10-Q 1 y14753e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 333-28157 TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization)
260 North Denton Tap Road (972) 304-5077 Coppell, TX 75019 (Registrant's telephone number) (Address of principal executive office)
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 [ ] 1st Quarter 10Q 2005 TEKNI-PLEX, INC.
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 2005 and October 1, 2004............................................... 3 Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2005 and October 1, 2004.................................................. 4 Consolidated Statements of Cash Flows for the three months ended September 30, 2005 and October 1, 2004.................. 5 Notes to Consolidated Financial Statements.................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 17 ITEM 4. CONTROLS AND PROCEDURES....................................... 17 PART II. OTHER INFORMATION Item 1. Legal proceedings............................................. 19 Item 2. Changes in securities......................................... 19 Item 3. Defaults upon senior securities............................... 19 Item 4. Submission of matters to a vote of securities holders......... 19 Item 5. Subsequent events............................................. 19 Item 6. Exhibits...................................................... 19
2 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
SEPTEMBER 30, JULY 1, 2005 2005 (UNAUDITED) AUDITED ------------- --------- ASSETS CURRENT: Cash $ 40,410 $ 18,584 Accounts receivable, net of allowance for doubtful accounts of $9,812 and $9,144 respectively 85,906 138,383 Inventories 136,824 129,617 Prepaid expenses and other current assets 9,435 5,845 --------- --------- TOTAL CURRENT ASSETS 272,575 292,429 PROPERTY, PLANT AND EQUIPMENT, NET 173,014 176,182 GOODWILL 198,532 198,532 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $5,433 AND $4,943 RESPECTIVELY 5,469 6,110 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $13,478 AND $12,817 RESPECTIVELY 16,253 16,677 OTHER ASSETS 1,914 1,765 --------- --------- $ 667,757 $ 691,695 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 1,061 $ 1,082 Accounts payable - trade 29,685 48,060 Accrued payroll and benefits 12,960 12,185 Accrued interest 29,259 6,385 Accrued liabilities - other 22,807 17,508 Income taxes payable 2,021 6,391 --------- --------- TOTAL CURRENT LIABILITIES 97,793 91,611 LONG-TERM DEBT 732,732 744,613 SERIES A REDEEMABLE PREFERRED STOCK 64,015 54,822 OTHER LIABILITIES 10,867 13,976 --------- --------- TOTAL LIABILITIES 905,407 905,022 --------- --------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 188,018 188,018 Accumulated other comprehensive loss (10,318) (10,294) Accumulated deficit (194,827) (170,528) Less: Treasury stock (220,523) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (237,650) (213,327) --------- --------- $ 667,757 $ 691,695 ========= =========
See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (in thousands) (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED ------------------------------------ SEPTEMBER 30, 2005 OCTOBER 1, 2004 (Restated See Note 1) ------------------ --------------- NET SALES $162,751 $143,461 COST OF GOODS SOLD 144,243 115,046 -------- -------- GROSS PROFIT 18,508 28,415 OPERATING EXPENSES: Selling, general and administrative 15,014 15,843 Integration expense 2,057 2,603 -------- -------- OPERATING PROFIT 1,437 9,969 OTHER EXPENSES Interest expense, net 26,952 21,803 Unrealized gain on derivative contracts (2,275) (3,176) Other (income) expense (20) 362 -------- -------- LOSS BEFORE INCOME TAXES (23,220) (9,020) Provision for income tax 1,079 864 -------- -------- NET LOSS $(24,299) $ (9,884) ======== ========
THREE MONTHS ENDED ------------------------------------ SEPTEMBER 30, 2005 OCTOBER 1, 2004 (Restated See Note 1) ------------------ --------------- NET LOSS $(24,299) $(9,884) COMPREHENSIVE (LOSS) GAIN, NET OF TAXES Foreign currency translation income adjustment (24) 1,639 -------- ------- COMPREHENSIVE LOSS $(24,323) $(8,245) ======== =======
