-----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, Hpms7fsq+lhmyERUJ+oQrfA/nWO4gUP0YOQNBUPe2tY9orn/Kgq9nx8AtbZfOgH0 XXyH9zpwz06t3gGqanhxmw== 0000950123-99-010207.txt : 19991117 0000950123-99-010207.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010207 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991001 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 333-28157 FILM NUMBER: 99752553 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-Q 1 TEKNI-PLEX INC 1 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 October 1, 1999 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) 201 Industrial Parkway (908) 722-4800 Somerville, New Jersey 08876 (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 / / 2 TEKNI-PLEX, INC.
Page # PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of October 1, 1999 and July 2, 1999 ..................................................... 3 Consolidated Statements of Operations for the three months ended October 1, 1999 and October 2, 1998 ............................ 4 Consolidated Statements of Comprehensive Income for the three months ended October 1, 1999 and October 2, 1998 ............................ 4 Consolidated Statements of Cash Flows for the three months ended October 1, 1999 and October 2, 1998 ............................ 5 Notes to Consolidated Financial Statements ............................... 6-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ....................................... 15-17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........... 17 PART II. OTHER INFORMATION Item 1. Legal proceedings ................................................. 18 Item 2. Changes in securities ............................................. 18 Item 3. Defaults upon senior securities ................................... 18 Item 4. Submission of matters to a vote of securities holders ............. 18 Item 5. Other information ................................................. 18 Item 6. Exhibits and reports on Form 8-K .................................. 18
3 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
OCTOBER 1, 1999 July 2, 1999 (UNAUDITED) --------------- ------------ ASSETS CURRENT: Cash $ 20,630 $ 22,117 Accounts receivable, net of an allowance of $1,174 and $1,662 for possible losses 64,632 96,835 Inventories 68,226 63,190 Deferred income taxes 5,600 5,900 Prepaid expenses and other current assets 8,930 3,664 --------- --------- Total current assets 168,018 191,706 --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET 133,635 136,953 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $33,574 AND $29,581 204,956 206,140 DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $4,922 AND $4,287 18,746 19,358 DEFERRED INCOME TAXES 1,036 1,346 OTHER ASSETS 4,019 3,933 --------- --------- $ 530,410 $ 559,436 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 5,619 $ 5,207 Line of credit -- 541 Accounts payable - trade 26,018 27,612 Accrued payroll and benefits 7,004 21,581 Accrued interest 2,615 7,965 Accrued liabilities - other 22,038 26,613 Income taxes payable 696 742 --------- --------- TOTAL CURRENT LIABILITIES 63,990 90,261 --------- --------- LONG-TERM DEBT 407,279 410,646 OTHER LIABILITIES 4,931 6,232 --------- --------- TOTAL LIABILITIES 476,200 507,139 --------- --------- STOCKHOLDER'S EQUITY: Common stock -- -- Additional paid-in capital 41,075 41,075 Cumulative currency translation adjustment (2,011) (1,368) Retained earnings 15,146 12,590 --------- --------- TOTAL STOCKHOLDER'S EQUITY 54,210 52,297 --------- --------- $ 530,410 $ 559,436 ========= =========
See accompanying notes to consolidated financial statements. 3 4 TEKNI-PLEX, INC. AND SUBSIDIARIES (Unaudited -- in thousands) CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended OCTOBER 1, 1999 October 2, 1998 --------------- --------------- NET SALES $ 109,926 $ 108,069 COST OF SALES 80,921 80,978 --------- --------- GROSS PROFIT 29,005 27,091 OPERATING EXPENSES: Selling, general and administrative 14,142 13,960 --------- --------- INCOME FROM OPERATIONS 14,863 13,131 OTHER EXPENSES: Interest, net 9,625 9,607 Other 182 375 --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES 5,056 3,149 PROVISION FOR INCOME TAXES 2,500 1,606 --------- --------- NET INCOME $ 2,556 $ 1,543 ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NET INCOME $ 2,556 $ 1,543 OTHER COMPREHENSIVE INCOME (LOSS), NET OF (643) (1,571) --------- --------- COMPREHENSIVE INCOME (LOSS) $ 1,913 $ (28) ========= =========
