-----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, FvCjWvoLMLmdhhKjuRcVqqyFdpqzF1In0O6jrW/N5kKFjY6P+AaUY//ot85mzBlJ +ptriyLqdttpvwoq2Smt7w== 0000950123-99-004572.txt : 19990514 0000950123-99-004572.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950123-99-004572 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990402 FILED AS OF DATE: 19990513 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: 99619422 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 April 2, 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 April 2, 1999 and July 3, 1998................................................................. 3 Consolidated Statement of Earnings for the nine months and three months ended April 2, 1999 and March 27, 1998..................................... 4 Consolidated Statement of Cash Flows for the nine months ended April 2, 1999 and March 27, 1998............................................ 5-6 Notes to Consolidated Financial Statements.............................................. 7-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................... 15-18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 18 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. Other information..................................................... 19 Item 6. Exhibits and reports on Form 8-K...................................... 19
3 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands)
April 2, 1999 July 3, 1998 (Unaudited) ------------- ------------ ASSETS Current: Cash $ 12,225 $ 29,363 Accounts receivable, net of allowance for doubtful accounts of $2,117 and $1,326 respectively 82,738 88,778 Inventories 81,102 57,929 Deferred taxes 5,388 5,565 Prepaid and other current assets 7,621 9,642 --------- --------- Total current assets 189,074 191,277 Property, plant and equipment, net 127,451 128,234 Intangible assets, net of accumulated amortization of $27,336 and $15,030 respectively 199,096 193,849 Deferred charges, net of accumulated amortization of $3,820 and $1,768 respectively 20,333 22,791 Deferred income taxes 7,065 7,065 Other assets 2,270 3,616 --------- --------- $ 545,289 $ 546,832 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt $ 4,476 $ 5,147 Line of credit 361 307 Accounts payable - trade 23,635 32,986 Accrued payroll and benefits 13,917 12,074 Accrued interest 2,492 8,884 Accrued liabilities - other 28,679 44,539 Income taxes payable 718 2,443 --------- --------- Total current liabilities 74,278 106,380 Long-term debt 416,946 396,451 Other liabilities 7,928 5,328 --------- --------- Total liabilities 499,152 508,159 --------- --------- Stockholder's equity: Common stock -- -- Additional paid-in capital 41,075 41,075 Cumulative currency translation adjustment (428) 5 Retained earnings 5,490 (2,407) --------- --------- Total stockholder's equity 46,137 38,673 --------- --------- $ 545,289 $ 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 Nine months ended April 2, March 27, April 2, March 27, 1999 1998 1999 1998 --------- -------- --------- --------- Net sales $ 129,754 $ 68,388 $ 331,827 $ 144,010 Cost of goods sold 92,074 51,236 242,178 106,460 --------- -------- --------- --------- Gross profit 37,680 17,152 89,649 37,550 Operating expenses: Selling, general and administrative 16,407 9,714 44,925 17,969 --------- -------- --------- --------- Operating profit 21,273 7,438 44,724 19,581 Other income (expenses) (164) (276) (661) (435) Interest expense (9,860) (4,526) (28,866) (8,862) --------- -------- --------- --------- Earnings before income taxes 11,249 2,636 15,197 10,284 Provision for income taxes 5,400 1,385 7,300 4,292 --------- -------- --------- --------- NET INCOME $ 5,849 $ 1,251 $ 7,897 $ 5,992 ========= ======== ========= =========
See accompanying notes to consolidated financial statements. 4 5 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (Unaudited)