See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED -------------------------- SEPTEMBER 30, OCTOBER 1, 2005 2004 ------------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(24,299) $ (9,884) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 7,865 7,578 Unrealized loss (gain) on derivative contracts (2,275) (3,176) Interest accretion 3,770 -- Deferred income taxes 7 (146) Changes in operating assets and liabilities: Accounts receivable 52,549 48,701 Inventories (7,186) (20,746) Prepaid expenses and other current assets (3,582) (935) Income taxes (4,370) 1,129 Accounts payable (18,392) (20,099) Accrued expenses and other liabilities 28,122 14,170 -------- -------- Net cash provided by operating activities 32,209 16,592 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,280) (5,918) Acquisition costs -- (39) Additions to intangibles 151 (240) Deposits and other assets (149) 38 -------- -------- Net cash used in investing activities (3,278) (6,159) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments under line of credit (12,158) (467) Proceeds from issuance of series A redeemable preferred stock 5,423 -- Debt financing costs (237) (500) -------- -------- Net cash used in financing activities (6,972) (967) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (133) (178) -------- -------- Net increase in cash 21,826 9,288 Cash, beginning of period 18,584 29,735 -------- -------- Cash, end of period $ 40,410 $ 39,023 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 1,674 $ 5,040 Income taxes 512 19
See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL DESCRIPTION OF BUSINESS We are a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. We primarily serve the food, healthcare and consumer markets. We have built leadership positions in our core markets, and focus on vertically integrated production of highly specialized products. We have operations in the United States, Europe, Argentina and Canada. We believe that our end market and product line diversity has the effect of reducing overall risk related to any single product or customer. Our operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. Representative product lines in each of our business segments are listed below: BUSINESS SEGMENTS
PACKAGING TUBING PRODUCTS --------- --------------- - Foam egg cartons - Garden and irrigation hose - Pharmaceutical blister films - Medical tubing - Poultry and meat processor trays - Pool and vacuum hose - Closure Liners - Aerosol and pump packaging components - Foam plates
The results for the first quarter of fiscal 2006 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting primarily of normal recurring accruals, necessary for a fair statement of the results of operations for the periods presented and the consolidated balance sheet at September 30, 2005. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company's latest annual report on Form 10-K for the fiscal year ended July 1, 2005. RESTATEMENT As previously disclosed on Form 8-K filed September 21, 2005, and the Company's latest annual report on Form 10-K for the fiscal year ended July 1, 2005, Tekni-Plex has identified certain inventory overstatements at its American Gasket & Rubber Division which resulted in a $6.8 million overstatement of inventory. With the assistance of outside legal counsel as well as an independent registered public accounting firm other than BDO Seidman, LLP, the Audit Committee of the Board of Directors of Tekni-Plex has concluded an internal investigation into this matter. These inventory overstatements at American Gasket and Rubber Division have required a non-cash charge to results of operations for fiscal 2005 as follows: 1st Quarter $(1.0) million 2nd Quarter $(0.9) million 3rd Quarter $(1.0 million 4th Quarter $(0.0) million Total Fiscal 2005 $(2.8) million
Results of operations for the first quarter of fiscal 2005 have been restated herein. Management has concluded that the impact of these errors on interim reporting periods filed under Form 10-Q during fiscal 2005 are not material. Consequently investors can continue to rely on all financial reports filed during fiscal 2005 on Form 10-Q. 6 Tekni-Plex has terminated the employment of the individual directly responsible for the inventory restatements at American Gasket & Rubber. It has also improved training for the accounting staff of this Division. In addition, Tekni-Plex has improved its internal financial systems and controls across all of its divisions to, among other things, increase both the frequency by which inventory is monitored as well as the number of managers responsible for monitoring inventory. Finally, Tekni-Plex will increase the frequency and depth by which the inventory of each of our divisions is tested by our independent registered public accountants during the course of our annual audit as additional audit procedures. The Company has restated the interim periods in fiscal 2005 and its consolidated financial statements as of July 2, 2004 and for each of the two previous years then ended. The effect of these adjustments on the financial statements of the Company are summarized below. The tax effect of these adjustments has not been reflected as the amount would be either immaterial or would have been offset by an increase in the deferred tax valuation reserve. The following table sets forth selected line items from the Company's historical consolidated statements of operations that are affected by the restatement on a restated basis and as previously reported.
