Filed Pursuant to Rule 424(b)(3)
Registration No. 333-50649
PROSPECTUS
TEKNI-PLEX, INC.
OFFER TO EXCHANGE ITS
SERIES B 9(1)/(4)% SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OF ITS OUTSTANDING
9(1)/(4)% SENIOR SUBORDINATED NOTES DUE 2008
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
JUNE 1, 1998, UNLESS EXTENDED
Tekni-Plex, Inc., a Delaware corporation ("Tekni-Plex" or the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
$1,000 principal amount of its Series B 9(1)/(4)% Senior Subordinated Notes
due 2008 (the "Exchange Notes") which will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 9(1)/(4)% Senior Subordinated Notes due
2008 (the "Old Notes") which were offered (the "Offering") by Tekni-Plex, of
which $200,000,000 aggregate principal amount is outstanding. The form and
terms of the Exchange Notes are substantially identical to the form and terms
of the Old Notes except that the Exchange Notes will bear a Series B
designation and will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions relating to an increase in the interest rate which
were included in the terms of the Old Notes in certain circumstances relating
to the timing of the Exchange Offer. The Exchange Notes will evidence the
same debt as the Old Notes (which they replace) and will be issued under and
be entitled to the benefits of the Indenture dated as of March 1, 1998 (the
"Indenture") among Tekni-Plex, the Guarantors, and Marine Midland Bank, as
trustee (the "Trustee"), governing the Old Notes. The Exchange Notes will be
fully and unconditionally guaranteed (the "Exchange Guarantee") by the
Guarantors in and on substantially identical form and terms as the guarantee
by the Guarantors of the Old Notes (the "Old Guarantee"). See "The Exchange
Offer" and "Description of Exchange Notes."
As of March 27, 1998, the Company's total debt was $400.9 million (including
the Old Notes) and, in addition, the Company could have borrowed up to $90
million of secured senior indebtedness under the New Credit Facility (as
defined) without requiring the consent of the holder of Exchange Notes. Other
than the foregoing, the Company does not intend or plan to incur any
significant indebtedness in the near future.
Tekni-Plex will accept for exchange any and all Old Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on June 1, 1998,
unless extended by Tekni-Plex in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, Tekni-Plex will not extend the Expiration Date
beyond June 19, 1998 (which, if extended to such date, would represent a
maximum Exchange Offer period of 50 days). Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date. The Old
Notes may be tendered only in integral multiples of $1,000 principal amount.
The Exchange Offer is subject to certain customary conditions. See "The
Exchange Offer."
The Old Notes were sold on March 3, 1998 (the "Issue Date") to the Initial
Purchaser (as defined) in a transaction not registered under the Securities
Act in reliance upon an exemption under the Securities Act. The Initial
Purchaser subsequently placed the Old Notes with qualified institutional
buyers in reliance upon Rule 144A under the Securities Act and outside the
United States in reliance on Regulation S under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereunder
in order to satisfy certain obligations of Tekni-Plex under the Registration
Rights Agreement (as defined) entered into in connection with the offering of
the Old Notes. See "The Exchange Offer."
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration statement or qualification under the
securities laws of any such state.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, Tekni-Plex
believes the Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than any such holder that is an "affiliate" of Tekni-Plex within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of
such holder's business and such holder has no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes.
See "The Exchange Offer--Purpose and Effect of the Exchange Offer" and "The
Exchange Offer--Resale of the Exchange Notes." Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering
a prospectus, a Participating Broker-Dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. Tekni-Plex has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any
such resale. See "Plan of Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. Tekni-Plex
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DESCRIPTION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN
EVALUATING AN INVESTMENT IN THE EXCHANGE NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
EXCHANGE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN EXCHANGE OFFER TO, AND THE
COMPANY WILL NOT ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN
ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY EXCHANGE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT INFORMATION SET FORTH
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
Page
Prospectus Summary...........................................................5
Risk Factors................................................................22
Capitalization..............................................................29
Pro Forma Unaudited Condensed Financial Information.........................30
Tekni-Plex Selected Historical Financial Information........................35
Tekni-Plex Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................37
Business....................................................................43
Management..................................................................61
Security Ownership..........................................................63
Certain Transactions........................................................64
Description of Certain Indebtedness.........................................65
The Exchange Offer..........................................................67
Description of Exchange Notes...............................................76
Certain United States Federal Income Tax Considerations....................101
Plan of Distribution.......................................................103
Legal Matters..............................................................103
Experts....................................................................103
Available Information......................................................104
Index to Financial Statements..............................................F-1
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There has not previously been any public market for the Old Notes or the
Exchange Notes. Tekni-Plex does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Lack of Public Market for the
Notes." Moreover, to the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected.
Initially, the Exchange Notes will be available only in book-entry form.
Tekni-Plex expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global Note (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the
"Depositary" or "DTC") and registered in its name or in the name of Cede &
Co., its nominee. Beneficial interests in the Global Note representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by DTC and
its participants. After the initial issuance of the Global Note, Exchange
Notes in certified form will be issued in exchange for the Global Note only on
the terms set forth in the Indenture. See "Description of Exchange Notes--Book
Entry; Delivery and Form."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, AS
AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THIS OFFERING MEMORANDUM, INCLUDING, WITHOUT
LIMITATION, CERTAIN STATEMENTS UNDER THE "PROSPECTUS SUMMARY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "INDUSTRY," AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN
REGARDING THE COMPANY'S FINANCIAL POSITION AND BUSINESS STRATEGY, MAY
CONSTITUTE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO
HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATION ("CAUTIONARY STATEMENTS")
ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto,
appearing elsewhere in this Offering Memorandum. Unless the context
otherwise requires, references in this Offering Memorandum to "Tekni-Plex"
refer to Tekni-Plex, Inc., and references to the "Company" refer to Tekni-
Plex, Inc. and its consolidated subsidiaries. Unless the context otherwise
requires, references in this Offering Memorandum to "PureTec" refer to
PureTec Corporation and its consolidated subsidiaries. All references in
this Offering Memorandum to the "fiscal year" of the Company refer to the
Company's fiscal year which ends on the Friday closest to June 30 of that
calendar year. For example, fiscal year 1997 refers to the year ended June
27, 1997. All references in this Offering Memorandum to the fiscal year of
PureTec refer to PureTec's fiscal year ended July 31. The Company's
unaudited pro forma financial information for the fiscal year ended June
27, 1997 and the six months ended December 26, 1997 presented herein
reflects PureTec's historical results for fiscal year ended July 31, 1997
and the six months ended January 31, 1998. Substantially all of the
information with respect to PureTec included herein (except for certain
market share data and financial information for the six months ended
January 31, 1998 which have been supplied by PureTec's management) has been
taken from PureTec's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, as amended. Unless otherwise noted, all references in this
Offering Memorandum to market share refer to market share within the United
States.
The Company
Overview
The Company designs, manufactures and markets packaging materials primarily
for the pharmaceutical and food industries. The Flexible Packaging Group sells
primarily flexible packaging materials to customers including pharmaceutical
companies. The Company is the market leader for clear, high-barrier
laminations for pharmaceutical blister packaging. The Company believes, based
upon its knowledge and experience in the industry, that it has a greater than
90% share of the market for such products. These packaging materials are used
for fast- acting pharmaceuticals that are generally highly reactive to
moisture. The Foam Products Group sells primarily foamed polystyrene packaging
products such as egg cartons and processor trays to the poultry and meat
industries. The Company believes, based upon its knowledge and experience in
the industry, that it produces in excess of 80% of all foam egg cartons and
has approximately 40% of the egg carton market. The Company has also built a
strong presence in the processor tray market, where it believes, based upon
its knowledge and experience in the industry, that it has an estimated share
of greater than 25%.
On March 3, 1998, the Company completed the merger of P.T. Holding, Inc.
("Merger Sub"), a wholly-owned subsidiary of Tekni-Plex, with and into PureTec
pursuant to the Agreement and Plan of Merger (the "Merger Agreement") dated as
of November 11, 1997 among Tekni-Plex, PureTec, Merger Sub, and Plastic
Specialties and Technologies, Inc. Tekni-Plex purchased all of the
outstanding shares of PureTec for $109.5 million in the aggregate. The total
consideration paid by the Company for the PureTec Acquisition was
approximately $296.5 million, which includes the repayment of debt and the
elimination of minority interests at certain subsidiaries of PureTec, and
excludes fees and expenses.
PureTec is the leading domestic producer of garden hose, medical-grade vinyl
compounds and precision tubing and gaskets and the second leading domestic
producer of disposable medical tubing. PureTec also produces plastic materials
that are used in various specialty applications and is the leading non-captive
supplier of recycled polyethylene terephthalate ("PET") suitable for reuse in
new bottles, as well as plastic sheet and other specialized applications.
Following completion of the PureTec Acquisition, the Company's pro forma
revenues and pro forma EBITDA (as defined below) for the fiscal year ended
June 27, 1997 would have been $460.1 million and $69.8 million, respectively,
for the six months ended December 26, 1997 would have been $214.3 million and
$32.9 million, respectively. See "Pro Forma Unaudited Condensed Financial
Information."
The management of the Company focuses on organizational development, imparting
a results-oriented culture to all areas of its businesses. Management seeks
and implements product and process improvements to produce higher quality
products, improve efficiencies, reduce labor and material costs, and create
differentiated products and product line extensions. The Company also expands
its product offerings by acquiring synergistic companies and significantly
reduces costs through product line rationalization and realizing economies of
scale. Management believes that this focus will continue with respect to the
Company's on-going business and will be the basis for successfully integrating
the PureTec Acquisition.
The Company believes that the PureTec Acquisition will have many significant
strategic benefits, including:
o Strong market shares in core businesses. PureTec has leading market
positions in most of its core product lines, a characteristic shared by the
Company. Management believes that Tekni-Plex's strong market presence in
its core businesses has been a key element in achieving consistent earnings
growth since acquiring the Company in 1994, and that the combined entity's
strong market presence in its core businesses will provide the merged group
with even greater consistency of earnings and cash flow.
o Diverse product mix and expanded geographic presence. The combined group
will offer a more diverse range of products over a wider geographic area
and provide a broader base for manufacturing and distribution. The Company
currently has sales offices in London and Manila, as well as sales
representatives in Europe, China (including Hong Kong) and Mexico. The
Company also has distribution networks and manufacturing liaisons in Europe
and Southeast Asia (including Australia). PureTec currently has
manufacturing and sales offices in Europe and Canada. The Company believes
that the combination of its operations with PureTec will provide a
foundation for further international expansion.
o Technically sophisticated products; technology sharing. Both the Company
and PureTec generally compete in the most technically sophisticated end of
each of their markets, such as primary pharmaceutical packaging, medical
tubing and medical plastics which are subject to strict Federal Food and
Drug Administration ("FDA") regulatory requirements. The manufacturing
operations of each entity employ similar core technical competencies, as
both involve plastic extrusion and compounding. The Company believes that
the PureTec Acquisition provides an opportunity to enhance both companies'
operations by combining and sharing the two companies' common and
complementary technologies.
o Cost savings and synergies. The Company expects to realize significant
cost savings and synergy benefits from (i) improved manufacturing and
production efficiencies, (ii) economies of scale and raw material purchasing
efficiencies and (iii) the elimination of certain duplicate overhead and
operating expenses.
o Significantly increased size. The PureTec Acquisition provides the Company
with "critical mass" creating a stronger business than either of the
companies operating on a stand-alone basis. The Company believes that its
significantly increased size will enhance its ability to access the capital
markets.
Overview of Tekni-Plex
In March 1994, the Company was acquired by its current controlling shareholder
and Dr. F. Patrick Smith who was elected Chief Executive Officer. Kenneth W.R.
Baker, the Company's Chief Operating Officer, was appointed in April 1994. At
the time of the acquisition, the Company had two operating facilities located
in Somerville, New Jersey ("Somerville"), and Brooklyn, New York ("Brooklyn"),
and its principal product lines were clear, high-barrier laminations and
closure liners sold primarily to the pharmaceutical industry, and foam
processor trays used predominantly for poultry packaging. In December 1995,
the Company acquired the Flemington, New Jersey, operation ("Flemington") of
Hargro Flexible Packaging Corporation ("Hargro"), thereby expanding the
Company's flexible packaging product line. In February 1996, the Company
acquired Dolco Packaging Corp ("Dolco"), the nation's leading supplier of foam
egg cartons (the "Dolco Acquisition"). In July 1997, the Company acquired
PurePlast Inc., a Canadian producer of calendered polyvinyl chloride (PVC)
sheet for pharmaceutical, food and electronic packaging applications. On March
3, 1998 the Company acquired PureTec, a manufacturer of specialty plastic
products and materials. See "-- Overview of PureTec" and "Description of the
Transactions."
Since its acquisition by the current owners, the Company has achieved
significant improvements in profitability. For the trailing twelve months
ended December 26, 1997 (without giving effect to the PureTec Acquisition),
the Company had revenues of $148.8 million, income before extraordinary item
of $9.1 million and EBITDA of $32.3 million for an EBITDA margin of 21.7%,
compared with revenues of $44.9 million, net income of $2.8 million and EBITDA
of $3.8 million for an EBITDA margin of 8.5% for the year ended December 31,
1993. "EBITDA" is defined as net income before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and may be defined differently for different companies. "EBITDA margin" is
calculated as the ratio of EBITDA to net sales for the period.
Overview of PureTec
PureTec is a vertically integrated manufacturer of specialty plastic products
and has leading market positions in most of its core product lines. With more
than 40% of the market in the United States, PureTec, through its Colorite
Plastics division, is the leading producer of garden hose. Through its Action
Technology division, PureTec is the leading producer of precision tubing and
gaskets for packaging applications, with over 90% of the domestic, non-captive
markets for such products. PureTec's specialty tubing and gasket product line
consists of (i) extruded plastic tubing, sold primarily to manufacturers of
aerosol valves, dispenser pumps, and writing instruments; (ii) rubber and
thermoplastic gaskets for the aerosol and dispenser pump markets; and (iii)
consumer products, chiefly consisting of swimming pool and other corrugated
hose. Action's products are manufactured in the United States and Europe and
are sold throughout the world.
PureTec's Plastron division is the second largest non-captive manufacturer of
medical tubing with approximately 60% of the market for cardiovascular tubing
and 50% of the intravenous tubing market. The Colorite Polymers division is
the largest producer of medical-grade vinyl compounds for FDA-regulated
applications, with approximately 50% of the domestic, non-captive market.
These compounds are sold to leading manufacturers of medical devices and
equipment. They are also sold to producers of tubing and closures for the food
and beverage industry and used in a variety of food-contact applications.
PureTec's specialty vinyl polymers business consists of two divisions of the
Colorite Polymers group: Burlington Resins, Inc., doing business as Colorite
Specialty Vinyl Resins ("SVR"); and Cybertech Polymers. SVR employs
specialized technology to produce dispersion, blending, and copolymer
suspension resins for a variety of industries, including floor covering,
automotive sealants and adhesives, coil coatings, plastisol compounding and
PVC packaging. Cybertech Polymers produces a variety of specialized and
general purpose vinyl compounds.
PureTec is also a leading plastics recycler. PureTec believes that its Pure
Tech Plastics division is the leading non-captive supplier of high-quality
recycled PET suitable for reuse in new bottles, as well as plastic sheet
and other specialized applications. The division has developed proprietary
processes for cleaning, sorting, and recycling post-consumer plastic
bottles into clean PET flakes or pellets. Raw materials used by the Pure
Tech Plastics division consist mostly of post-consumer soft drink bottles,
purchased from various suppliers who obtain bottles in states with "deposit
laws," or who conduct curb-side pickup operations.
For the six months ended January 31, 1998, PureTec had net sales of $138.7
million, a net loss from continuing operations of $3.4 million and EBITDA
(defined as net income before minority interest, equity in loss of affiliates,
income taxes, interest, depreciation and amortization and write offs of
goodwill, intangibles and obsolete equipment) of $15.6 million for an EBITDA
margin of 11.2%, compared with net sales of $123.4 million, a net loss from
continuing operations of $4.8 million and EBITDA of $14.5 million for an
EBITDA margin of 11.8% for the six months ended January 31, 1997. For the
fiscal year ended July 31, 1997, PureTec had net sales of $315.3 million, net
income from continuing operations of $1.3 million and EBITDA of $39.6 million
for an EBITDA margin of 12.6%, compared with net sales of $326.3 million, a
net loss from continuing operations of $4.4 million and EBITDA of $37.2
million for an EBITDA margin of 11.4% for the year ended July 31, 1996.
Competitive Strengths
The Company believes that its competitive strengths include:
o Producer of high quality, technically sophisticated products. The
Company believes, based upon its knowledge and experience in the
industry, that it has a long-standing reputation as a manufacturer of
high-quality, high performance primary packaging products (where the
packaging material comes into direct contact with the end- product).
The Company's emphasis on quality is evidenced by its product lines
which address the high-end of their respective markets. The Company
competes in technically sophisticated areas such as the high-barrier
pharmaceutical blister packaging market. Over the years, PureTec's
operating companies have developed a reputation for high-quality
products in their niche markets. PureTec's product lines include
technically sophisticated products such as medical and specialty tubing
manufactured to precise customer specifications as well as highly
specialized medical-grade vinyl compounds.
o Cost efficient producer. The Company continually focuses on improving
underlying operations and reducing costs. Since the 1994 acquisition,
current management has improved the Company's cost structure from an EBITDA
margin of 8.5% and income before income taxes as a percent of sales of 6.8%
on sales of $44.9 million for the twelve months ended December 31, 1993 to
an EBITDA margin of 21.7% and income before income taxes and extraordinary
item as a percent of sales of 9.7% on sales of $148.8 million for the
trailing twelve months ended December 26, 1997. The Company believes that
the PureTec Acquisition provides significant opportunities to realize cost
savings and synergies in the combined businesses through the sharing of
complementary technologies and manufacturing techniques, as well as
economies of scale including the purchase of raw materials. In addition,
the Company believes that cost savings can be achieved through the
elimination of certain duplicate overhead and operating expenses.
o Experienced management team. The Company's management team has been
successful in selecting and integrating strategic acquisitions as well as
improving underlying business fundamentals. After significantly improving
the business of Tekni-Plex following the 1994 acquisition of the Company by
the current owners, management successfully integrated both the Flemington
and Dolco operations during 1996, the latter being a public company then
nearly twice the Company's size. During the same period, the Brooklyn and
Flemington operations were merged, substantially improving production
efficiencies and reducing waste. In July 1997, the Company acquired
PurePlast Inc. of Ontario, Canada whose operations have already been
successfully integrated with those of the Company. Members of the
management team have integrated acquisitions, effected turnarounds,
provided strategic direction and leadership, increased sales and market
share, improved manufacturing efficiencies and productivity, and developed
new technologies to enhance the competitive strengths of the companies they
have managed. The Company believes that its track record of integrating
acquisitions will serve as the basis for the successful integration of
PureTec. In addition, PureTec has managers in each of its business units
with extensive experience and expertise as well as thorough technical and
operating skills.
o Strong market share in core businesses. The Company has a strong market
presence in its core product lines. The Company believes that it
produces in excess of 80% of all foam egg cartons and has approximately
40% of the overall egg carton market which is split approximately
equally between foam and pulp-based products. The Company believes that
it has greater than a 90% share of the market for clear, high-barrier
laminations for pharmaceutical blister packaging. The Company has also
built a strong presence in the processor tray market where it believes
that it has greater than a 25% share. PureTec has leading market
positions in most of its core product lines. PureTec believes that it
is the leading producer of garden hose in the United States with over
40% of the market and that it is the second largest non-captive
manufacturer of medical tubing with approximately 60% of the market for
cardiovascular tubing and 50% of the intravenous tubing market. PureTec
is also the leading producer of precision tubing and gaskets for
packaging applications, with over 90% of the domestic, non-captive
markets for such products. PureTec's management believes that it is the
world's largest producer of high-quality vinyl compounds for the medical
industry with approximately 50% of the domestic, non-captive market. In
addition, PureTec is the leading non-captive supplier of recycled PET
suitable for reuse in new bottles, as well as plastic sheet and other
specialized applications.
o Strong customer relationships. Both the Company and PureTec have
long-standing relationships with many of their customers. The Company
estimates the average tenure among the Company's ten largest customers at
more than 14 years. The Company attributes its long relationships with its
customers to the ability to consistently manufacture high quality products
and to consistently provide a superior level of customer service. The
Company routinely wins recognition for its superior products and customer
service including a recent Outstanding Supplier Award from Pharmacia &
Upjohn, and an Outstanding Quality Award from Abbott Laboratories. PureTec
estimates the average tenure among PureTec's ten largest customers at more
than 14 years. PureTec has a significant base of large, stable customers
who purchase PureTec's products on a repeat basis. PureTec attributes its
long relationships with customers to its ability to produce consistent,
high-quality products with on-time delivery.
Business Strategy
The Company seeks to maximize its growth and profitability and take advantage
of its competitive strengths by pursuing the following business strategy:
o Ongoing cost reduction through technical process improvement. The Company
has an ongoing program to improve manufacturing and other processes in
order to drive down costs. Examples of cost improvement programs include:
(i) material and energy conservation through enhanced process controls;
(ii) reduction in machine set-up time through the use of proprietary
technology; (iii) continual product line rationalization; and (iv)
development of backward integration opportunities. The Company believes
that the PureTec Acquisition will give rise to significant cost savings
from improved manufacturing efficiencies, economies of scale and reduced
operating and overhead expenses.
o Internal growth through product line extension and improvement. The
Company continually seeks to improve and extend its product lines and
leverage its existing technological capabilities in order to increase
market share and improve profitability. The Company believes that it has a
significant opportunity to increase sales of its foamed polystyrene
packaging products by focusing on incremental improvements to these
products. The Company's strategy is to emphasize its expertise in providing
primary packaging materials with specific high performance characteristics
through the use of various plastic materials (and combinations thereof) and
proprietary manufacturing process techniques. PureTec has also developed a
successful track record of new and improved products. PureTec's garden hose
business has introduced patented Colorite(R) Evenflow(R) design and drinking
water safe product lines. PureTec's medical tubing business has introduced
microbore tubing, silicone substitute formulations, and trilayer tubing
substitutes. In PureTec's medical-grade vinyl compounds business, PureTec's
chemists work closely with customers to develop compounds that address
their specific requirements. Through this custom work, PureTec has
introduced a number of breakthroughs to the medical device industry by
developing formulations with unique physical characteristics. For example,
PureTec has recently developed a new family of flexible vinyl compounds
designed to replace silicone rubber in a variety of medical and commercial
applications. The Company believes that the PureTec Acquisition may
accelerate new product introduction through the sharing of technological
and manufacturing expertise and the joint development of new products.
o Growth through international expansion. The Company believes that there is
significant opportunity to expand international sales. The Company
currently has sales offices in London and Manila as well as sales
representatives in Europe, China (including Hong Kong) and Mexico. The
Company also has distribution networks and manufacturing liaisons in Europe
and Southeast Asia (including Australia). PureTec's international operations
give the Company a manufacturing and direct sales force presence in Europe
and also strengthen the Company's existing presence in Canada. The Company
expects that the combination of its operations with PureTec will provide a
foundation for the further expansion of both companies' products in other
overseas markets.
o Growth through acquisitions. The PureTec Acquisition is consistent with
the Company's objective of pursuing acquisitions which provide the Company
with the opportunity to gain economies of scale and reduce costs through,
among other things, technology sharing and synergistic cost reduction. The
Company will continue to selectively pursue acquisitions when the
opportunity arises.
The PureTec Acquisition
On March 3, 1998 the Company acquired all of the outstanding shares of PureTec
Common Stock. Pursuant to the Merger Agreement, P.T. Holding, a wholly-owned
subsidiary of Tekni-Plex, merged into PureTec with PureTec continuing as the
surviving corporation and becoming a wholly-owned subsidiary of Tekni-Plex.
Under the terms of the Merger, each stockholder of PureTec received $3.50 per
share in cash ($109.5 million in the aggregate).
Pursuant to the Merger Agreement, PureTec caused Plastic Specialties and
Technologies ("PS&T"), a 96%-owned subsidiary of PureTec, to commence a
combined consent solicitation and offer to purchase (the "Debt Tender Offer")
all of its 11.25% Senior Secured Notes due 2003 (the "PS&T Notes"). In
addition, simultaneously with the Merger, PureTec repayed and caused each of
its subsidiaries to repay substantially all of its and their outstanding
domestic debt (the "Debt Retirement"). PS&T also eliminated its 4% minority
shareholders' interest prior to the Merger (the "PS&T Minority Buyout" and
together with the Debt Tender Offer and the Debt Retirement, the "Related
Transactions"). The Merger and the Related Transactions are referred to
herein, collectively, as the "Transactions". See "Description of the
Transactions."
The Exchange Offer
All capitalized terms used without definition within this section shall have
the respective meanings set forth under "Description of Exchange Notes" below.
Old Notes........................... The Old Notes were sold on March 3,
1998 to J.P. Morgan Securities Inc.
(the "Initial Purchaser") pursuant to a
Purchase Agreement dated February 25,
1998 (the "Purchase Agreement") between
the Company and the Initial Purchaser.
The Initial Purchaser subsequently
resold the Old Notes to qualified
institutional buyers pursuant to Rule
144A under the Securities Act and
outside the United States in reliance
on Regulation S under the Securities
Act.
Registration Rights Agreement....... Pursuant to the Purchase Agreement, the
Company and the Initial Purchaser
entered into a Registration Rights
Agreement dated as of March 3, 1998
(the "Registration Rights Agreement"),
which grants to the holders of the Old
Notes certain exchange and registration
rights. The Exchange Offer is intended
to satisfy certain of such exchange
rights which will terminate upon the
consummation of the Exchange Offer.
The Exchange Offer.................. The Company is offering to exchange
$1,000 principal amount of Exchange
Notes for each $1,000 principal amount
of Old Notes. As of the date hereof,
$200,000,000 aggregate principal amount
of Old Notes are outstanding.
Based on an interpretation by the staff
of the Commission set forth in
no-action letters issued to third
parties, the Company believes that
Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old
Notes may be offered for resale, resold
and otherwise transferred by any holder
thereof (other than any such holder
which is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with
the registration and prospectus
delivery requirements of the Securities
Act, provided that such Exchange Notes
are acquired in the ordinary course of
such holder's business and that such
holder does not intend to participate
and has no arrangement or understanding
with any person to participate in the
distribution of such Exchange Notes.
Each Participating Broker-Dealer
that receives Exchange Notes for its
own account pursuant to the Exchange
Offer must acknowledge that it will
deliver a prospectus in connection
with any resale of such Exchange
Notes. The Letter of Transmittal
states that by so acknowledging and
by delivering a prospectus, a
Participating Broker-Dealer will not
be deemed to admit that it is an
"underwriter" within the meaning of
the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may
be used by a Participating Broker-
Dealer in connection with resales of
Exchange Notes received in exchange
for Old Notes where such Old Notes
were acquired by such Participating
Broker-Dealer as a result of market-
marking activities or other trading
activities. The Company has agreed
that, for a period of 180 days after
the Expiration Date, it will make
this Prospectus available to any
Participating Broker-Dealer for use
in connection with any such resale.
See "Plan of Distribution."
Any holder of Old Notes who tenders in
the Exchange Offer with the intention
to participate, or for the purpose of
participating, in a distribution of the
Exchange Notes could not rely on the
position of the staff of the Commission
enunciated in no-action letters and, in
the absence of an exemption therefrom,
must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any
resale transaction. Failure to comply
with such requirements in such instance
may result in such holder incurring
liability under the Securities Act for
which the holder is not indemnified by
the Company.
Expiration Date..................... 5:00 p.m., New York City time, on
June 1, 1998 unless the Exchange Offer
is extended by the Company in its sole
discretion, in which case the term
"Expiration Date" means the latest date
and time to which the Exchange Offer is
extended. Notwithstanding the
foregoing, the Company will not extend
the Expiration Date beyond, June 19,
1998 (which, if extended to such date,
would represent a maximum Exchange
Offer period of 50 days).
Interest............................ Interest on Exchange Notes shall accrue
from the last interest payment date on
which interest was paid on the Old
Notes so surrendered, or, if no
interest has been paid on such Old
Notes, from March 3, 1998. No interest
will be paid on the Old Notes accepted
for exchange.
Conditions to the Exchange Offer.... The Exchange Offer is subject to
certain customary conditions, which may
be waived by the Company. See "The
Exchange Offer--Conditions."
Procedures for Tendering Old Notes.. Each holder of Old Notes wishing to
accept the Exchange Offer must
complete, sign and date the
accompanying Letter of Transmittal, or
a facsimile thereof, in accordance with
the instructions contained herein and
therein, and mail or otherwise deliver
such Letter of Transmittal, or such
facsimile, together with the Old Notes
and any other required documentation to
the Exchange Agent (as defined) at the
address set forth herein. By executing
the Letter of Transmittal, each holder
will be deemed to represent to the
Company, among other things, that (i)
the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained
in the ordinary course of business of
the person receiving such Exchange
Notes, whether or not such person is
the holder, (ii) neither the holder nor
any such other person has any
arrangement or understanding with any
person to participate in the
distribution of such Exchange Notes in
violation of the Securities Act, (iii)
neither the holder nor any such other
person is an "affiliate," as defined
under Rule 405 of the Securities Act,
of the Company and (iv) such holder has
full power and authority to exchange
the Old Notes for the Exchange Notes.
See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and
"--Procedures for Tendering."
Untendered Notes.................... Following the consummation of the
Exchange Offer, holders of Old Notes
eligible to participate but who do not
tender their Old Notes will not have
any further registration rights and
such Old Notes will continue to be
subject to certain restrictions on
transfer. Accordingly, the liquidity
of the market for such Old Notes could
be adversely affected.
Consequences of Failure to
Exchange.......................... Old Notes that are not exchanged
pursuant to the Exchange Offer will
remain restricted securities.
Accordingly, such Old Notes may be
resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some
other exemption under the Securities
Act, (iii) outside the United States to
a foreign person pursuant to the
requirements of Rule 904 under the
Securities Act, or (iv) pursuant to an
effective registration statement under
the Securities Act. See "The Exchange
Offer--Consequences of Failure to
Exchange."
Shelf Registration Statement........ If any holder of the Old Notes (other
than any such holder which is an
"affiliate" of the Company within the
meaning of Rule 405 under the
Securities Act) is not eligible under
applicable securities laws to
participate in the Exchange Offer, and
such holder has provided information
regarding such holder and the
distribution of such holder's Old Notes
to the Company for use therein, the
Company has agreed to register the Old
Notes on a shelf registration statement
(the "Shelf Registration Statement")
and to use its best efforts to cause it
to be declared effective by the
Commission as promptly as reasonably
practical on or after the consummation
of the Exchange Offer. The Company has
agreed to maintain the effectiveness of
the Shelf Registration Statement, under
certain circumstances, until the date on
which the Old Notes are no longer
"restricted securities" (within the
meaning of Rule 144 under the
Securities Act).
Special Procedures for
Beneficial Owners................. Any beneficial owner whose Old Notes
are registered in the name of a broker,
dealer, commercial bank, trust company
or other nominee and who wishes to
tender should contact such registered
holder promptly and instruct such
registered holder to tender on such
beneficial owner's behalf. If such
beneficial owner wishes to tender on
such owner's own behalf, such owner
must, prior to completing and executing
the Letter of Transmittal and
delivering its Old Notes, either make
appropriate arrangements to register
ownership of the Old Notes in such
owner's name or obtain a properly
completed bond power from the
registered holder. The transfer of
registered ownership may take
considerable time.
Guaranteed Delivery Procedures...... Holders of Old Notes who wish to
tender their Old Notes and whose Old
Notes are not immediately available
or who cannot deliver their Old
Notes, the Letter of Transmittal or
any other documents required by the
Letter of Transmittal to the
Exchange Agent (or comply with the
procedures for book- entry transfer)
prior to the Expiration Date, must
tender their Old Notes according to
the guaranteed delivery procedures
set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights................... Tenders may be withdrawn at any time
prior to 5:00 p.m., New York City time,
on the Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange Notes....... The Company will accept for exchange
any and all Old Notes which are
properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange
Notes issued pursuant to the Exchange
Offer will be delivered on the earliest
practicable date following the
Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Use of Proceeds..................... The Company will not receive any cash
proceeds from the issuance of the
Exchange Notes in the Exchange Offer.
See "Use of Proceeds."
Exchange Agent...................... Marine Midland Bank, as Trustee, is
serving as Exchange Agent in connection
with the Exchange Offer.
General............................. The form and terms of the Exchange
Notes are substantially identical to
the form and terms of the Old Notes
except that (i) the Exchange Notes bear
a Series B designation, (ii) the
Exchange Notes have been registered
under the Securities Act and,
therefore, will not bear legends
restricting the transfer thereof, and
(iii) the holders of Exchange Notes
will not be entitled to certain rights
under the Registration Rights
Agreement, including the provisions
providing for an increase in the
interest rate on the Old Notes in
certain circumstances relating to the
timing of the Exchange Offer, which
rights will terminate when the Exchange
Offer is consummated. See "The
Exchange Offer--Purpose and Effect of
the Exchange Offer." The Exchange
Notes will evidence the same debt as
the Old Notes (which they replace) and
will be entitled to the benefits of the
Indenture. See "Description of Exchange
Notes." The Old Notes and/or the
Exchange Notes, whichever was, is or
will be outstanding in the particular
context, are referred to herein
collectively as the "Notes".
Securities Offered.................. $200,000,000 aggregate principal amount
of Series B 9(1)/(4)% Senior
Subordinated Notes due 2008 of the
Company.
Maturity Date....................... March 1, 2008.
Interest Payment Dates.............. March 1 and September 1 of each year,
commencing September 1, 1998.
Ranking............................. The Exchange Notes will constitute
unsecured obligations of the Company
and will rank subordinate in right of
payment to all existing and future
Senior Debt of the Company, including
any Indebtedness (as defined) under the
Term Loan Facilities and the Revolving
Credit Facility. At March 27, 1998,
there was $400.9 million of outstanding
indebtedness to which the Notes were
subordinated. In addition, the Company
could have borrowed up to $90 million of
Indebtedness under the Revolving Credit
Facility, all of which would constitute
Senior Debt. See "Description of
Certain Indebtedness."
Exchange Guarantee.................. The Exchange Notes will be fully and
unconditionally guaranteed on a senior
subordinated basis by the Guarantors
(as defined). The form and terms of
the Exchange Guarantees will be
substantially identical to the form and
terms of the Old Guarantee. The
Exchange Guarantees will be general
unsecured obligations of the Guarantors
and will rank subordinate in right of
payment to all existing and future
Senior Debt of such Guarantors,
including such Guarantors' guarantee of
Indebtedness under the Bank Financing.
The Exchange Guarantees will rank pari
passu in right of payment with any
other senior subordinated indebtedness
of the Guarantors. The Old Guarantees
and/or the Exchange Guarantees,
whichever was, is or will be
outstanding in the particular context,
are referred to herein collectively as
the "Guarantees".
Optional Redemption................. The Exchange Notes will be redeemable
at the option of the Company, in whole
or in part, at any time on or after
March 1, 2003, at the redemption prices
set forth herein, plus accrued and
unpaid interest to the redemption date.
In addition, prior to March 1, 2001,
the Company may redeem up to 35% of the
principle amount of the Exchange Notes
at a redemption price of 109.25% of the
principal amount thereof, plus accrued
and unpaid interest to the redemption
date, with the net cash proceeds
received by the Company from one or
more public offerings of its Capital
Stock (as defined) other than
Disqualified Stock (as defined);
provided, however, that at least $130
million in aggregate principal amount
of the Notes remains outstanding
immediately after any such redemption
(excluding any Notes owned by the
Company or any of its Affiliates (as
defined)). See "Description of
Exchange Notes--Optional Redemption."
Change of Control................... Upon a Change of Control (as defined),
each holder of the Exchange Notes may
require the Company to repurchase such
holder's Exchange Notes, in whole or in
part, at a purchase price equal to 101%
of the principal amount thereof plus
accrued and unpaid interest to the
purchase date. See "Description of
Exchange Notes--Change of Control." The
Bank Financing prohibits the purchase
of outstanding Exchange Notes prior to
repayment of the borrowings under the
Bank Financing. There can be no
assurance that upon a Change of Control
the Company will have sufficient funds
to repurchase any of the Exchange
Notes. See "Description of Certain
Indebtedness."
Modifications of the Indenture...... The Company and the Trustee, with the
consent of the holders of a majority in
aggregate principal amount of the
outstanding Notes, may amend the
Indenture, provided, however, that
consent is required from the holder of
each Note affected thereby in instances
such as reductions in the amount or
changes in the timing of interest
payments, reductions in the principal
and changes in the maturity, redemption
or repurchase dates of the Notes. See
"Description of Exchange
Notes--Modification and Waiver."
Events of Default................... An Event of Default (as defined) occurs
under the Indenture in instances such
as the failure to pay principal when
due, the failure to pay any interest
within 30 days of when due and payable,
the failure to perform or comply with
various covenants under the Indenture
or the default under the terms of
certain other indebtedness of the
Company. See "Description of Exchange
Notes--Events of Default."
Covenants........................... The Indenture contains certain
covenants that, among other things,
limit the ability of the Company or any
of its Restricted Subsidiaries (as
defined) to incur additional
Indebtedness, make certain Restricted
Payments (as defined) and Investments
(as defined), create Liens (as defined),
permit dividend or other payment
restrictions to apply to Subsidiaries
(as defined), enter into certain
transactions with Affiliates or Related
Persons (as defined) or consummate
certain merger, consolidation or
similar transactions. In addition, in
certain circumstances, the Company will
be required to offer to purchase
Exchange Notes at 100% of the principal
amount thereof with the net proceeds of
certain asset sales. These covenants
are subject to a number of significant
exceptions and qualifications. See
"Description of Exchange Notes."
For additional information regarding the Exchange Notes, see "Description of
Exchange Notes."
Risk Factors
Prospective investors should carefully consider the specific matters set forth
under "Risk Factors" as well as the other information and data included in
this Prospectus in evaluating the Exchange Offer and an investment in the
Exchange Notes.
