-----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, MYMRJFQycqL6webDVvENShIiBhWJ3GktGpbA2dTCnRjJwd6Wa0xbsgS8xFYoe3BR L7bzjJeBZYO+KxSEBX1DxQ== 0000950123-99-000994.txt : 19990212 0000950123-99-000994.hdr.sgml : 19990212 ACCESSION NUMBER: 0000950123-99-000994 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990101 FILED AS OF DATE: 19990211 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: 99530967 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 FORM 10-Q 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 January 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 Sheet as of January 1, 1999 and July 3, 1998 ....................................................................................3 Consolidated Statement of Earnings for the six months and three months ended January 1, 1999 and December 26, 1997...................................................4 Consolidated Statement of Cash Flows for the six months ended January 1, 1999 and December 26, 1997...........................................................5 Notes to Consolidated Financial Statements...........................................................6-13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................................14-17 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 SHEET (in thousands)
JANUARY 1, 1999 July 3, 1998 (UNAUDITED) --------- --------- ASSETS Current: Cash $ 27,955 $ 29,363 Accounts receivable, net of allowance for doubtful accounts of $1,242 and $1,326 respectively 53,790 88,778 Inventories 79,586 57,929 Deferred taxes 5,565 5,565 Prepaid and other current assets 10,257 9,642 --------- --------- Total current assets 177,153 191,277 Property, plant and equipment, net 125,053 128,234 Intangible assets, net of accumulated amortization of $23,036 and $15,030 respectively 185,460 193,849 Deferred charges, net of accumulated amortization of $2,749 and $1,768 respectively 21,564 22,791 Deferred income taxes 7,065 7,065 Other assets 1,320 3,616 --------- --------- $ 517,615 $ 546,832 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt $ 4,729 $ 5,147 Line of credit 357 307 Accounts payable - trade 27,272 32,986 Accrued payroll and benefits 9,723 12,074 Accrued interest 9,212 8,884 Accrued liabilities - other 24,084 44,539 Income taxes payable -- 2,443 --------- --------- Total current liabilities 75,377 106,380 Long-term debt 392,426 396,451 Other liabilities 8,015 5,328 --------- --------- Total liabilities 475,818 508,159 --------- --------- Stockholder's equity: Common stock -- -- Additional paid-in capital 41,075 41,075 Cumulative currency translation adjustment 1,081 5 Retained earnings (359) (2,407) --------- --------- Total stockholder's equity 41,797 38,673 --------- --------- $ 517,615 $ 546,832 ========= =========
See accompanying notes to consolidated financial statements. 3 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (in thousands) (Unaudited)
Three months ended Six months ended January 1, December 26, January 1, December 26, 1999 1997 1999 1997 --------- --------- --------- --------- Net sales $ 94,004 $ 37,831 $ 202,073 $ 75,622 Cost of goods sold 69,126 27,367 150,104 55,224 --------- --------- --------- --------- Gross profit 24,878 10,464 51,969 20,398 Operating expenses: Selling, general and administrative 14,558 4,207 28,518 8,255 --------- --------- --------- --------- Operating profit 10,320 6,257 23,451 12,143 Other income (expenses) (122) (87) (497) (159) Interest expense (9,399) (2,227) (19,006) (4,336) --------- --------- --------- --------- Earnings before income taxes 799 3,943 3,948 7,648 Provision for income taxes 294 1,507 1,900 2,907 --------- --------- --------- --------- Net income $ 505 $ 2,436 $ 2,048 $ 4,741 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 5 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (Unaudited)
Six months ended January 1, 1999 December 26, 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,048 $ 4,741 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 16,061 4,793 Deferred income taxes -- 40 Changes in operating assets and liabilities: Accounts receivable 34,988 (1,454) Inventories (21,657) (225) Prepaid expenses and other current assets (615) 147 Income taxes (2,443) 2,458 Accounts payable (5,714) (1,206) Accrued interest 328 81 Accrued expenses and other liabilities (17,885) (4,409) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,111 4,966 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,023) (1,939) Acquisition costs (88) (2,292) Deposits and other assets 1,909 (2,778) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (3,202) (7,009) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments/borrowings of long-term debt (4,443) (30) Repayments/borrowings under line of credit 50 213 Foreign currency translation 1,076 -- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,317) 183 -------- -------- NET INCREASE IN CASH (1,408) (1,860) CASH, BEGINNING OF PERIOD 29,363 11,095 -------- -------- CASH, END OF PERIOD $ 27,955 $ 9,235 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 18,580 $ 4,236 -------- -------- Income taxes 5,822 409 -------- --------