October 1, 2004 -------------------------- As Restated As Reported ------------- ----------- Cost of Sales $ 115,046 $ 114,086 Net (Loss) income $ (9,884) $ (8,924)
NEW ACCOUNTING PRONOUNCEMENTS In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3." This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle, in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. This Statement is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on the Company's financial statements or results of operations. In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,"Accounting for Conditional Asset Retirement Obligations." FIN No. 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN No. 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not believe the adoption of FIN No. 47 will have a material impact on the Company's financial statements or results of operations. 7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 2 - INVENTORIES Inventories as of September 30, 2005 and July 1, 2005 are summarized as follows:
SEPTEMBER 30, 2005 JULY 1, 2005 ------------------ ------------ Raw materials $ 62,745 $ 53,450 Work-in-process 12,421 12,466 Finished goods 61,658 63,701 -------- -------- $136,824 $129,617 -------- --------
TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3 - LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER 30, 2005 JULY 1, 2005 ------------------ ------------ Revolving line of credit $ -- $ 12,000 Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $1,790 and $1,883) $273,210 $273,117 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $343 and $362) 40,343 40,362 Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $6,175 and $6,365 268,825 268,635 Senior Secured Notes issued June 10, 2005 at 10.875% due August 15, 2012 (less unamortized discount of $3,375) 146,625 146,625 Series A Redeemable Preferred Stock 64,015 54,822 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2005 to 2010 4,790 4,956 -------- -------- 797,808 800,517 Less: Current maturities 1,061 1,082 -------- -------- $796,747 $799,435 ======== ========
NOTE 4 - CONTINGENCIES The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. 8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. As a result, Tekni-Plex has aggregated its operating plants into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe and Canada. Other products not included in either segment are produced in the United States. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:
TUBING PACKAGING PRODUCTS OTHER TOTAL --------- -------- -------- -------- Three Months Ended September 30, 2005 Revenues from external customers $ 85,057 $ 43,221 $ 34,473 $162,751 Interest expense, net 8,611 12,638 5,703 26,952 Depreciation and amortization 3,519 2,244 1,846 7,609 Segment income (loss) from operations 12,771 (7,558) 833 6,046 Expenditures for segment assets 1,727 527 1,020 3,274 Segment assets as of September 30, 2005 $262,073 $248,937 $147,518 $658,528 -------- -------- -------- -------- Three Months Ended October 1, 2004 Revenues from external customers $ 81,762 $ 31,036 $ 30,663 $143,461 Interest expense, net 6,951 10,231 4,621 21,803 Depreciation and amortization 3,657 2,073 1,592 7,322 Segment income from operations 12,642 2,413 364 15,419 Expenditures for segment assets 3,342 1,103 1,244 5,689 Segment assets as of October 1, 2004 $287,499 $294,443 $139,306 $721,248 -------- -------- -------- --------
9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
THREE MONTHS ENDED -------------------------- SEPTEMBER 30, OCTOBER 1, 2005 2004 (Restated See Note 1) ------------- ---------- OPERATING PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 6,046 $15,419 Corporate and eliminations (4,609) (5,450) ------- ------- Consolidated total $ 1,437 $ 9,969 ======= ======= DEPRECIATION AND AMORTIZATION Segment totals $ 7,609 $ 7,322 Corporate 256 256 ------- ------- Consolidated total $ 7,865 $ 7,578 ======= ======= EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 3,274 $ 5,689 Other unallocated expenditures 6 229 ------- ------- Consolidated total $ 3,280 $ 5,918 ======= =======
SEPTEMBER 30, JULY 1, 2005 2005 ------------- -------- ASSETS Total assets from reportable segments $658,528 $683,169 Other unallocated amounts 9,229 8,526 -------- -------- Consolidated total $667,757 $691,695 ======== ========
GEOGRAPHIC INFORMATION
THREE MONTHS ENDED -------------------------- SEPTEMBER 30, OCTOBER 1, 2005 2004 ------------- ---------- REVENUES United States $143,042 $122,110 International 19,709 21,351 -------- -------- Total $162,751 $143,461 ======== ========
SEPTEMBER 30, JULY 1, 2005 2005 ------------- -------- LONG-LIVED ASSETS United States $361,693 $364,864 International 33,489 34,402 -------- -------- Total $395,182 $399,266 ======== ========
10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and May 2002, 8 3/4% Senior Secured Notes in November 2003 and 10 7/8% Senior Secured Notes in June 2005. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor subsidiaries are 100% owned by the issuer. The guarantees are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). The following condensed consolidation financial statements do not have debt and interest expense allocated to guarantors and non-guarantors. Consolidated Statement of Operations (in thousands) (Unaudited) For the three months ended September 30, 2005