Summary Pro Forma Financial Information
(Dollars in thousands)
The accompanying summary unaudited pro forma financial information is based
upon the historical consolidated financial statements of Tekni-Plex and
PureTec, adjusted to give effect to the PureTec Acquisition (accounted for as a
purchase) and the Transactions, as if the PureTec Acquisition and the
Transactions had occurred at June 29, 1996. The unaudited pro forma statement
of operations data for the year ended June 27, 1997 reflects PureTec's
historical results of operations for the year ended July 31, 1997. The
unaudited pro forma statement of operations data for the six months ended
December 26, 1997 reflects PureTec's historic results of operations for the
six months ended January 31, 1998. The pro forma condensed statements of
operations are not necessarily indicative of the results that would have been
obtained if the PureTec Acquisition and the Transactions had occurred on the
dates indicated or for any future period or date. The pro forma adjustments
give effect to available information and assumptions that the Company believes
are reasonable. The summary pro forma financial information should be read in
conjunction with the pro forma unaudited condensed financial information and
notes thereto, the Company's historical consolidated financial statements and
notes thereto and the historical consolidated financial statements of PureTec
and the notes thereto. See "Pro Forma Unaudited Condensed Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Pro Forma
Six Months
Ended
Year Ended December 26,
June 27, 1997 1997
--------------- ------------
Statement of Operations Data:
Net sales.......................................... $ 460,070 $ 214,312
Gross profit....................................... 104,644 48,527
Income from operations............................. 40,703 16,644
Interest expense, net.............................. 36,656 18,328
Other expense...................................... 2,605 301
Pre-tax income (loss) from continuing operations... 1,442 (1,990)
Income tax provision............................... 4,947 1,389
Income (loss) from continuing operations before
minority interest, discontinued
operations and extraordinary item................. (3,505) (3,379)
Net income (loss)(a)............................... $ (29,736) $ (3,864)
Other Financial Data:
EBITDA(b).......................................... $ 69,818 $ 32,862
EBITDA margin...................................... 15.2% 15.3%
Depreciation and amortization...................... $ 31,088 $ 15,630
Capital expenditures............................... 15,225 5,501
Cash flows:
From operations.................................... 14,093 (4,434)
From investing..................................... (17,537) (5,308)
From financing..................................... 15,606 6,659
Ratios:
Ratio of earnings to fixed charges(c).............. 1.0x 1.0x
Ratio of EBITDA to interest expense................ 1.9x 1.8x
Balance Sheet Data (End of Period):
Working capital.................................... $ 76,100 $ 84,241
Total assets....................................... 535,853 528,599
Total debt (including current portion)............. 394,805 394,850
Stockholders' equity............................... 30,397 35,071
- ------------
(a) Net loss for the year ended June 27, 1997 includes an extraordinary loss
comprised of (i) a prepayment penalty of $1.2 million and the write-off of
deferred financing costs and debt discounts of $3.4 million, net of the
combined tax benefit of $1.8 million, in connection with the early
repayment of debt and (ii) a loss of $17.8 million on the repurchase of
redeemable warrants. See "Tekni-Plex Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations."
(b) Pro forma EBITDA is defined as net income before interest, income taxes,
depreciation and amortization, (and for this pro forma presentation)
minority interest, equity in loss of affiliates and write offs of
goodwill, intangibles and obsolete equipment and reflects certain
adjustments for the Transactions (see "Pro Forma Unaudited Condensed
Financial Information"). EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. However, EBITDA should not be considered in isolation as a
substitute for net income or cash flow data prepared in accordance with
generally accepted accounting principles or as a measure of the Company's
profitability or liquidity. In addition, this measure of EBITDA may not be
comparable to similar measures reported by other companies. EBITDA margin
is calculated as the ratio of EBITDA to net sales for the period.
(c) For purposes of the pro forma ratio of earnings to fixed charges (i)
earnings are calculated as the Company's pro forma earnings before income
taxes, extraordinary item and fixed charges and (ii) fixed charges include
interest on all indebtedness, amortization of deferred financing costs and
accretion of all warrants.
Tekni-Plex Summary Financial Information
(Dollars in thousands)
The following table sets forth summary historical consolidated financial
information of the Company for the periods provided below. The information
contained in the table has been derived from, and should be read in conjunction
with, the audited and unaudited consolidated financial statements of the
Company, including the notes thereto.
<TABLE>
<CAPTION>
For the Six Months
For the Periods For the Years Ended Ended
---------------------------------- -------------------------------- -----------------------
January 1
to January 1 March 19
December to March to July 1, June 30, June 28, June 27, December December
31, 1993 18, 1994 1994 1995 1996 1997 27, 1996 26, 1997
--------- --------- ---------- -------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales..................... $ 44,878 $ 9,418 $ 12,723 $ 44,688 $ 80,917 $ 144,736 $ 71,595 $ 75,622
Gross profit.................. 8,274 1,494 2,762 9,747 18,582 37,729 18,135 20,398
Income from operations........ 3,198 892 1,241 4,933 8,243 21,843 10,984 12,142
Interest expense, net......... 160 22 1,141 4,322 5,816 8,094 4,129 4,336
Other expense................. 7 45 62 234 469 646 440 158
Pre-tax income before
extraordinary item........... 3,031 825 38 377 1,958 13,103 6,415 7,648
Income tax provision(a)....... 267 56 17 211 982 4,675 2,255 2,907
Income before extraordinary
item......................... 2,764 769 21 166 976 8,428 4,160 4,741
Net income (loss)............. $ 2,764 $ 769 $ 21 $ 166 $ 976 $ (12,238)(b) $ 4,160 $ 4,741
Other Financial Data:
EBITDA(c)..................... $ 3,800 $ 985 $ 1,988 $ 7,922 $ 14,157 $ 30,221 $ 15,062 $ 17,137
EBITDA margin(c).............. 8.5% 10.5% 15.6% 17.7% 17.5% 20.9% 21.0% 22.7%
Depreciation and
amortization................. $ 608 $ 138 $ 879 $ 3,462 $ 6,821 $ 9,551 $ 4,816 $ 4,793
Capital expenditures.......... 1,423 420 157 614 2,275 3,934 1,402 1,939
Cash flows:
From operations............... 3,512 (564) 1,147 2,354 6,568 19,536 9,908 4,966
From investing................ (1,871) 315 (45,567) (614) (49,522) (6,273) (1,771) (7,009)
From financing................ (570) (1,121) 44,465 (1,451) 43,669 (3,217) (6,565) (1,860)
Ratios:
Ratio of earnings to fixed
charges(d)................... 19.9x 38.5x 1.0x 1.1x 1.3x 2.6x 2.6x 2.8x
Ratio of EBITDA to interest
expense...................... -- -- 1.7x 1.8x 2.4x 3.7x 3.6x 3.9x
Balance Sheet Data
(End of Period):
Working capital............... $ 6,023 $ 4,565 $ 1,673 $ 3,173 $ 11,660 $ 25,950 $ 13,299 $ 28,400
Total assets.................. 15,701 14,900 53,724 53,415 121,770 129,029 120,046 130,684
Total debt (including current
portion)..................... 1,616 588 36,396 35,004 70,436 75,000 64,031 75,608
Stockholders' equity.......... 10,086 10,855 11,521 11,687 24,162 30,397 28,322 35,071
</TABLE>
- ------------
(a) Prior to the acquisition of Tekni-Plex by the current owners, the previous
owners elected to be taxed as an "S" corporation for federal income tax
purposes. Accordingly, there was no provision for federal income taxes for
periods prior to March 18, 1994 as such income was reported on the federal
income tax returns of the shareholders.
(b) Net loss for the year ended June 27, 1997 includes an extraordinary
loss comprised of (i) a prepayment penalty of $1.2 million and the
write-off of deferred financing costs and debt discounts of $3.4
million, net of the combined tax benefit of $1.8 million, in connection
with the early repayment of debt and (ii) a loss of $17.8 million on
the repurchase of redeemable warrants. See "Tekni-Plex Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(c) EBITDA is defined as net income before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of the Company's ability to incur and service
debt. However, EBITDA should not be considered in isolation as a substitute
for net income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's profitability
or liquidity. In addition, this measure of EBITDA may not be comparable to
similar measures reported by other companies. EBITDA margin is calculated as
the ratio of EBITDA to net sales for the period.
(d) For purposes of the ratio of earnings to fixed charges, (i) earnings are
calculated as the Company's earnings before income taxes, extraordinary item
and fixed charges and (ii) fixed charges include interest on all
indebtedness, amortization of deferred financing costs and accretion of the
warrant.
RISK FACTORS
Holders of Old Notes should consider carefully the following factors as well
as the other information and data included in this Prospectus prior to
tendering their Old Notes in the Exchange Offer.
Substantial Leverage; Restrictions Imposed by the Terms of the Company's
Indebtedness
The Company's total debt and stockholder's equity was $75.6 million and $35.1
million, respectively, as of December 26, 1997. Following completion of the
Transactions, the Company will be highly leveraged. On a pro forma basis after
giving effect to the Transactions, the Company's total debt would have been
$394.9 million at December 26, 1997 and its annual debt service would have
been $39.8 million and the ratio of earnings to fixed charges would have been
2 to 1 for the twelve months ended December 26, 1997. The Company's leverage
and obligations could have important consequences to the holders of Notes,
including: (i) the impairment of the Company's ability to obtain additional
financing for working capital, capital expenditures, acquisitions or other
purposes; (ii) the use of a substantial portion of the Company's cash flow
from operations for debt service; (iii) the competitive disadvantages that may
result from the Company being more highly leveraged than some of its
competitors; and (iv) making the Company more vulnerable to economic downturns
and limiting its ability to withstand competitive pressures.
In addition, the Company's operating flexibility with respect to certain
business matters will be limited by covenants contained in the Indenture, the
indenture (the "11(1)/(4)% Indenture") with respect to the 11(1)/(4)% Notes
and the Bank Financing. Among other things, these covenants will limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
create liens upon assets, apply the proceeds from disposal of assets, make
dividend payments and other distributions on capital stock and redeem capital
stock. There can be no assurance that such covenants will not adversely affect
the Company's ability to finance its future operations or capital needs or to
engage in other business activities that may be in the interest of the
Company. See "Description of Certain Indebtedness" and "Description of
Notes--Covenants."
On a pro forma basis as of December 26, 1997 after giving effect to the
Transactions, and subject to certain restrictions, the Company could have
borrowed up to $90.0 million of additional senior indebtedness under the
Revolving Credit Facility without requiring the consent of the holders of
Notes. If the entire $90.0 million under the Revolving Credit Facility had
been outstanding from the beginning of fiscal year 1997, the Company's annual
debt service (all interest) for such fiscal year would have increased by
approximately $6.6 million based on an assumed fixed interest rate of 7.35%.
The Company expects that its cash flow will be sufficient to cover its
expenses, including fixed charges. However, no assurance can be given that the
Company's operating results will be sufficient for the Company to meet such
obligations. The Company's ability to satisfy its obligations will be
dependent upon its future performance, which is subject to prevailing economic
conditions and financial, business and other factors, including factors beyond
the Company's control.
Ranking of the Exchange Notes
The Exchange Notes will be senior subordinated unsecured obligations of the
Company and will rank subordinate in right of payment to all existing and
future senior indebtedness of the Company. In addition, the Exchange Notes
will be effectively subordinated in right of payment to all existing and
future secured indebtedness of the Company and the Company's subsidiaries,
including indebtedness under the Bank Financing. Loans under the Bank
Financing will be secured by substantially all of the assets of the Company.
On a pro forma basis as of December 26, 1997, there was $119.9 million of
outstanding indebtedness to which the Exchange Notes were subordinated.
Included in such amount is $4.9 million of indebtedness of foreign
subsidiaries, which subsidiaries will not be Guarantors. In addition, the
Company could have borrowed up to $90.0 million of indebtedness under the
Revolving Credit Facility without the consent of the holders of the Exchange
Notes, all of which would constitute Senior Debt. The Guarantees will be senior
subordinated unsecured obligations of the Guarantors, and will rank
subordinate in right of payment to all existing and future senior indebtedness
of each such Guarantor, including its Guarantee under the Bank Financing.
Under the terms of the Indenture, the Company will be permitted, upon the
satisfaction of certain conditions, to incur additional senior indebtedness.
See "Description of Certain Indebtedness," "Description of Exchange
Notes--Ranking" and "--Covenants."
Raw Material Price Volatility and Availability
The Company's polystyrene foam products are manufactured from high heat
crystal polystyrene resin ("polystyrene resin"). Polystyrene resin is a
commodity petrochemical that is readily available in bulk quantities from
numerous large, vertically integrated chemical companies. The Company
purchases polystyrene resin from several of the top suppliers. Prices for
polystyrene resin have fluctuated in the past and may continue to do so in the
future. Historically, the Company has been able to pass on substantially all
of the price increases in raw materials to its customers. However, there can
be no assurance that the Company will be able to do so in the future. The
primary materials used by PureTec in the manufacture of its products are
plastic resins, primarily polyvinyl chloride, polypropylene and polyethylene,
and also plasticizers. All of these materials are widely available from
numerous sources and PureTec currently purchases these raw materials from
multiple suppliers. Prices for these materials have fluctuated in the past and
may continue to do so in the future. PureTec historically has set prices for
its garden hose products in advance of each season and, to the extent that raw
material costs increase more than anticipated, the additional costs generally
cannot be passed on to its customers during that season. However, with respect
to its other markets, PureTec has generally been able to pass on substantially
all of the price increases to its customers. If raw material prices increase
and the Company is unable to pass such price increases on to its customers,
employ successful hedging strategies, enter into supply contracts at favorable
prices or buy on the spot market at favorable prices, the Company's
profitability may be adversely affected.
A key raw material used in manufacturing the Company's clear, laminated
blister packaging materials is Aclar(R), a proprietary material produced by
Allied Signal. Allied Signal is currently the sole manufacturer and supplier of
Aclar(R). There is no long-term supply contract with Allied Signal. If the
supply of Aclar(R)is significantly interrupted, the Company would begin
substituting alternative blister packaging materials. Depending on the extent
of the disruption, the Company's profitability may be adversely affected.
Competition
Many of the Company's competitors are larger and, in some cases, have
significantly greater financial resources than the Company. See
"Business--Competition." While the packaging industry overall is relatively
large, the market for high performance pharmaceutical-type packaging materials
is considerably smaller, and the Company's achievement of its internal
expansion goals assumes expansion of its customers' volume for its products,
finding new applications for its existing high performance materials, and
development of new materials for new applications. In addition, many of the
markets for PureTec's products are highly competitive. Depending on the
particular product category, competition is based on breadth of product line,
quality, pricing, technical service and servicing the specialized needs of
customers. See "Business--Competition--PureTec" for a discussion of the
specific competitive factors applicable to each of PureTec's divisions.
Integration of PureTec and Other Acquisitions
The integration of PureTec will require substantial management time and other
resources and may pose risks with respect to production, customer service and
market share. While the Company believes that it has sufficient management and
other resources to accomplish the rationalization and integration of PureTec,
there can be no assurance in this regard or that the Company will not
experience difficulties with customers, suppliers, personnel or others. In
addition, although the Company believes that the PureTec Acquisition will
enhance the competitive position and business prospects of the Company, there
can be no assurance that such benefits will be realized or that the
combination of the Company and PureTec will be more successful than the
companies would have been if they had remained independent. There can be no
assurance that the Company will achieve synergies in the PureTec Acquisition
comparable to those from recent acquisitions.
Although PureTec recorded a net profit from continuing operations of $1.3
million for the year ended July 31, 1997, PureTec experienced net losses from
continuing operations for the 1996, 1995 and 1994 fiscal years of $4.4 million,
$7.5 million and $14.8 million, respectively. For the six months ended January
31, 1998, PureTec recorded a net loss from continuing operations of $3.4
million. The ability to generate positive net income in the future will be
dependent upon many factors, including the ability to obtain new customers and
retain existing customers, the degree of competition encountered by PureTec,
the level of PureTec's capital expenditures and operating expenses and general
economic conditions in any one, or all, of PureTec's markets. There can be no
assurance that PureTec will be profitable in the future.
As part of its business strategy, the Company may pursue suitable additional
acquisitions. Nonetheless, there can be no assurance that the Company will
identify suitable acquisitions or that such acquisitions can be made at an
acceptable price. In the event the Company acquires additional businesses, it
may require substantial capital. Although the Company will be able to borrow
under the Revolving Credit Facility under certain circumstances to fund
acquisitions, there can be no assurance that such borrowings will be available
in sufficient amounts or that other financing will be available in amounts and
on terms that the Company deems acceptable. Furthermore, the integration of
acquired businesses may result in unforeseen difficulties that require a
disproportionate amount of management's attention and other Company resources.
There can be no assurance that the Company will achieve synergies comparable
to those from recent acquisitions.
Dependence on Key Personnel
The Company is dependent on the management experience and continued services
of its executive officers, including Dr. F. Patrick Smith and Kenneth W.R.
Baker. See "Management." The loss of the services of these officers could
have a material adverse effect on the Company's business. In addition, the
Company's continued growth depends on its ability to attract and retain
experienced key employees.
Seasonality
The market for PureTec's garden hose is highly seasonal, with approximately
75% of the sales occurring in the second half of PureTec's fiscal year. As a
result of the need to build up inventories in anticipation of such second-half
sales, PureTec's working capital requirements have historically peaked in the
second and third quarters of its fiscal year. In addition, this seasonality
has a significant impact on PureTec's net income from quarter to quarter.
PureTec's Colorite Plastics division, the manufacturing division which
produces garden hose, historically operates the first two quarters of the
fiscal year at a loss. To the extent such sales peak later in any fiscal year
compared to other fiscal years, cash flows may not be comparable on an interim
period basis.
PureTec Foreign Operations
PureTec's European operations, representing approximately $35.3 million of
PureTec's sales (before eliminations) for the fiscal year ended July 31, 1997,
are subject to special risks inherent in doing business outside the United
States, including governmental instability, war and other international
conflicts, civil and labor disturbances, requirements of local ownership,
partial or total expropriation, nationalization, currency devaluation, foreign
exchange controls, and foreign laws and policies, each of which may limit the
movement of assets or funds or result in the deprivation of contract rights or
the taking of property without fair compensation. Although most of PureTec's
international revenues are derived from transactions denominated in United
States dollars, PureTec has and likely will continue to conduct some business
in currencies other than the United States dollar. PureTec only engages in
some limited hedging of specific transactions to hedge against foreign
currency fluctuations. Accordingly, its profitability has been and will
continue to be affected by fluctuations in foreign exchange rates. In
addition, PureTec's foreign operations are conducted primarily through its
foreign subsidiaries which will not guarantee the Notes.
Environmental Matters
Like similar companies, the Company's and PureTec's facilities, operations,
and properties are subject to foreign, federal, state, and local environmental
laws and regulations. As a result, the Company and PureTec are involved from
time to time in administrative or legal proceedings relating to environmental
matters and have in the past and will continue to incur capital costs and
other expenditures relating to environmental matters. Liability under
environmental laws may be imposed on current and prior owners and operators of
property or businesses without regard to fault or to knowledge about the
condition or action causing the liability. The Company and PureTec may be
required to incur costs relating to the remediation of property, including
property at which waste they dispose of is located, and environmental
conditions could lead to claims for personal injury, property damage or
damages to natural resources. The Company and PureTec are aware of
environmental conditions at certain properties which they now or previously
owned or leased which are undergoing remediation by third parties. Although
based on current information the Company and PureTec have no reason to believe
otherwise, there can be no assurance that such third parties will complete any
required remediation.
Both the Company and PureTec believe, based on current information, that any
costs they may incur relating to environmental matters will not have a
material adverse effect on their respective businesses, financial condition or
results of operations. There can be no assurance, however, that the Company or
PureTec will not incur significant fines, penalties, capital costs, or other
liabilities associated with noncompliance, remediation or natural resource
damage liability, or that future events, such as changes in laws or the
interpretation thereof, the development of new facts, or the failure of third
parties to perform remediation at current or former facilities, will not cause
the Company or PureTec to incur additional costs that could have a material
adverse effect on their respective businesses, financial condition or results
of operations. See "Business--Legal Proceedings and Environmental Matters."
Prior to the 1994 acquisition of the Company, public awareness and interest in
environmental issues adversely affected the polystyrene foam packaging
industry. In particular, in 1990, McDonald's discontinued its well-recognized
polystyrene foam clam shell sandwich package in favor of paper packaging. In
response, various recycling programs were commenced in the United States.
Although the Company believes that the environmental concerns that negatively
affected demand for these products in the 1980s have subsided and, to some
extent, given way to a view by many that polystyrene foam does not have
significantly worse environmental problems than other materials, there can be
no assurance that public awareness and interest in environmental issues will
not adversely affect the plastics and polystyrene industry.
Control of the Company
The Company is owned by Tekni-Plex Partners L.P., a limited partnership
organized under the laws of the State of Delaware, and its related investors
(the "Tekni-Plex Partnership"). Tekni-Plex Partnership beneficially owns 100%
of the outstanding shares of the Company and 95.1% of the Company on a fully
diluted basis and controls the affairs and policies of the Company. Tekni-Plex
Partnership is controlled by MST/TP Partners, L.P. ("MST/TP L.P."), which in
turn is controlled, directly or indirectly, by J. Andrew McWethy, Barry A.
Solomon, and Stephen A. Tuttle, who are all directors of the Company.
Circumstances may occur in which the interests of Tekni-Plex Partnership,
MST/TP L.P. and the three individuals could be in conflict with the interests
of the holders of the Notes. In addition, Tekni-Plex Partnership may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
its judgment, could enhance the value of its individual partners' equity
investments in the partnership, even though such transactions may involve
risks to the holders of the Notes.
Change of Control
Upon the occurrence of a Change of Control, each holder of Exchange Notes may
require the Company to repurchase all or a portion of such holder's Exchange
Notes. If a Change of Control were to occur, there can be no assurance that
the Company would have sufficient financial resources, or would be able to
arrange financing to pay the repurchase price for all Exchange Notes tendered
by holders thereof. Further, the provisions of the Indenture may not afford
holders of Exchange Notes protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving the Company that may adversely affect holders of Exchange Notes, if
such transaction does not result in a Change of Control. In addition, the
terms of the Bank Financing limit the Company's ability to repurchase any
Exchange Notes and also identify certain events that would constitute a change
of control, as well as certain other events with respect to the Company or
certain of its subsidiaries, that would constitute an event of default under
the Bank Financing. The 11(1)/(4)% Indenture contains substantially similar
change of control provisions to those contained in the Exchange Notes. Any
future credit agreements or other agreements relating to other indebtedness to
which the Company becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when the Company
is prohibited from repurchasing Exchange Notes, the Company could seek the
consent of its lenders to repurchase Exchange Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such consent or repay such borrowing, the Company would remain
prohibited from repurchasing Exchange Notes. In such case, the Company's
failure to repurchase tendered Exchange Notes would constitute an Event of
Default under the Indenture, which would, in turn, constitute a further
default under certain of the Company's existing debt agreements and may
constitute a default under the terms of other indebtedness that the Company
may enter into from time to time. See "Description of Exchange Notes--Change of
Control."
Lack of Public Market for the Notes
Prior to the Exchange Offer, there has not been any public market for the Old
Notes. The Old Notes have not been registered under the Securities Act and
will be subject to restrictions on transferability to the extent that they are
not exchanged for Exchange Notes by holders who are entitled to participate in
the Exchange Offer. The holders of Old Notes (other than any such holder that
is an "affiliate" of the company within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the Exchange Offer are
entitled to certain registration rights, and the Company is required to file a
Shelf Registration Statement with respect to such Old Notes. The Exchange Notes
will constitute a new issue of securities with no established trading market,
and there can be no assurance as to (i) the liquidity of any such market that
may develop, (ii) the ability of holders of Exchange Notes to sell their
Exchange Notes or (iii) the price at which the holders of Exchange Notes would
be able to sell their Exchange Notes. If such a market were to exist, the
Exchange Notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar notes and the financial
performance of the Company and its subsidiary. The Company does not intend to
list the Exchange Notes on any national securities exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Company has been advised by the Initial
Purchaser that, following completion of the Exchange Offer, the Initial
Purchaser presently intends to make a market in the Exchange Notes. However,
the Initial Purchaser is not obligated to do so, and any market-making
activity with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market-making activity will be subject to the
limits imposed by the Securities Act and the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and may be limited during such exchange offer
or the pendency of an applicable shelf registration statement. There can be
no assurance that an active trading market will develop for the Exchange Notes
or that such trading market will be liquid. If a trading market does not
develop or is not maintained, holders of the Exchange Notes may experience
difficulty in reselling the Exchange Notes or may be unable to sell them at
all. if a market for the Exchange Notes develops, any such market may be
discontinued at any time.
Fraudulent Conveyance Considerations
In the event U.S. federal and state fraudulent conveyance or similar laws were
applied to the issuance of a Guarantee, if any Guarantor, at the time it
incurs such Guarantee, (i) (a) was or is insolvent or rendered insolvent by
reason of such incurrence, (b) was or is engaged in a business or transaction
for which the assets remaining with such Guarantor constituted unreasonably
small capital or (c) intended or intends to incur, or believed or believes
that it would incur, debts beyond its ability to pay such debts as they mature
and (ii) received or receives less than reasonably equivalent value or fair
consideration, the obligations of such Guarantor under its Guarantee could be
avoided, or claims in respect of such Guarantee could be subordinated to all
other debts of such Guarantor. Among other things, a legal challenge of a
Guarantee on fraudulent conveyance grounds may focus on the benefits, if any,
realized by such Guarantor as a result of the issuance by the Company of the
Notes. To the extent that any Guarantee were held to be a fraudulent
conveyance or unenforceable for any other reason, the holders of the Notes
would cease to have any claim in respect of the Guarantor issuing such
Guarantee and would be solely creditors of the Company and any other
Guarantors whose Guarantees were not avoided or held unenforceable. There can
be no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy claims of the holders of the Notes relating to
any avoided portion of the Guarantee.
Management believes that, for purposes of U.S. federal and state fraudulent
conveyance or similar laws, the Guarantees are being incurred without the
intent to hinder, defraud or delay creditors, for proper purposes and in good
faith, that the Guarantors have received reasonably equivalent value or fair
consideration for incurring such Guarantees and that each of the Guarantors
are and, after the issuance of the Guarantees and the application of the
proceeds thereof, will be solvent, will have sufficient capital for carrying
on its business and will be able to pay its debts as they mature. There can be
no assurance, however, that a court passing on such questions would agree with
management's view.
Exchange Offer Procedures
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, certain registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transactions. Each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely
affected. See "The Exchange Offer."
USE OF PROCEEDS
(Dollars in millions)
The Exchange Offer is intended to satisfy certain of the Company's obligations
under the Registration Rights Agreement. The Company will not receive any
cash proceeds from the issuance of the Exchange Notes in the Exchange Offer.
Concurrently with the completion of the Offering, the Company entered into a
senior secured bank financing (the "Bank Financing"). The Bank Financing
consists of a $90 million revolving credit facility (the "Revolving Credit
Facility") and an aggregate of $115 million in Term Facilities (the "Term Loan
Facilities"), which is made up of a $50 million term loan facility (the "A
Term Loan Facility"), and a $65 million term loan facility (the "B Term Loan
Facility"). See "Description of Certain Indebtedness--Bank Financing."
The net proceeds of the Offering were approximately $193.5 million, after
deducting estimated discounts and commissions and other expenses payable by
the Company. The Offering was made together with the execution of the Bank
Financing to fund the purchase price of the PureTec Acquisition and the
Related Transactions.
CAPITALIZATION
(Dollars in thousands)
The following table sets forth the actual capitalization of the Company as of
December 26, 1997, and the pro forma capitalization of the Company as of
December 26, 1997 after giving effect to the Transactions. See "Use of
Proceeds."
----------------------------
Tekni-Plex at Pro Forma at
December 26, December 26,
1997 1997
------------- ------------
Revolving credit facilities........... -- --
Bank Financing:
Revolving Credit Facility(a).......... -- --
A Term Loan Facility............ -- $ 50,000
B Term Loan Facility............ -- 65,000
11 1/4% Senior Subordinated Notes.... $ 75,000 75,000
9 1/4% Senior Subordinated Notes
offered hereby....................... -- 200,000
PureTec 11 1/4% Senior Secured
Notes due 2003 (b)................... -- --
Other PureTec Indebtedness............ -- 4,242
Other................................. 608 608
------------- ------------
Total debt............................ 75,608 394,850
------------- ------------
Stockholders' equity:
Common stock and additional
paid-in capital............... 41,473 41,473
Foreign currency translation.... (67) (67)
Retained earnings............... (6,335) (6,335)
------------- ------------
Total stockholders' equity............ 35,071 35,071
------------- ------------
Total capitalization.................. $ 110,679 $ 429,921
============= ============
- ------------
(a) As of December 26, 1997, on a pro forma basis, the Company had $90.0
million unused and available, subject to certain restrictions, under
the Revolving Credit Facility. The Revolving Credit Facility replaces
the Company's existing $75.0 million credit facility. No amounts were
outstanding under the Tekni-Plex existing credit facility at December
26, 1997.
(b) Assumes 100% of the PS&T Notes are tendered in the Debt Tender Offer.
As of February 25, 1998, 97% were tendered and cannot be withdrawn.
PRO FORMA UNAUDITED CONDENSED FINANCIAL INFORMATION
The accompanying pro forma unaudited condensed statements of operations are
based upon the historical consolidated financial statements of Tekni-Plex and
PureTec, adjusted to give effect to the PureTec Acquisition (accounted for as a
purchase) and the Transactions, as if the PureTec Acquisition and the
Transactions had occurred at June 29, 1996. The unaudited pro forma condensed
statement of operations for the year ended June 27, 1997 reflects PureTec's
historical results of operations for the year ended July 31, 1997. The
unaudited pro forma condensed statement of operations for the six months ended
December 26, 1997 reflects PureTec's historical results of operations for six
months ended January 31, 1998. The pro forma condensed statements of
operations are not necessarily indicative of the results that would have been
obtained if the PureTec Acquisition and the Transactions had occurred on the
dates indicated or for any future period or date. The pro forma adjustments
give effect to available information and assumptions that the Company believes
are reasonable. The pro forma condensed financial information should be read
in conjunction with the Company's historical consolidated financial statements
and notes thereto and the historical consolidated financial statements of
PureTec and the notes thereto. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Pro Forma Unaudited Condensed Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year Ended
--------------------------------------------------------------------------------
Tekni-Plex PureTec July PureTec Acquisition Transaction Pro Forma
June 27, 1997 31, 1997 Adjustments Adjustments June 27, 1997
------------- ------------ ------------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 144,736 $ 315,334 -- $ -- $ 460,070
Cost of sales....................... 107,007 248,419 -- 355,426
---------- ---------- --------(a) ------------ -----------
Gross profit........................ 37,729 66,915 -- 104,644
Selling, general and administrative
expenses........................... 15,886 40,298 7,757(b) -- 63,941
-- -- (a) -- --
-- -- -- -- --
---------- ---------- -------- ------------ -----------
Income from operations.............. 21,843 26,617 (7,757) -- 40,703
Other expenses (income):
Interest...................... 8,094 19,749 -- 8,813(c) 36,656
Equity in loss of affiliates.. -- 1,824 -- -- 1,824
Other......................... 646 135 -- -- 781
---------- ---------- -------- ------------ -----------
Income from continuing operations
before minority interest and
provision for income taxes......... 13,103 4,909 (7,757) (8,813) 1,442
Provision for income taxes.......... 4,675 3,131 666 (3,525)(d) 4,947
---------- ---------- -------- ------------ -----------
Income (loss) from continuing
operations before minority
interest........................... 8,428 1,778 (8,423) (5,288) (3,505)
Minority interest................... -- (433) -- -- (433)
Income (loss) from continuing ---------- ---------- -------- ------------ -----------
operations.......................... $ 8,428 $ 1,345 $ (8,423) $ (5,288) $ (3,938)
========== ========== ========== ============ ===========
Other Financial Data:
EBITDA.............................. $ 30,221 $ 39,597 -- -- 69,818
EBITDA margin....................... 20.9% 12.6% -- -- 15.2%
Depreciation and amortization....... $ 9,551 $ 13,780 $ 7,757 -- 31,088
Capital expenditures................ 3,934 11,291 -- -- 15,225
Ratio of earnings to fixed charges.. 2.6x 1.2x -- -- 1.0x
Ratio of EBITDA to interest......... 3.7x 2.0x -- -- 1.9x
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Tekni-Plex PureTec Pro Forma
December 26, January 31, PureTec Acquisition Transaction December 26,
1997 1998 Adjustments Adjustments 1997
------------ ------------- ----------------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 75,622 $ 138,690 -- -- $ 214,312
Cost of sales...................... 55,224 110,561 -- 165,785
--------- --------- ------(a) --------- ------------
Gross profit....................... 20,398 28,129 -- 48,527
Selling, general and
administrative expenses........... 8,256 19,748 3,879(b) -- 31,883
(a) --
--
--------- --------- ------ --------- ------------
Income from operations............. 12,142 8,381 (3,879) -- 16,664
Other expenses (income):
Interest..................... 4,336 10,149 -- 3,843(c) 18,328
Equity in loss of affiliates. -- 387 -- -- 387
Other........................ 158 (239) -- -- (81)
--------- --------- ------ --------- ------------
Income (loss) before provision for
income taxes...................... 7,648 (1,916) (3,879) (3,843) (1,990)
Provision for income taxes......... 2,907 1,439 (1,420) (1,537) 1,389
Income (loss) from continuing --------- --------- ------ -------(d) ------------
operations......................... $ 4,741 $(3,355) $(2,459) $(2,306) (3,379)
========= ========= ====== ======= ============
Other Financial Data:
EBITDA............................. $ 17,137 $ 15,578 -- -- $ 32,862
EBITDA margin...................... 22.7% 11.2% -- 15.3%
Depreciation and amortization...... $ 4,793 $ 6,958 $ 3,879 -- $ 15,630
Capital expenditures............... 1,939 3,562 -- -- 5,501
Ratio of earnings to fixed charges. 2.8x 0.7x -- -- 1.0x
Ratio of EBITDA to interest........ 3.9x 1.5x -- -- 1.8x
</TABLE>
See Notes to Pro forma Unaudited condensed Statements of Operations,
on page 32.
Notes to Pro Forma Unaudited Condensed Statements of Operations
Adjustments to reflect the Transactions, as if they had occurred as of
June 29, 1996, reflect the following:
(a) The Company anticipates annual savings in raw materials purchases of
$3,000 and general and administrative expenses of $6,800 as a result of
elimination of duplicate overhead. These amounts have not been reflected
above.
(b) The pro forma adjustments to goodwill amortization to reflect the
following:
<TABLE>
<CAPTION>
--------------------------------------
Six Months
Year Ended June Ended December
27, 1997 26, 1997
----------------- ----------------
<S> <C> <C>
Elimination of historical amortization............................ $ (3,168) $ (1,584)
Amortization of new goodwill of $163.9 million over
15 years.................................................... 10,925 5,463
----------------- ----------------
$ 7,757 $ 3,879
================= ================
</TABLE>
(c) The pro forma adjustments to interest expense reflect the following:
<TABLE>
<CAPTION>
--------------------------------------------------
Six Months
Year Ended June Ended December
27, 1997 26, 1997
---------- ----------------- ----------------
<S> <C> <C> <C>
Elimination of Tekni-Plex interest.............. $ (8,094) $ (4,336)
Elimination of PureTec interest................. (19,749) (10,149)
Interest on new debt as follows:
A Term Loan Facility ($50MM at 7.35%)..... $ 3,675
B Term Loan Facility ($65MM at 7.85%)..... 5,103
Notes offered hereby ($200MM at 9.25%).... 18,500
11(1)/(4)% Notes ($75MM at 11.25%)........ 8,438
Amortization of financing fees and
expenses........................................ 940
----------
36,656 18,328
------------------ ----------------
$ 8,813 $ 3,843
================== ================
</TABLE>
(d) Tax benefit for the year ended June 27, 1997, calculated at the Company's
marginal effective tax rate of 40%.
Pro Forma Unaudited Condensed Balance Sheet
(Dollars in thousands)
<TABLE>
<CAPTION>
Tekni-Plex at PureTec at Pro Forma at
December 26, January 31, Transaction PureTec Acquisition December 26,
1997 1998 Proceeds Adjustments 1997
------------- ----------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current:
Cash......................... $ 9,235 $ 2,200 $ 305,600(a) $ (184,765)(c) $ 12,435
(119,835)(d)
Accounts receivable, net of an
allowance................. 15,055 48,830 -- -- 63,885
Inventory.................... 13,893 68,672 -- -- 82,565
Other current assets......... 3,263 2,513 -- -- 5,776
------------- ----------- ------------ ------------------- ------------
Total current assets....... 41,446 122,215 305,600 (304,600) 164,661
Property, plant and equipment,
net........................ 41,646 87,252 -- -- 128,898
Intangible assets, net of
accumulated amortization... 37,391 87,331 9,400(a) (87,331)(b) 201,269
157,478 (d)
Loan receivable-- PureTec....... 5,000 -- -- (5,000)(e) --
Other assets.................... 5,201 10,470 18,100 (d) 33,771
------------- ----------- ------------ ------------------- ------------
$ 130,684 $ 307,268 $ 315,000 $(224,353) $ 528,599
============= =========== ============ =================== ============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and
current portion of long-term
debt....................... $ 564 $ 54,766 -- $ (48,260)(c) 2,070
(5,000)(e)
Accounts payable-trade and
accrued liabilities........ 12,482 47,868 -- 18,000 (d) 78,350
------------- ----------- ------------ ------------------- ------------
Total current liabilities.. 13,046 102,634 -- (35,260) 80,420
------------- ----------- ------------ ------------------- ------------
Long-term debt.................. 44 2,942 115,000(a) (206)(c) 117,780
Notes........................... 75,000 125,000 200,000(a) (125,000)(c) 275,000
Other liabilities............... 7,523 12,857 -- (52)(d) 20,328
Stockholders' equity:
Capital stock and additional
paid-in capital............ 41,406 132,569 -- (132,569)(b) 41,406
Cumulative foreign currency
translation................ -- (3,432) -- 3,432 (b) --
Retained earnings
(deficit).................. (6,335) (65,302) -- 65,302 (b) (6,335)
------------- ----------- ------------ ------------------- ------------
Total stockholders' equity... 35,071 63,855 (63,835) 35,071
Total liabilities and ------------- ----------- ------------ ------------------- ------------
stockholders' equity...... $ 130,684 $307,268 $ 315,000 $(224,353) $ 528,599
============= =========== ============ =================== ============
</TABLE>
- ------------
(a) Issuance of $200,000 of Notes and $115,000 of term loans, including debt
issue costs of $9,400.
Record purchase of PureTec for $314,000 as follows:
(b) elimination of PureTec pre-acquisition equity and goodwill:
<TABLE>
<S> <C>
Capital Stock and additional paid-in capital.............. $132,569
Retained earnings (deficit)............................... (65,302)
Cumulative foreign currency translation adjustment........ (3,432)
Goodwill.................................................. (87,331)
</TABLE>
(c) redemption of PureTec Notes and repayment of other debt:
<TABLE>
<S> <C>
Notes................................................... $125,000
Current portion of long-term debt....................... 48,260
Other long-term debt.................................... 206
Cash, including premium on redemption of Notes.......... (184,765)
</TABLE>
(d) allocation of purchase price of $119,835 including estimated costs of
the transaction totaling $8,000, based on fair market value of the
acquired assets and liabilities, as follows:
<TABLE>
<S> <C>
Deferred tax benefit................................... $18,100
Minority interest...................................... 52
Accrued liabilities in connection with restructuring
and integration.................................... (18,000)
Cash................................................... (119,835)
--------
Goodwill............................................... $154,478
========
</TABLE>
(e) elimination of intercompany loan of $5,000.
