxes (1,447) 9,023 1,536 9,112 - ----------------------------------------------------------------------------------------- Net income (loss) $ (1,492) $ 8,670 $ 1,491 $ 8,669 =========================================================================================
F-33 51 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) Condensed Consolidating Balance Sheet - at July 3, 1998:
Non- Issuer Guarantors Guarantors Eliminations Total - --------------------------------------------------------------------------------------------------------------- Current assets $ 18,510 $ 107,700 $ 24,621 $ 40,446 $ 191,277 Property, plant and equipment, net 40,535 71,304 16,395 -- 128,234 Goodwill 30,624 161,722 1,503 -- 193,849 Investment in subsidiaries 333,498 -- -- (333,498) -- Deferred financing costs, net 22,277 396 118 -- 22,791 Other long-term assets 7,041 2,060 1,580 -- 10,681 - --------------------------------------------------------------------------------------------------------------- Total assets $ 452,485 $ 343,182 $ 44,217 $(293,052) $ 546,832 =============================================================================================================== Current liabilities $ 28,855 $ 64,948 $ 12,577 $ -- $ 106,380 Long-term debt 386,063 6,755 3,633 -- 396,451 Other long-term liabilities (6,377) (37,606) 10,599 38,712 5,328 - --------------------------------------------------------------------------------------------------------------- Total liabilities 408,541 34,097 26,809 38,712 508,159 - --------------------------------------------------------------------------------------------------------------- Additional paid-in capital 41,095 296,747 15,641 (312,408) 41,075 Retained earnings (deficit) 2,849 12,611 1,489 (19,356) (2,407) Cumulative currency translation adjustment -- (273) 278 -- 5 - --------------------------------------------------------------------------------------------------------------- Total equity 43,944 309,085 17,408 (331,764) 38,673 - --------------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 452,485 $ 343,182 $ 44,217 $(293,052) $ 546,832 ===============================================================================================================
F-34 52 TEKNI-PLEX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------- Net sales $37,791 $37,831 $68,388 $165,587 Gross profit 9,934 10,464 17,152 39,548 Income from operations 5,886 6,257 7,438 18,297 Net income 2,305 2,436 1,635 2,293 =========================================================================================
First Second Third Fourth 1997 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------- Net sales $35,167 $36,428 $38,233 $ 34,908 Gross profit 8,621 9,514 10,454 9,140 Income from operations 4,207 6,778 5,609 5,249 Income before extraordinary item 1,277 2,884 2,266 2,001 Loss on extinguishment of debt - - - (20,666) - ----------------------------------------------------------------------------------------- Net income (loss) $ 1,277 $ 2,884 $ 2,266 $ (18,665) =========================================================================================
F-35 53 INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE Board of Directors Tekni-Plex, Inc. Somerville, New Jersey The audits referred to in our report dated September 11, 1998 relating to the consolidated financial statements of Tekni-Plex, Inc. and Subsidiaries, which is contained in this Form 10-K, included the audits of the financial statement schedule for the years ended July 3, 1998, June 27, 1997 and June 28, 1996 listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. Woodbridge, New Jersey September 11, 1998 F-36 54 TEKNI-PLEX, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS)
Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Period Expenses (1) Accounts Deductions (2) Period - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED JUNE 30, 1996 Accounts receivable allowance $ 93 $121 $ 351(3) $ - $ 565 - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED JUNE 28, 1997 Accounts receivable allowance $565 $200 $ - $ 452 $ 313 - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED JULY 3, 1998 Accounts receivable allowance $313 $705 $1,592(4) $ 1,284 $ 1,326 - ------------------------------------------------------------------------------------------------------------------------------------
(1) To increase accounts receivable allowance. (2) Uncollectible accounts written off, net of recoveries. (3) Balance related to Dolco acquisition. (4) Balance related to Puretec acquisition. F-37 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKNI-PLEX, INC. By: /s/ F. PATRICK SMITH ------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer Dated: September 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Registrant and in the capacities indicated, on September 29, 1998.