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $162,751 $ 45,826 $97,216 $19,709 Cost of goods sold 144,243 33,875 93,403 16,965 -------- -------- ------- ------- Gross profit 18,508 11,951 3,813 2,744 Operating expenses: Selling, General and administrative 15,014 6,485 6,448 2,081 Integration expense 2,057 540 1,517 -- -------- -------- ------- ------- Operating profit (loss) 1,437 4,926 (4,152) 663 Interest expense, net 26,952 26,889 50 13 Unrealized gain on derivative contracts (2,275) (2,275) -- -- Other expense (20) (270) (493) 743 -------- -------- ------- ------- Income (loss) before income taxes (23,220) (19,418) (3,709) (93) Provision for income taxes 1,079 -- -- 1,079 -------- -------- ------- ------- Net (loss) $(24,299) $(19,418) $(3,709) $(1,172) ======== ======== ======= =======
Consolidated Statement of Operations (in thousands) For the three months ended October 1, 2004, restated
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $143,461 $ 42,235 $79,875 $21,351 Cost of sales 115,046 30,908 68,125 16,013 -------- -------- ------- ------- Gross profit 28,415 11,327 11,750 5,338 Operating expenses: Selling, General and administrative 15,843 7,563 6,228 2,052 Integration Expense 2,603 555 2,048 -- -------- -------- ------- ------- Operating profit 9,969 3,209 3,474 3,286 Interest expense, net 21,803 21,783 (16) 36 Unrealized gain on derivative contracts (3,176) (3,176) -- -- Other expense (income) 362 (235) (203) 800 -------- -------- ------- ------- Income (loss) before provision (benefit) for income taxes (9,020) (15,163) 3,693 2,450 Provision (benefit) for income taxes 864 (1,600) 1,600 864 -------- -------- ------- ------- Net income (loss) $ (9,884) $(13,563) $ 2,093 $ 1,586 ======== ======== ======= =======
11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at September 30, 2005
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ----------- ---------- ---------- Current assets $ 272,575 $ -- $ 60,865 $154,387 $57,323 Property, plant and equipment, net 173,014 -- 42,200 107,451 23,363 Intangible assets 204,001 -- 15,064 179,013 9,924 Investment in subsidiaries -- (557,493) 557,493 -- -- Deferred income taxes -- -- 8,502 (8,502) -- Deferred financing costs 16,253 -- 16,137 116 -- Other assets 1,914 (645,946) 351,893 295,765 202 --------- ----------- ---------- -------- ------- Total assets $ 667,757 $(1,203,439) $1,052,154 $728,230 $90,812 ========= =========== ========== ======== ======= Current liabilities $ 97,793 $ -- $ 45,638 $ 30,572 $21,583 Long-term debt 732,732 -- 728,845 158 3,729 Series A Redeemable Preferred stock 64,015 -- 64,015 -- -- Other long-term liabilities 10,867 (645,946) 443,224 192,361 21,228 --------- ----------- ---------- -------- ------- Total liabilities 905,407 (645,946) 1,281,722 223,091 46,540 --------- ----------- ---------- -------- ------- Additional paid-in capital 188,018 (313,529) 187,999 296,783 16,765 Retained earnings (deficit) (194,827) (243,964) (194,828) 219,028 24,937 Accumulated other comprehensive income (10,318) -- (2,216) (10,672) 2,570 Less: Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- -------- ------- Total equity (237,650) (557,493) (229,568) 505,139 44,272 --------- ----------- ---------- -------- ------- Total liabilities and deficit $ 667,757 $(1,203,439) $1,052,154 $728,230 $90,812 ========= =========== ========== ======== =======
Condensed Consolidating Balance Sheet - at July 1, 2005
NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ---------- ---------- ---------- Current assets $ 292,429 $ -- $ 38,998 $192,614 $60,817 Property, plant and equipment, net 176,182 -- 42,397 109,750 24,035 Intangible assets 204,642 -- 15,268 179,210 10,164 Investment in subsidiaries -- (562,374) 562,374 -- -- Deferred financing costs, net 16,677 -- 16,561 116 -- Other long-term assets 1,765 (592,288) 379,589 214,261 203 --------- ----------- ---------- -------- ------- Total assets $ 691,695 $(1,154,662) $1,055,187 $695,951 $95,219 ========= =========== ========== ======== ======= Current liabilities 91,611 -- 27,709 39,040 24,862 Long-term debt 744,613 -- 740,739 -- 3,874 Series A Redeemable Preferred stock 54,822 -- 54,822 -- -- Other long-term liabilities 13,976 (592,288) 437,185 148,101 20,978 --------- ----------- ---------- -------- ------- Total liabilities 905,022 (592,288) 1,260,455 187,141 49,714 --------- ----------- ---------- -------- ------- Additional paid-in capital 188,018 (313,529) 187,999 296,783 16,765 Retained earnings (accumulated deficit) (170,528) (248,845) (170,528) 222,736 26,109 Accumulated other comprehensive (income) loss (10,294) -- (2,216) (11,005) 2,927 Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- -------- ------- Total stockholders' deficit (213,327) (562,374) (205,268) 508,810 45,505 --------- ----------- ---------- -------- ------- Total liabilities and stockholders' deficit $ 691,695 $(1,154,662) $1,055,187 $695,951 $95,219 ========= =========== ========== ======== =======
12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the three months ended September 30, 2005
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ 32,209 $ (633) $ 25,994 $6,848 -------- -------- -------- ------ Cash flows from Investing activities: Capital expenditures (3,280) (1,023) (2,080) (177) Additions to intangibles 151 148 -- 3 Deposits and other assets (149) (152) 2 1 -------- -------- -------- ------ Net cash used in investing activities (3,278) (1,027) (2,078) (173) -------- -------- -------- ------ Cash flows from financing activities Repayment / borrowings of line of credit (12,158) (12,015) -- (143) Proceeds from issuance of Series A redeemable of preferred stock 5,423 5,423 -- -- Debt Financing costs (237) (237) -- -- Change in intercompany accounts -- 27,698 (27,391) (307) -------- -------- -------- ------ Net cash flows provided by (used in) financing activities (6,972) 20,869 (27,391) (450) Effect of exchange rate changes on cash (133) -- -- (133) -------- -------- -------- ------ Net increase (decrease) in cash 21,826 19,209 (3,475) 6,092 Cash, beginning of period 18,584 7,150 7,732 3,702 -------- -------- -------- ------ Cash, end of period $ 40,410 $ 26,359 $ 4,257 $9,794 ======== ======== ======== ======