TEKNI-PLEX SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands)
The following table sets forth selected historical consolidated financial
information of the Company, and has been derived from and should be read in
conjunction with the Company's audited and unaudited consolidated financial
statements, including the notes thereto. Unaudited interim data reflect, in
the opinion of the Company's management, all adjustments (consisting solely of
normal recurring adjustments) considered necessary for a fair presentation of
results for such interim periods. Results of operations for the unaudited
interim periods are not necessarily indicative of the results that may be
expected for any other interim or annual period. In addition, on March 18,
1994, Tekni-Plex was acquired by the current owners, in a transaction
accounted for under the purchase method of accounting. The financial
statements for the periods prior to March 18, 1994 are presented on the
predecessors' basis of accounting and accordingly, are not comparable to the
periods subsequent to March 18, 1994.
<TABLE>
<CAPTION>
For the Years Ended For the Periods For the Years Ended For the Six Months
Ended
------------------- ----------------------- ------------------------------ -------------------
January 1
December December to March March 19 to June 30, June 28, June 27, December December
31, 1992 31, 1993 18, 1994 July 1, 1994 1995 1996 1997 27, 1996 26, 1997
-------- -------- --------- ------------ --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................. $ 43,453 $ 44,878 $ 9,418 $ 12,723 $ 44,688 $ 80,917 $ 144,736 $ 71,595 $ 75,622
Cost of goods sold......... 35,860 36,604 7,924 9,961 34,941 62,335 107,007 53,460 55,224
Gross profit............... 7,593 8,274 1,494 2,762 9,747 18,582 37,729 18,135 20,398
Selling, general and
administrative expense.... 4,057 5,076 602 1,521 4,814 10,339 15,886 7,151 8,255
Income from operations..... 3,536 3,198 892 1,241 4,933 8,243 21,843 10,984 12,142
Interest expense, net...... 196 160 22 1,141 4,322 5,816 8,094 4,129 4,336
Other (income) expense..... (33) 7 45 62 234 469 646 440 158
Pre-tax income before
extraordinary item........ 3,373 3,031 825 38 377 1,958 13,103 6,415 7,648
Income tax provision(a).... 305 267 56 17 211 982 4,675 2,255 2,907
Income before
extraordinary item........ 3,068 2,764 769 21 166 976 8,428 4,160 4,741
Extraordinary item (loss).. -- -- -- -- -- -- (20,666)(b) -- --
Net income (loss).......... $ 3,068 $ 2,764 $ 769 $ 21 166 $ 976 $ (12,238) $ 4,160 4,741
Other Financial Data:
EBITDA(c).................. $ 4,204 $ 3,800 $ 985 $ 1,988 7,922 $ 14,157 $ 30,221 $ 15,062 17,137
EBITDA margin(c)........... 9.7% 8.5% 10.5% 15.6% 17.7% 17.5% 20.9% 21.0% 22.7%
Depreciation and
amortization.............. $ 636 $ 608 $ 138 $ 879 3,462 $ 6,821 $ 9,551 $ 4,816 4,793
Capital expenditures....... 502 1,423 420 157 614 2,275 3,934 1,402 1,939
Cash flows:
From operations............ 2,181 3,512 (564) 1,147 2,354 6,568 19,536 9,908 4,966
From investing............. (1,295) (1,871) 315 (45,567) (614) (49,522) (6,273) (1,771) (7,009)
From financing............. (680) (570) (1,121) 44,465 (1,451) 43,669 (3,217) (6,565) (1,860)
Ratios:
Ratio of earnings to fixed
charges(d)................ 18.2x 19.9x 38.5x 1.0x 1.1x 1.3x 2.6x 2.6x 2.8x
Ratio of EBITDA to
interest expense.......... -- -- -- 1.7x 1.8x 2.4x 3.7x 3.6x 3.9x
Balance Sheet Data
(End of Period):
Working capital............ $ 5,307 $ 6,023 $ 4,565 $ 1,673 3,173 $ 11,660 $ 25,950 $ 13,299 28,400
Total assets............... 13,204 15,701 14,900 53,724 53,415 121,770 129,029 120,046 130,684
Total debt (including
current portion).......... 1,913 1,616 588 36,396 35,004 70,436 75,000 64,031 75,608
Stockholders' equity....... 7,565 10,086 10,855 11,521 11,687 24,162 30,397 28,322 35,071
</TABLE>
- ------------
(a) Prior to the acquisition of Tekni-Plex by the current owners, the
previous owners elected to be taxed as an "S" corporation for federal
income tax purposes. Accordingly, there was no provision for federal
income taxes for periods prior to March 18, 1994 as such income was
reported on the federal income tax returns of the shareholders.
(b) Net loss for the year ended June 27, 1997 includes an extraordinary
loss comprised of (i) a prepayment penalty of $1.2 million and the
write-off of deferred financing costs and debt discounts of $3.4
million, net of the combined tax benefit of $1.8 million, in connection
with the early repayment of debt and (ii) a loss of $17.8 million on
the repurchase of redeemable warrants. See "Tekni-Plex Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(c) EBITDA is defined as net income before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of the Company's ability to incur
and service debt. However, EBITDA should not be considered in
isolation as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. In addition, this
measure of EBITDA may not be comparable to similar measures reported by
other companies. EBITDA margin is calculated as the ratio of EBITDA to
net sales for the period.
(d) For purposes of the ratio of earnings to fixed charges, (i) earnings
are calculated as the Company's earnings before income taxes,
extraordinary item and fixed charges and (ii) fixed charges include
interest on all indebtedness, amortization of deferred financing costs
and accretion of the warrant.
TEKNI-PLEX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparability of Periods
Financial results for the year ended June 27, 1997 are not fully comparable to
the year ended June 28, 1996, and financial results for the year ended June
28, 1996 are not fully comparable to the year ended June 30, 1995, because of
the acquisition of Flemington on December 22, 1995 (although the Company does
not consider this acquisition in itself to be substantial in the overall
context) and the acquisition of Dolco on February 21, 1996.
Results of Operations
The following discussion and analysis should be read in conjunction with the
"Tekni-Plex Selected Historical Financial Information" and the Tekni-Plex
Financial Statements included elsewhere in this Offering Memorandum. The
following table sets forth, for the periods indicated, selected operating data
as a percentage of net sales.
Selected Financial Information
(Percentage of net sales)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Years Ended Six Months Ended
--------------------------------------------------- -----------------------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 78.2 77.0 73.9 74.7 73.0
Gross profit.................... 21.8 23.0 26.1 25.3 27.0
Selling, general and
administrative expenses........ 10.8 12.8 11.0 10.0 10.9
Income from operations.......... 11.0 10.2 15.1 15.3 16.1
Interest expense................ 9.7 7.2 5.6 5.8 5.7
Provision for income taxes...... 0.5 1.2 3.2 3.1 3.8
Income before extraordinary
item........................... 0.4 1.2 5.8 5.8 6.3
Extraordinary item (loss)....... -- -- (14.3) -- --
Net income (loss)............... 0.4 1.2 (8.5) 5.8 6.3
Depreciation and amortization... 7.7 8.4 6.6 6.7 6.3
EBITDA(a)....................... 17.7 17.5 20.9 21.0 22.7
</TABLE>
- ------------
(a) EBITDA is defined as net income before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to incur and service
debt. However, EBITDA should not be considered in isolation as a substitute
for net income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of the Company's
profitability or liquidity. In addition, this measure of EBITDA may not be
comparable to similar measures reported by other companies.
Six Months Ended December 26, 1997 Compared to Six Months Ended
December 27, 1996
Net sales increased to $75.6 million for the six months ended December 26,
1997 from $71.6 million for the six months ended December 27, 1996. This
represents an increase of $4.0 million or 5.6%. The increased sales are
primarily attributed to increased demand for pharmaceutical packaging products.
Cost of sales increased to $55.2 million for the six months ended December 26,
1997 from $53.5 million for the six months ended December 27, 1996. Expressed
as a percentage of net sales, cost of goods sold fell to 73.0% for the six
months ended December 26, 1997 from 74.7% for the six months ended December
27, 1996. The decline in cost of goods sold as a percentage of net sales was
due primarily to a decline in raw material costs, continued reductions in
overhead costs and improved fixed cost absorption from higher sales volumes.
Gross profit as a result, increased to $20.4 million or 27.0% of net sales for
the six months ended December 26, 1997, from $18.1 million or 25.3% of net
sales for the same period in 1996.
Selling, general and administrative expenses increased to $8.3 million or
10.9% of net sales for the six months ended December 26, 1997 from $7.2
million or 10.0% of net sales for the same period in 1996. This is due
primarily to increases in administrative costs and higher selling expenses
associated with the global expansion of the Company's pharmaceutical packaging
business.
Operating profit increased to $12.1 million or 16.1% of net sales for the six
months ended December 26, 1997, from $11.0 million or 15.3% for the same
period in 1996, for the reasons stated above.
Interest expense increased to $4.3 million or 5.7% of net sales for the six
months ended December 26, 1997, from $4.1 million or 5.8% of net sales for the
same period in 1996 due primarily to a restructuring of the Company's debt from
notes to bonds.
Provision for income taxes increased to $2.9 million or 3.8% of net sales for
the six months ended December 26, 1997, from $2.3 million or 3.1% for the same
period in 1996. The Company's effective tax rate was 38% for the six months
ended December 26, 1997 compared to 35% for the same period in 1996. The
increase between periods is due primarily to the depletion of tax carryover
losses and credits.
Net income increased to $4.7 million or 6.3% of net sales for the six months
ended December 26, 1997, from $4.2 million or 5.8% of net sales for the same
period in 1996, for the same reasons discussed above.
Depreciation and amortization remained at $4.8 million for the six months
ended December 26, 1997, as compared to the same period of 1996. As a
percentage of net sales, depreciation and amortization decreased to 6.3% from
6.7% for the same period in 1996 due to the increase in sales.
EBITDA increased to $17.1 million or 22.7% on net sales for the six months
ended December 26, 1997, from $15.1 million or 21.0% of net sales for the same
period in 1996, for the same reasons discussed above.
Year Ended June 27, 1997 Compared to Year Ended June 28, 1996
Net sales for the year ended June 27, 1997 were $144.7 million, a 78.9%
increase over net sales of $80.9 million for the year ended June 28, 1996. The
increase was due primarily to the acquisition of Dolco in February 1996, which
accounted for $55.2 million, and to a much lesser extent to the acquisition of
Flemington in December 1995. The level of growth for the year ended June 27,
1997, is not necessarily indicative of future operations.
Cost of sales increased to $107.0 million for the year ended June 27, 1997, of
which the Dolco operation accounted for $40.3 million of such increase, from
$62.3 million for the same period in 1996. Expressed as a percentage of net
sales, cost of sales improved to 73.9% for the year ended June 27, 1997 from
77.0% for the same period in 1996. The decline in cost of sales as a
percentage of net sales was due primarily to a decline in raw material costs
resulting from improved market conditions and the increased purchasing power
of the Company. This level of increase in costs and decrease as a percent of
sales may not be indicative of future operations.
Gross profit, as a result, increased to $37.7 million or 26.1% of net sales
for the year ended June 27, 1997, from $18.6 million or 23.0% of net sales for
the same period in 1996.
Selling, general and administrative expenses increased to $15.9 million or
11.0% of net sales for the year ended June 27, 1997, from $10.3 million or
12.8% of net sales for the same period in 1996. Selling, general and
administrative expenses decreased as a percentage of net sales due primarily
to the acquisition of Dolco with no relatively comparable increase in the
general and administrative staff of the Company. See also note 9 to the
financial statements of the Company regarding stock options.
Income from operations increased to $21.8 million or 15.1% of net sales for
the year ended June 27, 1997, from $8.2 million or 10.2% of net sales for the
same period in 1996, for the reasons stated above.
Interest expense increased to $8.1 million or 5.6% of net sales for the year
ended June 27, 1997, from $5.8 million or 7.2% of net sales for the same
period in 1996 due primarily to increased borrowings related to the Dolco
Acquisition which accounted for an increase of $2.4 million. Expressed as a
percentage of net sales, interest expense for the 1997 period fell to 5.6%
from 7.2% for the 1996 period as a result of the decreasing debt as a
percentage of net sales following the Dolco and Flemington acquisitions.
Provision for income taxes increased to $4.7 million or 3.2% of net sales for
the year ended June 27, 1997, from $1.0 million or 1.2% of net sales for the
same period in 1996. The Company's effective tax rate was 36% for the year
ended June 27, 1997. The decrease from the Company's expected rate of 38% was
a result of the realization of certain state tax benefits.
Income before extraordinary item increased to $8.4 million or 5.8% of net
sales for the year ended June 27, 1997, from $1.0 million or 1.2% of net sales
for the same period in 1996, for the reasons discussed above.
Extraordinary loss on early extinguishment of debt was $20.7 million for the
year ended June 27, 1997. On April 4, 1997, the Company issued $75.0 million
of 11(1)/(4)% Notes. Interest on the 11(1)/(4)% Notes is payable semi-
annually. The Company also received approximately $18.4 million in additional
capital contribution. These proceeds were used to repay the balance of $36.8
million on the Company's then outstanding credit facility, repay the then
existing senior subordinated notes for $25.2 million, including a prepayment
penalty of $1.2 million, and repurchase the redeemable warrants for $20.0
million. The extraordinary loss comprised of (i) the prepayment penalty of
$1.2 million and the write-off of deferred financing costs and debt discount
of $3.4 million, net of the combined tax benefit of $1.8 million, and (ii) the
loss on the repurchase of the warrants of $17.8 million.
Net income (loss) decreased to a loss of $12.2 million or 8.5% of net sales
for the year ended June 27, 1997 from a net income of $1.0 million or 1.2% of
net sales for the same period in 1996, for the reasons discussed above.
Depreciation and amortization increased to $9.6 million or 6.6% of net sales
for the year ended June 27, 1997 from $6.8 million or 8.4% of net sales for
the same period in 1996. The increase in depreciation and amortization is due
to the acquisition of Dolco which represented $4.0 million of depreciation and
amortization.
EBITDA increased to $30.2 million or 20.9% of net sales for the year ended
June 27, 1997, from $14.2 million or 17.5% of net sales or the same period in
1996, for the reasons stated above.
Year Ended June 28, 1996 Compared to Year Ended June 30, 1995
Net sales increased to $80.9 million in fiscal year 1996, representing an
increase of $36.2 million or 81.0% over net sales of $44.7 million in fiscal
year 1995. The increase in net sales was primarily the effect of four full
months of Dolco results.
Cost of sales increased to $62.3 million in fiscal year 1996 from $34.9
million in fiscal year 1995, primarily due to the acquisitions. However, when
expressed as a percent of net sales, cost of sales decreased to 77.0% for
fiscal year 1996 from 78.2% for fiscal year 1995. The decline in cost of sales
as a percentage of net sales was due primarily to the increased purchasing
power of the Company and reductions in manufacturing overhead as a result of
the Dolco Acquisition.
Gross profit, as a result, increased to $18.6 million or 23.0% of net sales in
fiscal year 1996 from $9.7 million or 21.8% of net sales in fiscal year 1995.
Selling, general and administrative expenses increased to $10.3 million or
12.8% of net sales in fiscal year 1996, from $4.8 million or 10.8% of net
sales in fiscal year 1995. The increase in selling, general and administrative
expenses was due primarily to the Dolco Acquisition. The increase in selling,
general and administrative expenses as a percentage of net sales was due to
the to the historically higher selling, general and administrative expenses as
a percentage of net sales in the Dolco operation.
Income from operations increased to $8.2 million or 10.2% of net sales in
fiscal year 1996 from $4.9 million or 11.0% of net sales for the same period
in 1995. As a percentage of net sales, the increase in gross profit was more
than offset by the increase in selling, general and administrative expenses.
Interest expense increased to $5.8 million or 7.2% of net sales in fiscal year
1996, from $4.3 million or 9.7% of net sales in fiscal year 1995 due primarily
to an increase in borrowings related to the Dolco Acquisition. The lower
percentage of net sales for 1996 interest expenses reflects the decreasing
debt as a percentage of net sales following the Dolco Acquisition.
Provision for income taxes increased to $1.0 million and an effective tax rate
of 50.2% in fiscal year 1996, from $0.2 million and an effective tax rate of
56.0% in fiscal year 1995. The effective tax rate is higher than the Company's
expected rate of 38% due to certain state and local taxes incurred which
relate to prior periods in both fiscal years.
Net income increased to $1.0 million or 1.2% of net sales in fiscal year 1996
from $0.2 million or 0.4% of net sales in fiscal year 1995, for the reasons
discussed above.
Depreciation and amortization increased to $6.8 million or 8.4% of net sales
for the year ended June 28, 1996 from $3.5 million or 7.7% of net sales for
the same period in 1995. The increase in depreciation and amortization is due
to the acquisition of Dolco.
EBITDA increased to $14.2 million or 17.5% of net sales in fiscal year 1996
from $7.9 million or 17.7% of net sales for fiscal year 1995, for the reasons
stated above.
Liquidity and Capital Resources
The Company's principal sources of funds since March 1994 consisted of cash
from operations and financing sources. For the six months ended December 26,
1997, net cash provided by operating activities was $5.0 million compared to
$9.9 million for the same period in 1996. For the year ended June 27, 1997,
net cash provided by operating activities was $19.5 million compared to net
cash provided by operating activities of $6.6 million for the year ended June
28, 1996, and $2.4 million for the year ended June 30, 1995.
The Company's working capital at December 26, 1997 was $28.4 million compared
to $26.0 million at June 27, 1997 and $11.7 million at June 28, 1996. The
increase in working capital at December 26, 1997 was due primarily to higher
accounts receivable and inventory associated with increased sales. The
increase in working capital at June 27, 1997 compared to the prior fiscal year
was due primarily to the restructuring of the Company's debt, which resulted
in a build up of cash and a decrease of liabilities.
The estimated aggregate amount of funds required for the Transactions was
approximately $314.0 million, including approximately $215 million in debt or
other obligations that were repaid or assumed. The financing for the
Transactions was provided by the Offering, the Bank Financing and cash on hand.
Concurrently with the Offering, the Company entered into a Bank Financing
which consisted of a $50 million A Term Loan Facility, a $65 million B Term
Loan Facility and $90 million Revolving Credit Facility. The Revolving Credit
Facility replaced the Company's $75 million existing revolving credit
facility. As of December 26, 1997 and June 27, 1997, there was no outstanding
balance under the existing credit facility. The proceeds of the Term
Facilities were used to fund the Transactions. As of March 27, 1998 the
Company had $90.0 million undrawn and available under the Revolving Credit
Facility to fund ongoing general corporate and working capital requirements.
Borrowings under the A Term Loan Facility shall be subject to annual
amortization, payable in quarterly installments, beginning in June 1998 and
ending in March 2004, with payments totaling $35 million due in the final two
years. Borrowings under the B Term Loan Facility shall be subject to annual
amortization, payable in quarterly installments, beginning in June 1998 and
ending in March 2006, with payments totaling approximately $61 million due in
the final two years. The full amount outstanding under the Revolving Credit
Facility must be paid in March 2004. See "Description of Certain
Indebtedness--The Bank Financing." In April 1997, the Company issued $75
million aggregate principal amount of 11(1)/(4)% Notes. The 11(1)/(4)% Notes
mature on April 1, 2007. See "Description of Certain Indebtedness--The
11(1)/(4)% Notes." The Indenture, the 11(1)/(4)% Indenture and the Bank
Financing each include various covenants which limit the Company's ability to
incur additional debt. See "Description of Certain Indebtedness." Also see
"Description of Notes--Covenants--Limitation on Indebtedness."
The Company's capital expenditures for the six months ended December 26, 1997
and the years ended June 27, 1997 and June 28, 1996 were $1.9 million, $3.9
million and $2.3 million, respectively. Management expects that annual capital
expenditures will increase from historical levels during the next few years as
the Company makes improvements needed to address air emissions at three of the
Company's manufacturing facilities, and the Company pursues new development
and cost-reduction opportunities. Management has identified potential capital
investment opportunities of approximately $5.1 million for the calendar year
1998 in addition to approximately $3.0 million of non-discretionary capital
expenditures anticipated during such period. PureTec has historically financed
its ongoing capital expenditure requirements from its cash flow provided from
operations and borrowings under its credit facilities. Prior to the execution
of the Merger Agreement, PureTec management had budgeted capital expenditures
of approximately $23.5 million, including approximately $11.5 million for
various expansion and cost improvement projects. The Company is currently
reviewing PureTec's capital expenditure budget, particularly in light of the
ongoing integration of PureTec, and certain adjustments to this budget may be
made.
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
facilities 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 credit facilities to meet the Company's cash
needs to the extent management anticipates.
Part of the Company's strategy is to explore possible future acquisitions. 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.
New Accounting Pronouncements
In June 1997, SFAS 130, Reporting Comprehensive Income, and SFAS 131,
Disclosures about Segments of an Enterprise and Related Information, were
issued. SFAS 130 addresses standards for reporting and display of
comprehensive income and its components, and SFAS 131 requires disclosure of
reportable operating segments. In February 1998, SFAS 132, Employer's
Disclosures About Pensions and Other Post-Retirement Plans, was issued. SFAS
132 standardizes pension disclosures. These statements are effective for the
Company's 1999 fiscal year. The Company will be reviewing these pronouncements
to determine their applicability to the Company, if any.
Seasonality
Although certain different product lines of the Company experience some
seasonality, their effects are generally offsetting, and the Company overall
has not experienced any material seasonality in the periods reflected herein.
Effects of Inflation
The Company believes that inflation has not significantly affected its results
of operation in the periods reflected herein.
Year 2000 Issues
In mid-1997, the Company acquired and installed a new, large, mainframe
computing system with software that is "Year 2000 compliant". Since that time,
the Company has been in the process of converting its various older computer
systems to this mainframe system. At this time, all of the Company's systems,
with the exception of the systems for the former Dolco and PurePlast
operations, have been successfully converted. The Company expects that the
conversion of these remaining systems will be completed prior to year-end.
Management does not expect costs associated with completion of the conversion
process to have a material impact on the Company's operations or financial
condition.
BUSINESS
Overview
The Company designs, manufactures and markets packaging materials primarily
for the pharmaceutical and food industries. The Flexible Packaging Group sells
primarily flexible packaging materials to customers including pharmaceutical
companies. The Company is the market leader for clear, high-barrier
laminations for pharmaceutical blister packaging. The Company believes, based
upon its knowledge and experience in the industry, that it has a greater than
90% share of the market for such products. These packaging materials are used
for fast-acting pharmaceuticals that are generally highly reactive to
moisture. The Foam Products Group sells primarily foamed polystyrene packaging
products such as egg cartons and processor trays to the poultry and meat
industries. The Company believes, based upon its knowledge and experience in
the industry, that it produces in excess of 80% of all foam egg cartons and
has approximately 40% of the egg carton market. The Company has also built a
strong presence in the processor tray market, where it believes, based upon
its knowledge and experience in the industry, that it has an estimated share
of greater than 25%.
On March 3, 1998, the Company completed the merger of Merger Sub, a
wholly-owned subsidiary of Tekni-Plex, with and into PureTec pursuant to the
Merger Agreement among Tekni-Plex, PureTec, Merger Sub, and Plastic Specialties
and Technologies, Inc. The total consideration paid by the Company for the
PureTec Acquisition was approximately $296.5 million, which includes the
repayment of debt and the elimination of minority interests at certain
subsidiaries of PureTec, and excludes fees and expenses.
PureTec is the leading domestic producer of garden hose, medical-grade vinyl
compounds and precision tubing and gaskets and the second leading domestic
producer of disposable medical tubing. PureTec also produces plastic materials
that are used in various specialty applications and is the leading non-captive
supplier of recycled "PET" suitable for reuse in new bottles, as well as
plastic sheet and other specialized applications.
Following completion of the PureTec Acquisition, the Company's pro forma
revenues and EBITDA for the fiscal year ended June 27, 1997 would have been
$460.1 million and $69.8 million, respectively, for the six months ended
December 26, 1997 would have been $214.3 million and $32.9 million,
respectively. See "Pro Forma Unaudited Condensed Financial Information."
The management of the Company focuses on organizational development, imparting
a results-oriented culture to all areas of its businesses. Management seeks
and implements product and process improvements to produce higher quality
products, improve efficiencies, reduce labor and material costs, and create
differentiated products and product line extensions. The Company also expands
its product offerings by acquiring synergistic companies and significantly
reduces costs through product line rationalization and realizing economies of
scale. Management believes that this focus will continue with respect to the
Company's on-going business and will be the basis for successfully integrating
the PureTec Acquisition.
Company History
Tekni-Plex was founded as a Delaware corporation in 1967 to acquire the
General Felt Products division of Standard Packaging Corporation. In 1970, the
Company built an additional manufacturing facility in Somerville, New Jersey,
diversifying into the business of producing polystyrene foam trays for the
poultry processing industry. The Somerville facility serves as the current
headquarters of the Company.
1994--Acquisition by the Current Owner
In March 1994, Tekni-Plex was acquired by its current controlling
shareholder and Dr. F. Patrick Smith who was elected Chief Executive
Officer. Kenneth W.R. Baker, the Company's Chief Operating Officer, was
appointed in April 1994. At that time, the principal product lines in the
Flexible Packaging Group consisted of clear, high-barrier laminations for
pharmaceutical blister packaging, and closure (bottle cap) liners,
primarily for pharmaceutical end-uses. The principal product lines in the
Foam Products Group consisted of padded and unpadded foam processor trays
primarily for the poultry industry. At the time of the 1994 acquisition,
the current management was faced with three distinctly different situations
in Tekni-Plex's three primary product lines: (i) the clear, high-barrier
blister packaging product line, produced in Somerville, had achieved good
operating margins, but, because it was limited to a relatively narrow (but
important) range of performance characteristics, it was not positioned to
take full advantage of the trends in new drug development in the
pharmaceutical industry; (ii) the closure liner products, produced in the
Brooklyn plant, had consistently generated operating losses; and (iii) the
foam processor tray market had become intensely competitive as to price and
Tekni-Plex's heavy duty products were too costly and thus ill-suited to
compete in this environment.
In the ensuing months, management changed the Company's culture into a
focused, results-oriented, professional organization capable of managing
change and addressed each of the strategic issues facing the principal product
lines. New lines of clear, high-barrier laminations were developed that
extended the range of pharmaceutical packaging applications and laid the
groundwork for future sales growth. In the Brooklyn operation, management
developed and implemented an item-specific, customer-specific, product-costing
system. Once the true costs of the 600-plus basic items were understood, a
rational pricing policy was established. The Brooklyn operation was moved and
consolidated into the Flemington operation for further efficiencies, as
described below. The foam processor tray operation was reorganized, primarily
to establish a clear delineation of responsibilities. A new line of
material-efficient products was introduced with increased strength and lower
production costs, allowing the Company to participate in the price competitive
market place. In addition, the manufacturing operation was reconfigured to
improve material flows, and focus was brought to bear on the padding
operations to reduce waste and inefficiency.
1995--Flemington Acquisition
In December 1995, Tekni-Plex acquired the Flemington, New Jersey, plant and
business of Hargro for approximately $7.5 million. The Flemington plant
utilizes lamination and coating technology to produce packaging materials for:
(i) pharmaceutical products (transdermal patches, sutures, iodine and alcohol
swabs, aspirin and other physician samples); (ii) electronics and
telecommunications products (optical fiber and conventional cable shielding,
transformer and ballast insulation); (iii) industrial products (photographic
and automotive); and (iv) food products (snack foods, dry powders). Management
believed that the Flemington acquisition offered significant benefits by
providing a modern facility that increased capacity and removed physical
limitations associated with the older Brooklyn plant, adding new technologies
complimentary to Tekni- Plex's then existing capabilities, and avoiding
capital expenditures for environmental compliance that would have been
required at the Brooklyn plant. The Company relocated the Brooklyn equipment,
personnel and business into the Flemington facility during the quarter ending
in June 1996, which was concurrent with the expiration of the Brooklyn lease.
Having similar technologies under one roof led to improved efficiencies as
each group learned the subtle enhancements developed over the years by the
other. The result has been a combined operation with considerably higher
efficiencies and lower costs than the sum of the stand-alone operations.
1996--Dolco Acquisition
In February 1996, as Tekni-Plex was integrating the Flemington acquisition
from eight weeks earlier, it completed its acquisition of Dolco, a
publicly-traded $81 million foam products company which at the time was nearly
twice the size of Tekni-Plex. Dolco had been in the business of producing foam
packaging products since the 1960s and had attained the leading share of foam
egg carton sales in the United States. Following the acquisition, management
closed Dolco's headquarters in California and absorbed the requisite functions
into the Company. The Dolco research and development facility in
Lawrenceville, Georgia, was also closed and, in part, moved to the nearby
Dolco plant also in Lawrenceville. Dolco's operations in Wenatchee
(Washington), Dallas and Lawrenceville were reorganized. Management negotiated
more favorable material supply agreements, instituted pricing policies
consistent with those of the Company, and devised strategies to address the
environmental issues facing the Company. In August 1997, Dolco, which was then
a wholly owned subsidiary of Tekni-Plex, was merged into Tekni-Plex.
1997--PurePlast Acquisition
In July 1997, Tekni-Plex acquired the business and operating facility of
PurePlast Inc. of Cambridge, Ontario, Canada for $2.3 million. PurePlast
produces calendered polyvinyl chloride (PVC) sheet for pharmaceutical, food
and electronic packaging applications. Calendered PVC sheet is one of the
critical components of the Company's clear high barrier laminations for
pharmaceutical blister applications. Management has since negotiated more
favorable material supply agreements, expanded PurePlast pharmaceutical sales
globally and reorganized operations, thus effecting the integration of
PurePlast with the Company.
Overview of PureTec
PureTec is a vertically integrated manufacturer of specialty plastic products
and has leading market positions in most of its core product lines. With more
than 40% of the market in the United States, PureTec, through its Colorite
Plastics division, is the leading producer of garden hose. Through its Action
Technology division, PureTec is the leading producer of precision tubing and
gaskets for packaging applications, with over 90% of the domestic, non-captive
markets for such products. PureTec's specialty tubing and gasket product line
consists of (i) extruded plastic tubing, sold primarily to manufacturers of
aerosol valves, dispenser pumps, and writing instruments; (ii) rubber and
thermoplastic gaskets for the aerosol and dispenser pump markets; and (iii)
consumer products, chiefly consisting of swimming pool and other corrugated
hose. Action's products are manufactured in the United States and Europe and
are sold throughout the world.
PureTec's Plastron division is the second largest non-captive manufacturer of
medical tubing with approximately 60% of the market for cardiovascular tubing
and 50% of the intravenous tubing market. The Colorite Polymers division is
the largest producer of medical-grade vinyl compounds for FDA-regulated
applications, with approximately 50% of the domestic, non-captive market.
These compounds are sold to leading manufacturers of medical devices and
equipment. They are also sold to producers of tubing and closures for the food
and beverage industry and used in a variety of food-contact applications.
PureTec's specialty vinyl polymers business consists of two divisions of the
Colorite Polymers group: Burlington Resins, Inc., doing business as SVR; and
Cybertech Polymers. SVR employs specialized technology to produce dispersion,
blending, and copolymer suspension resins for a variety of industries,
including floor covering, automotive sealants and adhesives, coil coatings,
plastisol compounding and PVC packaging. Cybertech Polymers produces a variety
of specialized and general purpose vinyl compounds.
PureTec is also a leading plastics recycler. PureTec believes that its
Pure Tech Plastics division is the leading non-captive supplier of high-
quality recycled PET suitable for reuse in new bottles, as well as plastic
sheet and other specialized applications. The division has developed
proprietary processes for cleaning, sorting, and recycling post-consumer
plastic bottles into clean PET flakes or pellets. Raw materials used by
the Pure Tech Plastics division consist mostly of post-consumer soft drink
bottles, purchased from various suppliers who obtain bottles in states with
"deposit laws," or who conduct curb-side pickup operations.
For the six months ended January 31, 1998, PureTec had net sales of $138.7
million, a net loss from continuing operations of $3.3 million and EBITDA
(defined as net income before minority interest, equity in loss of affiliates,
income taxes, interest, depreciation and amortization and write-offs of
goodwill, intangibles and obsolete equipment) of $15.6 million for an EBITDA
margin of 11.2%, compared with net sales of $123.4 million, a net loss from
continuing operations of $4.8 million and EBITDA of $14.5 million for an
EBITDA margin of 11.8% for the six months ended January 31, 1997. For the
fiscal year ended July 31, 1997, PureTec had net sales of $315.3 million, net
income from continuing operations of $1.3 million and EBITDA of $39.6 million
for an EBITDA margin of 12.6%, compared with net sales of $326.3 million, a
net loss from continuing operations of $4.4 million and EBITDA of $37.2
million for an EBITDA margin of 11.4% for the year ended July 31, 1996.
The Company believes that the PureTec Acquisition will have many significant
strategic benefits, including:
o Strong market shares in core businesses. PureTec has leading market
positions in most of its core product lines, a characteristic shared by the
Company. Management believes that Tekni-Plex's strong market presence in
its core businesses has been a key element in achieving consistent earnings
growth since acquiring the Company in 1994, and that the combined entity's
strong market presence in its core businesses will provide the merged group
with even greater consistency of earnings and cash flow.
o Diverse product mix and expanded geographic presence. The combined group
will offer a more diverse range of products over a wider geographic area
and provide a broader base for manufacturing and distribution. The Company
currently has sales offices in London and Manila, as well as sales
representatives in Europe, China (including Hong Kong) and Mexico. The
Company also has distribution networks and manufacturing liaisons in Europe
and Southeast Asia (including Australia). PureTec currently has
manufacturing and sales offices in Europe and Canada. The Company believes
that the combination of its operations with PureTec will provide a
foundation for further international expansion.
o Technically sophisticated products; technology sharing. Both the Company
and PureTec generally compete in the most technically sophisticated end of
each of their markets, such as primary pharmaceutical packaging, medical
tubing and medical plastics which are subject to strict FDA regulatory
requirements. The manufacturing operations of each entity employ similar
core technical competencies, as both involve plastic extrusion and
compounding. The Company believes that the PureTec Acquisition provides an
opportunity to enhance both companies' operations by combining and sharing
the two companies' common and complementary technologies.
o Cost savings and synergies. The Company expects to realize significant
cost savings and synergy benefits from (i) improved manufacturing and
production efficiencies, (ii) economies of scale and raw material purchasing
efficiencies and (iii) the elimination of certain duplicate overhead and
operating expenses.
o Significantly increased size. The PureTec Acquisition provides the Company
with "critical mass" creating a stronger business than either of the
companies operating on a stand-alone basis. The Company believes that its
significantly increased size will enhance its ability to access the capital
markets.
Competitive Strengths
The Company believes that its competitive strengths include:
o Producer of high quality, technically sophisticated products. The
Company believes, based upon its knowledge and experience in the
industry, that it has a long-standing reputation as a manufacturer of
high-quality, high performance primary packaging products (where the
packaging material comes into direct contact with the end- product).
The Company's emphasis on quality is evidenced by its product lines
which address the high-end of their respective markets. The Company
competes in technically sophisticated areas such as the high-barrier
pharmaceutical blister packaging market. Over the years, PureTec's
operating companies have developed a reputation for high-quality
products in their niche markets. PureTec's product lines include
technically sophisticated products such as medical and specialty tubing
manufactured to precise customer specifications as well as highly
specialized medical-grade vinyl compounds.
o Cost efficient producer. The Company continually focuses on improving
underlying operations and reducing costs. Since the 1994 acquisition,
current management has improved the Company's cost structure from an EBITDA
margin (as defined) of 8.5% and income before income taxes as a percent of
sales of 6.8% on sales of $44.9 million for the twelve months ended
December 31, 1993 to an EBITDA margin of 21.7% and income before income
taxes and extraordinary item as a percent of sales of 9.7% on sales of
$148.8 million for the trailing twelve months ended December 26, 1997. The
Company believes that the PureTec Acquisition provides significant
opportunities to realize cost savings and synergies in the combined
businesses through the sharing of complementary technologies and
manufacturing techniques, as well as economies of scale including the
purchase of raw materials. In addition, the Company believes that cost
savings can be achieved through the elimination of certain duplicate
overhead and operating expenses.
o Experienced management team. The Company's management team has been
successful in selecting and integrating strategic acquisitions as well as
improving underlying business fundamentals. After significantly improving
the business of Tekni-Plex following the 1994 acquisition of the Company by
the current owners, management successfully integrated both the Flemington
and Dolco operations during 1994, the latter being a public company then
nearly twice the Company's size. During the same period, the Brooklyn and
Flemington operations were merged, substantially improving production
efficiencies and reducing waste. In July 1997, the Company acquired
PurePlast Inc. of Ontario, Canada whose operations have already been
successfully integrated with those of the Company. Members of the
management team have integrated acquisitions, effected turnarounds,
provided strategic direction and leadership, increased sales and market
share, improved manufacturing efficiencies and productivity, and developed
new technologies to enhance the competitive strengths of the companies they
have managed. The Company believes that its track record of integrating
acquisitions will serve as the basis for the successful integration of
PureTec. In addition, PureTec has managers in each of its business units
with extensive experience and expertise as well as thorough technical and
operating skills.
o Strong market share in core businesses. The Company has a strong market
presence in its core product lines. The Company believes that it
produces in excess of 80% of all foam egg cartons and has approximately
40% of the overall egg carton market which is split approximately
equally between foam and pulp-based products. The Company believes that
it has greater than a 90% share of the market for clear, high-barrier
laminations for pharmaceutical blister packaging. The Company has also
built a strong presence in the processor tray market where it believes
that it has greater than a 25% share. PureTec has leading market
positions in most of its core product lines. PureTec believes that it
is the leading producer of garden hose in the United States with over
40% of the market and that it is the second largest non-captive
manufacturer of medical tubing with approximately 60% of the market for
cardiovascular tubing and 50% of the intravenous tubing market. PureTec
is also the leading producer of precision tubing and gaskets for
packaging applications, with over 90% of the domestic, non-captive
markets for such products. PureTec's management believes that it is the
world's largest producer of high-quality vinyl compounds for the
medical industry with approximately 50% of the domestic, non- captive
market. In addition, PureTec is the leading non-captive supplier of
recycled PET suitable for reuse in new bottles, as well as plastic sheet
and other specialized applications.
o Strong customer relationships. Both the Company and PureTec have
long-standing relationships with many of their customers. The Company
estimates the average tenure among the Company's ten largest customers at
more than 14 years. The Company attributes its long relationships with its
customers to the ability to consistently manufacture high quality products
and to consistently provide a superior level of customer service. The
Company routinely wins recognition for its superior products and customer
service including a recent Outstanding Supplier Award from Pharmacia &
Upjohn, and an Outstanding Quality Award from Abbott Laboratories. PureTec
estimates the average tenure among PureTec's ten largest customers at more
than 14 years. PureTec has a significant base of large, stable customers
who purchase PureTec's products on a repeat basis. PureTec attributes its
long relationships with customers to its ability to produce consistent,
high-quality products with on-time delivery.