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 3, 1998. NOTE 2 - INVENTORIES Inventories as of January 1, 1999 and July 3, 1998 are summarized as follows:
January 1, 1999 July 3, 1998 -------------------- ------------------ Raw materials $ 26,057 $ 24,427 Work-in-process 5,305 5,136 Finished goods 48,224 28,366 -------------------- ------------------ $ 79,586 $ 57,929 -------------------- ------------------
6 7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3 - LONG-TERM DEBT Long-term debt as of January 1, 1999 and July 3, 1998 consists of the following:
January 1, July 3, 1999 1998 -------- -------- 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 -- -- Term notes 112,638 114,213 PS&T term notes at 11-1/4%, Senior Secured Notes due December 1, 2003 -- 1,550 Loan Promissory Note collateralized by a building in Newark, NJ 141 211 7% Subordinated Notes issued in connection with an acquisition by PureTec, due July 1, 2005 -- 662 Foreign Term Loans payable in Belgium Francs 1,085 1,265 Foreign Term Loans payable in Italian Lira 1,978 2,032 Foreign Term Loans and capitalized lease obligations, payable in British Pounds 5,942 6,055 Foreign Line of Credit payable in British Pounds 292 492 PurePlast Line of Credit payable in Canadian Dollars 357 307 PurePlast Term Loan payable in Canadian Dollars 41 67 Other, primarily equipment financing 38 51 -------- -------- 397,512 401,905 Less: Current maturities 5,086 5,454 -------- -------- $392,426 $396,451 -------- --------
On November 30, 1998, the Company redeemed its 7% Subordinated Notes, due July 1, 2005. On December 1, 1998, the Company redeemed its 11-1/4% Senior Secured Notes, due December 1, 2003. 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 $2,032 (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 $866 (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 operated for the three and six month periods ended January 1, 1999 is as follows:
Net Sales: Three months Six months Healthcare Packaging, Products, and Materials: Domestic $ 25,873 $ 56,008 Foreign 2,793 4,924 Consumer Packaging and Products: Domestic 17,715 41,766 Foreign 6,678 15,075 Food packaging 24,422 48,154 Specialty Resins and Compounds 16,523 36,146 Corporate & eliminations -- -- --------- --------- Total Net Sales $ 94,004 $ 202,073 --------- --------- Operating Income: Healthcare Packaging, Products, and Materials: Domestic $ 4,768 $ 9,994 Foreign 332 387 Consumer Packaging and Products: Domestic 961 4,720 Foreign 1,307 3,735 Food packaging 4,149 6,940 Specialty Resins and Compounds 2,367 4,277 Corporate & eliminations (3,564) (6,602) --------- --------- Total Operating Income $ 10,320 $ 23,451 --------- ---------
9 10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Depreciation and Amortization: Healthcare Packaging, Products, and Materials: Domestic $ 1,712 $ 2,996 Foreign 78 204 Consumer Packaging and Products: Domestic 3,938 5,594 Foreign 500 878 Food packaging 875 3,647 Specialty Resins and Compounds 1,261 2,596 Corporate & eliminations (202) 146 --------- --------- Total Depreciation and Amortization $ 8,162 $ 16,061 --------- --------- Capital Expenditures: Healthcare Packaging, Products, and Materials: Domestic $ 528 $ 1,037 Foreign -- 64 Consumer Packaging and Products: Domestic 558 952 Foreign 256 459 Food packaging 1,465 2,055 Specialty Resins and Compounds 311 382 Corporate & eliminations 56 74 --------- --------- Total Capital Expenditures $ 3,174 $ 5,023 --------- --------- Identifiable Assets: Healthcare Packaging, Products, and Materials: Domestic $ 56,300 Foreign 12,732 Consumer Packaging and Products: Domestic 168,996 Foreign 46,028 Food packaging 134,025 Specialty Resins and Compounds 89,822 Corporate & eliminations 9,712 --------- Total Identifiable Assets $ 517,615 ---------
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 January 1, 1999
Non- Total Issuer Guarantors Guarantors -------- -------- -------- -------- Net sales $ 94,004 $ 35,370 $ 49,163 $ 9,471 Cost of goods sold 69,126 25,293 37,185 6,648 -------- -------- -------- -------- Gross profit 24,878 10,077 11,978 2,823 Operating expenses Selling, General and administrative 14,558 8,508 4,866 1,184 -------- -------- -------- -------- Operating profit 10,320 1,569 7,112 1,639 Other income (expenses) (122) (15) 81 (188) Interest expense (9,399) (9,248) (76) (75) -------- -------- -------- -------- Earnings before income taxes 799 (7,694) 7,117 1,376 Provision for income taxes 294 (4,010) 3,554 750 -------- -------- -------- -------- Net income $ 505 $ (3,684) $ 3,563 $ 626 ======== ======== ======== ========
11 12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) For the six months ended January 1, 1999
Non- Total Issuer Guarantors Guarantors --------- --------- --------- --------- Net sales $ 202,073 $ 71,396 $ 110,678 $ 19,999 Cost of goods sold 150,104 52,442 83,867 13,795 --------- --------- --------- --------- Gross profit 51,969 18,954 26,811 6,204 Operating expenses Selling, General and administrative 28,518 14,975 11,461 2,082 --------- --------- --------- --------- Operating profit 23,451 3,979 15,350 4,122 Other income (expenses) (497) (95) 406 (808) Interest expense (19,006) (18,757) (128) (121) --------- --------- --------- --------- Earnings before income taxes 3,948 (14,873) 15,628 3,193 Provision for income taxes 1,900 (7,600) 8,000 1,500 --------- --------- --------- --------- Net income $ 2,048 $ (7,273) $ 7,628 $ 1,693 ========= ========= ========= =========