For the three months ended October 1, 2004, restated
NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $16,593 $(7,130) $ 17,038 $ 6,685 ------- ------- -------- ------- Cash flows from Investing activities: Capital expenditures (5,918) (1,112) (4,552) (254) Additions to intangibles (240) (92) -- (148) Deposits and other assets 38 38 -- -- Net cash provided by (used in) provided by investing activities (39) (39) -- -- ------- ------- -------- ------- Cash flows from financing activities (6,159) (1,205) (4,552) (402) ------- ------- -------- ------- Payment for treasury stock (467) 78 -- (545) Change in intercompany accounts (500) (500) -- -- Net cash flows provided by (used in) -- 7,444 (17,278) 9,834 ------- ------- -------- ------- financing activities (967) 7,022 (17,278) 9,289 Effect of exchange rate changes on cash (178) -- -- (178) ------- ------- -------- ------- Net increase (decrease) in cash 9,289 (1,313) (4,792) 15,394 Cash, beginning of period 29,735 11,890 8,923 8,922 ------- ------- -------- ------- Cash, end of period $39,024 $10,577 $ 4,131 $24,316 ======= ======= ======== =======
13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 7 - ACQUISITIONS In July 2002, the Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" for approximately $16,806. The acquisition was recorded under the purchase method, whereby Elm's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. In connection with the acquisition, a reserve of $4,500 has been established for the costs to integrate ELM's operations with the company. The reserve is included in accrued expenses. The components of the integration reserve and activity through September 30, 2005.
BALANCE COSTS CHARGED TO BALANCE JULY 2005 RESERVE SEPTEMBER 30, 2005 --------- ---------------- ------------------ Legal, environmental and other $1,144 $16 1,128 ------ --- ------ $1,144 $16 $1,128 ====== === ======
The remaining legal and environmental costs are expected to be paid over the next four years. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through September 30, 2005 is as follows:
BALANCE COSTS CHARGED TO BALANCE JULY 2005 RESERVE SEPTEMBER 30, 2005 --------- ---------------- ------------------ Legal and environmental $965 $52 913 ---- --- ---- $965 $52 $913 ==== === ====
The remaining legal and environmental costs are expected to extend over the next four years. 14 TEKNI-PLEX, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2005 COMPARED TO THE QUARTER ENDED OCTOBER 1, 2004 Net sales increased to $162.8 million in the first quarter fiscal 2006 from $143.5 million the same period last year, representing a 13.4% gain. Net sales in our Packaging Segment grew 4.0% to $85.1 million in the most recent period from $81.8 million in the comparable period of fiscal 2005 primarily due to higher selling prices. Net sales in our Tubing Products Segment increased 39.3% to $43.2 million in fiscal 2006 from $31.0 million in fiscal 2005 primarily due to strong, weather related demand for our garden hose products. We also benefited from a 3% to 6% price increase on our garden hose products that went into effect at the beginning of calendar 2005. Other net sales grew 12.4% to $34.5 million in fiscal 2006 compared to $30.7 million in the previous year due to both higher selling prices and higher volumes. Our accruals for rebates, discounts and sales allowances increased to $13.0 million or 8.0% of net sales in fiscal 2006 compared to $8.0 million or 5.6% of net sales in fiscal 2005. The increase was due to changes in our sales programs as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold increased to $144.2 million in fiscal 2006 from $115.0 million in fiscal 2005. Expressed as a percentage of net sales, cost of goods sold increased to 88.6% in the current period compared to 80.2% in the prior period, primarily due to higher raw material costs. Tekni-Plex's primary raw materials are Polyvinyl Chloride (PVC), Polystyrene, Vinyl Chloride Monomer (VCM) and various plasticizers, all of which are petrochemical based. Generally higher oil and natural gas prices, coupled with strong global demand for commodity chemicals and tight supplies, have resulted in generally higher costs for all of our key raw materials. We expect this trend to continue for the foreseeable future. In most of our businesses we have been able to pass on higher material costs to our customers in a relatively short time period. However, like most seasonal retail products, we traditionally have sold garden hose under annual agreements, where prices are generally set in the fall and generally remain in effect for the calendar year. Consequently, in recent fiscal years, the increase in raw material costs at our garden hose operations during a 12-month time period has reduced our profitability. Due to our inability to pass on rising raw material costs to our garden hose customers during a 12 month time period, our cost of goods sold was negatively impacted by our continued lower of cost or market adjustments as well as a $4.1 million