Nine months ended April 2, 1999 March 27, 1998 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,897 $ 5,992 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 24,966 8,167 Deferred income taxes 177 674 Changes in operating assets and liabilities: Accounts receivable 5,948 (7,010) Inventories (23,208) (1,683) Prepaid expenses and other current assets 2,013 (2,510) Income taxes (1,729) 1,815 Accounts payable (9,379) 3,117 Accrued interest (6,400) 4,163 Accrued expenses and other liabilities (11,429) 5,286 -------- --------- NET CASH PROVIDED BY ( USED IN) OPERATING ACTIVITIES (11,144) 18,011 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (9,976) (3,184) Acquisition costs (17,571) (309,668) Purchase of treasury stock -- (377) Deposits and other assets 1,746 (39) -------- --------- NET CASH USED IN INVESTING ACTIVITIES (25,801) (313,268) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments/borrowings of long-term debt 19,754 314,996 Repayments/borrowings under line of credit 53 209 Debt financing costs -- (17,978) -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 19,807 297,227 -------- --------- NET INCREASE (DECREASE) IN CASH (17,138) 1,970 CASH, BEGINNING OF PERIOD 29,363 11,095 -------- --------- CASH, END OF PERIOD $ 12,225 $ 13,065 ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 28,191 $ 4,308 -------- --------- Income taxes 7,119 3,268 -------- ---------
See accompanying notes to consolidated financial statements. 5 6 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (Unaudited) INVESTING ACTIVITIES: The Company purchased certain assets and assumed certain liabilities of Tri-Seal International, Inc., effective January 26, 1999. The acquisition was recorded as follows: Fair value of assets acquired $ 10,758 Goodwill 12,955 Cash paid (20,303) -------- Liabilities assumed $ 3,410 --------
See accompanying notes to consolidated financial statements. 6 7 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 April 2, 1999 and July 3, 1998 are summarized as follows:
April 2, 1999 July 3, 1998 ------------- ------------ Raw materials $ 28,465 $ 24,427 Work-in-process 5,024 5,136 Finished goods 47,613 28,366 -------- -------- $ 81,102 $ 57,929 -------- --------
7 8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3 - LONG-TERM DEBT Long-term debt as of April 2, 1999 and July 3, 1998 consists of the following:
April 2, 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 26,000 -- Term notes 111,850 114,213 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 -- 211 7% Subordinated Notes issued in connection with an acquisition by PureTec, due July 1, 2005 -- 662 Foreign Term Loans payable in Belgium Francs 947 1,265 Foreign Term Loans payable in Italian Lira 1,635 2,032 Foreign Term Loans and capitalized lease obligations, payable in British Pounds 5,635 6,055 Foreign Line of Credit payable in British Pounds 285 492 PurePlast Line of Credit payable in Canadian Dollars 361 307 PurePlast Term Loan payable in Canadian Dollars 30 67 Tri-Seal 6.9% Loan due Jan.1, 2002 24 -- Other, primarily equipment financing 16 51 -------- -------- 421,783 401,905 Less: Current maturities 4,837 5,454 -------- -------- $416,946 $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. On February 1, 1999, a Loan Promissory Note, collateralized by a building in Newark, NJ, matured and was redeemed. 8 9 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 $2,009 (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 $857 (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. 9 10 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 nine month periods ended April 2, 1999 is as follows:
Net Sales: Three months Nine months ------------ ----------- Healthcare Packaging, Products, and Materials: Domestic $ 33,272 $ 89,280 Foreign 2,811 7,735 Consumer Packaging and Products: Domestic 42,071 83,837 Foreign 9,353 24,428 Food packaging 26,784 74,938 Specialty Resins and Compounds 15,463 51,609 Corporate & eliminations -- -- --------- --------- Total Net Sales $ 129,754 $ 331,827 --------- --------- Operating Income: Healthcare Packaging, Products, and Materials: Domestic $ 7,177 $ 17,171 Foreign 409 796 Consumer Packaging and Products: Domestic 8,003 12,723 Foreign 2,492 6,227 Food packaging 7,295 14,235 Specialty Resins and Compounds 1,376 5,653 Corporate & eliminations (5,479) (12,081) --------- --------- Total Operating Income $ 21,273 $ 44,724 --------- ---------
10 11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)