See accompanying notes to consolidated financial statements. 4 5 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited -- in thousands)
Three months ended OCTOBER 1, 1999 October 2, 1998 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,556 $ 1,547 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 8,432 8,239 Deferred income taxes 599 -- Changes in operating assets and liabilities: Accounts receivable 32,178 31,530 Inventories (5,064) (10,451) Prepaid expenses and other current assets (5,284) (3,940) Income taxes (46) (769) Accounts payable (1,649) (4,130) Accrued interest (5,401) (6,935) Accrued expenses and other liabilities (20,711) (6,972) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,610 8,119 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,190) (1,578) Acquisition costs (274) (42) Deposits and other assets (90) 943 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (3,554) (677) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments/borrowings of long-term debt (2,976) (378) Repayments/borrowings under line of credit (544) 33 Debt financing costs (23) -- -------- -------- NET CASH USED IN FINANCING ACTIVITIES (3,543) (345) -------- -------- NET INCREASE (DECREASE) IN CASH (1,487) 7,097 CASH, BEGINNING OF PERIOD 22,117 29,363 -------- -------- CASH, END OF PERIOD $ 20,630 $ 36,460 -------- -------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 16,120 $ 15,983 -------- -------- Income taxes 2,546 433 -------- --------
See accompanying notes to consolidated financial statements. 5 6 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL 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. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. For further information please refer to the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended July 2, 1999. NOTE 2 - INVENTORIES Inventories as of October 1, 1999 and July 2, 1999 are summarized as follows:
OCTOBER 1, 1999 July 2, 1999 --------------- ------------ Raw materials $24,255 $26,663 Work-in-process 5,867 5,282 Finished goods 38,104 31,245 ------- ------- $68,226 $63,190 ------- -------
6 7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3 - LONG-TERM DEBT Long-term debt consists of the following:
OCTOBER 1, 1999 July 2, 1999 --------------- ------------ Senior Subordinated Notes issued March 3, 1998 at 9-1/4% due March 1, 2008 $200,000 $200,000 Senior Subordinated Notes issued April 4, 1997 at 11 -1/4% due April 1, 2007 75,000 75,000 Senior Debt: Revolving line of credit, expiring March 31, 2004. At October 1, 1999, the interest rate was 20,000 22,000 9.00% Term notes due March 31, 2004 and March 31, 2006, with interest rates at October 1, 1999 of 110,275 111,063 7.25% and 7.75% Other, primarily foreign term loans, with interest rates ranging from 4 -1/4% to 8.4% and maturities 7,623 8,331 from 2000 to 2004 -------- -------- 412,898 416,394 Less: Current maturities 5,619 5,748 -------- -------- $407,279 $410,646 -------- --------
7 8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 4 - CONTINGENCIES (a) In January 1993 and 1994, the Company's Belgian subsidiary received income tax assessments aggregating approximately $2,002 (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 $853 (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 is 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. 8 9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - 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. Prior to 1998, the Company operated principally in the food packaging segment. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:
Healthcare Packaging, Consumer Specialty Products, Packaging Food Resins and and Materials and Products Packaging Compounds TOTAL ------------- ------------ --------- ---------- ----- October 1, 1999 Revenues from external customers $ 37,270 $ 32,426 $ 25,116 $ 15,114 $109,926 Interest expense 2,857 3,212 2,101 1,455 9,625 Depreciation and amortization 2,583 2,726 1,889 1,127 8,325 Segment income from operations 7,102 4,513 4,673 1,469 17,757 Segment assets 169,997 194,019 73,394 82,539 519,949 Expenditures for segment assets 879 904 1,178 180 3,141 -------- -------- -------- -------- -------- October 2, 1998 Revenues from external customers $ 32,266 $ 32,448 $ 23,732 $ 19,623 $108,069 Interest expense 3,201 3,503 1,669 1,234 9,607 Depreciation and amortization 1,410 2,374 2,772 1,335 7,891 Segment income from operations 5,281 6,187 2,791 1,910 16,169 Expenditures for segment assets 573 326 590 71 1,560 -------- -------- -------- -------- -------- July 2, 1999 Segment assets 173,704 216,067 73,351 83,601 546,723 -------- -------- -------- -------- --------