SIGNATURE TITLE --------- ----- /s/ F. PATRICK SMITH -------------------------- Chairman of the Board and Chief Executive F. Patrick Smith Officer /s/ KENNETH W.R. BAKER -------------------------- President and Chief Operating Officer Kenneth W.R. Baker Principal Accounting and Financial Officer /s/ ARTHUR P. WITT -------------------------- Arthur P. Witt Corporate Secretary and Director /s/ J. ANDREW MCWETHY -------------------------- J. Andrew McWethy Director -------------------------- Barry A. Solomon Director /s/ STEPHEN A. TUTTLE -------------------------- Stephen A. Tuttle Director /s/ MICHAEL F. CRONIN -------------------------- Michael F. Cronin Director
19 56 Exhibit Index Exhibit Number Document Description 3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc. (Filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference.) 3.2 Amended and Restated By-laws of Tekni-Plex, Inc. (Filed as Exhibit 3.3 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference.) 10.1 Credit Agreement, dated as of March 3, 1998, among Tekni-Plex, Inc., the Guarantors party thereto, the Lenders party thereto, the LC Issuing Banks referred to therein and Morgan Guaranty Trust Company of New York, as Agent. (Filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference.) 10.2 Note (original not included; form of Note included in Exhibit 10.1). 10.3 Security Agreement, dated as of March 3, 1998, among Tekni-Plex, Inc., the Guarantors listed therein and Morgan Guaranty Trust Company of New York, as Collateral Agent (original not included; form of Security Agreement included in Exhibit 10.1). 10.4 Pledge Agreement, dated as of March 3, 1998, between Tekni-Plex, Inc. and Morgan Guaranty Trust Company of New York, as Agent (original not included; form of Pledge Agreement included in Exhibit 10.1). 10.5 Form of Mortgage, dated as of March 3, 1998, made by Tekni-Plex, Inc., or the Guarantors listed therein. in favor of Morgan Guaranty Trust Company, as Agent (original not included; form of Mortgage included in Exhibit 10.1). 10.6 Employment Agreement, dated as of January 30, 1997, between Dr. F. Patrick Smith and Tekni-Plex, Inc. (Filed as Exhibit 10.6 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.7 Employment Agreement, dated as of April 4, 1997, between Mr. Kenneth W.R. Baker and Tekni-Plex, Inc. (Filed as Exhibit 10.7 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.8 Form of Amended and Restated Option Agreement, dated as of April 4, 1997, among Tekni-Plex, Inc., Tekni-Plex Partners L.P. and F. Patrick Smith (Filed as Exhibit 10.8 to Registrant's Amendment No. 2 to Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.9 Form of Amended and Restated Stock Option Agreement, dated as of April 4, 1997, between Tekni-Plex, Inc. and Kenneth W.R. Baker (Filed as Exhibit 10.9 to Registrant's Amendment No. 1 to Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.10 Management Fee Agreement, dated as of April 4, 1997, between Tekni-Plex, Inc. and MST Management Company, Inc. (Filed as Exhibit 10.10 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 20 57 10.11 Management Fee Agreement, dated as of April 4, 1997, between Tekni-Plex, Inc. and MST/TP Holding, Inc. (Filed as Exhibit 10.11 to Registrant's Amendment No. 2 to Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.12 Indenture, dated as of April 1, 1997 among Tekni-Plex, Inc., Dolco Packaging, Corp. and Marine Midland Bank, as Trustee (Filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference). 10.13 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 10.12). 10.14 Agreement and Plan of Merger, dated as of November 11, 1997 among Tekni-Plex, Inc., P.T. Holding, Inc., PureTec Corporation and Plastic Specialties and Technologies, Inc. (Filed as Exhibit 2.1 to PureTec Corporation's Annual Report on Form 10-K, Commission File No. 0-26508 and incorporated herein by reference). 10.15 Indenture, dated as of March 1, 1998 among Tekni-Plex, Inc., the Guarantors listed therein and Marine Midland Bank, as Trustee. (Filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-4, Commission File No. 333-28157, and incorporated herein by reference.) 10.16 Senior Subordinated Note and Guarantee (original not included; form of Note and Guarantee included in Exhibit 4.1). 10.17 Tekni-Plex, Inc. Stock Incentive Plan.* 21.0 List of Subsidiaries.* 27.0 Financial Data Schedule.* * Filed herewith. 21 EX-10.17 2 TEKNI-PLEX, INC. STOCK INCENTIVE PLAN 1 EXHIBIT 10.17 TEKNI-PLEX, INC. Stock Incentive Plan SECTION 1. Purpose. The purposes of the Tekni-Plex, Inc. Stock Incentive Plan are to promote the interests of Tekni-Plex, Inc. (the "COMPANY") and its stockholders by (i) attracting and retaining exceptional executive personnel and other key employees of the Company and its Subsidiaries; (ii) motivating such employees by means of performance-related incentives to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of the Company. SECTION 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: "AFFILIATE" means (i) any entity that is, directly or indirectly, controlled by the Company and (ii) any other entity in which the Company has a significant equity interest or which has a significant equity interest in the Company, in either case as determined by the Committee. "AWARD" means any Option, Stock Appreciation Right, Performance Award, Restricted Share or other Stock-Based Award. "AWARD AGREEMENT" means any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "BOARD" means the Board of Directors of the Company. "CAUSE" means "Cause" as defined in any Employment Agreement or Award Agreement or if not so defined: (a) a Participant's willful and continued failure substantially to perform his duties (other than as a result of total or partial incapacity due to physical or mental illness); (b) an act or acts on