12 13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet (Unaudited)
January 1, 1999 Non- Total Eliminations Issuer Guarantors Guarantors --------- --------- --------- --------- --------- Current assets $ 177,153 $ (1,185) $ 48,815 $ 89,384 $ 40,139 Property, plant and equipment, net 125,053 -- 40,022 68,541 16,490 Intangible assets 185,460 -- 27,196 156,811 1,453 Investment in subsidiaries -- (342,819) 342,819 -- -- Deferred charges 21,564 -- 21,096 -- 468 Other assets 8,385 (98,485) 106,172 488 210 --------- --------- --------- --------- --------- Total assets $ 517,615 $(442,489) $ 586,120 $ 315,224 $ 58,760 ========= ========= ========= ========= ========= Current liabilities $ 75,377 $ (1,185) $ 24,507 $ 36,302 $ 15,753 Long-tern debt 392,426 -- 384,488 -- 7,938 Other long-term liabilities 8,015 (100,219) 131,152 (38,552) 15,634 --------- --------- --------- --------- --------- Total liabilities 475,818 (101,404) 540,147 (2,250) 39,325 --------- --------- --------- --------- --------- Additional paid-in capital 41,075 (312,408) 41,076 296,766 15,641 Retained earnings (359) (28,677) 4,897 20,708 2,713 Cumulative currency translation adjustment 1,081 -- -- -- 1,081 --------- --------- --------- --------- --------- Total equity 41,797 (341,085) 45,973 317,474 19,435 --------- --------- --------- --------- --------- Total liabilities and equity $ 517,615 $(442,489) $ 586,120 $ 315,224 $ 58,760 ========= ========= ========= ========= =========
14 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER OF FISCAL 1999 COMPARED WITH THE SECOND QUARTER OF FISCAL 1998 Net Sales increased to $94.0 million for the three months ended January 1, 1999 from $37.8 million for the three months ended December 26, 1997. This represents an increase of $56.2 million or 148.5%. The increased sales are primarily attributed to the acquisition of PureTec in March 1998. Cost of Goods Sold increased to $69.1 million for the three months ended January 1, 1999 from $27.4 million for the three months ended December 26, 1997, primarily due to the acquisition of PureTec. Expressed as a percentage of net sales, cost of goods sold increased to 73.5% for the three months ended January 1, 1999 from 72.3% for the three months ended December 26, 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. Gross Profit as a result, increased to $24.9 million or 26.5% of net sales for the three months ended January 1, 1999, from $10.5 million or 27.7% of net sales for the three months ended December 26, 1997. Selling, general and administrative expenses increased to $14.6 million or 15.5% of net sales for the three months ended January 1, 1999 from $4.2 million or 11.1% of net sales for the three months ended December 26, 1997. Selling, general and administrative expenses increased as a percentage of net sales due primarily to higher amortization of goodwill resulting from the acquisition of PureTec. Operating profit increased to $10.3 million or 11.0% of net sales for the three months ended January 1, 1999, from $6.3 million or 16.5% for the three months ended December 26, 1997, due primarily to the different sales mix associated with the purchase of PureTec as stated above. Interest expense increased to $9.4 million or 10.0% of net sales for the three months ended January 1, 1999, from $2.2 million or 5.9% of net sales for the same period in the prior year. This is due to the issuance of bonds and notes to acquire PureTec. Provision for income taxes decreased to $0.3 million or 0.3% of net sales for the three months ended January 1, 1999, from $1.5 million or 4.0% for the same period in the prior year. The Company's effective tax rate was 37% for the three months ended January 1, 1999 compared to 38% for the same period in the prior year. The decrease in effective tax rate between the first and second quarters of fiscal 1999 was made to more accurately reflect the annualized rate of income tax. Net income decreased to $0.5 million or 0.5% of net sales for the three months ended January 1, 1999, from $2.4 million or 6.4% of net sales for the same period in the prior year, due primarily to the impact of acquiring PureTec, and in particular, the garden hose product line. 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, with the second fiscal quarter historically being the least profitable. 