provision for obsolete inventory. Between September, 2004 and September 2005, the two primary raw materials for our garden hose business, PVC and plasticizers, rose an average of 8.6% and 36.5% respectively. Since the end of September, 2005, our suppliers have announced as much as a 41.6% increase in the cost of PVC and a 15.6% increase in the cost of plasticizers. To mitigate the impact of expected increases in the cost of our raw materials and in contrast to previous years, we have not guaranteed garden hose pricing for the 2006 selling season. As previously discussed, our cost of goods sold reflects a $1.0 million inventory write-down (0.7% of net sales) in fiscal 2005 to reflect inventory restatements at our American Gasket and Rubber Division. Gross profit, as a result of the above, decreased to $18.5 million in the current period compared to $28.4 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 11.4% in the first quarter of fiscal 2006 from 19.8% in comparable period of last year. Our Packaging Segment gross profit decreased slightly to $20.7 million in fiscal 2006 from $20.8 million for fiscal 2005 due to higher raw material costs. We believe this modest decline is a result of a small timing differences between when we incur raw material cost increases and when we raise the prices on our products. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 24.4% in the current period from 25.4% in the previous period. Our Tubing Products Segment gross profit decreased to a loss of ($4.6) million in fiscal 2006 from a profit of $5.7 million in fiscal 2005 as significantly higher raw material costs, particularly for plasticizers, more than offset the 3% to 6% price increases that went into effect in January at our garden hose unit. Expressed as a percentage of net sales, our Tubing Products Segment gross profit decreased to (10.5%) in the current period from 18.4% in the previous period. Other gross profit increased 21.1% to $2.3 million in fiscal 2006 from $1.9 million in fiscal 2005 as higher sales volumes at our specialty resins operations enabled us to better cover our fixed costs. Expressed as a percentage of net sales, Other gross profit improved to 6.8% in fiscal 2006 from 6.3% a year earlier. Selling, general and administrative expenses decreased to $15.0 million in the most recent fiscal year from $15.8 million last year, primarily due to lower executive compensation. This improvement in SG&A was partially offset by a $0.7 million one time charge associated with the restatement of accounting errors at our American Gasket & Rubber unit. Measured as a percentage of net sales, selling, general and administrative expenses decreased to 9.2% in the current period from 11.0% in the previous period. Integration expenses decreased to $2.1 million or 1.3% of net sales in fiscal 2006 from $2.6 million or 1.8% of net sales in fiscal 2005. The decrease was largely related to absence of charges associated with the closing of our Rockaway, New Jersey facility and 15 consolidating its operations at our Clinton, Illinois and Clayton, North Carolina facilities in fiscal 2005. Our integration expenses are typically cash expenses and relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards as well as the costs associated with consolidating facilities. These costs are comprised of the following:
2006 2005 ---- ---- Elm Packaging Material 1.1 0.8 Labor 0.4 0.4 Overhead 0.6 0.5 Rockaway closing Material 0.0 0.1 Labor 0.0 0.1 Overhead 0.0 0.6 SG&A 0.0 0.1 --- --- Total 2.1 2.6
We expect the closing of our Rockaway facility to result in approximately $1.0 million of annual cost savings. We also expect the reconfiguring and realignment of our Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, decreased to $1.4 million in fiscal 2006 from $10.0 million in fiscal 2005. Expressed as a percentage of net sales, operating profit decreased to 0.9% in the most recent period from 7.1% in the comparable period of last year. Our Packaging Segment operating profit increased slightly to $12.8 million (15.0% of net sales) in the current period compared to $12.6 million (15.5% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($7.6) million or (17.5%) of net sales in the current period compared to profit of $2.4 million or 7.8% of net sales in the previous year. Other operating profit improved to $0.9 million (2.6% of net sales) in the current period compared to $0.4 million or (1.2% of net sales) in the previous period. Interest expense increased to $27.0 million (16.6% of net sales) in fiscal 2006 from $21.8 million (15.2% of net sales) in fiscal 2005 due to the inclusion of a $3.8 million, non-cash charge reflecting the accretion of our Series A Redeemable preferred stock to its mandatory redemption amount, as well as higher average debt levels and interest rates. Unrealized gain on derivative transactions was $2.3 million or 1.4% of net sales in fiscal 2006 compared to $3.2 or 2.2% of net sales in the previous year due to the various movements of the interest rates embedded in our derivative contracts. See the Liquidity and Capital Resources discussion below for a detailed description of our derivative transactions. Loss before income taxes, as a result, was a loss of ($23.2) million or (14.3%) of net sales for fiscal 2006 compared to a loss of ($9.0) million or (6.3%) of net sales for fiscal 2005. Income tax expense was $1.1 million for fiscal 2006 compared to $0.9 million for fiscal 2005 primarily reflecting foreign taxes as we continued to fully reserve against