Business Strategy
The Company seeks to maximize its growth and profitability and take advantage
of its competitive strengths by pursuing the following business strategy:
o Ongoing cost reduction through technical process improvement. The Company
has an ongoing program to improve manufacturing and other processes in
order to drive down costs. Examples of cost improvement programs include:
(i) material and energy conservation through enhanced process controls;
(ii) reduction in machine set-up time through the use of proprietary
technology; (iii) continual product line rationalization; and (iv)
development of backward integration opportunities. The Company believes
that the PureTec Acquisition will give rise to significant cost savings
from improved manufacturing efficiencies, economies of scale and reduced
operating and overhead expenses.
o Internal growth through product line extension and improvement. The
Company continually seeks to improve and extend its product lines and
leverage its existing technological capabilities in order to increase
market share and improve profitability. The Company believes that it has a
significant opportunity to increase sales of its foamed polystyrene
packaging products by focusing on incremental improvements to these
products. The Company's strategy is to emphasize its expertise in providing
primary packaging materials with specific high performance characteristics
through the use of various plastic materials (and combinations thereof) and
proprietary manufacturing process techniques. PureTec has also developed a
successful track record of new and improved products. PureTec's garden hose
business has introduced patented Colorite(R) Evenflow(R) design and drinking
water safe product lines. PureTec's medical tubing business has introduced
microbore tubing, silicone substitute formulations, and trilayer tubing
substitutes. In PureTec's medical-grade vinyl compounds business, PureTec's
chemists work closely with customers to develop compounds that address
their specific requirements. Through this custom work, PureTec has
introduced a number of breakthroughs to the medical device industry by
developing formulations with unique physical characteristics. For example,
PureTec has recently developed a new family of flexible vinyl compounds
designed to replace silicone rubber in a variety of medical and commercial
applications. The Company believes that the PureTec Acquisition may
accelerate new product introduction through the sharing of technological
and manufacturing expertise and the joint development of new products.
o Growth through international expansion. The Company believes that there is
significant opportunity to expand international sales. The Company
currently has sales offices in London and Manila as well as sales
representatives in Europe, China (including Hong Kong) and Mexico. The
Company also has distribution networks and manufacturing liaisons in Europe
and Southeast Asia (including Australia). PureTec's international operations
give the Company a manufacturing and direct sales force presence in Europe
and also strengthen the Company's existing presence in Canada. The Company
expects that the combination of its operations with PureTec will provide a
foundation for the further expansion of both companies' products in other
overseas markets.
o Growth through acquisitions. The PureTec Acquisition is consistent with
the Company's objective of pursuing acquisitions which provide the Company
with the opportunity to gain economies of scale and reduce costs through,
among other things, technology sharing and synergistic cost reduction. The
Company will continue to selectively pursue acquisitions when the
opportunity arises.
Products
Tekni-Plex
Flexible Packaging Group. The Flexible Packaging Group sells printed and
unprinted multi-layer constructions of plastic, paper and metal films and
sheets combined with layers of other materials for particular purposes, with
emphasis on pharmaceutical and food applications. The principal product lines
in this group are clear, high-barrier laminations for pharmaceutical blister
packaging, and closure (bottle cap) liner products primarily for pharmaceutical
end-uses.
Transparent, high-barrier blister packaging is primarily used to protect
over-the-counter and ethical drugs from moisture vapor infiltration or
desiccation. Blister packaging is the preferred packaging form when
dispenser handling can affect shelf life or drug efficacy, or when unit
dose packaging is needed. Unit dose packaging is being used to improve
patient compliance with regard to dosage regimen, and has been identified
as the packaging form of choice in addressing child safety aspects of drug
packaging. The advantages of transparent blisters, as opposed to opaque
foil-based materials, include the ability to visually inspect the contents
of the blister and to present the product with maximum confidence.
Before 1994, the Company's line of blister laminations addressed a
relatively small (although important) range of performance requirements,
namely, the high-barrier category. New products developed since the 1994
acquisition have extended the Company's offerings to include the ultra-
high-barrier category, previously confined to foil-based (non-transparent)
products, and the low-to-medium barrier category, previously confined to
solution-coated products (as opposed to laminated products).
Closure liners perfect the seal between a container and its closure, for
example, between a bottle and its cap. The liner material has become an
integral part of the container/closure package. Without the gasketing effect
of the liner, most container/closure packages would not be secure enough to
protect the contents from contamination or loss of freshness.
The Company has a broad range of closure liner products currently available in
the marketplace including some of the most innovative structures available for
tamper protection and special barrier applications. The Company's major
closure liner products include PS22 (a pressure sensitive coated polystyrene
foam generally used for over-the-counter and ethical drugs and vitamins),
VapoSeal(R) (vinyl coated aluminum foil used for highly hygroscopic products
such as antacid), Heat Sealable Innerseals (high-barrier seals for
highly-sensitive products), and Tekniseal(R) 33 (extruded polyethylene liner
used generally as a backing for aqueous applications).
The Flemington acquisition added strategically important new pharmaceutical
products to the Company's line for the packaging of transdermal patches,
sutures, iodine and alcohol swabs, aspirin and other physician samples. In
addition, the Company manufactures food packaging laminations, optical fiber
cable shielding materials, specialty wire and cable wrap, electrical
laminates, and other specialty coating laminates for industrial applications.
The Company's line of calendered PVC sheet, obtained through the Pure Plast
acquisition, is used by the pharmaceutical industry for unit dose blister
packaging of less hydroscopic over-the-counter and ethical drugs. PVC sheet is
also one of the critical components in the Company's line of clear
high-barrier laminations. The Company also produces PVC sheet with
electrostatic dissipation formulations which is used by the electronics
industry to protect sensitive components.
Foam Products Group. The Foam Products Group sells a wide variety of foamed
polystyrene products, including egg packaging, processor trays for the
poultry, pork and sausage industries, apple packaging, mushroom tills,
containers for food products and baked goods, supermarket meat trays,
disposable plates, and hinged-lid containers for the food service industry.
These products are primarily used for the sale of food items and are designed
for protection, freshness, insulation, sanitation, and merchandising impact.
Some of the foam products are further laminated and/or coated with other
materials prior to being sold to customers.
In terms of economic and functional characteristics, foamed polystyrene
products offer a combination of high strength, minimum material content and
superior moisture barrier performance. Foamed polystyrene products also offer
greater dimensional consistency that enhances the high speed mechanical
feeding of cartons and trays into automated package filling operations.
The Company is the leading manufacturer of foam egg packaging products and
offers the broadest product line in the industry. Egg cartons may be printed,
embossed, or laminated to meet customer specifications. The Company's
extensive line of egg packaging is marketed in seven basic foam colors (often
used to distinguish the various grades of eggs) and is almost always printed
in multiple colors. Foam egg cartons (unlike pulp-based cartons) have smooth
surfaces, inside and out, that are suitable for high-definition printing. By
utilizing both the inside and outside surfaces for printing, foam egg cartons
maximize the amount of space available for each customer's unique advertising
requirements. The precise dimensions of polystyrene foam cartons lend
themselves to automated, high-speed, mechanized dispensing systems used in the
egg packing industry. The Company has been the innovator of new packaging
concepts and designs and was the first to manufacture foam egg cartons in
eight, twelve, and eighteen egg configurations. In addition, the Company was
the first to manufacture foam egg cartons with post-consumer recycle content
with the approval of the FDA.
Processor trays require greater dimensional consistency, strength and higher
resiliency than trays used by supermarkets because of their use in high-speed
automated poultry and meat packaging machines and because of handling during
shipping. The Company's processor trays are widely recognized for their high
performance qualities. Since the 1994 acquisition, the Company, through
proprietary technological advances, has developed a new line of products that
have a lower density of polystyrene foam but still meet all customer
requirements for strength and durability. Processor trays may also be printed,
embossed or laminated to meet customer specifications. Processor trays are
most often sold with an absorbent pad fixed to the tray bottom. The trays and
pads are generally designed to the customer's specifications to meet
functionality requirements.
PureTec
PureTec's operations consist of two manufacturing categories, "Plastic
Products," with approximately 60% of total sales; and "Plastic Materials,"
with approximately 40% of total sales. PureTec's major product lines are
listed below, with the manufacturing division names in parentheses:
<TABLE>
<CAPTION>
Plastic Products Plastic Materials
- ---------------------------------------------------------------------------
<S> <C>
Garden Hose (Colorite Plastics) Medical-grade Vinyl Compounds
(Colorite Polymers)
Medical Tubing (Plastron) Specialty Vinyl Polymers (Colorite
Polymers; Cybertech Polymers)
Specialty Tubing & Gaskets (Action Recycled Plastics (Pure Tech Plastics)
Technology; American Gasket &
Rubber)
</TABLE>
Garden Hose. PureTec believes that its Colorite Plastics division is the
leading producer of garden hose in the United States, with more than 40% of
the market. Colorite Plastics' market strategy is to provide a complete line
of innovative, high-quality products along with superior customer service.
Innovations have included the patented Colorite(R) EvenFlow(R) design and the
"drinking water safe" product lines. In addition to its core garden hose
business, Colorite Plastics has launched new products, such as a new line of
irrigation products for the do-it-yourself markets. For example, in recent
years the division has introduced an irrigator "soaker hose," composed of 65%
recycled rubber, and the Auto-Moist(TM) line of drip irrigation and watering
products. Colorite Plastics also manufactures specialty hose products such as
air hose.
Medical tubing. PureTec's Plastron division has been a leader in disposable
medical tubing for more than 40 years. Plastron specializes in high-quality,
close tolerance tubing for various surgical procedures and related medical
applications. These applications include intravenous ("IV") therapy,
hemodialysis therapy, cardiovascular procedures such as coronary bypass
surgery, suction and aspiration products, and urinary drainage and catheter
products. New products include microbore tubing, silicone substitute
formulations, and trilayer tubing substitutes. Plastron has developed
microbore tubing with extremely small internal diameters which can be used to
regulate the delivery of intravenous fluids without the need for more
expensive drip control devices.
Specialty Tubing & Gaskets. PureTec's specialty tubing and gasket product
line consists of (i) extruded plastic tubing, sold primarily to manufacturers
of aerosol valves, dispenser pumps, and writing instruments; (ii) rubber and
thermoplastic gaskets for the aerosol and dispenser pump markets; and (iii)
consumer products, chiefly consisting of swimming pool and other corrugated
hose. These products are manufactured primarily by PureTec's Action Technology
("Action") division, which includes the American Gasket and Rubber Company
("AGR"), Plastron, and Action-Europe. Most of Action's products are
manufactured by the plastic extrusion process and are sold throughout the
United States, Europe, and selected worldwide markets. Writing instrument
products include pen barrels and ink tubing as well as ink reservoirs for
felt-tip pens. Action's sales to the dispenser industry are comprised of dip
tubes which transmit the contents of a dispenser can to the nozzle, and
plastic and rubber gaskets and seals used in the manufacture of dispenser
valves and pumps. These products are manufactured to very precise tolerances,
according to the specifications developed by Action and its customers for
specific applications. Other OEM (Original Equipment Manufacturer) sales
include corrugated hose to manufacturers of floor care products, and various
types of hoses and tubing for other industrial applications. Action also
manufactures consumer products which are primarily sold to retail
merchandisers, including swimming pool and spa hose.
Medical-grade Vinyl Compounds. PureTec believes that its Colorite Polymers
division is the world's largest producer of high-quality vinyl compounds for
use in the medical industry with approximately 50% of the domestic, non-captive
market. Medical-grade compounds are sold primarily under the "Unichem
Products" brand. For more than 30 years, Colorite Polymers has been supplying
specialized vinyl compounds to leading manufacturers of medical devices and
equipment for FDA-regulated applications. Colorite Polymers' chemists work
closely with customers to develop compounds that address their specific
requirements. Through this custom work, PureTec has introduced a number of
breakthroughs to the medical device industry by developing formulations with
unique physical characteristics. For example, Colorite Polymers has recently
developed a new family of flexible vinyl compounds designed to replace
silicone rubber in a variety of medical and commercial applications.
Special Vinyl Polymers. PureTec's specialty vinyl polymers business consists
of two divisions of the Colorite Polymers group: Burlington Resins, Inc.,
doing business as Colorite Specialty Vinyl Resins ("SVR"); and Cybertech
Polymers. SVR employs specialized technology to produce dispersion, blending,
and copolymer suspension resins for a variety of industries, including floor
covering, automotive sealants and adhesives, coil coatings, plastisol
compounding and PVC packaging. SVR is actively developing new products to
serve specific customer applications. The SVR division has also added to its
product line by initiating a technology exchange with Vinnolit Kunstsoff of
Ismaning, Germany. The exchange agreement enhances PureTec's breadth of
product line by offering specialty resin formulations not previously available
in North America. The Cybertech Polymers division produces a variety of
specialized and general purpose vinyl compounds. Approximately 70% of
Cybertech Polymers' outside sales are to manufacturers of wire and cable, with
the remaining outside sales going to the footwear, general purpose extrusion
and molding markets.
Recycled Plastics. PureTec believes that its Pure Tech Plastics division
is the leading non-captive supplier of high-quality recycled PET suitable
for reuse in new bottles, as well as plastic sheet and other specialized
applications. The division has developed proprietary processes for
cleaning, sorting, and recycling post-consumer plastic bottles into clean
PET flakes or pellets. This technology has been optimized to produce
extremely high quality recycled PET, suitable for reuse in new bottles.
This technology continues to be refined by PureTec engineers, and has been
licensed to other companies in a number of countries, including Taiwan,
South Korea, Canada and Japan.
Sales, Marketing and Customers
Tekni-Plex
As of June 27, 1997, the Company had a sales team comprised of 41 people,
covering both domestic and international sales. There were 14 salespeople in
the Flexible Packaging Group and 27 in the Foam Products Group. The Company
believes it has earned a solid reputation with its customers for high quality
service. The Company engages in various marketing activities such as
participation in trade shows, mailings of samples, direct calls to potential
customers and advertising. The Company is currently developing its own
web-site on the Internet.
The Company's high-barrier, blister laminations are sold directly to the major
pharmaceutical companies (or their designated contract packagers), while
closure liners are sold to the closure (bottle cap) producers who, in turn,
supply these same pharmaceutical companies.
Distribution is accomplished from the manufacturing locations to the customers
via common carrier and/or customer pick up. In the Foam Products Group, most
sales are in full truckload quantities.
The Company has begun to market its full pharmaceutical product line directly
on a worldwide basis and is assembling a global network of sales personnel
(both direct and outside manufacturer's representatives).
The Company's customer base includes most of the major pharmaceutical
manufacturers, most egg packers (including those owned by egg retailers) and
many poultry processors. The Company estimates the average tenure among the
Company's ten largest customers at more than 14 years. Overall customer
concentration is low with the largest single customer accounting for less than
9% of total sales and the top ten customers generating approximately 38% of
sales for the trailing twelve months ended December 26, 1997.
PureTec
Colorite Plastics' garden hose products are sold primarily to home centers,
hardware cooperatives, food, automotive, drug and mass merchandising chains
and catalog companies throughout the United States and Canada. Colorite
Plastics' largest customers include some of the fastest growing and most
widely respected retail chains in North America including Wal-Mart, Home Depot
and ACE Hardware. Colorite Plastics, like other PureTec divisions, is also
expanding to international markets. Products are sold directly through
Colorite Plastics' salespeople and also through approximately 20 independent
representatives. The division sells both private label and brand-name products
to the retail market. Advertising is limited to trade journals and advertising
allowances to retailers.
Plastron division's medical tubing is sold primarily to a small number of
manufacturers of medical devices. Products are sold directly through
Plastron's salespeople. Advertising is conducted primarily through trade
journals and trade shows.
Action's OEM sales are conducted by technically trained full-time employees
who coordinate marketing activities directly with the managers of each plant.
Action also uses independent representatives to sell its pool hose products. In
addition, Action manufactures and markets pool hose nationwide under a joint
agreement with Haviland Consumer Products. This agreement utilizes the
technology and marketing strengths of both companies in their effort to build a
leadership position in the market for pool hose.
PureTec's Colorite Polymers division sells medical-grade compounds to leading
manufacturers of medical devices and equipment and to producers of tubing and
closures for the food and beverage industry. Colorite Polymers sells medical
grade compounds in worldwide markets. Products are sold directly though
PureTec's salespeople. Advertising is limited to trade journals and trade
shows.
SVR's products are sold throughout the United States through SVR's
salespeople. PureTec's management believes that SVR has built a relatively
unique position in the specialty resins market by offering customized products
for niche markets that the larger commodity producers do not serve.
Cybertech Polymers' compounds are sold throughout the United States by an
internal sales force and eight independent representatives. Approximately 50%
of Cybertech Polymers' overall production is used internally by PureTec's
Colorite Plastics division in the manufacture of garden hose.
PureTec's PET recycling operations (Pure Tech Plastics) involve the processing
of used and discarded PET containers back into raw material forms that can be
substituted for virgin PET material. The selling price for recycled PET
material reflects a discount from the market price of virgin PET. PureTec
attempts to negotiate contracts for the supply of used bottles that link their
cost for the bottles to the price of virgin PET thereby reducing the
volatility of the differential between PureTec's cost of raw materials versus
its selling price for recycled PET. Sales of recycled material are
accomplished by an internal sales force.
Each of PureTec's core product lines are sold in different markets with
different customers, competitors, and pricing structures. PureTec estimates
the average tenure among PureTec's ten largest customers at more than 14 years.
Although in a number of these product lines the ten largest customers
represent more than 75% of sales, PureTec's overall customer concentration is
low. PureTec's largest customer accounts for about 12% of gross sales and the
top ten customers generated approximately 30% of sales for the year ended July
31, 1997.
On a pro forma basis as of December 26, 1997 after consummation of the
Transactions, the combined entity's largest single customer would have
accounted for less than 9% of total sales and the top ten customers would have
generated approximately 28% of sales.
Manufacturing
The Company and PureTec employ similar core technical competencies in their
respective manufacturing operations, as both utilize the processes of plastic
extrusion and compounding.
Tekni-Plex
Flexible Packaging. The Company manufactures primary flexible packaging
materials in three locations: Somerville, New Jersey; Flemington, New Jersey
and Cambridge, Ontario (Canada). Both New Jersey locations have thermal
oxidation devices that provide the controls necessary to meet clean air
emissions standards. The Cambridge facility meets the applicable emissions
standards without such a device.
The manufacturing processes involve compounding, calendering, extrusion and
adhesive laminating, coating, printing and slitting. Raw materials used
include plastic films, metal foils, plastic resins, plasticizers, paper,
adhesives, inks and coatings. The Company has what it considers to be numerous
proprietary methods and formulations that are used to manufacture products
with specific sets of functional properties suited for specific packaging end
uses. For example, the Company's line of pharmaceutical-grade, clear,
high-barrier laminations utilizes proprietary adhesive technology to laminate
Aclar(R) films, a material that does not lend itself easily to adhesion onto
other plastic films and sheets.
The packaging materials for pharmaceutical applications require special
documentation of material sources and uses within the manufacturing process as
well as heightened quality assurance measures. See "--Competition."
Foam Products. The Company manufactures foamed polystyrene packaging and food
service products in five locations: Somerville, Wenatchee (Washington),
Decatur (Indiana), Dallas (Texas) and Lawrenceville (Georgia).
The manufacturing processes include compounding, extrusion, thermoforming,
printing and application of absorbent padding. Raw materials used are
polystyrene, blowing agents, color concentrates, inks, tray padding materials
and plastic bags. The Company has what it considers to be numerous proprietary
methods and formulations that are used to produce a wide variety of structures
which have specific sets of functional properties suited for specific uses.
PureTec
PureTec's manufacturing operations are conducted in 22 plants worldwide, and
are organized under four principal operating groups: Colorite Plastics,
Colorite Polymers, Action Technology, and Pure Tech Plastics.
Founded in 1949 in Garfield, New Jersey, Colorite Plastics manufactures vinyl
garden hose in five modern facilities located throughout the United States. In
1996, it began serving the Canadian market with a new facility in Mississauga,
Ontario. In five of these six locations, Colorite Plastics manufactures vinyl
garden hose by the plastic extrusion process. The sixth facility, located in
Tonawanda, New York, manufactures brass couplings used in the production of
garden hoses.
Colorite Polymers manufactures medical-grade vinyl in facilities in
Ridgefield, New Jersey; Sparks, Nevada; and Belfast, Northern Ireland. Vinyl
is sold primarily in the form of pellets, which are manufactured by
compounding vinyl resins with plasticizers, stabilizers, and other additives.
The Cybertech Polymers division of Colorite Polymers also produces vinyl
compounds using similar techniques and equipment. Approximately 50% of
Cybertech Polymers' overall production is used internally by PureTec's
Colorite Plastics division in the manufacture of garden hose. The SVR
division, located in Burlington, New Jersey, produces vinyl resins with
specialized reactors found in only one other plant in the world. In addition
to internal uses, these resins are used in a variety of industries, including
floor covering, automotive sealants and adhesives, coil coatings, plastisol
compounding and PVC packaging.
PureTec's specialty tubing and gasket products are manufactured by the
Action division, AGR, Plastron, and Action-Europe. Except for gaskets,
most of Action's products are manufactured by the plastic extrusion
process. Most gaskets are punched from proprietary rubber and plastic
formulations that are developed and manufactured by AGR and Action-Europe.
Each Action facility is strategically located to supply multi-national
customers on a timely basis. In the United States, Action maintains plants
in New Jersey and Illinois. AGR's facilities are in Illinois and Action's
Plastron subsidiary operates in California and Georgia. Action's three
European plants, located in Belgium and Italy, serve the European, Asian,
and African markets with products similar to those manufactured in the
United States.
The Pure Tech Plastics division uses proprietary technology for cleaning,
sorting, and processing post-consumer plastic bottles into clean PET flakes or
pellets. This technology has been optimized to produce extremely high quality
recycled PET, suitable for reuse in new bottles. Pure Tech Plastics operates
three recycling facilities in Michigan, Maine, and New York. A new
state-of-the-art facility is currently planned to open in Huntington, West
Virginia in 1998.
Raw Materials
Tekni-Plex
Polystyrene resin is the Company's largest single raw material component.
Polystyrene resin is widely available and is purchased by the Company from
several of the top suppliers. Aclar[Registered], a specialty film material
produced by Allied Signal and used in clear, high-barrier laminations, is the
second largest material component. Allied Signal, which has been supplying
Aclar[Registered] films to Tekni-Plex for nearly 30 years, is the sole
manufacturer and supplier of Aclar[Registered]films. In the history of this
relationship with Allied Signal, there has never been a significant
interruption in the supply of Aclar[Registered]. If the supply of
Aclar[Registered] were to be significantly interrupted, the Company would
begin substituting alternative blister packaging materials.
Historically, the Company has been able to pass through substantially all of
the price increases in raw materials to its customers. For example, over the
18 month period from January 1994 to June 1995, polystyrene prices rose by a
total of approximately 49%. Over that same period, the Company's gross margin,
expressed as a percentage of sales, rose from 18.4% to 21.8%. However, there
can be no assurance that the Company will be able to pass on raw material price
increases in the future.
PureTec
The primary materials used by PureTec in the manufacture of its products are
plastic resins, primarily polyvinyl chloride, polypropylene and polyethylene,
and also plasticizers. All of these materials are widely available from
numerous sources and PureTec currently purchases these raw materials from
multiple suppliers.
The Colorite Plastics division typically sets prices for its garden hose
products in advance of each season and, to the extent that raw material costs
increase more than anticipated, the additional costs generally cannot be
passed on during that season. However, with respect to its other markets,
PureTec has generally been able to pass on substantially all of the price
increases to its customers.
Proprietary Technology and Trademarks
Each of the Company and PureTec seeks to safeguard its respective proprietary
technology through the filing and registering of patents and trademarks, the
use of confidentiality agreements, and by restricting access to its plants.
However, in the opinion of management, none of the Company's or PureTec's
patents or trademarks is material to their respective operations.
Competition
Tekni-Plex
Flexible Packaging Group. The Company considers itself to be the market
leader in clear, high-barrier laminated blister materials with a greater than
90% share of the market for these products. These clear, laminated products
primarily compete with solution-coated and foil-based products manufactured by
various competitors.
The Company believes that pharmaceutical packaging products sold in the United
States enjoy a significant barrier to entry due to the stringent approval
process employed by the FDA. The entire process for new drug approval in the
past has averaged approximately 10 years, beginning with clinical trials and
ending with stability testing. The stability step requires that the drug be
tested in the packaging materials intended for commercial use. The cost of
stability testing is substantial. Therefore, when FDA approval is finally
attained, the drug companies are generally compelled, as a practical matter,
either to use the same packaging materials (from the same supplier) or to
re-submit to the stability test phase all over again. If the drug company opts
to re-submit to the stability test phase, it risks the uncertainty of renewed
scrutiny by the FDA. Manufacturers of primary packaging materials for
pharmaceutical products (where the drug is in direct contact with the
material) must maintain a confidential Drug Master File at the FDA that
describes each of its products. Manufacturers of primary packaging materials
for pharmaceutical products must also submit to regular, on-site compliance
audits performed by the major pharmaceutical companies. Pharma-class Good
Manufacturing Practices must be followed, and documentation of each production
run must provide an audit trail to allow the drug companies to identify the
genesis of each single package released to the market. Suppliers that have a
long history of consistently meeting the rigid requirements of the
pharmaceutical industry, such as the Company, are generally considered a
valuable asset to their pharmaceutical customers.
Foam Products Group. The Company believes that competition within the foam
processor tray market is based primarily on customer service, product quality
and price. There are two other domestic companies that are significant in the
foam processor tray market. The Company estimates, based on its own views of
the market, that it has in excess of 25% of the processor tray market.
The Company is one of the market leaders in producing egg cartons taking into
account both foam and pulp-based cartons. The Company believes that it
currently produces more than 80% of all foam egg cartons, and has
approximately a 40% share of the overall egg carton market. In this product
line, the Company's primary competitor is a manufacturer of pulp-based egg
cartons.
The Company believes that, for its foam egg packaging products, there are
significant disincentives for new competitors that include: (i) high capital
costs, including high opportunity costs associated with switching assets
presently dedicated to other uses to egg carton production; (ii) the high
level of technical competence required for the associated manufacturing
processes; and (iii) the high cost of meeting required customer order response
times in a job-shop environment.
PureTec
PureTec believes that Colorite Plastics is the leading producer of garden hose
in the United States, with more than 40% of the market. There are two
principal competitors in the United States and several smaller companies have
substantially smaller market shares.
PureTec's Plastron division has been a leader in disposable medical tubing for
more than 40 years. PureTec's Plastron division is the second largest
non-captive manufacturer of medical tubing with approximately 60% of the
market for cardiovascular tubing and 50% of the intravenous tubing market.
There are four other principal competitors serving the medical tubing market.
Many of the Plastron division's products are subject to FDA approval which
creates a significant barrier to entry for competition.
Action is the leading producer of precision tubing and gaskets for packaging
applications, with over 90% of the domestic, non-captive markets for such
products. Action's principal competitive pressure is the possibility of
internal production by its customers. The Company believes Action's products
compete successfully based on product quality, prompt delivery, technical
service and price. Action believes that its ability to produce high volumes of
products to exact specifications has been a key to its success in the
marketplace and the longevity of its customer relationships.
The Colorite Polymers division is the largest producer of medical-grade vinyl
compounds, with approximately 50% of the domestic, non-captive market. The
market for medical-grade vinyl compounds is highly specialized, with two
significant competitors. For more than 30 years, Colorite Polymers has been
supplying these specialized vinyl compounds for FDA-required applications.
PureTec believes it competes effectively based on product quality and
performance and prompt delivery, and that price is a secondary consideration
for its customers.
PureTec's management believes that SVR has built a relatively unique position
in the specialty resins market by offering customized products for niche
markets that larger commodity producers do not serve. Although SVR's market
share in the overall specialty resins market is about 7%, SVR's market share
in its target markets exceeds 20%. The division has in the past experienced
competitive pressure from large chemical companies who offer a greater breadth
of products.
The markets for Cybertech Polymers' vinyl compounds are highly fragmented, and
neither PureTec nor any competitor has a controlling share. PureTec believes
it competes effectively based on product quality, performance, prompt
delivery, and price.
PureTec believes that its Pure Tech Plastics division is the leading
non-captive supplier of high-quality recycled PET suitable for reuse in new
bottles, as well as plastic sheet and other specialized applications. Pure
Tech Plastics competes with other recycling facilities both to obtain
materials for recycling and to sell recycled materials to manufacturers.
Competition for supplies of recyclable material is based upon price and
promptness of service in collecting or accepting material. Competition for
sales of recycled material is based on price and consistency of quality.
Prices for recycled PET have been volatile in recent years, causing wide
swings in the division's revenues and earnings. Recognizing the connection
between the pricing of virgin PET and recycled PET, PureTec management has
begun to negotiate contracts for the supply of used bottles that link the
purchase price of the bottles to the market price of virgin PET. This strategy
is expected to reduce the volatility of the differential between PureTec's
effective raw material cost and its selling price for finished product.
Facilities
Tekni-Plex
The Company operates seven manufacturing facilities, including the Somerville,
New Jersey plant where the Company's headquarters are located. The Company
owns all of its manufacturing facilities with the exception of the Dallas
manufacturing facility which is currently leased. The Decatur, Lawrenceville,
and Wenatchee plants also lease additional warehousing space. The Company owns
or leases manufacturing, office and warehouse facilities at the locations
shown in the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Size
(Approximate Type of Product
Owned/Leased Square Feet) Facility(a) Category(b)
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Location
- ------------------------------------
Somerville, NJ..................... O 122,960 M/W/O P/F
Flemington, NJ..................... O 145,000 M/W/O F
Lawrenceville, GA.................. O 150,000 M/W/O P
L 31,662 W P
Wenatchee, WA...................... O 99,000 M/W/O P
L 26,400 W P
Decatur, IN........................ O 187,000 M/W/O P
L 3,750 W P
Dallas, TX......................... L 139,000 M/W/O P
Cambridge, Ontario, Canada......... O/L 14,000 M/W/O F
</TABLE>
- ------------
(a) M=Manufacturing; W=Warehouse; O=Office.
(b) P=Foam Products; F=Flexible Packaging.
The Company believes that its present facilities are adequate for its current
and projected operations.
PureTec
PureTec believes that its facilities are suitable and have sufficient
productive capacity for its current and foreseeable operational and
administrative needs. Set forth below is a list and brief description of all
of PureTec's offices and facilities, all of which are owned unless otherwise
indicated.
<TABLE>
<CAPTION>
Size
(Approximate
Location Function Square Feet)
- ------------------------------------- ----------------------------------------------------- ------------
<S> <C> <C>
Ridgefield, NJ(a).................... PureTec Corporate Headquarters 9,900
Tonawanda, NY(a)..................... Manufactures brass couplings 31,000
Piscataway, NJ(c).................... Manufactures general purpose vinyl compounds 150,000
Ridgefield, NJ....................... Manufactures garden hose and medical-grade vinyl
compounds 328,000
Ridgefield, NJ(c).................... Warehouse 70,000
Sparks, NV(c)........................ Manufactures garden hose and medical-grade vinyl
compounds 250,000
Waco, TX............................. Manufactures garden hose 104,600
McKenzie, TN(b)...................... Manufactures porous pipe 20,000
Mississauga, Ontario(d).............. Manufactures garden hose 150,000
City of Industry, CA(e).............. Manufactures medical tubing and other specialty tubing 110,000
Clinton, IL.......................... Manufactures dip tubes, writing instrument products and
corrugated hose 62,500
Dalton, GA........................... Manufactures medical tubing and other specialty tubing 40,000
Erembodegem (Aalst), Belgium......... Manufactures medical tubing and other speciality tubing 88,200
Milan (Gaggiano), Italy(f)........... Manufactures rubber compounds 15,000
Milan (Gaggiano), Italy.............. Manufactures dispenser gaskets and rubber injection-
molded parts 25,800
Milan (Gaggiano), Italy(c)........... Manufactures specialty tubing and related products 24,000
Rockaway, NJ......................... Manufactures specialty tubing and related products 98,600
Schiller Park, IL.................... Manufactures rubber compounds 20,000
Schaumburg, IL(g).................... Manufactures dispenser gasket 58,000
Howell, MI........................... PET recycling plant (inactive) 18,400
Livonia, MI(e)....................... PET recycling plant 60,000
East Farmingdale, NY(a).............. PET recycling plant 49,000
Auburn, ME(e)........................ Plastics and aluminum baling operation 22,000
Lawrence Twp., NJ(h)................. PET recycling plant (inactive) 80,000
Hillside, NJ(i)...................... Glass recycling plant (discontinued) 15,000
Newark, NJ........................... Glass recycling plant & MRF (discontinued) 101,000
Burlington, NJ....................... Manufactures specialty PVC resin 107,000
Belfast, Northern Ireland(j)......... Manufactures specialty compound 45,000
Under
Huntington, WV....................... PET recycling plant construction
</TABLE>
- ------------
(Years relate to calendar years)
(a) Lease expires in 2001.
(b) Leased on a month-to-month basis.
(c) Lease expires in 2002.
(d) Lease expires in 2005.
(e) Lease expires in 1999.
(f) Lease expires in 2000, with an option to renew for another
six year period.
(g) Lease expires in 2020.
(h) Facility not active. Lease expires in June 1998.
(i) Lease expires in 2000.
(j) Lease expires 2017.
Employees
Tekni-Plex
As of June 27, 1997, the Company employed an average of 757 hourly and 127
salaried persons. The Company provides a competitive employee benefits package
that includes medical insurance, life insurance, holiday pay, vacations and a
401(k) savings plan. There is also a performance based incentive compensation
program for selected managers.
Among the Company's approximately 884 total employees, all are non-union with
the exception of approximately 85 employees in the Flemington, New Jersey,
manufacturing facility who are represented by a collective bargaining agent.
Their collective bargaining agreement will expire on September 30, 1999. The
Company believes that its relations with all of its employees are good.
PureTec
As of July 31, 1997, PureTec employed approximately 1,900 full-time employees,
of which approximately 1,650 were employed in the United States and the
balance in Europe and Canada. Certain employees at facilities in Ridgefield and
Rockaway, New Jersey are represented by the International Brotherhood of
Teamsters under contracts that expire August 1, 2000. Certain employees at the
Burlington, New Jersey facility are represented by the Oil Chemical & Atomic
Workers International Union, AFL-CIO, under contracts that expire July 1,
2001. Contracts with both of the above unions were successfully renegotiated
in 1997. Certain employees in East Farmingdale, New York are represented by
the Waste Material Sorters, Trimmers & Handlers Union, under a contract that
expires on April 30, 1998. Approximately 45% of all employees are members of
unions including a majority of the European and Canadian employees. PureTec
believes that employee relations at all of its manufacturing facilities are
good, and it has not experienced any work stoppage since its formation.
Legal Proceedings and Environmental Matters
Tekni-Plex
The Company is regularly involved in legal proceedings arising in the ordinary
course of business, none of which is currently expected to have a material
adverse effect on the Company's businesses, financial condition, or results of
operations.
Like similar companies, the Company's facilities, operations, and properties
are subject to foreign, federal, state, and local laws and regulations
relating to, among other things, emissions to air, discharges to water, the
generation, handling, storage, transportation and disposal of hazardous and
nonhazardous materials and wastes and the health and safety of employees. The
Company maintains a primary commitment to employee health and safety, and
environmental responsibility. The Company's intention and policy are to be at
all times a responsible corporate citizen.
The Company's management includes a Director of Environmental Affairs who is
primarily engaged in making certain that the Company is in compliance in all
material respects with all foreign, federal, state and local laws and
regulations relating to the environment, and health and safety. This director
performs internal auditing procedures at all of the Company's facilities and
provides direction to local facility managers in the compliance areas. The
Director of Environmental Affairs and the President of the Company direct
outside environmental counsel and outside environmental consulting firms to
ensure that regulations are properly interpreted and reporting requirements
are met.
With respect to air emissions, in each state where the Company operates a
manufacturing facility, the Company has obtained or is in the process of
obtaining an agreement with the regulatory authorities to ensure that it has
their consent for current operations and, where necessary, to place the
Company on an approved compliance schedule. There are currently no known
environmental improvements required in respect of the manufacturing facilities
of the Company used for laminated and coated materials. In respect of foam
products, the Company expects improvements will be needed to address air
emissions at three of its manufacturing facilities. The Company has
established a capital budget to address such issues.
Although the Company believes that, based on historical experience, the costs
of achieving and maintaining compliance with environmental laws and
regulations are unlikely to have a material adverse effect on the Company's
business, financial condition or results of operations, it is possible that
the Company could incur significant fines, penalties, capital costs or other
liabilities associated with any confirmed noncompliance or remediation of
natural resource damage liability at or related to any of its current or
former facilities, the precise nature of which the Company cannot now predict.
Furthermore, there can be no assurance that future environmental laws or
regulations will not require substantial expenditures by the Company or
significant modifications of the Company's operations. See "Risk
Factors--Environmental Matters."
PureTec
PureTec is party to certain litigation and environmental proceedings in the
ordinary course of business, none of which are believed to be likely to have a
material adverse effect on the PureTec's consolidated financial position or
results of operations.
Ozite settled litigation with the former owner of Dalen, a discontinued
segment of Ozite. In December 1987, Ozite commenced legal proceedings against
the seller of Dalen, seeking monetary damages and other equitable relief from
the seller for various misrepresentations made in its financial statements and
other miscellaneous information, based on which Ozite elected to proceed with
the purchase of Dalen. The seller counterclaimed for the recovery of the
balance of the purchase price in an amount approximately equal to $3,000,000
plus accrued interest, amounts claimed to be due under a consulting agreement,
and punitive damages. The settlement agreement with Dalen provided for Ozite
to make two (2) payments of $500,000 each by October 15, 1997 and a payment
for $2,250,000 during the first quarter of 1998. Interest accrued on the final
payment of $2,250,000 from October 15, 1997 until March 3, 1998, the day the
final payment was made. PureTec has made the required payments.