14 15 FIRST SIX MONTHS OF FISCAL 1999 COMPARED WITH THE FIRST SIX MONTHS OF FISCAL 1998 Net Sales increased to $202.1 million for the six months ended January 1, 1999 from $75.6 million for the six months ended December 26, 1997. This represents an increase of $126.5 million or 167.2%. The increased sales are primarily attributed to the acquisition of PureTec in March 1998. Cost of Goods Sold increased to $150.1 million for the six months ended January 1, 1999 from $55.2 million for the six months ended December 26, 1997, primarily due to the acquisition of PureTec. Expressed as a percentage of net sales, cost of goods sold increased to 74.3% for the six months ended January 1, 1999 from 73.0% for the six months ended December 26, 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. Gross Profit as a result, increased to $52.0 million or 25.7% of net sales for the six months ended January 1, 1999, from $20.4 million or 27.0% of net sales for the six months ended December 26, 1997. Selling, general and administrative expenses increased to $28.5 million or 14.1% of net sales for the six months ended January 1, 1999 from $8.3 million or 10.9% of net sales for the six months ended December 26, 1997. Selling, general and administrative expenses increased as a percentage of net sales due primarily to higher amortization of goodwill resulting from the acquisition of PureTec. Operating profit increased to $23.5 million or 11.6% of net sales for the six months ended January 1, 1999, from $12.1 million or 16.1% for the six months ended December 26, 1997, due primarily to the different sales mix associated with the purchase of PureTec as stated above. Interest expense increased to $19.0 million or 9.4% of net sales for the six months ended January 1, 1999, from $4.3 million or 5.7% of net sales for the same period in the prior year. This is due to the issuance of bonds and notes to acquire PureTec. Provision for income taxes decreased to $1.9 million or 0.9% of net sales for the six months ended January 1, 1999, from $2.9 million or 3.8% for the same period in the prior year. The Company's effective tax rate was 48% for the six months ended January 1, 1999 compared to 38% for the same period in the prior year. The increase in effective tax rate between periods is due primarily to non-deductible amortization and the depletion of tax carryover losses and credits from prior acquisitions. Net income decreased to $2.0 million or 1.0% of net sales for the six months ended January 1, 1999, from $4.7 million or 6.3% of net sales for the same period in the prior year, due primarily to the impact of acquiring PureTec, and in particular, the garden hose product line. 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, with the second fiscal quarter historically being the least profitable. 15 16 LIQUIDITY AND CAPITAL RESOURCES For the six months ended January 1, 1999, net cash provided by operating activities was $5.1 million compared to $5.0 million for the same period in the prior year. Although this net change is small, the more significant changes in various components of cash flow were due primarily to the acquisition of PureTec. Working capital at January 1, 1999 was $101.8 million compared to $84.9 million at July 3, 1998. The increase in working capital was due primarily to the decrease in accounts payable, accrued expenses, and increased inventory, partially offset by normal seasonal decreases in accounts receivable. As of January 1, 1999 and July 3, 1998, there was no outstanding balance under the $90 million revolving credit line of the Existing Credit Facility. The Company's capital expenditures for the six months ended January 1, 1999 and December 26, 1997 were $5.0 million, and $1.9 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. DEBT REDEMPTIONS On November 30, 1998, the Company redeemed the remaining $194 thousand of its 7% Subordinated Notes, due July 1, 2005. On December 1, 1998, the Company redeemed the remaining $1.55 million its 11 1/4% Senior Secured Notes, due December 1, 2003. SUBSEQUENT EVENTS On December 23, 1998, a wholly-owned subsidiary of Tekni-Plex entered into a definitive agreement to acquire substantially all of the assets of Tri-Seal International, Inc., a privately-owned company, in a cash transaction. The transaction was completed on January 26, 1999, at net purchase price of $ 17.8 million. The agreement also called for Tekni-Plex to assume Tri-Seal's $2.4 million of debt. Tekni-Plex elected to retire this debt on January 26, 1999. 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. 16 17 Assessment: Tekni-Plex continues to evaluate 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 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 computer interface interruptions, if any. Conclusion: Tekni-Plex expects to 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 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable 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 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 (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. February 10, 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 SIX MONTHS ENDED JANUARY 1, 1999 AND BALANCE SHEET AS AT JANUARY 1, 1999 AND IS QUALIFIED IN IS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JUL-02-1999 JUL-04-1998 JAN-01-1999 27,955 0 55,032 1,242 79,586 177,153 151,254 26,201 517,615 75,377 275,000 0 0 0 0 517,615 202,073 202,073 150,104 150,104 28,518 0 19,006 3,948 1,900 2,048 0 0 0 2,048 0 0
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