a Participant's part constituting a felony under the laws of the United States or any state thereof or any other jurisdiction in which the Company conducts business; 2 (c) a Participant being repeatedly under the influence of illegal drugs or alcohol while performing his duties; or (d) any other act or omission which is materially injurious to the financial condition or business reputation of the Company as determined in the reasonable discretion of the Company, including a Participant's breach of the provisions of any non-competition, non-solicitation or confidentiality covenant in favor of the Company and its subsidiaries binding upon such Participant. "CHANGE OF CONTROL" shall mean, unless otherwise defined in any Employment Agreement or Award Agreement, (i) any "PERSON" (as such term is used in Section 3(a)(9) and 13(d)(3) of the Exchange Act) other than any person who is an Affiliate of the Company on the Effective Date or any "GROUP" (within the meaning of such Section 13(d)(3)) other than any group consisting of one or more of such Affiliates, acquires, directly or indirectly, by virtue of the consummation of any purchase, merger or other combination, securities of the Company representing more than 33% of the combined voting power of the Company's then outstanding voting securities with respect to matters submitted to a vote of the stockholders generally; (ii) the approval by the shareholders of the Company of a plan or agreement providing for (A) a merger or consolidation of the Company, other than a merger or consolidation with a wholly-owned subsidiary, unless, immediately following such merger or consolidation, the voting securities of the Company outstanding immediately prior thereto represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 67% of the combined voting power of the surviving entity; or (ii) a sale or transfer by the Company or any of its Subsidiaries of substantially all of the consolidated assets of the Company and its Subsidiaries to an entity which is not an Affiliate of the Company prior to such sale or transfer. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITTEE" means the Compensation Committee of the Board. "DISABILITY" shall mean a Participant's inability, as a result of physical or mental illness, to perform the duties of his position(s) for a period of 120 consecutive days or for an aggregate of 180 days in any twelve consecutive month 2 3 period. Any question as to the existence of the Disability of a Participant as to which such Participant and the Company cannot agree shall be determined in writing by a qualified independent physician selected by the Company and reasonably acceptable to the Participant. The determination of Disability made in writing to the Company and the Participant shall be final and conclusive for all purposes of the Plan. "EMPLOYEE" means an employee of the Company or any Subsidiary. "EMPLOYMENT AGREEMENT" means an employment agreement entered into between the Company or any Subsidiary and a Participant. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means with respect to the Shares as of any given date or dates, the average reported closing price of a share of such class of common stock on such exchange or market as is the principal trading market for such class of common stock for the five trading days immediately preceding such date or dates. If such class of common stock is not traded on an exchange or principal trading market on such date, the fair market value of a Share shall be determined by the Committee in good faith. "INCENTIVE STOCK OPTION" means a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "INITIAL PUBLIC OFFERING" means an initial underwritten public offering of equity securities of the Company pursuant to an effective registration statement under the Securities Act of 1933, as amended. "NON-QUALIFIED STOCK OPTION" means a right to purchase Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option. "OPTION" means an Incentive Stock Option or a Non-Qualified Stock Option. "OTHER STOCK-BASED AWARD" shall mean any right granted under Section 10 of the Plan. 3 4 "PARTICIPANT" means any Employee selected by the Committee to receive an Award under the Plan (and to the extent applicable, any heirs or legal representatives thereof). "PERFORMANCE AWARD" shall mean any right granted under Section 8 of the Plan. "PERSON" means any individual, corporation, limited liability company, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "PLAN" means this Tekni-Plex, Inc. Stock Incentive Plan. "RESTRICTED SHARE" shall mean any Share granted under Section 9 of the Plan. "SEC" means the Securities and Exchange Commission or any successor thereto. "SHARES" means shares of common stock, $0.01 par value, of the Company or such other securities as may be designated by the Committee from time to time. "STOCK APPRECIATION RIGHT" means any right granted under Section 7 of the Plan. "SUBSIDIARY" shall mean, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "SUBSTITUTE AWARDS" means Awards granted in assumption of, or in substitution for, outstanding awards previously granted by a company acquired by the Company or with which the Company combines. SECTION 3. Administration. (a) AUTHORITY OF COMMITTEE. The Plan shall be administered by the Committee. Subject to the terms of the Plan, applicable law and contractual restrictions affecting the Company, and in addition to other express powers and authorizations conferred on the Committee by the 4 5 Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to a Participant; (iii) determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award and Award Agreement; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend, or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) COMMITTEE DISCRETION BINDING. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any Subsidiary, any Participant, any holder or beneficiary of any Award, any shareholder and any Employee. SECTION 4. Shares Available for Awards. (a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(b) and 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 45.75206, of which the number of Shares with respect to which Incentive Stock Options may be granted under the Plan shall be 45.75206. If, after the effective date of the Plan, any Shares covered by an Award granted under the Plan or to which such an Award relates are forfeited, or if such an Award is settled for cash or otherwise terminates or is canceled without the delivery of Shares, then the Shares covered by such Award, or to which such Award relates, or the number of Shares otherwise counted against the aggregate number of 5 6 Shares with respect to which Awards may be granted, to the extent of any such settlement, forfeiture, termination or cancellation, shall, in the calendar year in which such settlement, forfeiture, termination or cancellation occurs, again become Shares with respect to which Awards may be granted. In addition, Shares tendered in satisfaction or partial satisfaction of the exercise price of any Award or any tax withholding obligations will again become Shares with respect to which Awards may be granted. Notwithstanding the foregoing and subject to adjustment as provided in Section 4(b), no Employee of the Company may receive Awards in any calendar year that relate to more than 15 Shares. (b) ADJUSTMENTS. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, reclassification, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number of Shares of the Company (or number and kind of other securities or property) with respect to which Awards may thereafter be granted, (ii) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award. (c) SUBSTITUTE AWARDS. Any Shares underlying Substitute Awards shall not be counted against the Shares available for Awards under the Plan. (d) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. SECTION 5. Eligibility. Any Employee shall be eligible to be designated a Participant. 6 7 SECTION 6. Stock Options. (a) GRANT. The Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the exercise price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any regulations implementing such statute. (b) EXERCISE PRICE. Except as otherwise provided in an Award Agreement and in the case of Substitute Awards, the exercise price shall be the Fair Market Value on the date of grant. (c) EXERCISE. Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award Agreement or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of Federal or state securities laws, as it may deem necessary or advisable. (d) PAYMENT. No Shares shall be delivered pursuant to any exercise of an Option until payment in full of the exercise price, or adequate provision therefor, is received by the Company. Such payment may be made: (i) in cash; (ii) in Shares owned by the Participant for at least six months (the value of such Shares shall be their Fair Market Value on the date of exercise); (iii) by a combination of cash and Shares; (iv) if approved by the Committee, in accordance with a cashless exercise program; or (v) in such other manner as permitted by the Committee at the time of grant or thereafter. SECTION 7. Stock Appreciation Rights. (a) GRANT. The Committee shall have sole and complete authority to determine the Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Stock Appreciation Right Award, the grant thereof and the conditions and limitations applicable to the exercise thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or 7 8 freestanding and unrelated to another Award. Stock Appreciation Rights granted in tandem with or in addition to an Award may be granted either at the same time as the Award or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant and shall have an exercise price as determined by the Committee on the date of grant. (b) EXERCISE AND PAYMENT. A Stock Appreciation Right shall entitle the Participant to receive an amount equal to the excess of the Fair Market Value of a Share on the date of exercise of the Stock Appreciation Right over the exercise price thereof. The Committee shall determine whether a Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (c) OTHER TERMS AND CONDITIONS. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of a Stock Appreciation Right, the term, methods of exercise, methods and form of settlement, and any other terms and conditions of any Stock Appreciation Right. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted or exercised prior to such determination as well as Stock Appreciation Rights granted or exercised thereafter. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. Performance Awards. (a) GRANT. The Committee shall have sole and complete authority to determine the Employees to whom Performance Awards shall be granted, the number of Shares to be covered by each Performance Award, the grant thereof and the conditions and limitations applicable to the exercise thereof. Performance Awards (i) shall consist of rights denominated or payable in cash, Shares, other securities or other property (including without limitation, restricted securities) and (ii) shall confer on the holder thereof rights valued as determined by the Committee and payable to, or exercisable by, such holder, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. The criteria with respect to which performance goals may be established shall be determined by the Committee and may include stock price, market share, sales, earnings, 8 9 earnings per share, earnings before income tax, cash flow and return on equity. (b) TERMS AND CONDITIONS. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award. (c) PAYMENT OF PERFORMANCE AWARDS. Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis. SECTION 9. Restricted Shares. (a) GRANT. The Committee shall have sole and complete authority to determine the Employees to whom Restricted Shares shall be granted, the number of Restricted Shares to be granted to each Participant, the duration of the period during which, and the conditions under which, the Restricted Shares may be forfeited to the Company, and the other terms and conditions of such Awards. In addition: (i) Transfer Restrictions. Restricted Shares may not be sold, assigned, transferred, pledged or otherwise encumbered, except as provided in the Plan or the applicable Award Agreement. Each certificate issued in respect of Restricted Shares with respect to which transfer restrictions remain in effect shall bear a legend describing the restrictions to which the Restricted Shares are subject. Upon the lapse of the restrictions applicable to such Restricted Shares, the owner thereof may surrender to the Company the certificate or certificates representing such Shares and receive in exchange therefor a new certificate or certificates representing such Shares free of the legend and a certificate or certificates representing the remainder of the Shares, if any, with the legend. (ii) Distributions. Distributions paid on or in respect of any Restricted Shares may be paid directly to the Participant, or 9 10 may be reinvested in additional Restricted Shares, as determined by the Committee in its sole discretion. SECTION 10. Other Stock-Based Awards. The Committee is hereby authorized to grant Employees Other Stock-Based Awards, which shall consist of a right (i) which is other than an Award or right described in Sections 6, 7, 8 or 9 above and (ii) which is denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purposes of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award, which conditions may include satisfaction of performance goals. SECTION 11. Termination or Suspension of Employment or Service. The following provisions shall apply in the event of the Participant's termination of employment or service unless the Committee shall have provided otherwise, either at the time of the grant of the Award or thereafter. (a) CAUSE; TERMINATION BY PARTICIPANT. If the Participant's employment or service with the Company or its Subsidiaries is terminated by the Company for Cause or by the Participant for any reason other than retirement after age 65 (or earlier with the Company's consent), all Awards (whether vested or unvested) shall be forfeited. (b) DEATH; DISABILITY; RETIREMENT; TERMINATION BY THE COMPANY WITHOUT CAUSE. Except as the Committee may at any time otherwise provide or as required to comply with applicable law, if the Participant's employment or service with the Company or its Subsidiaries is terminated for any reason other than those described in clause (a) above, the Participant or his successor (if employment or service is terminated by death) shall have the right (subject to Section 11(c)) to exercise, or retain, as the case may be, any vested Award, during the one-year period (90 days in the case of a termination by the Company without Cause) following such termination of employment or service, but in no event shall such Award be exercisable later than the date such Award would 10 11 have expired had it not been for the termination of such employment or service. All unvested Awards shall be forfeited. (c) CALLS. Prior to an Initial Public Offering, upon a Participant's termination of employment, the Company or its designee shall have the right to purchase all or a portion of the vested Awards and/or Shares acquired upon the exercise of Awards. In the case of a termination of employment by the Company for Cause or by the Participant for any reason other than retirement after age 65 (or earlier with the Company's consent), the purchase price per Share shall equal the lower of (i) Fair Market Value on the date of termination and (ii) the amount paid by the Participant for such Share, if any. In all other types of terminations, the purchase price per Share shall equal the Fair Market Value on the date of termination and the purchase price per vested Award shall equal the Fair Market Value on the date of termination less the exercise price of such Award. If the Company elects to exercise its right under this clause (c), the Company shall deliver written notice to the Participant to such effect within 60 days of a termination of employment. Payment of the purchase price may be made in cash or by certified check; provided that if the terms of any agreement to which the Company is a party, or any of the indentures governing any debt securities issued by the Company or any of its subsidiaries would prohibit the Company from effecting such payment, payment may be effected through a promissory note having such commercially reasonable terms and interest rate as may be determined by the Company in its reasonable discretion, provided that in any event such note shall become due at such time as the prohibitions described above shall lapse. Payment shall be made within five days of the Company's determination of Fair Market Value. The Company shall use its best efforts to determine Fair Market Value at the time it delivers the written notice referred to above. SECTION 12. Change of Control. In the event of a Change of Control, all Awards shall become immediately vested. SECTION 13. Amendment and Termination. (a) AMENDMENTS TO THE PLAN. The Board may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without shareholder 11 12 approval if such approval is necessary to comply with any tax or regulatory requirement for which or with which the Board deems it necessary or desirable to qualify or comply. Notwithstanding anything to the contrary herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations in any jurisdiction outside the United States. (b) AMENDMENTS TO AWARDS. Subject to the terms of the Plan and applicable law, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. (c) CANCELLATION. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, in the event of a Change of Control or an offer to Participants generally relating to the acquisition of Shares, including through purchase, merger or otherwise, the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to the Fair Market Value of such canceled Award. SECTION 14. General Provisions. (a) DIVIDEND EQUIVALENTS. In the sole and complete discretion of the Committee, an Award may provide the Participant with dividends or dividend equivalents, payable in cash, Shares, other securities or other property on a current or deferred basis. (b) NONTRANSFERABILITY. Except to the extent otherwise provided in an Award Agreement, (i) no Award and (ii) prior to expiration of the right of the Company to purchase Shares pursuant to Section 11(c), no Share acquired upon exercise of an Award shall be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant, except by will or the laws of descent and distribution. 12 13 (c) NO RIGHTS TO AWARDS. No Employee, Participant or other Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient. (d) SHARE CERTIFICATES. Certificates issued in respect of Shares shall, unless the Committee otherwise determines, be registered in the name of the Participant. Such stock certificate shall carry such appropriate legends, and such written instructions shall be given to the Company's transfer agent, as may be deemed necessary or advisable by counsel to the Company in order to comply with the requirements of the Securities Act of 1933, any state securities laws or any other applicable laws and the restrictions on transfer set forth herein. All certificates for Shares or other securities of the Company or any Subsidiary delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission or any stock exchange upon which such Shares or other securities are then listed and any applicable laws or rules or regulations, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) WITHHOLDING. A Participant may be required to pay to the Company or any Subsidiary, and the Company or any Subsidiary shall have the right and is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes in respect of an Award, its exercise, or any payment or transfer under an Award or under the Plan and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from any such grant, lapse, vesting, or exercise of any Award. (f) AWARD AGREEMENTS. Each Award hereunder shall be evidenced by an Award Agreement which shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto. 13 14 (g) NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS. Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of options, restricted stock, Shares and other types of Awards provided for hereunder (subject to shareholder approval if such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (h) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ or service of the Company or any Subsidiary. Further, the Company or an Subsidiary may at any time dismiss a Participant from employment or service, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (i) RIGHTS AS A STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or holder or beneficiary of any Award shall have any rights as a stockholder with respect to any Shares to be issued under the Plan until he or she has become the holder of such Shares. (j) GOVERNING LAW. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the State of Delaware. (k) SEVERABILITY. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (l) OTHER LAWS. The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole 14 15 discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant in connection therewith shall be promptly refunded to the relevant Participant, holder or beneficiary. Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject. (m) NO TRUST OR FUND CREATED. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary. (n) NO FRACTIONAL SHARES. The Committee shall not be required to issue or deliver fractional Shares pursuant to the Plan or any Award, and the Committee shall determine whether cash or other securities or other property shall be paid or transferred in lieu of any fractional Shares. (o) HEADINGS. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 15. Term of the Plan. (a) EFFECTIVE DATE. The Plan shall be effective as of December 31, 1997. (b) EXPIRATION DATE. No Incentive Stock Option shall be granted under the Plan after the tenth anniversary of the Effective Date. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Board or the Committee to amend, alter, adjust, suspend, discontinue, or 15 16 terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted. 16 EX-21.0 3 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 List of Subsidiaries
Name of Subsidiary Place of Organization - ------------------ --------------------- PureTec Corporation Delaware PTI Plastics, Inc. Delaware Burlington Resins, Inc. Delaware Plastic Specialties & Technologies, Inc. Delaware PurePlast, Inc. Ontario Colorite Europe, Ltd. No. Ireland Action Technology Belgium N.V. Belgium Action Technology Italia, SpA Italy
EX-27.0 4 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEKNI-PLEX, INC. STATEMENT OF EARNINGS FOR THE YEAR ENDED JULY 3, 1998 AND BALANCE SHEET AS AT JULY 3 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-03-1998 JUN-28-1997 JUL-03-1998 29,363 0 90,104 1,326 57,929 191,277 147,572 19,338 546,832 106,380 275,000 0 0 0 0 546,832 309,597 309,597 232,499 232,499 39,220 0 19,682 17,781 9,112 8,669 0 0 0 8,669 0 0
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