9 10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
OCTOBER 1, 1999 October 2, 1998 --------------- --------------- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $17,757 $ 16,169 Corporate and eliminations (2,894) (3,038) ------- -------- $14,863 $ 13,131 ======= ======== DEPRECIATION AND AMORTIZATION Segment totals $ 8,325 $ 7,891 Corporate 107 348 ======= ======== Consolidated total $ 8,432 $ 8,239 ======= ======== EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 3,141 $ 1,560 Other unallocated expenditures 49 18 ------- -------- Consolidated total $ 3,190 $ 1,578 ======= ========
OCTOBER 1, 1999 July 2, 1999 --------------- ------------ ASSETS Total assets from reportable segments $519,949 $546,723 Other unallocated amounts 10,461 12,713 -------- -------- Consolidated total $530,410 $559,436 ======== ========
GEOGRAPHIC INFORMATION
OCTOBER 1, 1999 October 2, 1998 --------------- --------------- REVENUES United States $100,039 $ 97,431 International 9,887 10,638 -------- -------- Total $109,926 $108,069 ======== ========
OCTOBER 1, 1999 July 2, 1999 --------------- ------------ LONG-LIVED ASSETS United States $333,707 $339,409 International 28,685 28,321 -------- -------- Total $362,392 $367,730 ======== ========
10 11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Earnings (Unaudited) For the three months ended October 1, 1999
Non- TOTAL Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $109,926 $ 40,614 $ 59,425 $ 9,887 Cost of sales 80,921 27,879 46,334 6,708 -------- -------- -------- -------- Gross profit 29,005 12,735 13,091 3,179 Operating expenses: Selling, General and administrative 14,142 9,065 3,954 1,123 -------- -------- -------- -------- Income from operations 14,863 3,670 9,137 2,056 Interest expense, net 9,625 9,704 (84) 5 Other expense (income) 182 94 (286) 374 -------- -------- -------- -------- Income (loss) before provision for income taxes 5,056 (6,128) 9,507 1,677 Provision for income taxes 2,500 (3,035) 4,705 830 -------- -------- -------- -------- Net income(loss) $ 2,556 $ (3,093) $ 4,802 $ 847 ======== ======== ======== ========
11 12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) For the three months ended October 2, 1998
Non- Total Issuer Guarantors Guarantors ----- ------ ---------- ---------- Net sales $108,069 $ 36,026 $ 61,405 $ 10,638 Cost of sales 80,978 27,149 46,534 7,295 -------- -------- -------- -------- Gross profit 27,091 8,877 14,871 3,343 Operating expenses: Selling, General and administrative 13,960 6,467 6,575 918 -------- -------- -------- -------- Income from operations 13,131 2,410 8,296 2,425 Interest expense, net 9,607 9,509 52 46 Other expense (income) 375 80 (325) 620 -------- -------- -------- -------- Income (loss) before provision for income taxes 3,149 (7,179) 8,569 1,759 Provision for income taxes 1,606 (3,590) 4,446 750 -------- -------- -------- -------- Net income(loss) $ 1,543 $ (3,589) $ 4,123 $ 1,009 ======== ======== ======== ========
12 13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at October 1, 1999 (Unaudited)
Non- TOTAL Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 168,018 $ -- $ 46,659 $ 91,855 $ 29,504 Property, plant and equipment, net 133,635 -- 44,964 72,985 15,686 Intangible assets 204,956 -- 49,675 153,878 1,403 Investment in subsidiaries -- (372,816) 372,816 -- -- Deferred financing costs, net 18,746 -- 18,357 175 214 Other long-term assets 5,055 (122,437) 53,170 62,940 11,382 --------- --------- --------- --------- --------- Total assets $ 530,410 $(495,253) $ 585,641 $ 381,833 $ 58,189 ========= ========= ========= ========= ========= Current liabilities $ 63,990 $ -- $ 18,825 $ 32,209 $ 12,956 Long-term debt 407,279 -- 400,875 -- 6,404 Other long-term liabilities 4,931 (122,437) 104,463 4,293 18,612 --------- --------- --------- --------- --------- Total liabilities 476,200 (122,437) 524,163 36,502 37,972 --------- --------- --------- --------- --------- Additional paid-in capital 41,075 (312,408) 41,076 296,766 15,641 Retained earnings 15,146 (60,408) 20,402 48,565 6,587 Cumulative currency translation adjustment (2,011) -- -- -- (2,011) --------- --------- --------- --------- --------- Total equity 54,210 (372,816) 61,478 345,331 20,217 --------- --------- --------- --------- --------- Total liabilities and equity $ 530,410 $(495,253) $ 585,641 $ 381,833 $ 58,189 ========= ========= ========= ========= =========