PureTec's facilities, operations, and properties, and its prior ownership of
businesses or properties are also subject to foreign, federal, state and local
environmental laws and regulations relating to, among other things, emissions
to air, discharges to water, the generation, handling, storage, transportation
and disposal of hazardous and non-hazardous materials and waste, the
investigation and remediation of soil and ground water and the health and
safety of employees. Based on historical experience and currently available
information, PureTec believes that the costs of maintaining compliance with
environmental laws and regulations are unlikely to have a material adverse
effect on PureTec. No assurances can be given, however, that PureTec will
continue to be able to secure, renew, and maintain compliance with the terms
and conditions of the required environmental permits and approvals, that other
environmental permits or approvals may not be required for PureTec's
operations, or that significant fines or penalties will not be imposed by
regulatory entities for any failures to have secured all required
environmental permits or approvals. Certain environmental laws, such as the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund") and similar state laws, provide for strict, joint and several
liability for investigation and remediation of spills or other releases of
hazardous substances. Such laws may apply to conditions at properties
presently or formerly owned or operated by PureTec or by its predecessors or
previously owned business entities, as well as to conditions at properties at
which wastes or other contamination attributable to PureTec or its
predecessors or previously owned business entities come to be located. With
respect to certain properties which are undergoing or may be required to
undergo remediation in the future, PureTec believes that prior owners or
operators are or will be obligated to perform any required remediation, or to
indemnify PureTec pursuant to agreements with such parties, should PureTec be
required to perform such remediation. There can be no assurance, however, that
such third parties will perform their obligations under such agreements and as
a result it is possible PureTec will be required to make material expenditures
relating to those matters in the future. Further, there can be no assurance
that new facts regarding potential liabilities will not arise or that more
stringent statutory or regulatory environmental or work place safety
requirements will not be enacted or adopted in the future which could have a
material adverse effect on PureTec's business, financial condition or results
of operation, or materially restrict PureTec's operations or business. See
"Risk Factors--Environmental Matters."
PureTec recently received a correspondence from a customer claiming damages
relating to an alleged defective product sold by Plastron. The customer
alleges that it has suffered direct and indirect damages in a yet to be
determined amount but which the customer initially projected to be between $1
million and $10 million. PureTec is currently investigating the merits of this
correspondence and whether it would be covered by insurance. PureTec intends
to contest any claim that might arise from this correspondence vigorously.
There can be no assurances as to the ultimate outcome of these litigations or
proceedings or their possible impact on PureTec.
General
The Company's executive offices are located at 201 Industrial Parkway,
Somerville, New Jersey 08876, and its telephone number is (908) 722-4800.
MANAGEMENT
The directors and executive officers of Tekni-Plex are listed below. Each
director is elected at the annual meeting of the stockholders of Tekni-Plex to
serve a one year term until the next annual meeting or until a successor is
elected and qualified, or until his earlier resignation. Each executive
officer holds his office until a successor is chosen and qualified or until
his earlier resignation or removal. Pursuant to its by-laws, Tekni-Plex
indemnifies its officers and directors to the fullest extent permitted by the
General Corporation Law of the State of Delaware and Tekni-Plex's certificate
of incorporation.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------- --- -------------------------------------------------
<S> <C> <C>
Dr. F. Patrick Smith..... 50 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker....... 52 President and Chief Operating Officer
Arthur P. Witt........... 67 Corporate Secretary and Director
William H. Kaplan........ 46 Controller
Marvin Weintraub......... 51 Director of Management and Information Systems
J. Andrew McWethy........ 57 Director
Barry A. Solomon......... 49 Director
Stephen A. Tuttle........ 57 Director
Michael F. Cronin........ 43 Director
</TABLE>
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive
Officer of Tekni-Plex since March 1994. He received his doctorate degree
in chemical engineering from Texas A&M University in 1975. He served as
Senior Chemical Engineer to Texas Eastman Company, a wholly owned chemical
and plastics subsidiary of Eastman Kodak, where he developed new grades of
polyolefin resins and hot melt and pressure sensitive adhesives. In 1979,
he became Technical Manager of the Petrochemicals and Plastics Division of
Cities Service Company, and a Member of the Business Steering Committee of
that division. From 1982 to 1984, Dr. Smith was Vice President of R&D and
Marketing for Guardian Packaging Corporation, a diversified flexible
packaging company. Thereafter, he joined Lily-Tulip, Inc. and managed
their research and marketing functions before becoming Senior Vice
President of Manufacturing and Technology. Following the acquisition of
Lily-Tulip by Fort Howard Corporation in 1986, he became the Corporate Vice
President of Fort Howard, responsible for the manufacturing and technical
functions of the combined Sweetheart Products and Lily-Tulip operations.
From 1987 to 1990, Dr. Smith was Chairman and Chief Executive Officer of
WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos
Financial Group, a business consulting firm. Dr. Smith is a limited
partner of the Tekni-Plex Partnership.
Kenneth W.R. Baker has served as Tekni-Plex's Chief Operating Officer since
April 1994 and as President since July 1995. He joined the Lily Division of
Owens-Illinois, Inc. in 1975, serving as its Manager of Systems Development
from 1975 to 1977 and as its Financial and Planning Manager from 1977 to 1980.
Since 1980, he has served in a number of technical and managerial positions.
These include Manager, Industrial Engineering at the Lily Division from 1980 to
1981, Director, Corporate Technology at Lily-Tulip, Inc. from 1981 to 1986 and
Vice President, Operations at Fort Howard Cup Corporation from 1986 to 1987.
In 1987, Mr. Baker joined WFP Corporation, Inc. as Senior Vice President,
Operations and eventually became the company's President and CEO before
leaving the company in 1992. Thereafter, Mr. Baker became Vice President,
Research and Development at the Molded Products Division of Carlisle Plastics,
Inc. where he stayed until joining the Company. Mr. Baker is a limited partner
of the Tekni-Plex Partnership.
Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was
appointed Secretary in January 1997. Since July 1989, he has been president of
PAJ Investments which is involved in financial consulting and property
management. Over the same period, Mr. Witt also served as a temporary chief
financial officer for WFP Corporation and Flexible Technology. Prior to 1989,
Mr. Witt served in a number of senior management positions for companies such
as Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. Mr. Witt is a
limited partner of the Tekni-Plex Partnership.
William H. Kaplan joined Tekni-Plex in August 1992 and has been the Company's
Controller since March 1994. From 1977 until 1992, Mr. Kaplan was a manager
with Rich Baker Berman & Co., P.A.
Marvin Weintraub has served as Tekni-Plex's Director of Management and
Information Systems since August 1996. From 1980 until joining the Company,
Mr. Weintraub served as the MIS Director for N. Erlanger Blumgart Inc. where
he was responsible for all of that company's data processing activities.
J. Andrew McWethy has served as a director of Tekni-Plex since March 1994. He
is a co-founder of MST Partners L.P. ("MST L.P.") and MST Offshore Partners,
C.V. (together with MST L.P., the "MST Investment Partnerships"), each of
which was formed in 1989, and is a general partner of MST Management, L.P., a
general partner of MST Investment Partnerships. Prior to 1989, Mr. McWethy was
employed by Irving Trust Company for twelve years where he held various
positions including most recently that of President of Irving Capital
Corporation.
Barry A. Solomon has served as a director of Tekni-Plex since March 1994. He
is a co-founder of the MST Investment Partnerships and is a general partner of
MST Management, L.P. Prior to 1989, Mr. Solomon was employed by Irving Trust
Company for ten years as Vice President of Irving Capital Corporation.
Stephen A. Tuttle has served as a director of Tekni-Plex since March 1994. He
is a co-founder of the MST Investment Partnerships and is a general partner of
MST Management, L.P. Prior to 1989, Mr. Tuttle was employed by Irving Trust
Company for four years as Vice President of Irving Capital Corporation.
Michael F. Cronin has served as a director of Tekni-Plex since March 1994. He
has invested in emerging growth companies and various industrial and service
businesses since 1978. Since June 1991, Mr. Cronin has been a general partner
of Weston Presidio Capital.
Compensation of Directors
Tekni-Plex reimburses directors for any reasonable out-of-pocket expenses
incurred by them in connection with services provided in such capacity. In
addition, Tekni-Plex compensates outside directors for services provided in
such capacity of up to $15,000 per fiscal year for each such director.
Compensation of Executive Officers
The following table sets forth the remuneration paid by Tekni-Plex to the
Chief Executive Officer and the next most highly compensated executive officer
of Tekni-Plex whose salary and bonus exceeded $100,000 for the years indicated
in connection with his position with Tekni-Plex:
Summary Compensation Table
<TABLE>
<CAPTION>
------------------------------------------------------------
Annual Compensation
----------------------------
Other Annual
Name & Principal Position Fiscal Year Salary Bonus Compensation
- --------------------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Dr. F. Patrick Smith,............................... 1997 $ 490,385 $ 1,921,291 $ 15,417(a)
Chairman of the Board and Chief Executive Officer
1996 351,923 859,248 21,245(a)
1995 300,000 333,678 6,624(a)
Mr. Kenneth W.R. Baker,............................. 1997 $ 260,096 $ 960,645 $ 32,136(a)
President and Chief Operating Officer
1996 217,308 429,624 13,870(a)
1995 162,500 166,839 --
</TABLE>
- ------------
(a) Amount reimbursed during the fiscal year for payment of taxes.
Employment Agreements
Tekni-Plex recently renewed its employment agreements with Dr. F. Patrick
Smith and Mr. Kenneth W.R. Baker. Both Dr. Smith and Mr. Baker's
employment agreements expire June 30, 2000 and have renewal provisions.
The employment agreements provide, among other things, for (i) payment of a
base annual salary in the amount of $650,000 in the case of Dr. Smith and
$325,000 in the case of Mr. Baker, and that these salaries may be
increased (but not decreased) at the sole discretion of Tekni-Plex's Board
of Directors, (ii) payment of bonuses based on Tekni-Plex's performance,
and (iii) certain fringe benefits. Each employment agreement provides that
the executive may be terminated by Tekni-Plex upon the following bases:
(i) for cause or (ii) death or disability of the executive. Each of Dr.
Smith and Mr. Baker are entitled to severance benefits if he is terminated
due to the occurrence of an event specified in the preceding sentence.
The employment agreements also provide that the executives may not compete
with Tekni-Plex or its subsidiaries during the period of employment and for
one year thereafter.
Compensation Committee Interlocks and Insider Participation
Mr. Witt, who is also the corporate secretary of Tekni-Plex, has served as a
member of the compensation committee of Tekni-Plex's board of directors. In
addition, as Chief Executive Officer of Tekni-Plex, Dr. Smith participated in
deliberations concerning the compensation of certain executive officers of
Tekni-Plex (but not the compensation for himself or Mr. Witt).
SECURITY OWNERSHIP
Tekni-Plex Partnership owns 100% of the outstanding shares of Tekni-Plex and
95.1% of Tekni-Plex on a diluted basis.
Tekni-Plex Partnership has one general partner and six limited partners.
Messrs. McWethy, Solomon and Tuttle are affiliated with the general partner of
Tekni-Plex Partnership which owns an aggregate interest in the net profits of
Tekni-Plex Partnership equal to approximately 55% and Dr. Smith owns an
interest in the net profits of Tekni-Plex Partnership equal to approximately
18%, in each case, subject to certain conditions contained in Tekni-Plex
Partnership's agreement of limited partnership.
In 1994, Kenneth W.R. Baker was granted options on 2.5% of Tekni-Plex's common
stock, with anti-dilution provisions. Mr. Baker's option has a term of fifteen
years from the date of the grant. The option terminates immediately upon Mr.
Baker's termination for cause from Tekni-Plex. If Mr. Baker for any other
reason ceases to be employed by Tekni-Plex or is terminated by reason of a
disability, the option may be exercised for a period of six months following
Mr. Baker's cessation of employment. The option may be exercised by Mr.
Baker's estate for a year following Mr. Baker's death.
In April 1997, Tekni-Plex, Tekni-Plex Partnership and Dr. F. Patrick Smith
entered into an agreement pursuant to which: (i) so long as Tekni-Plex
Partnership continues, Dr. Smith has an option to acquire an interest in
Tekni-Plex Partnership representing up to 1.4% of the outstanding equity
interest in Tekni-Plex Partnership; and (ii) if Tekni-Plex Partnership has
been dissolved, Dr. Smith has an option to acquire shares of common stock of
Tekni-Plex representing up to 1.4% (less any options exercised pursuant to
clause (i) above) of the outstanding common stock. These options have a term
of five years from the date of the grant.
In January 1998, Tekni-Plex adopted an incentive stock plan (the "Stock
Incentive Plan"). Under the Stock Incentive Plan, 45.75206 shares are
available for awards to employees of Tekni-Plex. Options will be granted at
fair market value on the date of grant. Upon adoption of the Stock Incentive
Plan, options for 9.15 and 13.73 shares were granted to Dr. Smith and Mr.
Baker, respectively.
CERTAIN TRANSACTIONS
Tekni-Plex has a management consulting agreement with MST Management Company
and MST/TP Holding, Inc., both of whom are affiliated with Tekni-Plex's
controlling shareholder. Pursuant to their respective agreements, MST
Management Company and MST/TP Holding, Inc. provide regular and customary
management consulting services to Tekni-Plex. The terms of each agreement
require Tekni-Plex to pay a monthly management fee to MST Management Company
and MST/TP Holding, Inc. for a period of ten years from March 18, 1994.
Consulting service fees were in the aggregate approximately $274,000 for
fiscal year 1996 and increased to approximately $400,000 for fiscal year 1997
as a result of the Dolco Acquisition. The Company's policy is not to enter
into any significant transaction with an affiliate of the Company unless a
majority of the disinterested directors of the board of directors of the
Company determines, in such majority's sole discretion (making such
assumptions and determinations of fact as such majority sees fit), that the
terms of such transaction are, in all material respects or taken as a whole,
at least as favorable as the terms that could be obtained by the Company in a
comparable transaction made on an arm's-length basis between unaffiliated
parties.
Tekni-Plex has an arrangement with Arthur P. Witt, a director of Tekni-Plex,
whereby Mr. Witt provides customary management consulting services to
Tekni-Plex on an "as needed" basis. For the fiscal year 1997, compensation
paid to Mr. Witt for consulting services rendered on behalf of Tekni-Plex
equaled $70,800.
In connection with the Dolco Acquisition, Tekni-Plex loaned to Arthur P. Witt
$100,000, at 8% annual interest, enabling Mr. Witt to acquire a partnership
interest in Tekni-Plex Partnership as a limited partner.
Tekni-Plex also loaned to Kenneth W.R. Baker $100,000, at 8% annual interest,
enabling Mr. Baker to acquire a partnership interest in Tekni-Plex Partnership
as a limited partner.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Bank Financing
Concurrently with the Offering, the Company entered into a Bank Financing
pursuant to a credit agreement (the "Credit Agreement") which consisted of a
$50 million A Term Loan Facility, a $65 million B Term Loan Facility and a $90
million Revolving Credit Facility. Amounts borrowed under the Term Loan
Facilities were used to finance the Transactions and amounts borrowed under
the Revolving Credit Facility may be used for general corporate and working
capital purposes. In addition, up to $20 million of the amounts borrowed under
the Revolving Credit Facility will be available for the issuance of letters of
credit.
Loans under the Bank Financing will be secured by substantially all of the
assets of Tekni-Plex and PureTec and their domestic subsidiaries and will be
guaranteed by each domestic subsidiary of Tekni-Plex and PureTec.
Loans under the Bank Financing bear interest, at the Company's option, by
reference to a Base Rate or a reserve adjusted Eurodollar Rate in each case
plus an Applicable Margin, as each such term is defined in the Credit
Agreement. The actual interest rates applicable to borrowings under the Term
Loan Facilities and the Revolving Credit Facilities, as well as fees imposed
for issuance of letters of credit, are determined based upon the Company's then
existing Leverage Ratio as defined in the Credit Agreement.
Borrowings under the A Term Loan Facility shall be subject to annual
amortization, payable in quarterly installments, beginning in June 1998 and
ending in March 2004, with payments totaling $35 million due in the final two
years. Borrowings under the B Term Loan Facility shall be subject to annual
amortization, payable in quarterly installments, beginning in June 1998 and
ending in March 2006, with payments totaling approximately $61 million due in
the final two years. The full amount outstanding under the Revolving Credit
Facility must be paid in March 2004. In addition, under certain circumstances,
borrowings under the Term Loan Facilities are subject to mandatory prepayment
from the proceeds of asset sales and issuances of debt or equity securities
and out of the Company's excess cash flow as set forth in the Credit Agreement.
The Credit Agreement imposes certain affirmative and negative covenants on the
Company and its subsidiaries. As part of these covenants, the Company is
required to meet certain financial tests, including a minimum consolidated
EBITDA (as defined in the Credit Agreement), a minimum fixed charge coverage
ratio and a maximum leverage ratio. The negative covenants in the Credit
Agreement restrict or limit, among other things, (i) the incurrence of certain
debt by the Company and its subsidiaries, (ii) the pledge of assets of the
Company and its subsidiaries, (iii) capital expenditures, (iv) certain
mergers, consolidations and sales of assets by the Company and its
subsidiaries, (v) the payment of certain dividends or distributions by the
Company and the redemption, purchase, retirement or other acquisition of the
equity interests of the Company, (vi) certain investments and acquisitions by
the Company and its subsidiaries and (vii) certain other transactions with
affiliates of the Company.
The Credit Agreement provides that certain events will constitute events of
default under the Credit Agreement, which events include the failure by the
Company to pay when due amounts owed under the Credit Agreement, the failure by
the Company or its subsidiaries to observe or perform the covenants set forth
in the Credit Agreement, the inaccuracy of the representations and warranties
set forth in the Credit Agreement, the imposition of certain judgments against
the Company or its subsidiaries, the failure by the Company or its
subsidiaries to pay certain other debt of the Company and its subsidiaries,
the acceleration of the maturity of Material Debt (as defined), the occurrence
of certain bankruptcy or insolvency proceedings or events with respect to the
Company or its subsidiaries, the invalidity or unenforceability of any lien or
guarantee securing the obligations of the Company under the Credit Agreement,
and the occurrence of a change of control (as defined in the Credit Agreement)
of the Company.
The 11 1/4% Notes
In April 1997, the Company issued the 11 1/4% Notes pursuant to an
indenture (the "11 1/4% Indenture") dated April 1, 1997 among the Company,
Dolco, the Company's subsidiary, and Marine Midland Bank, as Trustee. The
aggregate cash proceeds from the sale of 11 1/4% Notes were $75,000,000.
The 11 1/4% Notes mature on April 1, 2007. Subsequent to the issuance of
the 11 1/4% Notes, Dolco was merged into the Company.
The 11 1/4% Notes are unsecured senior subordinate obligations of the
Company ranking equally with the Notes offered hereby. The 11 1/4%
Indenture provides that the Company shall not create or acquire any Domestic
Restricted Subsidiary (as defined in the 11 1/4% Indenture) having assets
or stockholder's equity in excess of $25,000 unless such Domestic Restricted
Subsidiary unconditionally guarantees the Company's obligations under the
11 1/4% Notes and the 11 1/4% Indenture on the terms set forth in the
11 1/4% Indenture. As a result of this requirement, the Guarantors of the
Notes will also guarantee the Company's obligations under the 11 1/4% Notes
and the 11 1/4% Indenture.
The 11 1/4% Notes accrue interest at a rate of 11 1/4% per annum payable
semi-annually in arrears on April 1, and October 1 of each year, commencing
October 1, 1997. The 11 1/4% Notes are redeemable, at the option of the
Company, at any time after April 1, 2002 at various redemption prices set
forth in the 11 1/4% Indenture, plus accrued and unpaid interest to the
date of redemption. In addition, on or prior to April 1, 2000, the Company may
redeem up to 33% in aggregate principal amount of the 11 1/4% Notes at
redemption price of 111.25% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, with the net proceeds of one or
more public offerings of capital stock of the Company provided that at least
$60 million in aggregate principal amount of 11 1/4% Notes remain
outstanding immediately after the occurrence of each such redemption. Upon the
occurrence of a Change of Control (as defined in the 11 1/4% Indenture),
the Company is required to make an offer to repurchase the 11 1/4% Notes at
an offer price of 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase.
The 11 1/4% Indenture sets forth various occurrences each of which would
constitute an event of default. If an event of default occurs, other than for
the bankruptcy or insolvency of the Company, holders of not less than 25% of
the principal amount of 11 1/4% Notes outstanding may declare the accreted
value of the securities together with any accrued interest to be due and
payable. If an act of bankruptcy or insolvency occurs, the 11 1/4% Notes
immediately become due and payable without any action required by the
noteholders.
The 11 1/4% Indenture contains covenants that, among other things, limit
(i) the issuance of additional debt, (ii) the payment of dividends and other
distributions to shareholders and affiliated persons or companies, (iii)
investments, (iv) certain transactions with affiliated companies, (v) the
incurrence of liens, (vi) sales of assets, including capital stock of
subsidiaries, and (vii) certain mergers, consolidations and sales of
substantially all of the Company's assets.
The foregoing summary describes certain provisions of the 11 1/4% Indenture
and the 11 1/4% Notes, but does not purport to be complete and is subject
to and is qualified by reference to the 11 1/4% Indenture and the
11 1/4% Notes.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were originally sold on March 3, 1998 to the Initial Purchaser
pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold
the Notes to qualified institutional buyers in reliance on Rule 144A under the
Securities Act and outside the United States in reliance on Regulation S under
the Securities Act. As a condition to the Purchase Agreement, the Company
entered into the Registration Rights Agreement with the Initial Purchaser
pursuant to which the Company has agreed, for the benefit of the holders of
the Old Notes, at the Company's cost, to use its best efforts (i) to file the
Exchange Registration Statement (as defined) within 90 days after the Issue
Date of the Old Notes (March 3, 1998) with the Commission with respect to the
Exchange Offer for the Exchange Notes and (ii) to cause the Exchange
Registration Statement to be declared effective under the Securities Act
within 180 days after the date of original issuance of the Old Notes. Upon the
Exchange Registration Statement being declared effective, the Company will
offer the Exchange Notes in exchange for surrender of the Old Notes. The
Company will keep the Exchange Offer open for not less than 20 calendar days
(or longer if required by applicable law) after the date on which notice of
the Exchange Offer is mailed to the holders of the Old Notes. For each Old
Note surrendered to the Company pursuant to the Exchange Offer, the holder of
such Old Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Old Note. Interest on Exchange Notes will accrue from
the last interest payment date on which interest was paid on the Old Notes so
surrendered, or, if no interest has been paid on such Old Notes, from March 3,
1998. No interest will be paid on the Old Notes accepted for exchange.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Old Notes who
is an "affiliate" of the Company or who intends to participate in the Exchange
Offer for the purpose of distributing the Exchange Notes (i) will not be able
to rely on the interpretation of the staff of the Commission, (ii) will not be
able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
Each holder of the Old Notes (other than certain specified holders) who wishes
to exchange the Old Notes for Exchange Notes in the Exchange Offer will be
deemed to represent in the Letter of Transmittal that (i) it is not an
affiliate of the Company, (ii) the Exchange Notes to be received by it were
acquired in the ordinary course of its business, (iii) at the time of
commencement of the Exchange Offer, it has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes in violation of the Securities Act and
(iv) such holder has full power and authority to tender the Old Notes in
exchange for the Exchange Notes. In addition, in connection with any resales
of Exchange Notes, any Participating Broker-Dealer who acquired the Old Notes
for its own account as a result of market-making or other trading activities
must deliver a prospectus meeting the requirements of the Securities Act. The
Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of
the Old Notes) with the prospectus contained in the Exchange Registration
Statement. Under the Registration Rights Agreement, the Company is required to
allow Participating Broker-Dealers and other persons, if any, subject to
similar prospectus delivery requirements to use the prospectus contained in
the Exchange Registration Statement in connection with the resale of such
Exchange Notes.
In the event that changes in the law or the applicable interpretations of the
staff of the Commission do not permit the Company to effect such an Exchange
Offer, or if for any other reason the Exchange Offer is not consummated within
180 days after the original issue date of the Old Notes, or if any holder of
the Old Notes (other than an "affiliate" of the Company or the Initial
Purchaser) is not eligible to participate in the Exchange Offer, or upon the
request of the Initial Purchaser under certain circumstances, the Company
will, at its cost, (a) as promptly as practicable, file the Shelf Registration
Statement covering resales of the Old Notes, (b) use its best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act and (c) use its best efforts to keep effective the Shelf Registration
Statement until the earlier of the date on which the Old Notes are no longer
"restricted securities" (within the meaning of Rule 144 under the Securities
Act) and such time as all of the applicable Old Notes have been sold
thereunder. The Company will, in the event of the filing of the Shelf
Registration Statement, provide to each applicable holder of the Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement has become
effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of Old Notes that sells such
Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement which
are applicable to such a holder (including certain indemnification
obligations). In addition, each holder of the Old Notes will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Old Notes included in the Shelf Registration Statement and to
benefit from the provisions set forth in the following paragraph.
If the Company fails to comply with the above provisions or if such
registration statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable with
respect to the Old Notes as follows:
(i) if neither the Exchange Registration Statement nor the Shelf
Registration Statement is filed on or prior to the 90th day after the Issue
Date, Additional Interest shall be accrued on the Old Notes over and above the
stated interest at a rate of 0.25% per annum for the first 90 days commencing
on the 91st day after the Issue Date, such Additional Interest rate increasing
by an additional 0.25% per annum at the beginning of each subsequent 90-day
period;
(ii) if neither the Exchange Registration Statement nor Shelf
Registration Statement is declared effective by the Commission on or prior to
the 180th day after the Issue Date, Additional Interest shall be accrued on the
Old Notes over and above the stated interest at a rate of 0.25% per annum for
the first 90 days commencing on the 181st day after the Issue Date, such
Additional Interest rate increasing by an additional 0.25% per annum at the
beginning of each subsequent 90-day period; or
(iii) if (A) the Company has not exchanged Exchange Notes for all
Old Notes validly tendered in accordance with the terms of the Exchange Offer
on or prior to the 225th day after the Issue Date or (B) the Exchange
Registration Statement ceases to be effective at any time prior to the time
that the Exchange Offer is consummated or (C) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf Registration
Statement ceases to be effective at any time prior to the date on which the
Old Notes are no longer "restricted securities" (within the meaning of Rule
144 under the Securities Act) (unless all the Old Notes have been sold
thereunder), then Additional Interest shall be accrued on the Old Notes over
and above the stated interest at a rate of 0.25% per annum for the first 90
days commencing on (x) the 226th day after the Issue Date, in the case of (A)
above, or (y) the day the Exchange Registration Statement ceases to be
effective or usable for its intended purpose in the case of (B) above, or (z)
the day such Shelf Registration Statement ceases to be effective in the case
of (C) above, such Additional Interest rate increasing by an additional 0.25%
per annum at the beginning of each subsequent 90-day period;
provided, however, that the Additional Interest rate on the Old Notes may not
exceed at any one time in the aggregate 1.0% per annum; and provided, further,
that (1) upon the filing of the Exchange Registration Statement or a Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Exchange Registration Statement or a Shelf Registration
Statement (in the case of clause (ii) above), or (3) upon the exchange of
Exchange Notes for all Old Notes validly tendered (in the case of clause
(iii)(A) above), or upon the effectiveness of the Exchange Registration
Statement which had ceased to remain effective (in the case of clause (iii)(B)
above), or upon the effectiveness of the Shelf Registration Statement which
had ceased to remain effective (in the case of clause (iii)(C) above),
Additional Interest on the Old Notes as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or (iii)
above will be payable in cash, on the same original interest payment dates as
the Old Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Old Notes, multiplied by a fraction, the numerator of which is the number
of days such Additional Interest rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months
and, in the case of a partial month, the actual number of days elapsed), and,
the denominator of which is 360.
The statements made in this Prospectus relating to the Registration Rights
Agreement are intended to be summaries of all material elements of such
agreement in connection with the Exchange Offer and, as such, do not purport
to be complete. Reference is made to the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Exchange Registration Statement of
which this Prospectus is a part, for a more complete description of the
agreement or matter involved.
Following the consummation of the Exchange Offer, holders of the Old Notes who
were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding Old
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Old Notes pursuant to the Exchange Offer. However, Old Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are substantially identical to the
form and terms of the Old Notes except that (i) the Exchange Notes bear a
Series B designation and a different CUSIP Number from the Old Notes, (ii) the
Exchange Notes have been registered under the Securities Act and hence will
not bear legends restricting the transfer thereof and (iii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
interest rate on the Old Notes in certain circumstances relating to the timing
of the Exchange Offer, all of which rights will terminate when the Exchange
Offer is terminated. The Exchange Notes will evidence the same debt as the Old
Notes (which they replace) and will be entitled to the benefits of the
Indenture.
The Exchange Notes will be fully and unconditionally guaranteed on a senior
subordinated basis by the Guarantors. The form and terms of the Exchange
Guarantees will be substantially identical to the form and terms of the Old
Guarantees.
Solely for reasons of administration (and for no other purpose) the Company
has fixed the close of business on April 30, 1998 as the record date for the
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially. Only a registered
holder of Old Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the
Indenture may participate in the Exchange Offer. There will be no fixed record
date for determining registered holders of Old Notes entitled to participate
in the Exchange Offer.
Holders of Old Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes and for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Old Notes will be returned (or in the
case of Old Notes tendered by book-entry transfer through DTC, will be
credited to an account maintained with DTC), without expense, to the tendering
holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant
to the Exchange Offer. The Company will pay all charges and expenses, other
than transfer taxes in certain circumstances, in connection with the Exchange
Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
June 1, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Notwithstanding the
foregoing, the Company will not extend the Expiration Date beyond June 19,
1998 (which, if extended to such date, would represent a maximum Exchange
Offer period of 50 days).
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
Interest on the Exchange Notes
Interest on Exchange Notes shall accrue from the last interest payment date on
which interest was paid on the Old Notes so surrendered, or, if no interest
has been paid on such Old Notes, from March 3, 1998. No interest will be paid
on the Old Notes accepted for exchange.
Procedures for Tendering
For a holder of Old Notes to tender Old Notes validly pursuant to the
Exchange Offer, a properly completed and duly executed Letter of
Transmittal (or facsimile thereof), with any required signature guarantee,
or (in the case of a book-entry transfer) an Agent's Message in lieu of the
Letter of Transmittal, and any other required documents, must be received
by the Exchange Agent at the address set forth below under "--Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, prior to 5:00 p.m., New York City time, on the Expiration Date,
either (a) certificates for tendered Old Notes must be received by the
Exchange Agent at such address or (b) such Old Notes must be transferred
pursuant to the procedures for book-entry transfer described below (and a
confirmation of such tender received by the Exchange Agent, including an
Agent's Message if the tendering holder has not delivered a Letter of
Transmittal).
The term "Agent's Message" means a message transmitted by DTC, received by the
Exchange Agent and forming part of the confirmation of a book-entry transfer,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering Old Notes which are the subject of such
book-entry confirmation, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may
enforce such agreement against such participant. In the case of an Agent's
Message relating to guaranteed delivery, the term means a message transmitted
by DTC and received by the Exchange Agent, which states that DTC has received
an express acknowledgment from the participant in DTC tendering Old Notes that
such participant has received and agrees to be bound by the Notice of
Guaranteed Delivery.
By tendering Old Notes pursuant to the procedures set forth above, each holder
will be deemed to make to the Company the representations set forth above in
the third paragraph under the heading "--Purpose and Effect of the Exchange
Offer."
The tender by a holder of Old Notes and the acceptance thereof by the Company
will constitute agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF
THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of a recognized signature guarantee medallion program within the meaning of
Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended, approved
by the Securities Transfer Association, Inc. (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the book-entry transfer facility, The Depository Trust Company
("DTC" or the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee, or, in the
case of a book-entry transfer, an Agent's Message in lieu of the Letter of
Transmittal and all other required documents must in each case be transmitted
to and received or confirmed by the Exchange Agent at its address set forth
below on or prior to the Expiration Date, or, if the guaranteed delivery
procedures described below are complied with, within the time period provided
under such procedures. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
The Exchange Agent and DTC have confirmed that the Exchange Offer is eligible
for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange Offer
by causing DTC to transfer Old Notes to the Exchange Agent in accordance with
DTC's ATOP procedures for transfer. DTC will then send an Agent's Message to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its reasonable discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its reasonable
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s) of
such Old Notes and the principal amount of Old Notes tendered, stating that
the tender is being made thereby and guaranteeing that, within three New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal
(or facsimile thereof), as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent upon three New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the " Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall not be
required to accept for exchange, or Exchange Notes for, any Old Notes, and may
terminate or amend the Exchange Offer as provided herein before the acceptance
of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to the Exchange
Offer (or other similar exchange offers) which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed with
the Exchange Offer or any material adverse development has occurred in any
existing action or proceeding with respect to the Company or any of its
subsidiaries;
(b) any law, statute, rule, regulation or interpretation by the
staff of the Commission is proposed, adopted or enacted, which, in the
reasonable judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which
approval the Company shall, in its reasonable discretion, deem necessary for
the consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn.
Exchange Agent
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail,
Overnight Courier or Hand: By Facsimile:
Marine Midland Bank Marine Midland Bank
140 Broadway--A Level Attention: Frank Godino
New York, New York 10005-1180 (212) 658-2292
Attention: Corporate Trust Operations
Tel: (212) 658-5931
</TABLE>
Originals of all documents submitted by facsimile should be sent promptly by
registered or certified mail, overnight courier or hand. Delivery to an
address other than as set forth above will not constitute a valid delivery.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The principal
solicitation is being made by mail; however, additional solicitation may be
made by telegraph, facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
Consequences of Failure to Exchange
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
Resale of the Exchange Notes
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a
person that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) who receives Exchange Notes in exchange for Old
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes, will be
allowed to resell the Exchange Notes to the public without further
registration under the Securities Act and without delivering to the
purchasers of the Exchange Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, such
holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters,
and must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each
Participating Broker-Dealer that receives Exchange Notes for its own
account in exchange for Old Notes where such Old Notes were acquired by
such Participating Broker-Dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or other person participates in the Exchange Offer for the
purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those
no-action letters. As indicated above, each Participating Broker-Dealer that
receives an Exchange Note for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF EXCHANGE NOTES
As used below in this "Description of Exchange Notes" section, the "Company"
means Tekni-Plex, Inc. but not any of its subsidiaries. The Old Notes were,
and the Exchange Notes will be, issued under the Indenture, dated as of March
1, 1998 (the "Indenture"), among the Company, the Guarantors and Marine
Midland Bank, as Trustee (the "Trustee"). The terms of the Exchange Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Exchange Notes are subject to all such terms, and holders of the
Exchange Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. A copy of the proposed form of the Indenture and the
Registration Rights Agreement described below has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The statements
made under this caption relating to the Notes, the Indenture and the
Registration Rights Agreement are intended to be summaries of all material
elements of such documents and, as such, do not purport to be complete and
where reference is made to particular provisions of the Indenture and
Registration Rights Agreement, such provisions, including the definitions of
certain terms, are qualified in their entirety by such reference.
The Old Notes are, and the Exchange Notes will be, general unsecured
obligations of the Company, limited to $275,000,000 aggregate principal amount
of which $200,000,000 aggregate principal was issued in the offering of the
Old Notes. Additional amounts may be issued in one or more series from time
to time subject to the limitations set forth under "Covenants--Limitation on
Indebtedness" and restrictions contained in the Credit Agreement. The Exchange
Notes will be senior subordinated obligations of the Company, subordinated in
right of payment to all Senior Debt of the Company. The Exchange Notes will be
issued only in fully registered form, without coupons, in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for
any registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith. Initially, the Trustee will act as paying
agent and registrar for the Exchange Notes. The form and terms of the
Exchange Notes are substantially identical to the form and terms of the Old
Notes except that (i) the Exchange Notes bear a Series B designation, (ii) the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (iii) the holders
of Exchange Notes will not be entitled to certain rights under the
Registration Rights Agreement, including the provisions providing for an
increase in the interest rate on the Old Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated.
Principal, Maturity and Interest
The Notes will mature on March 1, 2008 and will bear interest at the rate per
annum shown on the cover page hereof from March 3, 1997 or from the most
recent interest payment date to which interest has been paid or provided for.
Interest will be payable semiannually on March 1 and September 1 of each year,
commencing September 1, 1998, to the Person in whose name a Note is registered
at the close of business on the preceding February 15 or August 15 (each, a
"Record Date"), as the case may be. Interest on the Notes will be computed on
the basis of a 360-day year of twelve 30-day months. Holders must surrender
the Notes to the paying agent for the Notes to collect principal payments. The
Company will pay principal and interest by check and may mail interest checks
to a holder's registered address.
Optional Redemption
The Notes will be subject to redemption, at the option of the Company, in
whole or in part, at any time on or after March 1, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' notice mailed to each holder of
Notes to be redeemed at his address appearing in the register for the Notes,
in amounts of $1,000 or an integral multiple of $1,000, at the following
redemption prices (expressed as percentages of principal amount) plus accrued
interest to but excluding the date fixed for redemption (subject to the right
of holders of record on the relevant Record Date to receive interest due on an
interest payment date that is on or prior to the date fixed for redemption), if
redeemed during the 12-month period beginning March 1 of the years indicated:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2003...................................... 104.625%
2004...................................... 103.083%
2005...................................... 101.542%
2006 and thereafter....................... 100.000%
</TABLE>
In addition, prior to March 1, 2001, the Company may redeem up to 35% of the
principal amount of the Notes with the net cash proceeds received by the
Company from one or more public offerings of Capital Stock (other than
Disqualified Stock) of the Company, at a redemption price (expressed as a
percentage of the principal amount) of 109.25% of the principal amount
thereof, plus accrued and unpaid interest to the date fixed for redemption;
provided, however, that at least 65% of the aggregate principal amount of the
Notes originally issued pursuant to the Offering remains outstanding
immediately after any such redemption (excluding any Notes owned by the
Company or any of its Affiliates). Notice of redemption pursuant to this
paragraph must be mailed to holders of Notes not later than 60 days following
the consummation of such public offering.
Selection of Notes for any partial redemption shall be made by the Trustee, in
accordance with the rules of any national securities exchange on which the
Notes may be listed or, if the Notes are not so listed, pro rata or by lot or
in such other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. Notice of redemption will be mailed before the date fixed
for redemption to each holder of Notes to be redeemed at his or her registered
address. On and after the date fixed for redemption, interest will cease to
accrue on Notes or portions thereof called for redemption.
The Notes will not have the benefit of any sinking fund.
Ranking
The payment of principal, premium, if any, and interest on the Notes and any
claims arising out of or with respect to the Indenture is subordinated and
subject in right of payment, to the extent and in the manner provided in the
Indenture, to the prior payment in full of all Senior Debt of the Company.