our deferred tax asset Net loss, as a result, was a loss of ($24.3) million for fiscal 2006 or (14.9%) of net sales compared with a loss of ($9.9) million for fiscal 2005 or (6.9%) of net sales. LIQUIDITY AND CAPITAL RESOURCES For the quarter ended September 30, 2005, net cash generated in operating activities was $32.2 million compared to $16.6 million of cash generated in operating activities in the first quarter of the prior year. The $15.6 million increase was due primarily to a normal seasonal reduction in accounts receivable at our garden hose operations coupled with a smaller increase in inventories compared to last year. These working capital improvements were offset by greater operating losses in fiscal 2006. Other various year-over-year changes in operating assets, accrued expenses (including interest expense) and liabilities, are generally due to offsetting timing differences. In June, 2005 we arranged a new $65 million asset backed credit facility. As of November 14, 2005 we have no borrowings under this facility. Working capital at September 30, 2005 was $174.8 million compared to $200.8 million at July 1, 2005. The $26 million decrease was primarily due to operating losses as well as a reduction of long term debt. 16 Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the quarters ended September 30, 2005 and October 1, 2004 were $3.3 million and $5.9 million, respectively. We believe that we will be able to pass along expected higher raw material costs to our garden hose customers during fiscal 2006 and consequently, cash generated from operations plus funds available under our new asset backed facility will be sufficient to meet our needs and to provide us with the flexibility to make capital expenditures and other investments which we believe are prudent. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet all of our future cash needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS In June 2000, we entered into a series of interest rate derivative transactions designed to protect us from rising interest rates on our senior term debt facilities while enabling us to partially benefit from falling interest rates. At that time, Tekni-Plex had $344.0 million of term loans outstanding with variable rates of interest tied to US$ LIBOR. These loans, which originally had maturity dates ranging from June 2006 through June 2008, have been repaid. Concurrent with incurring this debt, Tekni-Plex entered into a series of interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on 3 month dollar LIBOR on an aggregate of $344.0 million amount of indebtedness. The swaps amortize on the same schedule as the original term loans. As of September 30, 2005 the notional amount of the swaps is approximately $269.2 million. Portfolio theory and empirical evidence suggested that the change in value of a basket of LIBOR benchmarks would be less volatile than the change in value of a single benchmark. Since 2000, this has generally been our experience. In conjunction with our swap contracts we also purchased an interest rate cap. We believe the reduced volatility created by the interest rate swaps made the interest rate cap less expensive. We recorded an unrealized gain from derivative transactions of $2.3 million and $3.2 million in the first quarters of fiscal 2006 and 2005, respectively. Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which limit our incremental debt and capital expenditures. The availability of borrowings under our new asset based facility is subject to a borrowing base limitation equal to the lesser of the borrowing base as defined in the asset backed agreement and the then effective commitments under the new asset based facility minus such availability reserves as the administrative agent, in its sole discretion, deems appropriate. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As previously disclosed on Form 8-K, in fiscal 2005, management identified certain overstated inventory valuations at its American Gasket & Rubber Division ("AGR"), totaling approximately $6.8 million, resulting in a $2.8 million reduction in fiscal 2005 operating profit, a $2.7 million reduction in fiscal 2004 operating profit and a restatement of Tekni-Plex's financial statements for those periods. Management promptly reported the inventory overstatement at AGR to the Board, the Audit Committee and BDO Seidman, LLP, our independent registered public accounting firm. The Audit Committee subsequently engaged counsel to supervise an internal investigation of the circumstances leading to the inventory overstatement. Counsel to the Audit Committee, in turn, engaged a forensic accounting firm to assist it in the investigation. The investigation determined that prior accounting management at AGR, from at least 2001 through fourth-quarter 2005, made unsupported adjustments to cost of goods sold that had the effect both of improving the appearance within Tekni-Plex of the financial performance of AGR and increasing the value of AGR's ending inventory. Tekni-Plex has terminated the employment of the accounting manager who made these adjustments and re-assigned his direct supervisor to functions that do not include accounting supervision. As part of the internal investigation, the investigative team made certain remedial recommendations to the Audit Committee, including that (1) a divisional controller or a manager delegated by a divisional controller be assigned responsibility, on a regular basis, to conduct a substantive review of AGR's financial statements, and