13 14 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at July 2, 1999
Non- Total Eliminations Issuer Guarantors Guarantors ----- ------------ ------ ---------- ---------- Current assets $ 191,706 $ -- $ 45,967 $ 117,689 $ 28,050 Property, plant and equipment, net 136,953 -- 44,507 77,132 15,314 Intangible assets 206,140 -- 68,073 136,639 1,428 Investment in subsidiaries -- (367,167) 367,167 -- -- Deferred financing costs, net 19,358 -- 19,257 (128) 229 Deferred taxes 1,346 -- 1,346 -- -- Other long-term assets 3,933 (132,685) 89,222 36,046 11,350 --------- --------- --------- --------- --------- Total assets $ 559,436 $(499,852) $ 635,539 $ 367,378 $ 56,371 ========= ========= ========= ========= ========= Current liabilities $ 90,261 $ -- $ 52,551 $ 26,868 $ 10,842 Long-term debt 410,646 -- 404,288 -- 6,358 Other long-term liabilities 6,232 (132,685) 119,759 -- 19,158 --------- --------- --------- --------- --------- Total liabilities 507,139 (132,685) 576,598 26,868 36,358 --------- --------- --------- --------- --------- Additional paid-in capital 41,075 (312,408) 41,095 296,747 15,641 Retained earnings 12,590 (54,759) 17,846 43,763 5,740 Cumulative currency translation adjustment (1,368) -- -- -- (1,368) --------- --------- --------- --------- --------- Total equity 52,297 (367,167) 58,941 340,510 20,013 --------- --------- --------- --------- --------- Total liabilities and equity $ 559,436 $(499,852) $ 635,539 $ 367,378 $ 56,371 ========= ========= ========= ========= =========
14 15 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2000 COMPARED WITH THE FIRST QUARTER OF FISCAL 1999 Net Sales increased to $109.9 million for the three months ended October 1, 1999 from $108.1 million for the three months ended October 2, 1998. This represents an increase of $1.86 million or 1.7%. The increase in sales over the same period in the prior year is due primarily to the acquisition of Tri-Seal International in January 1999 and Natvar in April 1999, offset by factors related to the restructuring of acquired operations. These factors include primarily the elimination in fiscal 2000 of low-margin sales in certain acquired businesses, and to a lesser extent the elimination of sales to Natvar, which became intercompany transfers after the acquisition. The level of growth for the first quarter of fiscal 2000 may not be indicative of future operations. Cost of Sales decreased slightly to $80.9 million for the three months ended October 1, 1999 from $81.0 million for the three months ended October 2, 1998. Expressed as a percentage of net sales, cost of sales decreased to 73.6% for the three months ended October 1, 1999 from 74.9% for the three months ended October 2, 1998. The decrease in cost of sales as a percentage of net sales was due primarily to efficiencies achieved in operations acquired with the purchase of PureTec, partially offset by higher raw material costs. Gross Profit as a result, increased to $29.0 million or 26.4% of net sales for the three months ended October 1, 1999, from $27.1 million or 25.1% of net sales for the three months ended October 2, 1998. Selling, general and administrative expense, at $14.1 million or 12.9% of net sales, was essentially unchanged from the prior year's first quarter. Additional selling, general and administrative expenses incurred with the acquisitions of Tri-Seal International and Natvar were offset by reductions related to the restructuring of other acquired operations. Operating profit increased to $14.9 million or 13.5% of net sales for the three months ended October 1, 1999, from $13.1 million or 12.2% of net sales for the three months ended October 2, 1998, for the reasons discussed above. Interest expense, at $9.6 million, was essentially unchanged from the prior year's first quarter. As a percent of sales, interest expense decreased slightly to 8.8% from 8.9% in the prior year. Provision for income taxes increased to $2.5 million or 2.3% of net sales for the three months ended October 1, 1999, from $1.6 million or 1.5% of net sales for the same period in the prior year. The Company's effective tax rate was 49.5% for the three months ended October 1, 1999 compared to 51.0% for the same period in the prior year. The decrease in the effective tax rate is the result of the decrease in non-deductible expenses in relation to pretax income. Net income increased to $2.6 million or 2.3% of net sales for the three months ended October 1, 1999, from $1.5 million or 1.4% of net sales for the same period in the prior year, for the reasons discussed above. 