Upon any payment or distribution of assets or securities of the Company of any
kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due with
respect to Senior Debt of the Company (including any interest accruing on or
after, or which would accrue but for, an event of bankruptcy, regardless of
whether such interest is an allowed claim enforceable against the debtor under
the Bankruptcy Code) shall first be paid in full, or payment provided for, in
either case in cash or cash equivalents or otherwise in a form satisfactory to
the holders of Senior Debt, before the Holders of the Notes or the Trustee on
behalf of such Holders shall be entitled to receive any payment by the Company
of the principal of, premium, if any, or interest on the Notes, or any payment
to acquire any of the Notes for cash, property or securities, or any
distribution with respect to the Notes of any kind or character, whether in
cash, property or securities, by set-off or otherwise (all such payments and
distributions referred to individually and collectively, as a "Securities
Payment"). Before any payment may be made by, or on behalf of, the Company of
the principal of, premium, if any, or interest on the Notes upon any such
dissolution or winding up or liquidation or reorganization, any payment or
distribution of assets or securities of the Company of any kind or character,
whether in cash, property or securities, to which the Holders of the Notes or
the Trustee on their behalf would be entitled, but for the subordination
provisions of the Indenture, shall be made by the Company or by any receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, directly to the holders of Senior Debt of the Company
(pro rata to such holders on the basis of the respective amounts of Senior
Debt held by such holders) or their representatives or to the trustee or
trustees under any indenture pursuant to which any such Senior Debt may have
been issued as their respective interests may appear, to the extent necessary
to pay all such Senior Debt in full in cash or cash equivalents or otherwise
in a form satisfactory to the holders of such Senior Debt after giving effect
to any concurrent payment, distribution or provision therefor to or for the
holders of such Senior Debt.
No Securities Payment by or on behalf of the Company, whether pursuant to the
terms of the Notes or upon acceleration or otherwise, will be made if, at the
time of such payment, there exists a default in the payment of all or any
portion of the obligations on any Designated Senior Debt, whether at maturity,
on account of mandatory redemption or prepayment, acceleration or otherwise,
and such default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Designated Senior Debt.
In addition, during the continuance of any non-payment default or non-payment
event of default with respect to any Designated Senior Debt pursuant to which
the maturity thereof may be accelerated, and upon receipt by the Trustee of
notice (a "Payment Blockage Notice") from a holder or holders of such
Designated Senior Debt or the trustee or agent acting on behalf of such
Designated Senior Debt, then, unless and until such default or event of
default has been cured or waived or has ceased to exist or such Designated
Senior Debt has been discharged or repaid in full in cash or cash equivalents
or otherwise in a form satisfactory to the holders of such Designated Senior
Debt, no Securities Payment will be made by or on behalf of the Company,
except from those funds held in trust for purposes of defeasance for the
benefit of the Holders of any Notes to such Holders, during a period (a
"Payment Blockage Period") commencing on the date of receipt of such Payment
Blockage Notice by the Trustee and ending 179 days thereafter. Notwithstanding
anything herein to the contrary, (x) in no event will a Payment Blockage
Period extend beyond 179 days from the date of the Payment Blockage Notice in
respect thereof was given and (y) there must be 180 days in any 365 day period
during which no Payment Blockage Period is in effect. Not more than one
Payment Blockage Period may be commenced with respect to the Notes during any
period of 365 consecutive days. No default or event of default that existed or
was continuing on the date of commencement of any Payment Blockage Period with
respect to the Designated Senior Debt initiating such Payment Blockage Period
may be, or be made, the basis for the commencement of any other Payment
Blockage Period by the holder or holders of such Designated Senior Debt or the
trustee or agent acting on behalf of such Designated Senior Debt, whether or
not within a period of 365 consecutive days, unless such default or event of
default has been cured or waived for a period of not less than 90 consecutive
days (it being acknowledged that any subsequent action or any breach of any
financial covenants for a period commencing after the date of commencement of
such Payment Blockage Period that, in either case, would give rise to an event
of default pursuant to any provision under which an event of default
previously existed or was continuing, shall constitute a new event of default
for this purpose).
The failure to make any payment or distribution for or on account of the Notes
by reason of the provisions of the Indenture described under this section will
not be construed as preventing the occurrence of an Event of Default described
in clause (a), (b) or (c) of the first paragraph under "--Events of Default."
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders
of the Notes will be paid to the holders of Senior Debt of the Company to the
extent necessary to repay such Senior Debt in full, and the Company may be
unable to fully meet its obligations with respect to the Notes. Subject to the
restrictions set forth in the Indenture, in the future the Company may incur
additional Senior Debt.
At December 26, 1997, after giving pro forma effect to the Transactions, there
would have been $119.9 million of Senior Debt outstanding. However, the
Company could also have borrowed up to $90.0 million of Indebtedness under the
Credit Agreement, all of which would have constituted Senior Debt.
The Guarantees
The Indenture provides that the Guarantors will fully and unconditionally
guarantee, jointly and severally, on a senior subordinated basis all of the
obligations of the Company under the Indenture, including its obligation to
pay principal, premium, if any, and interest with respect to the Notes. The
obligation of each Guarantor is limited to the maximum amount which, after
giving effect to all other contingent and fixed liabilities of such Guarantor,
will result in the obligations of such Guarantor under the Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Except as provided in "--Covenants" below, the Company is not
restricted from selling or otherwise disposing of a Guarantor.
The Indenture provides that if the Notes are defeased in accordance with the
terms of the Indenture, or if all or substantially all of the assets of a
Guarantor or all of the Capital Stock of a Guarantor is sold (including by
issuance or otherwise) by the Company or any of its Restricted Subsidiaries in
a transaction constituting an Asset Disposition, and if (x) the Net Available
Proceeds from such Asset Dispositions are used in accordance with the covenant
described under "--Covenants--Limitation on Certain Asset Dispositions" or (y)
the Company delivers to the Trustee an Officers' Certificate to the effect
that the Net Available Proceeds from such Asset Disposition shall be used in
accordance with the covenant described under "--Covenants--Limitation on
Certain Asset Dispositions" and within the time limits specified by such
covenant, then such Guarantor (in the event of a sale or other disposition of
all or substantially all of its assets) shall be released and discharged from
its Guarantee obligations.
The obligations of each Guarantor under the Guarantee are subordinated to the
prior payment in full of all Senior Debt of such Guarantor on the same basis
as the obligations of the Company on the Notes are subordinated to Senior Debt
of the Company. The Guarantee will be pari passu in right of payment with any
other senior subordinated indebtedness of each Guarantor and senior to any
future Subordinated Indebtedness of each Guarantor.
Covenants
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness), except: (i) Indebtedness
of the Company or any of its Restricted Subsidiaries, if immediately after
giving effect to the Incurrence of such Indebtedness and the receipt and
application of the net proceeds thereof, the Consolidated Cash Flow Ratio
of the Company for a year consisting of the four full fiscal quarters for
which quarterly or annual financial statements are available next preceding
the Incurrence of such Indebtedness (calculated on a pro forma basis in
accordance with Article 11 of Regulation S-X under the Securities Act or
any successor provision as if such Indebtedness had been Incurred on the
first day of such year) would be greater than 2.0 to 1.0; (ii)
Indebtedness of the Company and its Restricted Subsidiaries Incurred under
the Credit Agreement in an amount not to exceed $120.0 million in aggregate
principal amount less the amount of any such Indebtedness that is
permanently repaid or, without duplication, the amount by which commitments
thereunder are permanently reduced, in either case, from the proceeds of
Asset Dispositions (it being understood that the amount incurred under the
Credit Agreement may be increased as a result of the operation of clause
(xv) below); (iii) Indebtedness owed by the Company to any direct or
indirect Wholly Owned Subsidiary of the Company or Indebtedness owed by a
direct or indirect Restricted Subsidiary of the Company to the Company or a
direct or indirect Wholly Owned Subsidiary of the Company; provided,
however, upon either (I) the transfer or other disposition by such direct
or indirect Wholly Owned Subsidiary or the Company of any Indebtedness so
permitted under this clause (iii) to a Person other than the Company or
another direct or indirect Wholly Owned Subsidiary of the Company or (II)
the issuance (other than directors' qualifying shares), sale, transfer or
other disposition of shares of Capital Stock or other ownership interests
(including by consolidation or merger) of such direct or indirect Wholly
Owned Subsidiary to a Person other than the Company or another such Wholly
Owned Subsidiary of the Company, the provisions of this clause (iii) shall
no longer be applicable to such Indebtedness and such Indebtedness shall be
deemed to have been Incurred at the time of any such issuance, sale,
transfer or other disposition, as the case may be; (iv) Indebtedness of
the Company or any Restricted Subsidiary under any interest rate or foreign
currency hedge or exchange or other similar agreement to the extent entered
into to hedge any other Indebtedness permitted under the Indenture
(including the Notes); (v) Indebtedness Incurred to defer, renew, extend,
replace, refinance or refund, whether under any amendment, supplement or
otherwise (collectively for purposes of this clause (v) to "refund") any
Indebtedness outstanding on the Issue Date (including Indebtedness under
clause (xiv) below and Indebtedness under the Term Loan Facilities), any
Indebtedness Incurred under the prior clause (i) above or the Notes and the
Guarantees of the Notes; provided, however, that (I) such Indebtedness does
not exceed the principal amount (or accrual amount, if less) of
Indebtedness so refunded plus the amount of any premium required to be paid
in connection with such refunding pursuant to the terms of the Indebtedness
refunded or the amount of any premium reasonably determined by the issuer
of such Indebtedness as necessary to accomplish such refunding by means of
a tender offer, exchange offer, or privately negotiated repurchase, plus
the expenses of such issuer reasonably incurred in connection therewith and
(II)(A) in the case of any refunding of Indebtedness that is pari passu
with the Notes, such refunding Indebtedness is made pari passu with or
subordinate in right of payment to the Notes, and, in the case of any
refunding of Indebtedness that is subordinate in right of payment to the
Notes, such refunding Indebtedness is subordinate in right of payment to
the Notes on terms no less favorable to the holders of the Notes than those
contained in the Indebtedness being refunded, (B) in either case, the
refunding Indebtedness by its terms, or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, does not have an
Average Life that is less than the remaining Average Life of the
Indebtedness being refunded and does not permit redemption or other
retirement (including pursuant to any required offer to purchase to be made
by the Company or a Restricted Subsidiary of the Company) of such
Indebtedness at the option of the holder thereof prior to the final stated
maturity of the Indebtedness being refunded, other than a redemption or
other retirement at the option of the holder of such Indebtedness
(including pursuant to a required offer to purchase made by the Company or
a Restricted Subsidiary of the Company) which is conditioned upon a change
of control of the Company pursuant to provisions substantially similar to
those contained in the Indenture described under "--Change of Control"
below and (C) any Indebtedness Incurred to refund any Indebtedness is
Incurred by the obligor on the Indebtedness being refunded or by the
Company; provided, further, that clause (II) of the immediately preceding
proviso shall not apply to any Indebtedness incurred to refinance term
loans under the Credit Agreement outstanding on the Issue Date or to
subsequent refinancings of any such refinancing Indebtedness; (vi)
commodity agreements of the Company or any of its Restricted Subsidiaries
to the extent entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in the prices of raw materials used in their
businesses; (vii) Indebtedness of the Company under the Exchange Notes
and Indebtedness of the Guarantors under the Guarantees incurred in
accordance with the Indenture; (viii) Indebtedness outstanding on the
Issue Date; (ix) guarantees by the Company or its Restricted Subsidiaries
of Indebtedness otherwise permitted to be incurred hereunder; (x)
Indebtedness the net proceeds of which are applied to defease the Notes in
their entirety; (xi) Indebtedness of the Company or any of its
Subsidiaries that is an endorsement of bank drafts and similar negotiable
instruments for collection or deposit in the ordinary course of business;
(xii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims or self-insurance and
obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business not in excess of $5.0 million;
(xiii) guarantees by the Guarantors of the 11 1/4% Notes pursuant to the 11
1/4% Notes Indenture; (xiv) Indebtedness of PureTec and its subsidiaries
outstanding on the Issue Date, including Indebtedness under any PS&T Notes
which are not tendered pursuant to and remain outstanding following the
PS&T Tender Offer; and (xv) Indebtedness of the Company or its Restricted
Subsidiaries not otherwise permitted to be Incurred pursuant to clauses (i)
through (xiv) above which, together with any other outstanding Indebtedness
Incurred pursuant to this clause (xv), has an aggregate principal amount
not in excess of $40.0 million at any time outstanding, which Indebtedness
may be incurred under the Credit Agreement or otherwise.
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay any
dividend, or make any distribution of any kind or character (whether in cash,
property or securities), on or in respect of any class of the Capital Stock of
the Company or any of its Restricted Subsidiaries excluding any (x) dividends
or distributions payable solely in shares of Capital Stock of the Company
(other than Disqualified Stock) or in options, warrants or other rights to
acquire Capital Stock of the Company (other than Disqualified Stock), or (y)
in the case of any Restricted Subsidiary of the Company, dividends or
distributions payable to the Company or a Restricted Subsidiary of the Company
or to the extent payable on a pro rata basis to all holders of Capital Stock
of such Restricted Subsidiary, (ii) purchase, redeem, or otherwise acquire or
retire for value shares of Capital Stock of the Company or any of its
Restricted Subsidiaries, any options, warrants or rights to purchase or
acquire shares of Capital Stock of the Company or any of its Restricted
Subsidiaries or any securities convertible or exchangeable into shares of
Capital Stock of the Company or any of its Restricted Subsidiaries, excluding
any such shares of Capital Stock, options, warrants, rights or securities
which are owned by the Company or a Restricted Subsidiary of the Company,
(iii) make any Investment in (other than a Permitted Investment), or make any
payment on a guarantee of any obligation of, any Person, other than the
Company or a direct or indirect Wholly Owned Subsidiary of the Company, or
(iv) redeem, defease, repurchase, retire or otherwise acquire or retire for
value, prior to any scheduled maturity, repayment or sinking fund payment,
Subordinated Indebtedness (each of the transactions described in clauses (i)
through (iv) (other than any exception to any such clause) being a "Restricted
Payment"), if at the time thereof: (1) a Default or an Event of Default shall
have occurred and be continuing, or (2) upon giving effect to such Restricted
Payment, the Company could not Incur at least $1.00 of additional Indebtedness
pursuant to the terms of the Indenture described in clause (i) of
"--Limitation on Indebtedness" above, or (3) upon giving effect to such
Restricted Payment, the aggregate of all Restricted Payments made on or after
April 4, 1997 exceeds the sum of: (a) 50% of cumulative Consolidated Net
Income of the Company (or, in the case cumulative Consolidated Net Income of
the Company shall be negative, less 100% of such deficit) since April 4, 1997,
plus (b) 100% of the aggregate net proceeds received after April 4, 1997,
including the fair market value of property other than cash (determined in good
faith by the Board of Directors of the Company as evidenced by a resolution of
such Board of Directors filed with the Trustee) from the issuance of, or
equity contribution with respect to, Capital Stock (other than Disqualified
Stock) of the Company and warrants, rights or options on Capital Stock (other
than Disqualified Stock) of the Company (other than in respect of any such
issuance to a Restricted Subsidiary of the Company) and the principal amount of
Indebtedness of the Company or any of its Restricted Subsidiaries that has
been converted into or exchanged for Capital Stock of the Company which
Indebtedness was Incurred after April 4, 1997; plus (c) $7,325,000; plus (d)
100% of the aggregate after-tax net cash proceeds, of the sale or other
disposition of any Investment constituting a Restricted Payment made after
April 4, 1997; provided that any gain on the sale or disposition to the extent
included in this clause (d) shall not be included in determining Consolidated
Net Income for purposes of clause (a) above; provided, further, that amounts
included in this clause (d) shall not exceed the Net Investment by the Company
in the asset so sold or disposed.
The foregoing provision will not be violated by (i) any dividend on any class
of Capital Stock of the Company or any of its Restricted Subsidiaries paid
within 60 days after the declaration thereof if, on the date when the dividend
was declared, the Company or such Restricted Subsidiary, as the case may be,
could have paid such dividend in accordance with the provisions of the
Indenture, (ii) the renewal, extension, refunding or refinancing of any
Indebtedness otherwise permitted pursuant to the terms of the Indenture
described in clause (v) of "--Limitation on Indebtedness" above, (iii) the
exchange or conversion of any Indebtedness of the Company or any of its
Restricted Subsidiaries for or into Capital Stock of the Company (other than
Disqualified Stock), (iv) so long as no Default or Event of Default has
occurred and is continuing, any Investment made with the proceeds of a
substantially concurrent sale (other than in respect of any issuance to a
Restricted Subsidiary of the Company) for cash of Capital Stock of the Company
(other than Disqualified Stock); provided, however, that the proceeds of such
sale of Capital Stock, to the extent used in any such Investment, shall not be
(and have not been) included in subclause (b) of clause (3) of the preceding
paragraph, (v) the redemption, repurchase, retirement or other acquisition of
any Capital Stock of the Company in exchange for or out of the net cash
proceeds of a substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of Capital Stock of the Company (other than
Disqualified Stock); provided, however, that the proceeds of such sale of
Capital Stock, to the extent used for such redemption, repurchase, retirement
or other acquisition or retirement, shall not be (and have not been) included
in subclause (b) of clause (3) of the preceding paragraph, (vi) payments made
to purchase, redeem or otherwise acquire or retire for value shares of Capital
Stock of the Company or any of its Restricted Subsidiaries at no more than
fair market value (determined in good faith by the Board of Directors of the
Company as evidenced by a resolution of such Board of Directors filed with the
Trustee) from present and former employees and directors of the Company or any
such Restricted Subsidiary and present and former limited partners of
Tekni-Plex Partnership (in each case other than F. Patrick Smith, J. Andrew
McWethy, Barry A. Solomon and Stephen A. Tuttle) in an amount not in excess of
up to $4.0 million for each fiscal year and $10.0 million in the aggregate
commencing with the fiscal year ended June 27, 1997, (vii) all payments, not
exceeding $600,000 in the aggregate, for each fiscal year, required to be made
to Tekni-Plex Partnership, MST/TP Partners, L.P., MST Management, L.P., MST
Partners L.P. or their respective Affiliates or partners under the terms of
existing agreements and notes, (viii) so long as no Default or Event of
Default has occurred and is continuing, the redemption, repurchase or
retirement of Subordinated Indebtedness of the Company in exchange for, by
conversion into, or out of the net proceeds of, a substantially concurrent
sale or incurrence of Subordinated Indebtedness (other than any Indebtedness
owed to a Subsidiary) of the Company that is contractually subordinated in
right of payment to the Notes to at least the same extent, and which has an
Average Life at least as long, in each case, as the subordinated Indebtedness
being redeemed, repurchased or retired, (ix) so long as no Default or Event of
Default has occurred and is continuing, Investments not otherwise permitted
pursuant to the clauses above up to $20.0 million in the aggregate from and
after April 4, 1997, (x) so long as no Default or Event of Default has
occurred and is continuing, Restricted Payments not otherwise permitted
pursuant to the clauses above up to $5.0 million in the aggregate from and
after April 4, 1997, (xi) any Permitted Investment and (xii) so long as no
Default or Event of Default has occurred and is continuing, Investments in any
Person the primary business of which is located outside the United States and
is related, ancillary or complementary to the business of the Company or its
Restricted Subsidiaries, provided that the aggregate amount of Investments
pursuant to this clause does not exceed $15 million. Each Restricted Payment
described in clauses (i) (to the extent not already taken into account for
purposes of computing the aggregate amount of all Restricted Payments pursuant
to clause (3) above), (iv), (vi), (vii), (ix), (x) and (xii) of the previous
sentence shall be taken into account for purposes of computing the aggregate
amount of all Restricted Payments pursuant to clause (3) of the preceding
paragraph.
The Indenture provides that for purposes of this covenant, (i) an "Investment"
shall be deemed to have been made at the time any Restricted Subsidiary is
designated as an Unrestricted Subsidiary in an amount (proportionate to the
Company's equity interest in such Subsidiary) equal to the net worth of such
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated as an Unrestricted Subsidiary; (ii) at any date the aggregate of
all Restricted Payments made as Investments since April 4, 1997 shall exclude
and be reduced by an amount (proportionate to the Company's equity interest in
such Subsidiary) equal to the net worth of an Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary,
not to exceed, in the case of any such redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary, the amount of Investments previously
made by the Company and the Restricted Subsidiaries in such Unrestricted
Subsidiary (in each case (i) and (ii) "net worth" to be calculated based upon
the fair market value of the assets of such Subsidiary as of any such date of
designation); and (iii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer.
Limitations Concerning Distributions and Transfers by Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (i) pay, directly or
indirectly, dividends or make any other distributions in respect of its
Capital Stock or pay any Indebtedness or other obligation owed to the Company
or any Restricted Subsidiary of the Company, (ii) make loans or advances to
the Company or any Restricted Subsidiary of the Company or (iii) transfer any
of its property or assets to the Company or any Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of (a) any agreement in effect on the Issue Date as any such agreement
is in effect on such date, (b) the Credit Agreement, (c) any agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary prior to
the date on which such Restricted Subsidiary was acquired by the Company and
outstanding on such date and not Incurred in anticipation or contemplation of
becoming a Restricted Subsidiary and provided such encumbrance or restriction
shall not apply to any assets of the Company or its Restricted Subsidiaries
other than such Restricted Subsidiary, (d) customary provisions contained in
an agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of a Restricted Subsidiary;
provided, however, that such encumbrance or restriction is applicable only to
such Restricted Subsidiary or assets, (e) an agreement effecting a renewal,
exchange, refunding, amendment or extension of Indebtedness Incurred pursuant
to an agreement referred to in clause (a) or (c) above; provided, however,
that the provisions contained in such renewal, exchange, refunding, amendment
or extension agreement relating to such encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement that is the subject thereof in the reasonable judgment of the Board
of Directors of the Company as evidenced by a resolution of such Board of
Directors filed with the Trustee, (f) the Indenture, (g) applicable law, (h)
customary provisions restricting subletting or assignment of any lease
governing any leasehold interest of any Restricted Subsidiary of the Company,
(i) restrictions contained in Indebtedness permitted to be incurred subsequent
to the Issue Date pursuant to the provisions of the covenant described under
"--Limitation on Indebtedness"; provided that any such restrictions are
ordinary and customary with respect to the type of Indebtedness incurred, (j)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the type referred to in clause (iii) of
this covenant or (k) restrictions of the type referred to in clause (iii) of
this covenant contained in security agreements securing Indebtedness of a
Restricted Subsidiary of the Company to the extent that such Liens were
otherwise incurred in accordance with "--Limitation on Liens" below and
restrict the transfer of property subject to such agreements.
Limitation on Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, incur any Lien on or with respect to any
property or assets of the Company or such Restricted Subsidiary owned on the
Issue Date or thereafter acquired or on the income or profits thereof to
secure Indebtedness, without making, or causing any such Restricted Subsidiary
to make, effective provision for securing the Notes and all other amounts due
under the Indenture (and, if the Company shall so determine, any other
Indebtedness of the Company or such Restricted Subsidiary, including
Subordinated Indebtedness; provided, however, that Liens securing the Notes
and any Indebtedness pari passu with the Notes are senior to such Liens
securing such Subordinated Indebtedness) equally and ratably with such
Indebtedness or, in the event such Indebtedness is subordinate in right of
payment to the Notes or the Guarantee, prior to such Indebtedness, as to such
property or assets for so long as such Indebtedness shall be so secured.
The foregoing restrictions shall not apply to (i) Liens existing on the Issue
Date securing Indebtedness existing on the Issue Date; (ii) Liens securing
Senior Debt (including Liens securing Indebtedness outstanding under the Credit
Agreement) and any guarantees thereof to the extent that the Indebtedness
secured thereby is permitted to be incurred under the covenant described under
"--Limitation on Indebtedness" above; provided, however, that Indebtedness
under the Credit Agreement shall be deemed not to have been Incurred in
violation of such provisions for purposes of this clause (ii) if the holder(s)
of such Indebtedness or their agent or representative shall have received a
representation from the Company to the effect that the Incurrence of such
Indebtedness does not violate such provision; (iii) Liens securing only the
Notes and the Guarantees; (iv) Liens in favor of the Company or a Guarantor;
(v) Liens to secure Indebtedness Incurred for the purpose of financing all or
any part of the purchase price or the cost of construction or improvement of
the property (or any other capital expenditure financing) subject to such
Liens; provided, however, that (a) the aggregate principal amount of any
Indebtedness secured by such a Lien does not exceed 100% of such purchase
price or cost, (b) such Lien does not extend to or cover any other property
other than such item of property and any improvements on such item, (c) the
Indebtedness secured by such Lien is Incurred by the Company within 180 days
of the acquisition, construction or improvement of such property and (d) the
Incurrence of such Indebtedness is permitted by the provisions of the
Indenture described under "--Limitation on Indebtedness" above; (vi) Liens on
property existing immediately prior to the time of acquisition thereof (and
not created in anticipation or contemplation of the financing of such
acquisition); (vii) Liens on property of a Person existing at the time such
Person is acquired or merged with or into or consolidated with the Company or
any such Restricted Subsidiary (and not created in anticipation or
contemplation thereof); (viii) Liens to secure Indebtedness Incurred to
extend, renew, refinance or refund (or successive extensions, renewals,
refinancings or refundings), in whole or in part, any Indebtedness secured by
Liens referred to in clauses (i)-(vii), (ix)-(xii) and (xiv) of this paragraph
so long as such Liens do not extend to any other property and the principal
amount of Indebtedness so secured is not increased except for the amount of any
premium required to be paid in connection with such renewal, refinancing or
refunding pursuant to the terms of the Indebtedness renewed, refinanced or
refunded or the amount of any premium reasonably determined by the Company as
necessary to accomplish such renewal, refinancing or refunding by means of a
tender offer, exchange offer or privately negotiated repurchase, plus the
expenses of the issuer of such Indebtedness reasonably incurred in connection
with such renewal, refinancing or refunding; (ix) Liens in favor of the
Trustee as provided for in the Indenture on money or property held or
collected by the Trustee in its capacity as Trustee (x) Liens securing a tax,
assessment or other governmental charge or levy or the claim of a materialman,
mechanic, carrier, warehouseman or landlord for labor, materials, supplies or
rentals incurred in the ordinary course or business; (xi) Liens consisting of a
deposit or pledge made in the ordinary course of business in connection with,
or to secure payment of, obligations under worker's compensation, unemployment
insurance or similar legislation; (xii) Liens arising pursuant to an order of
attachment, distraint or similar legal process arising in connection with
legal proceedings; (xiii) Liens incurred in the ordinary course of business
securing assets not having a fair market value in excess of $500,000 and (xiv)
Liens in favor of the trustee under the 11 1/4% Notes Indenture as provided
for in the 11 1/4% Notes Indenture on money or property held or collected by
such trustee in its capacity as trustee under the 11 1/4% Notes Indenture.
Limitation on Certain Asset Dispositions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, make one or more Asset
Dispositions unless: (i) the Company or such Restricted Subsidiary, as the case
may be, receives consideration for such Asset Disposition at least equal to
the fair market value of the assets sold or disposed of as determined by the
Board of Directors of the Company in good faith and evidenced by a resolution
of such Board of Directors filed with the Trustee; (ii) not less than 75% of
the consideration for the disposition consists of (a) cash or readily
marketable cash equivalents or the assumption of Indebtedness (other than
non-recourse Indebtedness or any Subordinated Indebtedness) of the Company or
such Restricted Subsidiary or other obligations relating to such assets (and
release of the Company or such Restricted Subsidiary from all liability on the
Indebtedness or other obligations assumed) or (b) assets which constitute or
are part of businesses which are related to the business of the Company or its
Restricted Subsidiaries as of the Issue Date or which assets consist of the
issued and outstanding Capital Stock of a person (which becomes a Restricted
Subsidiary as a result of the transaction) the assets of which are principally
comprised of such assets; and (iii) all Net Available Proceeds, less any
amounts invested within 360 days of such Asset Disposition in assets related
to the business of the Company or its Restricted Subsidiaries (including in
the Capital Stock of another Person (other than any Person that is a
Restricted Subsidiary of the Company immediately prior to such investment);
provided, however, that immediately after giving effect to any such investment
in Capital Stock (and not prior thereto) such Person shall be a Restricted
Subsidiary of the Company), are applied, on or prior to the 360th day (or
390th day in the case of clause (y) below) after such Asset Disposition,
unless and to the extent that the Company shall determine to make an Offer to
Purchase, (x) to the permanent reduction and prepayment of any Senior Debt of
the Company or any of its Subsidiaries then outstanding (including a permanent
reduction of commitments in respect thereof) or (y) to the repurchase of the
Company's 11 1/4% Notes pursuant to the 11 1/4% Notes Indenture. Any Net
Available Proceeds from any Asset Disposition which is subject to the
immediately preceding sentence that are not applied as provided in the
immediately preceding sentence shall be used promptly after the expiration of
the 390th day after such Asset Disposition, or promptly after the Company
shall have earlier determined to not apply any Net Available Proceeds
therefrom as provided in clause (iii) of the immediately preceding sentence, to
make an Offer to Purchase outstanding Notes at a purchase price in cash equal
to 100% of their principal amount plus accrued interest to the Purchase Date.
Notwithstanding the foregoing, the Company may defer making any Offer to
Purchase outstanding Notes until there are aggregate unutilized Net Available
Proceeds from Asset Dispositions otherwise subject to the two immediately
preceding sentences equal to or in excess of $15.0 million (at which time, the
entire unutilized Net Available Proceeds from Asset Dispositions otherwise
subject to the two immediately preceding sentences, and not just the amount in
excess of $15.0 million, shall be applied as required pursuant to this
paragraph). Any remaining Net Available Proceeds following the completion of
the required Offer to Purchase may be used by the Company for any other
purpose (subject to the other provisions of the Indenture) and the amount of
Net Available Proceeds then required to be otherwise applied in accordance
with this covenant shall be reset to zero, subject to any subsequent Asset
Disposition. These provisions will not apply to a transaction consummated in
compliance with the provisions of the Indenture described under "--Mergers,
Consolidations and Certain Sales of Assets" below.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1
under, the Exchange Act.
Limitation on Senior Subordinated Indebtedness
The Indenture provides that the Company will not (i) directly or indirectly
Incur any Indebtedness that by its terms would expressly rank senior in right
of payment to the Notes and expressly rank subordinate in right of payment to
any Senior Debt and (ii) permit a Guarantor to, and no Guarantor will,
directly or indirectly Incur any Indebtedness that by its terms would
expressly rank senior in right of payment to the Guarantee of such Guarantor
and expressly rank subordinate in right of payment to any Senior Debt of such
Guarantor.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, (a) transfer, convey, sell or otherwise
dispose of any shares of Capital Stock of any Restricted Subsidiary of the
Company (other than to the Company or a Wholly Owned Subsidiary of the
Company), except that the Company and any such Restricted Subsidiary may, in
any single transaction, sell all, but not less than all, of the issued and
outstanding Capital Stock of any such Restricted Subsidiary to any Person,
subject to complying with the provisions of the Indenture described under
"--Limitation on Certain Asset Dispositions" above and (b) issue shares of
Capital Stock of a Restricted Subsidiary of the Company (other than directors'
qualifying shares), or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, Capital Stock of a Restricted
Subsidiary of the Company to any Person other than to the Company or a Wholly
Owned Subsidiary of the Company and other than to the holders of the Capital
Stock of such Restricted Subsidiary made pro rata to the relative amounts of
such Capital Stock held by such holders.
Limitation on Transactions with Affiliates and Related Persons
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into directly or indirectly any
transaction with any of their respective Affiliates or Related Persons (other
than the Company or a Restricted Subsidiary of the Company), including,
without limitation, the purchase, sale, lease or exchange of property, the
rendering of any service, or the making of any guarantee, loan, advance or
Investment, either directly or indirectly, involving aggregate consideration
in excess of $2.0 million unless a majority of the disinterested directors of
the Board of Directors of the Company determines, in its good faith judgment
evidenced by a resolution of such Board of Directors filed with the Trustee,
that the terms of such transaction are at least as favorable as the terms that
could be obtained by the Company or such Restricted Subsidiary, as the case
may be, in a comparable transaction made on an arm's-length basis between
unaffiliated parties; provided, however, that if the aggregate consideration
is in excess of $15.0 million the Company shall also obtain, prior to the
consummation of the transaction, the favorable opinion as to the fairness of
the transaction to the Company or such Restricted Subsidiary, from a financial
point of view from an independent financial advisor. The provisions of this
covenant shall not apply to (i) transactions permitted by the provisions of
the Indenture described above under the caption "--Limitation on Restricted
Payments" above and (ii) reasonable fees and compensation paid to, and
indemnity provided on behalf of, officers, directors and employees of the
Company and its Restricted Subsidiaries as determined in good faith by the
Board of Directors or authorized executive officers, as the case may be, of
the Company.
Change of Control
Within 30 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company will commence an Offer to
Purchase all outstanding Notes at a purchase price in cash equal to 101% of
their principal amount plus accrued interest to the Purchase Date. Such Offer
to Purchase will be consummated not earlier than 30 days and not later than 60
days after the commencement thereof. Each holder shall be entitled to tender
all or any portion of the Notes owned by such holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Note tendered must
bear an integral multiple of $1,000 principal amount. A "Change of Control"
will be deemed to have occurred in the event that (whether or not otherwise
permitted by the Indenture), after the Issue Date (a) any Person or any
Persons acting together that would constitute a group (for purposes of Section
13(d) of the Exchange Act, or any successor provision thereto) (a "Group"),
together with any Affiliates or Related Persons thereof, other than any such
Person, Persons, Affiliates or Related Person who are Permitted Holders, shall
"beneficially own" (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto), directly or indirectly, at least (i) 50% of the
voting power of the outstanding Voting Stock of the Company or (ii) 40% of the
voting power of the outstanding Voting Stock of the Company and in the case of
clause (ii) the Permitted Holders own less than such Person or Group (in doing
the "own less than" comparison in this clause (ii), the holdings of the
Permitted Holders who are members of the new Group shall not be counted in the
shares held in the aggregate by Permitted Holders); (b) any sale, lease or
other transfer (in one transaction or a series of related transactions) is
made by the Company or any of its Restricted Subsidiaries of all or
substantially all of the consolidated assets of the Company and its Restricted
Subsidiaries to any Person; (c) the Company consolidates with or merges with
or into another Person or any Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which
immediately after the consummation thereof Persons owning a majority of the
Voting Stock of the Company immediately prior to such consummation shall cease
to own a majority of the Voting Stock of the Company or the surviving entity
if other than the Company; (d) Continuing Directors cease to constitute at
least a majority of the Board of Directors of the Company; or (e) the
stockholders of the Company approve any plan or proposal for the liquidation or
dissolution of the Company. In no event would the sale of common stock of the
Company to an underwriter or a group of underwriters in privity of contract
with the Company (or anybody in privity of contract with such underwriters) be
deemed to be a Change of Control or be deemed the acquisition of more than 40%
of the voting power of the outstanding Voting Stock of the Company by a Person
or any Group unless such common stock is not held in an investment account in
which case the investment account would be treated without giving effect to
the foregoing part of this sentence.
The Indenture acknowledges that, prior to the mailing of a notice to each
holder regarding the Offer to Purchase, but in any event within 30 days
following the date on which a Change of Control occurs, the Company will be
obligated under the Credit Agreement as in effect on the Issue Date to (i)
repay in full all Indebtedness under the Credit Agreement (and terminate all
such commitments) or offer to repay in full all such Indebtedness (and
terminate all such commitments) and to repay the Indebtedness owed to (and
terminate the commitments of) each lender which has accepted such offer or
(ii) obtain the requisite consents under the Credit Agreement to permit the
repurchase of the Notes as provided below. The Company will first comply with
its obligations described in the preceding sentence before it will be required
to offer to repurchase Notes pursuant to the provisions described below,
provided that nothing in this paragraph shall eliminate the obligation of the
Company to consummate an Offer to Purchase the Notes within 90 days of the
consummation of a transaction resulting in a Change of Control.
In the event that the Company makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1
under, the Exchange Act.
With respect to the sale of assets referred to in the definition of "Change of
Control," the phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or
substantially all" of the assets of the Company has occurred. In addition, no
assurances can be given that the Company will be able to acquire Notes
tendered upon the occurrence of a Change of Control. The ability of the
Company to pay cash to the holders of Notes upon a Change of Control may be
limited by its then existing financial resources. The Credit Agreement will
contain certain covenants prohibiting, or requiring waiver or consent of the
lenders thereunder prior to, the repurchase of the Notes upon a Change of
Control and future debt agreements of the Company may provide the same. If the
Company does not obtain such waiver or consent to repay such Indebtedness, the
Company will remain prohibited from repurchasing the Notes. In such event, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture (without any further grace period) which would in
turn constitute a default under the Credit Agreement and possibly other
Indebtedness. If such a cross-default leads to an acceleration of the
obligations under the Credit Agreement or any other Senior Debt, the payment
on the Notes would be effectively subordinated to any such Senior Debt. In
addition, the 11 1/4% Notes Indenture contains provisions relating to a
Change of Control substantially identical to those in the Indenture. As a
result, upon a Change of Control under the Indenture, a Change of Control
under the 11 1/4% Notes Indenture would also have occurred, and the Company
would be required to make an offer to purchase the 11 1/4% Notes as well as
the Notes. None of the provisions relating to a repurchase upon a Change of
Control are waivable by the Board of Directors of the Company or the Trustee.
The foregoing provisions will not prevent the Company from entering into
transactions of the types described above with management or their affiliates.
In addition, such provisions may not necessarily afford the holders of the
Notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect the holders because such transactions may
not involve a shift in voting power or beneficial ownership, or even if they
do, may not involve a shift of the magnitude required under the definition of
Change of Control to trigger the provisions. Nonetheless, such provisions may
have the effect of deterring certain mergers, tender offers, takeover attempts
or similar transactions by increasing the cost of such a transaction and may
limit the Company's ability to obtain additional equity financing in the
future.
Future Guarantors
The Indenture provides that the Company shall not create or acquire, nor
permit any of its Domestic Restricted Subsidiaries to create or acquire, any
Domestic Restricted Subsidiary after the Issue Date unless, at the time such
Domestic Restricted Subsidiary has either assets or stockholder's equity in
excess of $25,000, such Domestic Restricted Subsidiary (a) executes and
delivers to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Domestic Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(b) delivers to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Domestic
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Domestic Restricted Subsidiary.
Provision of Financial Information
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if the Company
were so required, such documents to be filed with the Commission on or prior
to the respective dates (the "Required Filing Dates") by which the Company
would have been required so to file such documents if the Company were so
required. The Company shall also in any event (a) within 15 days of each
Required Filing Date (i) transmit by mail to all holders of Notes, as their
names and addresses appear in the Note Register, without cost to such holders,
and (ii) file with the Trustee, copies of the annual reports, quarterly
reports and other documents which the Company is required to file with the
Commission pursuant to the preceding sentence, and (b) if, notwithstanding the
preceding sentence, filing such documents by the Company with the Commission
is not permitted under the Exchange Act, promptly upon written request supply
copies of such documents to any prospective holder of Notes.