> Three Months Nine Months Depreciation and Amortization: Healthcare Packaging, Products, and Materials: Domestic $ 2,097 $ 5,093 Foreign 101 305 Consumer Packaging and Products: Domestic 2,677 8,271 Foreign 337 1,215 Food packaging 2,313 5,960 Specialty Resins and Compounds 1,337 3,933 Corporate & eliminations 43 189 -------- ------- Total Depreciation and Amortization $ 8,905 $24,966 -------- ------- Capital Expenditures: Healthcare Packaging, Products, and Materials: Domestic $ 1,752 $ 2,789 Foreign 394 458 Consumer Packaging and Products: Domestic 766 1,718 Foreign 729 1,188 Food packaging 925 2,980 Specialty Resins and Compounds 293 675 Corporate & eliminations 94 168 -------- ------- Total Capital Expenditures $ 4,953 $ 9,976 -------- ------- Identifiable Assets: Healthcare Packaging, Products, and Materials: Domestic $ 80,519 Foreign 12,857 Consumer Packaging and Products: Domestic 182,868 Foreign 46,576 Food packaging 127,164 Specialty Resins and Compounds 85,667 Corporate & eliminations 9,638 -------- Total Identifiable Assets $545,289 --------
11 12 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 April 2, 1999
Non- Total Issuer Guarantors Guarantors --------- -------- ---------- ---------- Net sales $ 129,754 $ 38,873 $78,717 $ 12,164 Cost of goods sold 92,074 28,020 55,888 8,166 --------- -------- ------- -------- Gross profit 37,680 10,853 22,829 3,998 Operating expenses Selling, General and administrative 16,407 7,500 7,810 1,097 --------- -------- ------- -------- Operating profit 21,273 3,353 15,019 2,901 Other income (expenses) (164) (249) 449 (364) Interest expense (9,860) (10,468) 670 (62) --------- -------- ------- -------- Earnings before income taxes 11,249 (7,364) 16,138 2,475 Provision for income taxes 5,400 (3,100) 7,300 1,200 --------- -------- ------- -------- Net income $ 5,849 $ (4,264) $ 8,838 $ 1,275 ========= ======== ======= ========
12 13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) For the nine months ended April 2, 1999
Non- Total Issuer Guarantors Guarantors --------- -------- ---------- ---------- Net sales $ 331,827 $ 110,269 $189,395 $ 32,163 Cost of goods sold 242,178 80,462 139,755 21,961 --------- --------- -------- -------- Gross profit 89,649 29,807 49,640 10,202 Operating expenses Selling, General and administrative 44,925 22,475 19,271 3,179 --------- --------- -------- -------- Operating profit 44,724 7,332 30,369 7,023 Other income (expenses) (661) (344) 855 (1,172) Interest expense (28,866) (29,225) 542 (183) --------- --------- -------- -------- Earnings before income taxes 15,197 (22,237) 31,766 5,668 Provision for income taxes 7,300 (10,700) 15,300 2,700 --------- --------- -------- -------- Net income $ 7,897 $ (11,537) $ 16,466 $ 2,968 ========= ========= ======== ========
13 14 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet (Unaudited) April 2, 1999
Non- Total Eliminations Issuer Guarantors Guarantors --------- ------------ -------- ---------- ---------- Current assets $ 189,074 $ -- $ 40,967 $ 118,356 $ 29,751 Property, plant and equipment, net 127,451 -- 39,720 71,955 15,776 Intangible assets 199,096 -- 44,656 153,012 1,428 Investment in subsidiaries -- (351,198) 351,198 -- -- Deferred charges 20,333 -- 20,031 -- 302 Other assets 9,335 (102,059) 109,598 (10,380) 12,176 --------- --------- -------- --------- -------- Total assets $ 545,289 $(453,257) $606,170 $ 332,943 $ 59,433 ========= ========= ======== ========= ======== Current liabilities $ 74,278 $ -- $ 24,209 $ 37,303 $ 12,766 Long-tern debt 416,946 -- 409,700 17 7,229 Other long-term liabilities 7,928 (102,059) 120,439 (30,689) 20,237 --------- --------- -------- --------- -------- Total liabilities 499,152 (102,059) 554,348 6,631 40,232 --------- --------- -------- --------- -------- Additional paid-in capital 41,075 (312,408) 41,076 296,766 15,641 Retained earnings 5,490 (38,790) 10,746 29,546 3,988 Cumulative currency translation adjustment (428) -- -- -- (428) --------- --------- -------- --------- -------- Total equity 46,137 (351,198) 51,822 326,312 19,201 --------- --------- -------- --------- -------- Total liabilities and equity $ 545,289 $(453,257) $606,170 $ 332,943 $ 59,433 ========= ========= ======== ========= ========