that a similar structure of review be instituted with respect to other decentralized businesses of Tekni-Plex; (2) reporting by AGR accounting 17 management be direct to Tekni-Plex corporate accounting; (3) notification be distributed to all Tekni-Plex accounting employees on a periodic basis instructing them that any difficulties in accounting or the use of the company's accounting systems be reported timely to Tekni-Plex corporate accounting; (4) in annual performance reviews of accounting and bookkeeping personnel, all reviewing personnel be required to inquire whether the reviewed employee has had or observed any problems in the use of approved accounting systems or in the accounting function generally, (5) Tekni-Plex apply additional resources to ensure that all of its site controllers and staff are trained properly in the use of company accounting systems, (6) in addition to establishing a hotline through which employees may report problems, Tekni-Plex publish to its employees a statement of ethics and periodically circulate written reminders to all employees that the company expects its employees (a) to perform all functions consistent with established accounting and legal standards and high ethics, and (b) to report any accounting difficulties to Tekni-Plex's corporate office. Lastly, the investigative team recommended that full consideration be given to establishing, or out-sourcing, an adequately staffed internal audit function. In fiscal 2006, the Audit Committee adopted these recommendations. In response to the findings above, Tekni-Plex has: (1) terminated the employment of an individual directly responsible for the inventory restatements, (2) improved training for the accounting staff of AGR, (3) improved its internal financial reporting systems and related controls across all of its divisions to, among other things, increase both the frequency by which inventory is monitored as well as increasing the number of managers responsible for monitoring inventory; and (4) increased the frequency and depth by which the inventory and other financial transactions of each of divisions are reviewed by our independent registered public accountants during the course of our annual audit. In connection with the completion of its audit of and the issuance of an unqualified report on the Company's consolidated financial statements for the fiscal year ended July 1, 2005, the Company's independent registered public accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that the following matters involving the Company's internal controls and operations were considered to be "significant deficiencies", as defined under standards established by the Public Company Accounting Oversight Board: - Lack of quantity of staff which led to issues related to timeliness of financial reporting. - Lack of quantity of staff which led to issues related to the timely review of the financial statements of AGR and the calculation of inventory. As a result, accounting errors existed in the financial statements of this subsidiary resulted in a restatement of inventory and cost of sales for certain accounting periods as described within this filing. Significant deficiencies are matters coming to the attention of the independent auditors that in their judgment, relate to material weaknesses in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider these matters, which are listed above, to be "material weaknesses" that, by themselves or in a combination, may increase the possibility that a material misstatement in our financial statements might not be prevented or detected by our employees in the normal course of performing their assigned functions. Prior to the identification of the accounting overstatement at AGR, and in response to material weaknesses identified by BDO last year, Tekni-Plex has committed to increase and reorganize its finance staff with a strong emphasis on internal audit. This process is ongoing. As required by SEC Rule 13a-15(b), the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures and internal controls over financial reporting as of September 30, 2005. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer determined that deficiencies in our internal control over financial reporting have caused the Company's disclosure controls and procedures to not be effective today. However, the Chief Executive Officer and Chief Financial Officer noted that the Company is actively seeking to remedy the deficiencies identified herein including hiring additional staff to assure the accuracy and timeliness of financial reporting. 18 The Company's Chief Executive Officer and Chief Financial Officer did not note any other material weakness or significant deficiencies in the Company's disclosure controls and procedures during their evaluation. The Company continues to improve and refine its internal controls. This process is ongoing. Except as disclosed above, in the first quarter of fiscal 2006, there were no significant changes in the Company's internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. 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 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Subsequent Events None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chairman and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. November 14, 2004 By: /s/ F. Patrick Smith --------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ James E. Condon --------------------------------- James E. Condon Vice President and Chief Financial Officer 20