Mergers, Consolidations and Certain Sales of Assets
The Company will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary of the Company to consolidate or merge with or into any
Person or sell, assign, lease, convey or otherwise dispose of) all or
substantially all of the Company's assets (determined on a consolidated basis
for the Company and its Restricted Subsidiaries), whether as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution, to any Person
unless, in each such case: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Company or such Restricted
Subsidiary, as the case may be), or to which such sale, assignment, lease,
conveyance or other disposition shall have been made (the "Surviving Entity"),
is a corporation organized and existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) if there is a Surviving
Entity, the Surviving Entity assumes by supplemental indenture all of the
obligations of the Company (or in the case a Restricted Subsidiary is the
Surviving Entity, the obligations of such Restricted Subsidiary) on the Notes
and under the Indenture; (iii) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis,
the Company or the Surviving Entity, as the case may be, (A) shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction and (B) could Incur at least
$1.00 of Indebtedness pursuant to clause (i) of the provisions of the
Indenture described under "--Limitation on Indebtedness" above; (iv)
immediately before and after giving effect to such transaction and treating
any Indebtedness which becomes an obligation of the Company or any of its such
Restricted Subsidiaries as a result of such transaction as having been
incurred by the Company or such Restricted Subsidiary, as the case may be, at
the time of the transaction, no Default or Event of Default shall have
occurred and be continuing; and (v) if, as a result of any such transaction,
property or assets of the Company or a Restricted Subsidiary would become
subject to a Lien not excepted from the provisions of the Indenture described
under "--Limitation on Liens" above, the Company, Restricted Subsidiary or the
Surviving Entity, as the case may be, shall have secured the Notes as required
by said covenant. The provisions of this paragraph shall not apply to any
merger of a Restricted Subsidiary of the Company with or into the Company or a
Wholly Owned Subsidiary of the Company or any transaction pursuant to which a
Guarantor, is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "--Limitation on Certain Asset Dispositions"
above.
Termination of Certain Covenants if Notes Rated Investment Grade
Notwithstanding the foregoing, the Company's obligation to comply with the
provisions of the Indenture described above under the captions
"--Covenants--Limitation on Indebtedness," "--Limitation on Restricted
Payments," "--Limitations Concerning Distributions and Transfers by Restricted
Subsidiaries," "--Limitation on Certain Asset Dispositions," "Limitation on
Issuance and Sale of Capital Stock of Restricted Subsidiaries" and
"--Limitation on Transactions with Affiliates and Related Persons" will
terminate if the Notes are rated Investment Grade.
Events of Default
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due (whether or not
prohibited by the provisions of the Indenture described under "--Ranking"
above); (b) failure to pay any interest on any Note when due, and the default
continues for 30 days (whether or not prohibited by the provisions of the
Indenture described under "--Ranking" above); (c) default in the payment of
principal of and interest on Notes required to be purchased pursuant to an
Offer to Purchase as described under "--Covenants--Change of Control" and
"--Covenants--Limitation on Certain Asset Dispositions" above when due and
payable (whether or not prohibited by the provisions of the Indenture
described under "--Ranking" above); (d) failure to perform or comply with any
of the provisions described under "--Covenants--Mergers, Consolidations and
Certain Sales of Assets" above; (e) failure to perform any other covenant or
agreement of the Company under the Indenture or the Notes and the default
continues for 60 days after written notice to the Company by the Trustee or
holders of at least 25% in aggregate principal amount of outstanding Notes;
(f) default under the terms of one or more instruments evidencing or securing
Indebtedness of the Company or any of its Restricted Subsidiaries having an
outstanding principal amount of $15 million or more individually or in the
aggregate that has resulted in the acceleration of the payment of such
Indebtedness or failure to pay principal when due at the stated maturity of
any such Indebtedness; (g) the rendering of a final judgment or judgments (not
subject to appeal) against the Company or any of its Restricted Subsidiaries
in an amount of $5 million or more which remains undischarged or unstayed for
a period of 60 days after the date on which the right to appeal has expired;
(h) certain events of bankruptcy, insolvency or reorganization affecting the
Company or any of its Material Subsidiaries; and (i) any Guarantee ceases to
be in full force and effect or is declared null and void and unenforceable or
is found to be invalid or a Guarantor denies its liability under the Guarantee
(other than by reason of a release of such Guarantor from the Guarantee in
accordance with the terms of the Indenture and the Guarantee).
If an Event of Default (other than an Event of Default with respect to the
Company described in clause (h) of the preceding paragraph) shall occur and be
continuing, either the Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Notes may accelerate the maturity of all
Notes; provided, however, that after such acceleration, but before a judgment
or decree based on acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, under certain circumstances,
rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal, have been cured or waived as provided in
the Indenture; and provided, further, that so long as the Credit Agreement
shall be in full force and effect, if an Event of Default shall have occurred
and be continuing (other than as specified under clause (h) above), the Notes
shall not become due and payable until the earlier to occur of (x) five
business days following delivery of a written notice of such acceleration of
the Notes to the agent under the Credit Agreement, if such Event of Default
has not been cured prior to such fifth business day, and (y) the acceleration
of any Indebtedness under the Credit Agreement. If an Event of Default
specified in clause (h) of the preceding paragraph with respect to the Company
occurs, the outstanding Notes will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder. For information as to waiver of defaults, see "--Modification and
Waiver."
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the holders thereof notice of all uncured Defaults or Events of Default known
to it; provided, however, that, except in the case of an Event of Default or a
Default in payment with respect to the Notes or a Default or Event of Default
in complying with "--Covenants--Mergers, Consolidations and Certain Sales of
Assets," the Trustee shall be protected in withholding such notice if and so
long as the Board of Directors or responsible officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
holders of the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and unless the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
and the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a holder
of a Note for enforcement of payment of the principal of and premium, if any,
or interest on such Note on or after the respective due dates expressed in
such Note.
The Company will be required to furnish to the Trustee annually a statement as
to its performance of certain of its obligations under the Indenture and as to
any default in such performance.
Satisfaction and Discharge of Indenture; Defeasance
The Company may terminate its substantive obligations and the substantive
obligations of the Guarantors in respect of the Notes and the Guarantees by
delivering all outstanding Notes to the Trustee for cancellation and paying
all sums payable by the Company on account of principal of, premium, if any,
and interest on all Notes or otherwise. In addition to the foregoing, the
Company may, provided that no Default or Event of Default has occurred and is
continuing or would arise therefrom (or, with respect to a Default or Event of
Default specified in clause (h) of "--Events of Default" above, any time on or
prior to the 91st calendar day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after such
91st day)) and provided that no default under any Senior Debt would result
therefrom, terminate its substantive obligations and the substantive
obligations of the Guarantors in respect of the Notes and the Guarantees
(except for the Company's obligation to pay the principal of (and premium, if
any, on) and the interest on the Notes and such Guarantors' guarantee thereof)
by (i) depositing with the Trustee, under the terms of an irrevocable trust
agreement, money or United States Government Obligations sufficient (without
reinvestment) to pay all remaining indebtedness on the Notes, (ii) delivering
to the Trustee either an Opinion of Counsel or a ruling directed to the
Trustee from the Internal Revenue Service to the effect that the holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and termination of obligations, (iii)
delivering to the Trustee an Opinion of Counsel to the effect that the
Company's exercise of its option under this paragraph will not result in the
Company, the Trustee or the trust created by the Company's deposit of funds
pursuant to this provision becoming or being deemed to be an "investment
company" under the Investment Company Act of 1940, as amended, and (iv)
complying with certain other requirements set forth in the Indenture. In
addition, the Company may, provided that no Default or Event of Default has
occurred, and is continuing or would arise therefrom (or, with respect to a
Default or Event of Default specified in clause (h) of "--Events of Default"
above, any time on or prior to the 91st calendar day after the date of such
deposit (it being understood that this condition shall not be deemed satisfied
until after such 91st day)) and provided that no default under any Senior Debt
would result therefrom, terminate all of its substantive obligations and all
of the substantive obligations of the Guarantors in respect of the Notes and
the Guarantees (including the Company's obligation to pay the principal of
(and premium, if any, on) and interest on the Notes and such Guarantors'
guarantee thereof by (i) depositing with the Trustee, under the terms of an
irrevocable trust agreement, money or United States Government Obligations
sufficient (without reinvestment) to pay all remaining indebtedness on the
Notes, (ii) delivering to the Trustee either a ruling directed to the Trustee
from the Internal Revenue Service to the effect that the holders of the Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such deposit and termination of obligations or an Opinion of Counsel
based upon such a ruling addressed to the Trustee or a change in the
applicable Federal tax law since the date of the Indenture, to such effect,
(iii) delivering to the Trustee an Opinion of Counsel to the effect that the
Company's exercise of its option under this paragraph will not result in the
Company, the Trustee or the trust created by the Company's deposit of funds
pursuant to this provision becoming or being deemed to be an "investment
company" under the Investment Company Act of 1940, as amended, and (iv)
complying with certain other requirements set forth in the Indenture.
The Company may make an irrevocable deposit pursuant to this provision only if
at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the instruments governing
Senior Debt and the Company has delivered to the Trustee and any Paying Agent
an Officers' Certificate to that effect.
Governing Law
The Indenture, the Notes and the Guarantees will be governed by the laws of
the State of New York without regard to principles of conflicts of laws.
Modification and Waiver
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of a majority in aggregate
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each Note
affected thereby, (a) change the Stated Maturity of the principal of or any
installment of interest on any Note or alter the optional redemption or
repurchase provisions of any Note or the Indenture in a manner adverse to the
holders of the Notes, (b) reduce the principal amount of (or the premium) of
any Note, (c) reduce the rate of or extend the time for payment of interest on
any Note, (d) change the place or currency of payment of principal of (or
premium) or interest on any Note, (e) modify any provisions of the Indenture
relating to the waiver of past defaults (other than to add sections of the
Indenture subject thereto) or the right of the holders to institute suit for
the enforcement of any payment on or with respect to any Note or the
Guarantee, or the modification and amendment of the Indenture and the Notes
(other than to add sections of the Indenture or the Notes which may not be
amended, supplemented or waived without the consent of each holder affected),
(f) reduce the percentage of the principal amount of outstanding Notes
necessary for amendment to or waiver of compliance with any provision of the
Indenture or the Notes or for waiver of any Default, (g) waive a default in the
payment of principal of, interest on, or redemption payment with respect to,
any Note (except a rescission of acceleration of the Notes by the holders as
provided in the Indenture and a waiver of the payment default that resulted
from such acceleration), (h) modify the ranking or priority of the Notes or
the Guarantee, or modify the definition of Senior Debt or Designated Senior
Debt or amend or modify the subordination provisions of the Indenture in any
manner adverse to the Holders, (i) release the Guarantors from any of their
respective obligations under the Guarantee or the Indenture otherwise than in
accordance with the Indenture, or (j) modify the provisions relating to any
Offer to Purchase required under the covenants described under
"--Covenants--Limitation on Certain Asset Dispositions" or
"--Covenants--Change of Control" in a manner materially adverse to the holders
of Notes with respect to any Asset Disposition that has been consummated or
Change of Control that has occurred.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain
rights of the Trustee, as provided in the Indenture, the holders of a majority
in aggregate principal amount of the outstanding Notes, on behalf of all
holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase,
or a default in respect of a provision that under the Indenture cannot be
modified or amended without the consent of the holder of each outstanding Note
affected.
The Trustee
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein
contain limitations on the rights of the Trustee, should it become a creditor
of the Company, the Guarantors, or any other obligor upon the Notes, to obtain
payment of claims in certain cases or to realize on certain property received
by it in respect of any such claim as security or otherwise. The Trustee is
permitted to engage in other transactions with the Company or an Affiliate of
the Company; provided, however, that if it acquires any conflicting interest
(as defined in the Indenture or in the Trust Indenture Act), it must eliminate
such conflict or resign.
Book-Entry; Delivery and Form
The Exchange Notes will initially be represented by one or more global Notes
in definitive, fully registered form without interest coupons (collectively,
the "Global Note") and will be deposited with the Trustee as custodian for the
Depositary in the name of a nominee of the Depositary.
Upon the issuance of the Global Note, the Depositary or its custodian will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Note to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Note will be limited to persons who have
accounts with the Depositary ("participants") or persons who hold interests
through participants. Ownership of beneficial interests in the Global Note
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by the Depositary or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as the Depositary, or its nominee, is the registered holder of the
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Exchange Notes represented by such
Global Note for all purposes under the Indenture and the Exchange Notes. No
beneficial owner of an interest in a Global Note will be able to transfer that
interest except in accordance with the Depositary's applicable procedures.
Payments of the principal of, and interest on, the Global Notes will be made
to the Depositary or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of the Depositary or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in
such Global Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the name of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in the Depositary will be effected in the
ordinary way in accordance with the Depositary rules and will be settled in
same-day funds.
The Depositary has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including the presentation of Notes for
exchange as described below) only at the direction of one or more participants
to whose accounts an interest in the Global Notes is credited and only in
respect of such portion of the aggregate principal amount of Notes as to which
such participant or participants has or have given such direction.
The Depositary has advised the Company as follows: the Depositary is a limited
purpose trust company organized under the laws of the State of New York, a
"banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. The Depositary was created to
hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the Depositary system is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Although the Depositary, Euroclear and Cedel have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among participants of the Depositary, Euroclear and Cedel, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by the Depositary,
Euroclear or Cedel or their respective participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations.
Certificated Exchange Notes
If the Depositary is at any time unwilling or unable to continue as a
depositary for the Global Notes and a successor depositary is not appointed by
the Company within 90 days, the Company will issue certificated notes in
exchange for the Global Notes which will bear the legend referred to under the
heading "Notice to Investors."
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture or the Registration Rights Agreement. Reference is made to the
Indenture or the Registration Rights Agreement for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means, with respect to any Person, Indebtedness of
such Person (i) existing at the time such Person becomes a Restricted
Subsidiary or (ii) assumed in connection with the acquisition of assets from
another Person, including Indebtedness Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, as the case may be.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with any specified Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, transfer or other disposition (including,
without limitation, by merger, consolidation or sale-and-leaseback
transaction) of (i) shares of Capital Stock of a Restricted Subsidiary of the
Company (other than directors' qualifying shares) or (ii) property or assets
of the Company or any Restricted Subsidiary of the Company other than in the
ordinary course of business; provided, however, that an Asset Disposition
shall not include (a) any sale, transfer or other disposition of shares of
Capital Stock, property or assets by a Restricted Subsidiary of the Company to
the Company or to any Wholly Owned Subsidiary of the Company, (b) any sale,
transfer or other disposition of defaulted receivables for collection or any
sale, transfer or other disposition of property or assets in the ordinary
course of business, (c) any isolated sale, transfer or other disposition that
does not involve aggregate consideration in excess of $2 million individually,
(d) the grant in the ordinary course of business of any non-exclusive license
of patents, trademarks, registrations therefor and other similar intellectual
property, (e) any Lien (or foreclosure thereon) securing Indebtedness to the
extent that such Lien is granted in compliance with "--Covenants--Limitation on
Liens" above, (f) any Restricted Payment permitted by "--Covenants--Limitation
on Restricted Payments" above, (g) any disposition of assets or property in
the ordinary course of business to the extent such property or assets are
obsolete, worn-out or no longer useful in the Company's or any of its
Restricted Subsidiaries' business, (h) the sale, lease, conveyance or
disposition or other transfer of all or substantially all of the assets of the
Company as permitted under "--Covenants--Mergers, Consolidations and Certain
Sales of Assets" above; provided, that the assets not so sold, leased,
conveyed, disposed of or otherwise transferred shall be deemed an Asset
Disposition, or (i) any disposition that constitutes a Change of Control.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness for borrowed money or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the dates of each successive scheduled principal or
liquidation value payments of such Indebtedness or Preferred Stock,
respectively, and the amount of such principal or liquidation value payments,
by (ii) the sum of all such principal or liquidation value payments.
"Capital Lease Obligations" of any Person means the obligations to pay rent or
other amounts under a lease of (or other Indebtedness arrangements conveying
the right to use) real or personal property of such Person which are required
to be classified and accounted for as a capital lease or liability on the face
of a balance sheet of such Person in accordance with GAAP. The amount of such
obligations shall be the capitalized amount thereof in accordance with GAAP
and the stated maturity thereof shall be the date of the last payment of rent
or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person.
"Common Stock" of any Person means Capital Stock of such Person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" of any Person means for
any period the Consolidated Net Income of such Person for such period
increased (to the extent Consolidated Net Income for such period has been
reduced thereby) by the sum of (without duplication) (i) Consolidated Interest
Expense of such Person for such period, plus (ii) Consolidated Income Tax
Expense of such Person for such period, plus (iii) the consolidated
depreciation and amortization expense included in the income statement of such
Person prepared in accordance with GAAP for such period, plus (iv) any other
non-cash charges to the extent deducted from or reflected in Consolidated Net
Income except for any non-cash charges that represent accruals of, or reserves
for, cash disbursements to be made in any future accounting period.
"Consolidated Cash Flow Ratio" of any Person means for any period the ratio of
(i) Consolidated Cash Flow Available for Fixed Charges of such Person for such
period to (ii) the sum of (A) Consolidated Interest Expense of such Person for
such period, plus (B) the annual interest expense with respect to any
Indebtedness proposed to be Incurred by such Person or its Restricted
Subsidiaries, minus (C) Consolidated Interest Expense of such Person to the
extent included in clause (ii)(A) with respect to any Indebtedness that will
no longer be outstanding as a result of the Incurrence of the Indebtedness
proposed to be Incurred, plus (D) the annual interest expense with respect to
any other Indebtedness Incurred by such Person or its Restricted Subsidiaries
since the end of such period to the extent not included in clause (ii)(A),
minus (E) Consolidated Interest Expense of such Person to the extent included
in clause (ii)(A) with respect to any Indebtedness that no longer is
outstanding as a result of the Incurrence of the Indebtedness referred to in
clause (ii)(D); provided, however, that in making such computation, the
Consolidated Interest Expense of such Person attributable to interest on any
Indebtedness bearing a floating interest rate shall be computed on a pro forma
basis as if the rate in effect on the date of computation (after giving effect
to any hedge in respect of such Indebtedness that will, by its terms, remain
in effect until the earlier of the maturity of such Indebtedness or the date
one year after the date of such determination) had been the applicable rate
for the entire period; provided, further, however, that, in the event such
Person or any of its Restricted Subsidiaries has made any Asset Dispositions
or acquisitions of assets not in the ordinary course of business (including
acquisitions of other Persons by merger, consolidation or purchase of Capital
Stock) during or after such period and on or prior to the date of measurement,
such computation shall be made on a pro forma basis as if the Asset
Dispositions or acquisitions had taken place on the first day of such period.
Calculations of pro forma amounts in accordance with this definition shall be
done in accordance with Article 11 of Regulation S-X under the Securities Act
or any successor provision and may include reasonably ascertainable cost
savings.
"Consolidated Income Tax Expense" of any Person means for any period the
consolidated provision for income taxes of such Person and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" for any Person means for any period, without
duplication, (a) the consolidated interest expense included in a consolidated
income statement (without deduction of interest or finance charge income) of
such Person and its Restricted Subsidiaries for such period calculated on a
consolidated basis in accordance with GAAP and (b) dividend requirements of
such Person and its Restricted Subsidiaries with respect to Disqualified Stock
and with respect to all other Preferred Stock of Restricted Subsidiaries of
such Person (in each case whether in cash or otherwise (except dividends
payable solely in shares of Capital Stock of such Person or such Restricted
Subsidiary)) paid, accrued or accumulated during such period times a fraction
the numerator of which is one and the denominator of which is one minus the
then effective consolidated Federal, state and local tax rate of such Person,
expressed as a decimal.
"Consolidated Net Income" of any Person means for any period the consolidated
net income (or loss) of such Person and its Restricted Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP; provided,
however, that there shall be excluded therefrom (a) the net income (or loss)
of any Person acquired by such Person or a Restricted Subsidiary of such
Person in a pooling-of-interests transaction for any period prior to the date
of such transaction, (b) the net income (but not net loss) of any Restricted
Subsidiary of such Person which is subject to restrictions which prevent or
limit the payment of dividends or the making of distributions to such Person
to the extent of such restrictions (regardless of any waiver thereof), (c)
non-cash gains and losses due solely to fluctuations in currency values, (d)
the net income of any Person that is not a Restricted Subsidiary of such
Person, except to the extent of the amount of dividends or other distributions
representing such Person's proportionate share of such other Person's net
income for such period actually paid in cash to such Person by such other
Person during such period, (e) gains but not losses on Asset Dispositions by
such Person or its Restricted Subsidiaries, (f) all extraordinary gains and
losses determined in accordance with GAAP and (g) in the case of a successor
to the referent Person by consolidation or merger or as a transferee of the
referent Person's assets, any earnings (or losses) of the successor
corporation prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Continuing Director" means a director who either was a member of the Board of
Directors of the Company on the Issue Date or who became a director of the
Company subsequent to the Issue Date and whose election, or nomination for
election by the Company's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Company, either by
a specific vote or by approval of the proxy statement issued by the Company on
behalf of the entire Board of Directors of the Company in which such
individual is named as nominee for director.
"Credit Agreement" means the Credit Agreement, to be dated as of March 3,
1998, among the Company as borrower thereunder, and Morgan Guaranty Trust
Company of New York, as agent on behalf of itself and the others named
therein, and any deferrals, renewals, extensions, replacements, refinancings
or refundings thereof, or amendments, modifications or supplements thereto or
replacements thereof (including, without limitation, any amendment increasing
the amount borrowed thereunder) and any agreement providing therefor whether
by or with the same or any other lender, creditors, or group of creditors and
including related notes, guarantee agreements, security agreements and other
instruments and agreements executed in connection therewith.
"Default" means any event that is, or after notice or lapse of time or both
would become, an Event of Default.
"Designated Senior Debt" means (i) so long as the Credit Agreement is in
effect, the Senior Debt incurred thereunder and (ii) thereafter, any other
Senior Debt which has at the time of initial issuance an aggregate outstanding
principal amount in excess of $25.0 million which has been so designated as
Designated Senior Debt by the Board of Directors of the Company at the time of
initial issuance in a resolution delivered to the Trustee.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity of the Notes (other
than pursuant to change of control provisions similar to those applicable to
the Notes, provided that such provisions expressly provide that no payment can
be made on such Capital Stock until any Offer to Purchase the Notes required
pursuant to the provisions described under "--Change of Control" above shall
have been consummated and paid in full).
"Domestic Restricted Subsidiary" means any Restricted Subsidiary of the
Company organized and existing under the laws of the United States, any state
thereof or the District of Columbia.
"11 1/4% Notes" means the Company's 11 1/4% Senior Subordinated Notes
due 2007 issued pursuant to the 11 1/4% Notes Indenture.
"11 1/4% Notes Indenture" means the indenture dated as of April 1, 1997,
among the Company, the subsidiaries of the Company from time to time party
thereto as guarantors thereunder and Marine Midland Bank, as Trustee as
supplemented from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated by the Commission thereunder.
"GAAP" means generally accepted accounting principles, consistently applied,
as in effect on the Issue Date in the United States of America, as set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as is approved by a significant segment of the
accounting profession in the United States.
"Guarantee" means the guarantee of the Senior Subordinated Notes by each
Guarantor under the Indenture.
"Guarantor" means (i) each Domestic Restricted Subsidiary on the Issue Date
with assets or stockholder's equity in excess of $25,000 and (ii) each
Domestic Restricted Subsidiary, if any, of the Company formed or acquired
after the Issue Date, which pursuant to the terms of the Indenture executes a
supplement to the Indenture as a Guarantor.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of any Person or any of
its Restricted Subsidiaries existing at the time such Person becomes a
Restricted Subsidiary of the Company (or is merged into or consolidates with
the Company or any of its Restricted Subsidiaries), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary of the Company (or being merged into
or consolidated with the Company or any of its Restricted Subsidiaries), shall
be deemed Incurred at the time any such Person becomes a Restricted Subsidiary
of the Company or merges into or consolidates with the Company or any of its
Restricted Subsidiaries.
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person outstanding for more than 15 days, (iv) every obligation of such Person
issued or assumed as the deferred purchase price of property or services
outstanding for more than 15 days (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) every net obligation under interest rate swap
or similar agreements or foreign currency hedge, exchange or similar
agreements of such Person and (vii) every obligation of the type referred to
in clauses (i) through (vi) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable for, directly or indirectly, as obligor, guarantor or
otherwise. Indebtedness shall include the liquidation preference and any
mandatory redemption payment obligations in respect of any Disqualified Stock
of the Company owned by any Person other than the Company or a Restricted
Subsidiary of the Company, and any Preferred Stock of a Restricted Subsidiary
of the Company. Indebtedness shall never be calculated taking into account any
cash and cash equivalents held by such Person. Indebtedness shall not include
obligations arising from agreements of the Company or a Restricted Subsidiary
of the Company to provide for indemnification, adjustment of purchase price,
earn-out, or other similar obligations, in each case, incurred or assumed in
connection with the disposition of any business or assets of a Restricted
Subsidiary of the Company.
"Investment" by any Person means any direct or indirect loan, advance,
guarantee or other extension of credit (excluding credit balances in bank
accounts or similar accounts with other financial institutions) or capital
contribution to (by means of transfers of cash or other property to others or
payments for property or services for the account or use of others, or
otherwise), or purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities or evidence of Indebtedness issued by any other
Person.
"Investment Grade Rated" means, with respect to the Notes, both a rating of
the Notes by S&P of BBB- or higher and a rating of the Notes by Moody's of
Baa3 or higher.
"Issue Date" means the original issue date of the Notes.
"Lien" means, with respect to any property or assets, any mortgage or deed of
trust, pledge, hypothecation, assignment, security interest, lien, charge,
easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, preference, priority or other security agreement
with respect to such property or assets (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Material Subsidiary" means, at any date of determination, any Subsidiary
that, together with its Subsidiaries, (i) for the most recent fiscal year of
the Company accounted for more than 5% of the consolidated revenues of the
Company or (ii) as of the end of such fiscal year, was the owner of more than
5% of the consolidated assets of the Company, all as set forth on the most
recently available consolidated financial statements of the Company for such
fiscal year prepared in conformity with GAAP.
"Moody's" means Moody's Investors Service, Inc. or any successor to its debt
rating business.
"Net Available Proceeds" from any Asset Disposition by any Person means cash
or readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Indebtedness or other obligations relating to such properties or
assets or received in any other non-cash form) therefrom by such Person,
including any cash received by way of deferred payment or upon the
monetization or other disposition of any non-cash consideration (including
notes or other securities) received in connection with such Asset Disposition,
net of (i) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred and all federal, state, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition, (ii) all payments made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such assets in accordance
with the terms of any Lien upon or with respect to such assets or which must
by the terms of such Lien, or in order to obtain a necessary consent to such
Asset Disposition or by applicable law, be repaid out of the proceeds from
such Asset Disposition, (iii) all payments made with respect to liabilities
associated with the assets which are the subject of the Asset Disposition,
including, without limitation, trade payables and other accrued liabilities,
(iv) appropriate amounts to be provided by such Person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance with GAAP
against any liabilities associated with such assets and retained by such
Person or any Restricted Subsidiary thereof, as the case may be, after such
Asset Disposition, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination costs
associated with such Asset Disposition, until such time as such amounts are no
longer reserved or such reserve is no longer necessary (at which time any
remaining amounts will become Net Available Proceeds to be allocated in
accordance with the provisions of clause (iii) of the covenant of the
Indenture described under "--Covenants--Limitation on Certain Asset
Dispositions") and (v) all distributions and other payments made to minority
interest holders in Restricted Subsidiaries of such Person or joint ventures
as a result of such Asset Disposition.
"Net Investment" means the excess of (i) the aggregate amount of all
Investments in Unrestricted Subsidiaries or joint ventures made by the Company
or any Restricted Subsidiary on or after the Issue Date (in the case of an
Investment made other than in cash, the amount shall be the fair market value
of such Investment as determined in good faith by the Board of Directors of
the Company or such Restricted Subsidiary) over (ii) the aggregate amount
returned in cash on or with respect to such Investments whether through
interest payments, principal payments, dividends or other distributions or
payments; provided, however, that such payments or distributions shall not be
(and have not been) included in subclause (b) of clause (3) of the first
paragraph described under "--Covenants--Limitation on Restricted Payments;"
provided, further that with respect to all Investments made in any
Unrestricted Subsidiary or joint venture the amounts referred to in clause
(ii) above with respect to such Investments shall not exceed the aggregate
amount of all such Investments made in such Unrestricted Subsidiary or joint
venture.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company by
first class mail, postage prepaid, to each holder at his address appearing in
the register for the Notes on the date of the Offer offering to purchase up to
the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration
date (the "Expiration Date") of the Offer to Purchase which shall be not less
than 30 days nor more than 60 days after the date of such Offer and a
settlement date (the "Purchase Date") for purchase of Notes within five
Business Days after the Expiration Date. The Company shall notify the Trustee
at least 15 Business Days (or such shorter period as is acceptable to the
Trustee) prior to the mailing of the Offer of the Company's obligation to make
an Offer to Purchase, and the Offer shall be mailed by the Company or, at the
Company's request, by the Trustee in the name and at the expense of the
Company. The Offer shall contain all the information required by applicable
law to be included therein. The Offer shall contain all instructions and
materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes
offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such amount has been
determined pursuant to the Section of the Indenture requiring the Offer to
Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note tendered
must be tendered in an integral multiple of $1,000 principal amount;
(6) the place or places where Notes are to be surrendered for
tender pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due
and payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a
Note pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of business on
the Expiration Date (such Note being, if the Company or the Trustee so
requires, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Company and the Trustee duly executed by, the
holder thereof or his attorney duly authorized in writing);
(10) that holders will be entitled to withdraw all or any portion
of Notes tendered if the Company (or its Paying Agent) receives, not later
than the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the principal amount of the Note the holder
tendered, the certificate number of the Note the holder tendered and a
statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than
or equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only
in part, the Company shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or Notes,
of any authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of the
Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with the
provisions above pertaining to any Offer.
"Permitted Holder" means any of any member of the Board of Directors of the
Company as of the Issue Date, Tekni-Plex Partnership, MST/TP Partners,
L.P., MST Management, L.P., MST Partners L.P., any Affiliate of or partner
in any of the foregoing (including any Person receiving common stock of the
Company upon a distribution by any of the foregoing partnerships, whether a
partner or designated by a partner for purposes of estate or similar
personal planning), or any group if the majority of the shares of Common
Stock of the Company owned by such group are beneficially owned by any or
all of the foregoing and their Related Persons and Affiliates.
"Permitted Investments" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or any
governmental entity or agency or political subdivision thereof (provided that
the full faith and credit of the United States of America is pledged in
support thereof), maturing within one year of the date of purchase; (ii)
Investments in commercial paper issued by corporations or financial
institutions maturing within 180 days from the date of the original issue
thereof, and rated "P-1" or better by Moody's Investors Service or "A-1" or
better by Standard & Poor's Corporation or an equivalent rating or better by
any other nationally recognized securities rating agency; (iii) Investments in
certificates of deposit issued or acceptances accepted by or guaranteed by any
bank or trust company organized under the laws of the United States of
America, any state thereof, the District of Columbia, Canada or any province
thereof, in each case having a combined capital, surplus and undivided profits
totaling more than $500,000,000, maturing within one year of the date of
purchase; (iv) Investments representing Capital Stock or obligations issued or
otherwise transferred to the Company or any of its Restricted Subsidiaries in
the course of the good faith settlement of claims against any other Person or
by reason of a composition or readjustment of debt or a reorganization of any
debtor of the Company or any of its Restricted Subsidiaries; (v) deposits,
including interest-bearing deposits, maintained in the ordinary course of
business in banks; (vi) any Investment in any Person; provided, however,
that (x) after giving effect to any such Investment such Person shall
become a Restricted Subsidiary of the Company or (y) such Person is merged
with or into, or substantially all of such Person's assets are transferred
to, the Company or a Restricted Subsidiary of the Company; (vii)
receivables and prepaid expenses, in each case arising in the ordinary
course of business; provided, however, that such receivables and prepaid
expenses would be recorded as assets of such Person in accordance with
GAAP; (viii) endorsements for collection or deposit in the ordinary course
of business by such Person of bank drafts and similar negotiable
instruments of such other Person received as payment for ordinary course of
business trade receivables; (ix) any interest swap or hedging obligation
with an unaffiliated Person otherwise permitted by the Indenture; (x)
Investments received as consideration for an Asset Disposition in
compliance with the provisions of the Indenture described under "--
Covenants--Limitation on Certain Asset Dispositions" above; (xi)
Investments in Restricted Subsidiaries or by virtue of which a person
becomes a Restricted Subsidiary (including under circumstances in which
equity interests in a Restricted Subsidiary are acquired from third parties
subsequent to such Person becoming a Restricted Subsidiary pursuant to the
terms of any merger or acquisition or similar agreement in existence at the
time such Person became a Restricted Subsidiary); and (xii) loans and
advances to employees of the Company or any of its Restricted Subsidiaries
in the ordinary course of business.
"Person" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"PS&T" means Plastic Specialties and Technologies, Inc.
"PS&T Notes" means the 11 1/4% Senior Secured Notes due 2003 of PS&T.
"PS&T Tender Offer" means the tender offer and consent solicitation relating
to the PS&T Notes commenced February 2, 1998.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Related Person" of any Person means any other Person directly or indirectly
owning (a) 5% or more of the outstanding Common Stock of such Person (or, in
the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group or any successor to its debt
rating business.
"Senior Debt" means, with respect to any Person at any date, (i) in the case
of the Company or the Guarantor, all Indebtedness and other obligations under
the Credit Agreement, including, without limitation, principal, premium, if
any, and interest on such Indebtedness and all other amounts due on or in
connection with such Indebtedness including all charges, fees and expenses,
(ii) all other Indebtedness of such Person for money borrowed, including
principal, premium, if any, and interest on such Indebtedness, unless the
instrument under which such Indebtedness for money borrowed is created,
incurred, assumed or guaranteed expressly provides that such Indebtedness for
money borrowed is not senior or superior in right of payment to the Notes, and
all renewals, extensions, modifications, amendments, refinancing or
replacements thereof and all other Indebtedness of such Person of the types
referred to in clauses (iii), (iv) (not including obligations issued or
assumed as the deferred purchase price of services) and (vi) of the definition
of Indebtedness and (iii) all interest on any Indebtedness referred to in
clauses (i) and (ii) accruing during, or which would accrue but for, the
pendency of any bankruptcy or insolvency proceeding, whether or not allowed
thereunder.
Notwithstanding the foregoing, Senior Debt shall not include (a)
Indebtedness which is pursuant to its terms or any agreement relating thereto
or by operation of law subordinated or junior in right of payment or otherwise
to any other Indebtedness of such Person; provided, however, that no
Indebtedness shall be deemed to be subordinate or junior in right of payment
or otherwise to any other Indebtedness of a Person solely by reason of such
other Indebtedness being secured and such Indebtedness not being secured, (b)
the Notes, (c) any Indebtedness of such Person to any of its Subsidiaries, (d)
Indebtedness Incurred in violation of the provisions of the Indenture described
under "--Covenants--Limitation on Indebtedness"; provided, however, that
Indebtedness under the Credit Agreement shall be deemed not to have been
Incurred in violation of such provisions for purposes of this clause (d) if
the holder(s) of such Indebtedness or their agent or representative shall have
received a representation from the Company to the effect that the Incurrence
of such Indebtedness does not violate such provision and (e) any Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of the Bankruptcy Code, is without recourse to the Company.
"Subordinated Indebtedness" means any Indebtedness (whether outstanding on the
date hereof or hereafter incurred) which is by its terms expressly subordinate
or junior in right of payment to the Notes.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more other Subsidiaries thereof or (ii) any other Person (other
than a corporation) in which such Person, or one or more other Subsidiaries of
such Person or such Person and one or more other Subsidiaries thereof,
directly or indirectly, have at least a majority ownership and voting power
relating to the policies, management and affairs thereof.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company formed or
acquired after the Issue Date that at the time of determination is designated
an Unrestricted Subsidiary by the Board of Directors in the manner provided
below and (ii) any Subsidiary of an Unrestricted Subsidiary. Any such
designation by the Board of Directors will be evidenced to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect
to such designation and an officers' certificate certifying that such
designation complied with the foregoing provisions. The Board of Directors of
the Company may not designate any Subsidiary of the Company to be an
Unrestricted Subsidiary if, after such designation, (a) the Company or any
other Restricted Subsidiary (i) provides credit support for, or a guarantee
of, any Indebtedness of such Subsidiary (including any undertaking, agreement
or instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Subsidiary, (b) a default with respect to
any Indebtedness of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other
Indebtedness of the Company or any Restricted Subsidiary to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity or (c) such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any Restricted
Subsidiary which is not a Subsidiary of the Subsidiary to be so designated.
"Voting Stock" of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person or by
such Person and one or more Wholly Owned Subsidiaries of such Person.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material United States federal income
tax consequences of the Exchange Offer to holders of Old Notes. Unless
otherwise stated, this discussion addresses the United States federal income
tax consequences to persons that hold Old Notes as capital assets, and that
are (i) citizens or residents of the United States, (ii) corporations,
partnerships or other entities created or organized in or under the laws of
the United States or any political subdivision thereof or therein, (iii)
estates the income of which is subject to United States federal income tax
regardless of its source, or (iv) trusts the administration of which is
subject to the primary supervision of a court within the United States and for
which one or more United States fiduciaries have the authority to control all
substantial decisions ("U.S. Holders"). This discussion does not purport to
address specific tax consequences that may be relevant to particular persons
(including, for example, financial institutions, broker-dealers, insurance
companies, tax-exempt organizations, and persons in special situations, such
as those who hold Old Notes or Exchange Notes as part of a straddle, hedge,
conversion transaction, or other integrated investment). This discussion does
not address the tax consequences to persons that have a "functional currency"
other than the U.S. dollar. In addition, this discussion does not address
United States federal alternative minimum tax consequences or any aspect of
state, local or foreign taxation. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Department
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as of the date hereof and all of which are
subject to change, possibly on a retroactive basis.
HOLDERS OF NOTES ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND
DISPOSING OF THE EXCHANGE NOTES, AS WELL AS THE APPLICATION OF STATE, LOCAL
AND FOREIGN INCOME AND OTHER TAX LAWS.