14 15 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - On March 3, 1998, Tekni-Plex acquired PureTec Corporation, whose sales at the time were about twice those of Tekni-Plex. As a result, the third quarter of fiscal 1998 includes approximately one month's results for the combined operations, versus a full quarter's combined results in fiscal 1999. In addition, significant sales in the Consumer Packaging and Products segment are attributable to the garden hose product line that was acquired with PureTec. The garden hose business is highly seasonal with approximately 75% of sales occurring in the spring and early summer months. This seasonality has an impact on the Company's financial results from quarter to quarter. These two factors account for most of the year-over-year differences in the comparisons that follow. THIRD QUARTER OF FISCAL 1999 COMPARED WITH THE THIRD QUARTER OF FISCAL 1998 Net Sales increased to $129.8 million for the three months ended April 2, 1999 from $68.4 million for the three months ended March 27, 1998. This represents an increase of $61.4 million or 89.7%. The increased sales are primarily attributed to the acquisition of PureTec. Cost of Goods Sold increased to $92.1 million for the three months ended April 2, 1999 from $51.2 million for the three months ended March 27, 1998, primarily due to the acquisition of PureTec. Expressed as a percentage of net sales, cost of goods sold decreased to 71.0% for the three months ended April 2, 1999 from 74.9% for the three months ended March 27, 1998. The decrease in cost of goods sold as a percentage of net sales was due primarily to the Company's progress in reorganizing and improving its acquired operations. Gross Profit, as a result, increased to $37.7 million or 29.0% of net sales for the three months ended April 2, 1999, from $17.2 million or 25.1% of net sales for the three months ended March 27, 1998. Selling, general and administrative expenses increased to $16.4 million or 12.6% of net sales for the three months ended April 2, 1999 from $9.7 million or 14.2% of net sales for the three months ended March 27, 1998. Selling, general and administrative expenses increased primarily as a result of the acquisition of PureTec. However, these expenses decreased as a percentage of net sales due primarily to the reorganization of acquired operations, partially offset by higher amortization of goodwill resulting from the acquisition of PureTec. Operating profit, as a result, increased to $21.3 million or 16.4% of net sales for the three months ended April 2, 1999, from $7.4 million or 10.9% for the three months ended March 27, 1998. Interest expense increased to $9.9 million or 7.6% of net sales for the three months ended April 2, 1999, from $4.5 million or 6.6% 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 increased to $5.4 million or 4.2% of net sales for the three months ended April 2, 1999, from $1.4 million or 2.0% for the same period in the prior year. The Company's effective tax rate was 48.0% for the three months ended April 2, 1999 compared to 52.5% for the same period in the prior year. The decrease in effective tax rate is due primarily to the impact of non-deductible goodwill in the prior year. Net income increased to $5.8 million or 4.5% of net sales for the three months ended April 2, 1999, from $1.3 million or 1.8% of net sales for the same period in the prior year, due primarily to the impact of acquiring PureTec. 15 16 FIRST NINE MONTHS OF FISCAL 1999 COMPARED WITH THE FIRST NINE MONTHS OF FISCAL 1998 Net Sales increased to $331.8 million for the nine months ended April 2, 1999 from $144.0 million for the nine months ended March 27, 1998. This represents an increase of $187.8 million or 130.4%. The increased sales are primarily attributed to the acquisition of PureTec. Cost of Goods Sold increased to $242.2 million for the nine months ended April 2, 1999 from $106.5 million for the nine months ended March 27, 1998, primarily due to the acquisition of PureTec. Expressed as a percentage of net sales, cost of goods sold decreased to 73.0% for the nine months ended April 2, 1999 from 73.9% for the nine months ended March 27, 1998. The decrease in cost of goods sold as a percentage of net sales was due primarily to the Company's progress in reorganizing and improving its acquired operations, partially offset by the different sales mix associated with the purchase of PureTec. Gross Profit, as a result, increased to $89.6 million or 27.0% of net sales for the nine months ended April 2, 1999, from $37.6 million or 26.1% of net sales for the nine months ended March 27, 1998. Selling, general and administrative expenses increased to $44.9 million or 13.5% of net sales for the nine months ended April 2, 1999 from $18.0 million or 12.5% of net sales for the nine months ended March 27, 1998. 