15 16 LIQUIDITY AND CAPITAL RESOURCES For the three months ended October 1, 1999, net cash provided by operating activities was $5.6 million compared to $8.1 million for the same period in the prior year. This was due primarily to the timing of accrued payroll and benefit payments. Working capital at October 1, 1999 was $104.0 million compared to $101.4 million at July 2, 1999. The increase in working capital was due primarily to the decrease in accrued expenses offset by normal seasonal decreases in accounts receivable. As of October 1, 1999 the Company had an outstanding balance of $20.0 million under the $90 million revolving credit line of the existing credit facility. This is a reduction of $2.0 million from the outstanding balance as of July 2, 1999. The Company's capital expenditures for the three months ended October 1, 1999 and October 2, 1998 were $3.2 million, and $1.6 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. 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 has evaluated the potential impact and remediation costs of Year 2000 issues. 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 fabrication 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 will be disrupted by the Year 2000 issues. 16 17 Support Systems: The Company believes that it has identified the major computers, software applications, and other equipment utilized by support systems, primarily the accounting systems, that must be modified, upgraded, or replaced to minimize the possibility of any disruption of business. The Company has 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 as part of the Company's normal integration strategy. As a result, additional costs that will be incurred solely due to Year 2000 issues are difficult to isolate. Nonetheless, the Company estimates such additional costs will be less than $250,000 in the aggregate. 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 has contacted its suppliers to identify any potential disruption in the supply of raw materials. As a result, 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 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 computer interface interruptions, if any. Conclusion: Tekni-Plex believes that it is taking adequate steps to address all significant internal Year 2000 issues that could adversely affect its business operations. Of course, it is not 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 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At October 1, 1999, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $130.3 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $0.5 million on the Company's after-tax earnings and cash flows, assuming the Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows, in a similar proportion. 17 18 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. Other Information In order to provide liquidity to certain investors in the Company's sole stockholder, the Company has decided to pursue a recapitalization of the Company. The Company currently anticipates completing the recapitalization in the first quarter of calendar year 2000. The recapitalization is subject to various contingencies, including the availability of sufficient debt and equity financing on terms acceptable to the Company and certain of its principle investors, and approval by various investors in the Company. Although there can be no assurance that the proposed recapitalization will be consummated at all or without delay, the Company currently contemplates that substantially all of the Company's current outstanding indebtness will be refinanced as part of the proposed recapitalization of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None 18 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 15, 1999 By: /s/ F. Patrick Smith ---------------------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker ---------------------------------------------- Kenneth W. R. Baker President and Chief Operating Officer and Principal Accounting and Financial Officer 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEKNI-PLEX, INC. STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED OCTOBER 1, 1999 AND BALANCE SHEET AS AT OCTOBER 1, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-2000 JUL-03-1999 OCT-01-1999 20,630 0 65,806 1,174 68,226 168,018 170,167 36,532 530,410 63,990 275,000 0 0 0 0 530,410 109,926 109,926 80,921 80,921 14,142 0 9,625 5,056 2,500 2,556 0 0 0 2,556 0 0
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