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, as a result, increased to $44.7 million or 13.5% of net sales for the nine months ended April 2, 1999, from $19.6 million or 13.6% for the nine months ended March 27, 1998. Interest expense increased to $28.9 million or 8.7% of net sales for the nine months ended April 2, 1999, from $8.9 million or 6.2% 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 increased to $7.3 million or 2.2% of net sales for the nine months ended April 2, 1999, from $4.3 million or 3.0% for the same period in the prior year. The Company's effective tax rate was 48.0% for the nine months ended April 2, 1999 compared to 41.7% 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 increased to $7.9 million or 2.4% of net sales for the nine months ended April 2, 1999, from $6.0 million or 4.2% of net sales for the same period in the prior year, due primarily to the impact of acquiring PureTec. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended April 2, 1999, net cash used in operating activities was $11.1 million. This compares to $18.0 million provided by operating activities during the same period in the prior year. This year-over-year difference is caused primarily by factors related to the acquisition of PureTec. The largest such factor is the increase in inventories, a significant portion of which corresponds to the needs of the seasonal garden hose business. This business requires a build up of inventory during the winter months in order to meet customer demand in the spring and summer. Other factors include a reduction of trade account payables, non-recurring acquisition restructuring charges, and a change in the timing of interest payments on bonds from the prior year, which caused a significant difference in accrued interest. These uses of cash were partially offset by increased depreciation and amortization of goodwill. 16 17 Working capital at April 2, 1999 was $114.8 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. During the fiscal third quarter of 1999, the Company borrowed $26 million under the $90 million revolving credit line of the Existing Credit Facility. The proceeds were used primarily to fund the purchase of assets from Tri-Seal International, Inc., and for the seasonal inventory requirements mentioned above. At July 3, 1998, there was no outstanding balance under this revolving credit line. The Company's capital expenditures for the nine months ended April 2, 1999 and March 27, 1998 were $10.0 million, and $3.2 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. On February 1, 1999, a $141 thousand Loan Promissory Note, collateralized by a building in Newark, NJ, matured and was redeemed. SUBSEQUENT EVENTS On April 23, 1998, a wholly-owned subsidiary of Tekni-Plex acquired substantially all of the assets of High Voltage Engineering Corporation's Natvar division for approximately $26 million in cash. The Natvar operations are engaged in the production of medical tubing and will be merged with Tekni-Plex's Healthcare Packaging, Products, and Materials segment. 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 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. 17 18 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. Support Systems: The Company's assessment does indicate that there may be support systems, primarily the accounting systems, that will 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 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 $100,000 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 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 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 Not Applicable 18 19 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 - Financial Data Schedule (b) Reports on Form 8-K None 19 20 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. May 12, 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 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEKNI-PLEX, INC. STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED APRIL 2, 1999 AND BALANCE SHEET AS AT APRIL 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUL-02-1999 JUL-04-1998 APR-02-1999 12,225 0 84,855 2,117 81,102 189,074 157,186 29,735 545,289 74,278 275,000 0 0 0 0 545,289 331,827 331,827 242,178 242,178 44,925 0 28,866 15,197 7,300 7,897 0 0 0 7,897 0 0
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