The Exchange
The exchange of an Old Note for an Exchange Note pursuant to the Exchange
Offer should not be treated as an exchange or otherwise as a taxable event for
U.S. federal income tax purposes. Accordingly, the Exchange Notes should have
the same issue price as the Old Notes and each holder should have the same
adjusted basis and holding period in the Exchange Notes as it had in the Old
Notes immediately before the Exchange Offer. It is assumed, for purposes of
the following discussion, that the consummation of the Exchange Offer will not
be treated as a taxable event and that the Exchange Notes and the Old Notes
will be treated as the same instruments for U.S. federal income tax purposes.
Disposition of Exchange Notes
If a U.S. Holder sells an Exchange Note between interest payment dates, the
U.S. Holder will recognize gain or loss equal to the difference between the
amount realized on the sale (except to the extent such amount is attributable
to accrued but previously unrecognized interest, which is taxable as ordinary
interest income) and the U.S. Holder's adjusted tax basis in the Exchange
Note. A U.S. Holder's adjusted tax basis in an Exchange Note will be equal to
the amount the U.S. Holder paid to purchase the Old Note, (i) increased by any
interest that has accrued since the last interest payment date, any "original
issue discount" within the meaning of Section 1273 of the Code, and any market
discount, in each case that has previously been included by such U.S. Holder
in taxable income with respect to such Note, and (ii) decreased by any bond
premium previously amortized and any principal payments previously received
by such U.S. Holder with respect to such Note. Subject to the market discount
rules, any such gain or loss will be capital gain or loss, long-term or
short-term depending upon whether the Holder has held such Note for more than
one year. Subject to certain limited exceptions, capital losses cannot be used
to offset ordinary income.
Foreign Holders
For purposes of this discussion, a "Foreign Holder" is any noteholder other
than a U.S. Holder.
A Foreign Holder generally will not be subject to United States federal
withholding tax on interest paid on the Exchange Notes so long as the Foreign
Holder (i) is not actually or constructively a "10 percent shareholder"' of the
Company or a "controlled foreign corporation" with respect to which the
Company is a "related person" within the meaning of the Code, and (ii)
provides an appropriate statement, signed under penalties of perjury,
certifying that the beneficial owner of the Exchange Note is a foreign person
and providing that foreign person's names and address. If the information
provided in this statement changes, the foreign person must so inform the
Company within 30 days of such change. The statement generally must be
provided in the year a payment occurs or in either of the two preceding years.
If the foregoing conditions are not satisfied, then interest paid on the
Exchange Notes will be subject to United States withholding tax at a rate of
30%, unless such rate is reduced or eliminated pursuant to an applicable tax
treaty.
Any capital gain a Foreign Holder realizes on the sale, redemption, retirement
or other taxable disposition of an Exchange Note will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the Foreign Holder's conduct of a trade or business
in the United States, (ii) in the case of a Foreign Holder that is an
individual, the Foreign Holder is not present in the United States for 183
days or more in the taxable year of the disposition and (iii) the Foreign
Holder is not subject to tax pursuant to the provisions of U.S. tax law
applicable to certain U.S. expatriates.
If the interest, gain or other income a Foreign Holder recognizes on an
Exchange Note is effectively connected with the Foreign Holder's conduct of a
trade or business in the United States, the Foreign Holder (although exempt
from the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to United States federal income tax on
the interest, gain or other income at regular federal income tax rates. In
addition, if the Foreign Holder is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its "effectively connected earnings and
profits," as adjusted for certain items, unless it qualifies for a lower rate
under an applicable tax treaty.
Information Reporting and Backup Withholding
The Company will be required to report annually to the IRS, and to each U.S.
Holder of record, the amount of interest paid on the Exchange Notes (and the
amount, if any, withheld) for each calendar year, except as to exempt holders
(generally, corporations, tax-exempt organizations, qualified pension and
profit-sharing trusts, individual retirement accounts, or non-resident aliens
that provide certification as to their status). Each U.S. Holder (other than
holders, including, among others, corporations, that are not subject to the
reporting requirements) will be required to provide to the Company, under
penalties of perjury, a certificate containing the U.S. Holder's name,
address, correct federal taxpayer identification number and a statement that
the U.S. Holder is not subject to backup withholding. Should a nonexempt U.S.
Holder fail to provide the required certificate, the Company will be required
to withhold 31% of the interest otherwise payable to the U.S. Holder and to
remit the withheld amount to the IRS as a credit against the U.S. Holder's
federal income tax liability.
PLAN OF DISTRIBUTION
Prior to the Exchange Offer, there has been no market for any of the Exchange
Notes. The Old Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automatic Linkages ("PORTAL") market. There can be
no assurance that an active trading market will develop for, or as to the
liquidity of, any of the Notes.
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired as
a result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, the
Company will make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sales of the Exchange Notes
by Participating Broker-Dealers. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchaser
or to or through brokers or dealers who may receive compensation in the form
of commissions or concessions from any such Participating Broker-Dealer and/or
the purchasers of any such Exchange Notes. Any Participating Broker-Dealer
that resells the Exchange Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such documents
in the Letter of Transmittal.
LEGAL MATTERS
Certain legal matters relating to the Exchange Notes offered hereby will be
passed upon for the Company by Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of Tekni-Plex included in this
Prospectus have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of PureTec Corporation and of Plastic
Specialties and Technologies, Inc. included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-4
(the "Exchange Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder relating
to the securities being offered hereby.
This Prospectus does not contain all the information set forth in the Exchange
Registration Statement. For further information with respect to Tekni-Plex
and the Exchange Offer, reference is made to the Exchange Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Registration Statement, reference is made
to the exhibit for a more complete description of the document or matter
involved. The Exchange Registration Statement, including the exhibits
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Regional Offices of the Commission at 75 Park Place, New
York, New York 10007 and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally, the
Commission maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
The Company is subject to the informational requirements of the Exchange Act,
and in accordance therewith is required to file periodic reports and other
information with the Commission. The Company has also agreed that, whether or
not it is required to do so by the rules and regulations of the Commission,
for so long as any of the Notes remain outstanding, it will furnish to the
holders of the Exchange Notes and file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company was required to file such
forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all reports that would be required to be filed with the
Commission on Form 8-K if the Company was required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available to any prospective purchaser of the Notes or
beneficial owner of the Notes in connection with any sale thereof the
information required by Rule 144(d)(4) under the Securities Act. Under the
Indenture, the Company shall file with the Trustee annual, quarterly and other
reports within fifteen days after it files such reports with the Commission.
Further, to the extent that annual, quarterly or other financial reports are
furnished by the Company to stockholders generally, it will mail such reports
to holders of Notes. The Company will furnish annual and quarterly financial
reports to stockholders of the Company and will mail such reports to holders
of Notes pursuant to the Indenture. Annual reports delivered to the Trustee
and the holders of Exchange Notes will contain financial information that has
been examined and reported upon, with an opinion expressed by an independent
public or certified public accountant. The Company will also furnish such
other reports as may be required by law.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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Page
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Tekni-Plex, Inc.
Report of Independent Certified Public Accountants....................................................... F-2
Financial Statements:
Consolidated balance sheets as of June 28, 1996 and June 27, 1997 and December 26, 1997
(unaudited)........................................................................................... F-3
Consolidated statements of operations for the years ended June 30, 1995, June 28, 1996 and June
27, 1997 and the six months ended December 27, 1996 (unaudited) and December 26, 1997
(unaudited)........................................................................................... F-4
Statements of consolidated stockholders' equity for the years ended June 30, 1995, June 28, 1996
and June 27, 1997 and the six months ended December 26, 1997 (unaudited).............................. F-5
Consolidated statements of cash flows for the years ended June 30, 1995, June 28, 1996 and June
27, 1997 and the six months ended December 27, 1996 (unaudited) and December 26, 1997
(unaudited)........................................................................................... F-6
Notes to consolidated financial statements............................................................... F-8
PureTec Corporation
Independent Auditor's Report..............................................................................F-17
Independent Auditor's Report............................................................................. F-18
Consolidated Balance Sheets as of July 31, 1996 and 1997 and January 31, 1998 (unaudited)................ F-19
Consolidated Statements of Operations for the years ended July 31, 1995, 1996 and 1997 and for
the six months ended January 31, 1997 (unaudited) and January 31, 1998 (unaudited)...................... F-20
Consolidated Statements of Stockholders' Equity for the years ended July 31, 1995, 1996 and 1997 and
for the six months ended January 31, 1998 (unaudited)................................................... F-21
Consolidated Statements of Cash Flows for the years ended July 31, 1995, 1996 and 1997 and for
the six months ended January 31, 1997 (unaudited) and January 31, 1998 (unaudited)...................... F-23
Notes to Consolidated Financial Statements............................................................... F-24
Plastic Specialties and Technologies, Inc.
Independent Auditors' Report............................................................................. F-54
Consolidated Statement of Operations for the year ended July 31, 1995.................................... F-55
Consolidated Statement of Stockholders' Deficit for the year ended July 31, 1995......................... F-56
Consolidated Statement of Cash Flows for the year ended July 31, 1995.................................... F-57
Notes to Consolidated Financial Statements............................................................... F-58
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of Tekni-Plex,
Inc. and its wholly owned subsidiary (the "Company") as of June 27, 1997 and
June 28, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 27, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tekni-Plex, Inc. and its wholly owned subsidiary as of June 27, 1997 and June
28, 1996, and the results of their operations and their cash flows for each of
the three years in the period ended June 27, 1997, in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
August 26, 1997
Woodbridge, New Jersey
TEKNI-PLEX, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
[Years Ended]
------------------------------------------------------
December 26,
June 28, 1996 June 27, 1997 1997
---------------- ------------------ -----------------
<S> <C> <C> <C>
(unaudited)
Assets(Note 4)
Current assets:
Cash........................................................ $ 1,048,287 $ 11,095,061 $ 9,235,072
Accounts receivable, net of an allowance of $565,000,
$313,000 and $316,000 for possible losses...................... 12,955,647 12,688,165 15,054,734
Inventories................................................. 12,954,993 13,315,278 13,893,003
Income tax refund receivable................................ -- 1,082,800 --
Deferred income taxes....................................... 2,900,000 1,500,000 1,172,000
Prepaid and other current assets............................ 1,738,009 2,029,606 2,091,174
------------- ------------- ---------------
Total current assets........................................ 31,596,936 41,710,910 41,445,983
Property, plant and equipment, net................................ 44,506,233 42,389,315 41,645,861
Intangible assets, net of accumulated amortization of
$4,821,400, $7,700,300 and $9,227,000............................ 40,751,682 36,966,687 37,390,994
Deferred charges, net of accumulated amortization of $496,200,
$77,400 and $408,000............................................. 4,515,045 5,204,506 4,919,423
Loan receivable -- PureTec........................................ -- -- 5,000,000
Other assets...................................................... 400,142 2,757,946 281,341
------------- ------------- ---------------
Total assets................................................ $ 121,770,038 $ 129,029,364 130,683,602
============= ============= ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long term debt........................... $ 3,226,149 $ -- $ 563,775
Accounts payable--trade..................................... 5,480,514 6,138,694 5,673,431
Accrued payroll and benefits................................ 3,917,404 5,189,683 1,956,164
Accrued interest............................................ 1,068,690 -- 2,119,378
Accrued liabilities--other.................................. 5,448,782 4,432,916 1,358,231
Income taxes payable........................................ 795,000 -- 1,375,000
------------- ------------- ---------------
Total current liabilities................................... 19,936,539 15,761,293 13,045,979
Long-term debt.................................................... 67,209,889 75,000,000 75,044,000
Deferred income taxes............................................. 7,655,000 7,255,000 6,967,000
Other liabilities................................................. 1,135,869 615,576 555,500
Redeemable warrants............................................... 1,670,374 -- --
------------- ------------- ---------------
Total liabilities........................................... 97,607,671 98,631,869 95,612,479
------------- ------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000 shares,
issued and outstanding 1,707 shares at June 28, 1996 and
June 27, 1997 and 850 shares at December 26, 1997.............. 17 17 9
Additional paid-in capital.................................. 22,999,983 41,473,251 41,473,259
Cumulative currency translation adjustment.................. $ (66,928)
Retained earnings (deficit) $ 1,162,367 $(11,075,773) $ (6,335,217)
------------- ------------- ---------------
Total stockholders' equity.................................. 24,162,367 30,397,495 35,071,123
------------- ------------- ---------------
Total liabilities and stockholders' equity..................... $ 121,770,038 $ 129,029,364 $ 130,683,602
============= ============= ===============
</TABLE>
See acompanying summary of accounting policies and notes to
consolidated financial statments.
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
--------------------------------------------------------------------------------
Years ended Six months ended
----------------------------------------------- ------------------------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
------------- ------------- ------------- ------------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales...................... $ 44,688,453 $ 80,917,205 $ 144,735,927 $ 71,594,561 $ 75,621,895
Cost of sales.................. 34,941,442 62,335,102 107,006,755 53,459,922 55,224,465
------------ ------------ ------------- ------------ ------------
Gross profit................... 9,747,011 18,582,103 37,729,172 18,134,639 20,397,430
Operating expenses:
Selling, general and
administrative................ 4,813,583 10,338,632 15,886,002 7,150,191 8,255,574
------------ ------------ ------------- ------------ ------------
Income from operations......... 4,933,428 8,243,471 21,843,170 10,984,448 12,141,856
Other expenses:
Interest....................... 4,321,979 5,816,166 8,094,149 4,129,478 4,335,701
Other.......................... 234,743 469,370 646,433 440,106 158,599
Income before provision for
income taxes and
extraordinary item.......... 376,706 1,957,935 13,102,588 6,414,864 7,647,556
Provision for income taxes..... 211,000 982,200 4,675,000 2,255,000 2,907,000
------------ ------------ ------------- ------------ ------------
Income before extraordinary
item........................ 165,706 975,735 8,427,588 4,159,864 4,740,556
Extraordinary loss on
extinguishment of debt...... -- -- (20,665,728) -- --
------------ ------------ ------------- ------------ ------------
Net income (loss).............. $ 165,706 $ 975,735 $(12,238,140) $ 4,159,864 $ 4,740,556
============ ============ ============= ============ ============
</TABLE>
See acompanying summary of accounting policies and notes to
consolidated financial statments.
TEKNI-PLEX, INC.
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
----------------------------------------------------------------------------------
Cumulative
Common Additional Paid- Foreign Currency Retained
Stock In Capital Adjustment Earnings Total
--------- ------------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1994............ $ 9 $ 1,499,991 $ 20,926 $ 11,520,926
Net income................. -- -- -- 165,706 165,706
------- ------------- ---------------- -------------- --------------
Balance, June 30, 1995........... 9 11,499,991 186,632 11,686,632
Proceeds from capital
contribution.................. 8 11,499,992 -- 11,500,000
Net income................. -- -- -- 975,735 975,735
------- ------------- ---------------- -------------- --------------
Balance, June 28, 1996........... 17 22,999,983 1,162,367 24,162,367
Proceeds from capital
contribution.................. -- 18,473,268 -- 18,473,268
Net loss................... -- -- -- (12,238,140) (12,238,140)
------- ------------- ---------------- -------------- --------------
Balance, June 27, 1997........... 17 41,473,251 (11,075,773) 30,397,495
Return of 857 shares to the
Company (unaudited)............. (8) 8 -- -- --
Foreign currency translation.....
Foreign currency translation
adjustment--(unaudited)......... -- -- (66,928) -- (66,928)
Net Income (unaudited)........... -- -- -- 4,740,556 4,740,556
------- ------------- ---------------- -------------- --------------
Balance, December 26, 1997
(unaudited)..................... $ 9 $ 41,473,259 $ (66,928) $ (6,335,217) $ 35,071,123
======= ============= =============== ============== ==============
</TABLE>
See acompanying summary of accounting policies and notes to
consolidated financial statments.
TEKNI-PEX, INC.
` CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Years ended Six months ended
------------------------------------------------ ----------------------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
------------- ------------- -------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 165,706 $ 975,735 $ (12,238,140) $ 4,159,864 $ 4,740,556
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation...................... 1,018,157 3,247,239 6,051,201 2,976,820 3,010,858
Amortization...................... 2,444,222 3,573,592 3,499,679 1,838,876 1,782,472
Deferred income taxes............. 210,000 63,700 1,000,000 705,000 40,000
Allowance for doubtful accounts... -- 120,614 200,000 200,000 3,000
Amortization of redeemable warrants 391,100 379,274 556,400 363,400 --
Extraordinary loss on extinguishment
of debt........................... -- -- 20,665,728 -- --
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable............... (1,005,933) 1,160,960 67,482 (1,479,497) (1,456,965)
Inventories....................... (801,591) 1,394,980 (360,285) (860,458) (224,934)
Prepaid expenses and other current
assets............................ (128,978) (791,519) (291,597) 751,621 147,096
Deferred charges and other
assets............................ 44,637 163,146 12,108 (34,917) --
Accounts payable and other
current liabilities............... 16,681 (4,516,499) 495,368 297,291 (5,534,278)
Income taxes payable.............. -- 796,343 (121,100) 989,372 2,457,800
------------- ------------- -------------- ------------ ------------
Net cash provided by operating
activities........................ 2,354,001 6,567,565 19,536,844 9,908,372 4,965,605
Cash flows from investing activities:
Acquisitions of net assets including
acquisition costs, net of cash
acquired............................ -- (47,246,686) -- -- (2,292,000)
Capital expenditures.............. (614,344) (2,275,215) (3,934,283) (1,402,132) (1,939,190)
Investment/loan to PureTec........ -- (5,262,624)
Increase in deposits.............. -- -- (2,338,535) (369,047) 2,484,605
------------- ------------- -------------- ------------ ------------
Net cash used in investing
activities........................ (614,344) (49,521,901) (6,272,818) (1,771,179) (7,009,209)
------------- ------------- -------------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt...... -- 51,614,974 75,000,000 -- --
Repayments of long-term debt...... (1,500,000) (19,550,000) (64,551,149) (1,552,263) (29,783)
Borrowings/payments on line of
credit, net......................... 131,969 3,459,324 (6,857,505) (4,853,177) 213,398
Repayments of notes payable....... (83,380) (92,016) -- -- --
Proceeds from capital contribution -- 11,500,000 18,473,268 -- --
Debt financing costs.............. -- (3,713,039) (5,281,866) (159,895) --
Redemption of warrants............ -- -- (20,000,000) -- --
Proceeds from issuance of warrants -- 450,000
------------- ------------- -------------- ------------ ------------
Net cash provided by (used in)
financing activities.................. (1,451,411) 43,669,243 (3,217,252) (6,565,335) 183,615
------------- ------------- -------------- ------------ ------------
Net increase in cash................... 288,246 714,907 10,046,774 1,571,858 (1,859,989)
Cash, beginning of period.............. 45,134 333,380 1,048,287 1,048,287 11,095,061
------------- ------------- -------------- ------------ ------------
Cash, end of period.................... $ 333,380 $ 1,048,287 $ 11,095,061 $ 2,620,145 $ 9,235,072
============= ============= ============== ============ ============
</TABLE>
See acompanying summary of accounting policies and notes to
consolidated financial statments.
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the six months ended December 27, 1996 and December 26, 1997
is unaudited)
1. Summary of Accounting Policies
Nature of Business
Tekni-Plex, Inc. is a New Jersey based manufacturer of primary packaging
materials for the pharmaceutical, food, foodservice disposables and
telecommunications industries. The Company is organized into two operating
groups. The Flexible Packaging Group produces printed and unprinted
multi-layer constructions of plastic, paper and metal films and sheets, with
emphasis on pharmaceutical and telecommunications applications. The Foam
Products Group primarily produces polystyrene foam packaging products for the
food and foodservice disposables industries.
The Company operates seven manufacturing plants in New Jersey (2), Indiana,
Washington, Georgia, Texas and Cambridge, Ontario (Canada). All facilities are
owned with the exception of the Texas plant. The Company's products are sold
to both domestic and international customers.
On March 18, 1994, T.P. Acquisition Company, Inc. acquired Tekni-Plex, Inc.
for approximately $43,775,000. The companies were merged. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to assets acquired and liabilities assumed based
on their fair market value on the closing date. The excess of cost over the
fair value of net assets acquired amounted to $31,035,000 after providing for
certain restructuring costs.
Consolidation Policy
The consolidated financial statements include the financial statements of
Tekni-Plex, Inc. and its wholly-owned subsidiary, Dolco Packaging Corp.
("Dolco"). All intercompany transactions and balances have been eliminated in
consolidation. In August 1997, Dolco was merged into Tekni-Plex, Inc.
Interim Financial Information
The unaudited balance sheet as of December 26, 1997, the unaudited
consolidated statements of earnings and cash flows for the six month periods
ended December 27, 1996 and December 26, 1997, and the unaudited statement of
stockholders' equity for the six month period ended December 26, 1997 have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(which include normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows at December 27, 1996
and December 26, 1997 and for the six month periods presented, have been
included.
The results of operations for the six months ended December 26, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Inventories
Inventories are stated at the lower of cost (weighted average) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed over the estimated useful lives of the assets by the
straight-line method for financial reporting purposes and by accelerated
methods for income tax purposes.
Intangible Assets
The Company amortizes the excess of cost over the fair value of net assets
acquired on a straight-line basis over 15 years, and the cost of acquiring
certain patents and trademarks, over seventeen and ten years, respectively.
Recoverability is evaluated periodically based on the expected undiscounted
net cash flows of the related businesses.
Deferred Charges
The Company amortizes the deferred financing costs incurred in connection with
the Company's borrowings over the life of the related indebtedness (5-10
years). The covenant not to compete portion of the Consulting Agreement with
former management is amortized over its related term of 10 years (see Note 10).
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Deferred income tax assets and liabilities are recognized for
differences between the financial statement and income tax basis of assets and
liabilities based upon statutory rates enacted for future periods. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less to be cash
equivalents.
Fiscal Year-End
The Company utilizes a 52/53 week fiscal year ending on the Friday closest to
June 30.
Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
Effective June 29, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets Being Disposed of,"
which provides guidance on how and when impairment losses are recognized on
long-lived assets. This statement did not have a material impact on the
financial position or results of operations of the Company.
Stock Based Compensation
Effective June 29, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company chose to apply APB Opinion 25 and
related interpretations in accounting for its stock options. As a result, this
statement did not have an effect on the financial position or results of
operations of the Company.
New Accounting Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information," were
issued. SFAS 130 addresses standards for reporting and display of
comprehensive income and its components and SFAS 131 requires disclosure of
reportable operating segments. Both statements are effective for the Company's
1999 fiscal year. The Company will be reviewing these pronouncements to
determine their applicability to the Company, if any.
2. Acquisitions
On July 3, 1997, the Company purchased 100% of the stock of PurePlast, Inc.
("PurePlast") for $2,292,000. Pro forma results of operations, assuming the
PurePlast acquisition had occurred on June 29, 1996, would not be materially
different from the results presented.
On February 22, 1996, the Company purchased 100% of the common stock of Dolco
Packaging Corp. ("Dolco") for approximately $40,000,000. Dolco is the nation's
leading producer of foamed egg cartons and various grocery store containers
for meat, poultry, baked goods and produce. The acquisition was recorded under
the purchase method and Dolco's operations have been reflected in the
statement of operations since that date. As a result of the acquisition,
goodwill of approximately $14,044,000 has been recorded, which is being
amortized over 15 years.
In connection with this acquisition, a reserve of $5,000,000 was established
for the costs to integrate Dolco's operations with the Company and to
eliminate duplicate personnel. At June 28, 1996, the Company had approximately
$4,200,000 remaining in this reserve. During the year ended June 27, 1997, the
Company reduced its estimate of these costs and, accordingly, reduced this
reserve and goodwill by $790,000. At June 27, 1997, the remaining balance in
this reserve was approximately $1,032,000.
The following table presents the unaudited pro forma results of operations as
though the acquisition of Dolco occurred on July 2, 1994:
<TABLE>
<CAPTION>
----------------------------------
June 30, 1995 June 28, 1996
--------------- ---------------
<S> <C> <C>
Net sales..................... $ 117,920,000 $ 135,800,000
Income from operations........ 10,748,000 11,753,000
Net income.................... 1,623,000 1,848,000
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
On December 22, 1995, the Company purchased certain assets and assumed certain
liabilities of Hargro Flexible Packaging Corporation in Flemington, NJ, for
approximately $7,500,000, which approximated the fair value of the net assets
acquired. The acquisition was recorded under the purchase method. As a result
of this acquisition, the former Brooklyn, New York Closure Liners Operation of
Tekni-Plex was closed on May 31, 1996. The machinery and equipment along with
many of the employees have been relocated to the Flemington facility. Pro
forma results of operations, assuming the Hargro acquisition had been made on
July 2, 1994, would not be materially different from the unaudited pro forma
results presented above.
3. Inventories
Inventories are summarized as follows:
<TABLE>
---------------------------------------------------
December 26,
June 28,1996 June 27, 1997 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Raw materials...... $ 3,642,000 $ 5,943,000 $ 6,226,000
Work-in-process.... 4,038,000 3,362,000 3,542,000
Finished goods..... 5,275,000 4,010,000 4,125,000
-------------- --------------- --------------
12,955,000 13,315,000 13,893,000
============== =============== ==============
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
December 26, Estimated useful
June 28, 1996 June 27, 1997 1997 lives
--------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Land................................ 1,886,000 1,901,000 1,901,000
Building and improvements........... 10,209,000 10,450,000 10,572,000 30-40 years
Machinery and equipment............. 35,837,000 38,375,000 39,050,000 5-10 years
Furniture and fixtures.............. 338,000 451,000 910,000 5-10 years
Construction in progress............ 660,000 2,138,000 2,722,000
--------------- --------------- --------------
48,930,000 53,315,000 55,155,000
Less: Accumulated depreciation...... 4,424,000 10,926,000 13,509,000
--------------- --------------- --------------
44,506,000 42,389,000 41,646,000
=============== =============== ==============
</TABLE>
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
---------------------------------------------
December 26,
June 28, 1996 June 27, 1997 1997
--------------- ------------- ------------
<S> <C> <C> <C>
Senior Subordinated Notes(a).................................... $ -- $ 75,000,000 $ 75,000,000
Revolving line of credit(b)..................................... 6,858,000 -- --
Term loans(b)................................................... 39,250,000 -- --
Subordinated note payable I (less unamortized discount of
$330,000)(c)................................................... 11,670,000 -- --
Subordinated note payable II (less unamortized discount of
$432,000)(d)................................................... 11,568,000 -- --
Notes payable -- covenant not to compete (less unamortized
discount of $443,000)(e)....................................... 1,090,000 --
Other(g)........................................................ 608,000
------------ ------------- ------------
70,436,000 75,000,000 75,608,000
Less: Current maturities........................................ 3,226,000 -- 564,000
------------ ------------- ------------
$ 67,210,000 $ 75,000,000 $ 75,044,000
============ ============= ============
</TABLE>
- ------------
The recorded value of long-term debt approximates fair value based on current
rates available to the Company for debt of the same remaining maturities.
(a) On April 4, 1997, the Company issued $75,000,000 of 11 1/4% ten year
notes. Interest on the notes is payable semi-annually. These proceeds
along with a capital contribution of $18,373,000 were used to repay the
balance of $36,800,000 on the credit facility, repay the subordinated
notes of $25,200,000, including a prepayment penalty of $1,200,000 and
repurchase the redeemable warrants for $20,000,000. These transactions
resulted in an extraordinary loss of approximately $20,666,000. The
extraordinary loss was comprised of (i) the prepayment penalty of
$1,200,000 and the write-off of deferred financing costs and debt
discount of $3,449,000 net of the combined tax benefit of $1,757,000,
and (ii) the loss of the repurchase of the warrant of $17,773,000. The
fair value of the warrants was determined pursuant to the contractually
agreed value among the relevant parties.
(b) The Company maintained a revolving line of credit and two term notes
with a bank, expiring February 21, 2002. Advances under the revolving
line were limited to the sum of eligible accounts receivable and
inventory, not to exceed $19,000,000. Outstanding borrowings under the
revolving loan bore interest, payable monthly, at the bank's prime
rate, plus 1 1/2% (9 1/2% at June 28, 1996) or LIBOR, plus 2 3/4% (8.2%
at June 28, 1996). The maximum amount outstanding was $11,771,000 and
$4,525,000 for the years ended June 28, 1996 and June 30, 1995,
respectively. The average amount outstanding and average rate of
interest were $5,389,000 at 7.6% for the year ended June 28, 1996 and
$3,664,000 at 9.8% for the year ended June 30, 1995.
The term loans were payable in increasing quarterly principal
installments commencing May 31, 1996 with a final payment of $2,500,000
due on August 1, 2002. The term loans bore interest, payable monthly,
at LIBOR plus 2 3/4% and 3% (8.195% and 8.281% at June 28, 1996).
The loan agreement contained, among other things, provisions for
maximum capital expenditures and required the Company to comply with
certain financial ratios. Loans were secured by substantially all of
the Company's assets, including a first mortgage on the Company's
facilities.
(c) Subordinated note payable I in the original principal amount of
$12,000,000 was amended on February 21, 1996 and was due in two annual
principal installments of $6,000,000 on February 21 in 2003 and 2004,
with interest payable quarterly at 12 1/2%. In connection with this
note, the Company issued warrants for the purchase of 150 shares of the
Company's common stock exercisable at par value. The warrants are
effective as of March 18, 1994 and would have expired on February 21,
2004.
(d) Subordinated note payable II in the original principal amount of
$12,000,000, issued on February 21, 1996 was due in two annual
principal installments of $6,000,000 on February 21 in 2003 and 2004,
with interest payable quarterly at 12 1/2%. In connection with this
note, the Company issued warrants for the purchase of 150 shares of the
Company's common stock, exercisable at par value. The warrants were
effective as of February 21, 1996 and would have expired February 21,
2004.
Each of the subordinated notes were discounted by $450,000,
representing the estimated fair market value of the warrants at the
time of issuance. The discounts were being amortized on the interest
method over the terms of the notes.
The Company entered into a put option agreement ("agreement") with the
warrant holders that may have required the Company to acquire all or a
portion of shares of the Company's common stock issuable in connection
with the warrants at a price equal to, approximately, the greater of
book value or fair market value per share of common stock. At March
28, 1997, the estimated value of the put option was $5,438,000. The
difference between the calculated value and the recorded value was
being accreted, as a charge to interest expense, over the remaining
life of the put option.
(e) The Company entered into a Consulting Agreement with former
management, the terms of which call for 120 monthly payments of $16,667
through the year 2004, the total of such payments being $2,000,000.
The Company was amortizing the covenant not to compete portion over 10
years. The net present value was calculated using an implied interest
rate of 9 1/2% (see Note 10).
(f) On May 8, 1997, the Company entered into the New Credit Facility and
the Company has terminated the Existing Credit Facility. The New
Credit Facility includes various covenants including, but not limited
to, the maintenance of a minimum net worth, a minimum EBITDA, a ratio
of EBITDA to interest expense, and a ratio of debt to EBITDA. As of
December 26, 1997, there was no outstanding balance under the
$75,000,000 revolving credit line of the New Credit Facility.
(g) PurePlast has loan facilities as follows:
o Line of credit for $722,000 at the prime rate, plus 1/4%. The line is
due on demand and is unsecured. There is $515,000 outstanding at
December 26, 1997.
o Term loan in the amount of $109,000. The loan is due in monthly payments
of $4,000, plus interest at prime, plus 1 1/4%.
6. Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended Six months ended
----------------------------------------------------- -------------- --------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Current:
Federal................... $ -- $ 735,000 $ 3,425,000 $ 1,387,000 $ 2,355,000
State and local........... 1,000 183,000 250,000 163,000 512,000
--------------- --------------- --------------- -------------- --------------
1,000 918,000 3,675,000 1,550,000 2,867,000
Deferred.................. 210,000 64,000 1,000,000 705,000 40,000
--------------- --------------- --------------- -------------- --------------
Provision for income taxes $ 211,000 $ 982,000 $ 4,675,000 $ 2,255,000 $ 2,907,000
=============== =============== =============== ============== ==============
</TABLE>
The provision for income taxes differs from the amounts computed by applying
the applicable Federal statutory rates due to the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended Six months ended
----------------------------------------------------- -------------- --------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Provision for Federal income
taxes at statutory rate........ $ 128,000 $ 666,000 $ 4,455,000 $ 2,181,000 $ 2,600,000
State and local income taxes,
net of Federal benefit......... 81,000 305,000 165,000 64,000 343,000
Other, net...................... 2,000 11,000 55,000 10,000 (36,000)
--------------- --------------- --------------- -------------- --------------
Provision for income taxes...... $ 211,000 $ 982,000 $ 4,675,000 $ 2,255,000 $ 2,907,000
=============== =============== =============== ============== ==============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------
December 26,
June 28, 1996 June 27, 1997 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Current deferred taxes:
Allowance for doubtful accounts..................... $ 226,000 $ 125,000 $ 126,000
Inventory........................................... 338,000 360,000 360,000
Tax credit and net operating loss carryforwards..... 1,002,000 298,000 --
Accrued expenses.................................... 1,334,000 717,000 686,000
--------------- --------------- --------------
Total current deferred taxes........................ 2,900,000 1,500,000 1,172,000
--------------- --------------- --------------
Long-term deferred taxes:
Net operating loss carryforwards 325,000 -- --
Difference in book vs tax basis of assets........... (7,980,000) (7,255,000) (6,967,000)
--------------- --------------- --------------
Total long-term deferred tax liabilities............ (7,655,000) (7,255,000) (6,967,000)
--------------- --------------- --------------
$(4,755,000) $(5,755,000) $(5,795,000)
=============== =============== ==============
</TABLE>
7. Employee Benefit Plans
The Company maintains a discretionary profit sharing plan covering all
eligible employees, excluding those employed by Dolco, with at least one year
of service. Contributions to the plan are determined annually by the Board of
Directors. There was no contribution for years ended June 27, 1997, June 28,
1996 and June 30, 1995.
The Company has a defined contribution profit sharing plan for the benefit of
all employees having completed one year of service with Dolco Packaging Corp.
The Company contributes 3% of each participant's compensation on a weekly
basis. In 1993, the plan was amended to reintroduce the company matching
contribution of up to 1% when an employee contributes 3% of compensation.
Contributions totaled approximately $475,000 for the year ended June 27, 1997
and approximately $188,000 for the period February 22, 1996 to June 28, 1996.
The Company also has a defined benefit pension plan for the benefit of all
employees having completed one year of service with Dolco. The Company's
policy is to fund the minimum amounts required by applicable regulations.
Dolco's Board of Directors approved a plan to freeze the pension plan on June
30, 1987, at which time benefits ceased to accrue. Dolco has not been required
to contribute to the plan since 1990.
8. Related Party Transactions
The Company has a management consulting agreement with an affiliate of a
stockholder. The terms of the agreement require the Company to pay a fee of
approximately $30,000 per month for a period of ten years. Consulting service
fees were approximately $390,000, $274,000 and $203,000 for the years ending
June 27, 1997, June 28, 1996 and June 30, 1995, respectively.
9. Stock Options
In April 1994, the Company granted options to an employee to acquire 2 1/2% of
the outstanding common stock with anti-dilution provisions. The options are
exercisable as to 33 1/3% of the shares on the first, second and third
anniversary dates of the original grant and expire fifteen years from the date
of the grant. No options have been exercised or forfeited as of June 27, 1997.
The Company applies APB Opinion 25 and related interpretations in accounting
for these options. Accordingly, no compensation cost has been recognized. Had
compensation cost been determine based on the fair value at the grant dates
for these awards consistent with the method of SFAS Statement 123, the
Company's net income (loss) would have been reduced to the pro forma amounts
indicated below. The calculations were based on a risk free interest rate of
6 3/4% and 6.24%.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended Six months ended
----------------------------------------------------- --------------------------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Income before extraordinary
item:
As reported............... $ 165,700 $ 975,700 $ 8,427,600 $ 4,160,000 $ --
Pro forma................. 127,600 904,100 8,323,500 4,086,000 --
=============== =============== =============== ============== ==============
</TABLE>
10. Commitments and Contingencies
Commitments
(a) The Company leases building space in Texas, California, Georgia and
Washington. At June 27, 1997, the Company's future minimum lease payments are
as follows:
<TABLE>
<S> <C>
1998............................... $667,000
1999............................... 649,000
2000............................... 591,000
2001............................... 122,000
2002............................... --
----------
$2,029,000
==========
</TABLE>
Rent expense, including escalation charges, amounted to approximately
$676,000, $614,000 and $343,000 for the years ended June 27, 1997, June 28,
1996 and June 30, 1995, respectively.
(b) The Company has employment contracts with two employees. These contracts
provide aggregate minimum annual compensation for the years ended June 30 as
follows: 1998 -- $825,000; 1999 -- $825,000; 2000 -- $825,000.
Contingencies
(a) The Company filed an action under the arbitration provisions of the
Merger and Acquisition Agreement, dated March 18, 1994 (the "Merger
Agreement") demanding a reduction in the purchase price paid due to a breach
of that agreement. In the above action, the Company also sought to nullify its
obligation under the Consulting Agreement (see Note 5).
On April 18, 1997, the Company and the former shareholder reached a settlement
in arbitration (the "Settlement"). All obligations of each party to the other
were nullified. This Settlement did not have a material impact on the financial
condition or results of operations of the Company.
(b) The Company is a party to various legal proceedings arising in the
normal conduct of business. Management believes that the final outcome of
these proceedings will not have a material adverse effect on the Company's
financial position.
11. Concentrations of Credit Risks
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash deposits and trade
accounts receivable.
The Company provides credit to customers on an unsecured basis after
evaluating customer credit worthiness. Since the Company sells to a broad
range of customers, concentrations of credit risk are limited. The Company
provides an allowance for bad debts where there is a possibility for loss.
The Company maintains demand deposits at several major banks throughout the
United States. As part of its cash management process, the Company
periodically reviews the credit standing of these banks.
12. Supplemental Cash Flow Information
(a) Cash Paid
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Years ended Six months ended
----------------------------------------------------- --------------------------------
December 27, December 26,
June 30, 1995 June 28, 1996 June 27, 1997 1996 1997
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Interest.......... $ 3,502,000 $ 4,730,000 $ 5,317,000 $ 3,330,000 $ 4,236,000
Income taxes...... 467,000 188,000 3,747,000 525,000 409,000
</TABLE>
(b) Acquisitions
The Company purchased certain assets and assumed certain liabilities of Hargro
Flexible Packaging Corporation, effective December 22, 1995, for approximately
$7,500,000 in cash. In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................. $10,592,000
Cash paid..................................... (7,543,000)
-----------
Liabilities assumed........................... $ 3,049,000
===========
</TABLE>
The Company purchased all of the outstanding common and preferred stock of
Dolco Packaging Corp, effective February 22, 1996, for approximately
$40,000,000 in cash. In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired................. $46,293,000
Goodwill...................................... 14,044,000
Cash paid..................................... (39,434,000)
-----------
Liabilities assumed........................... $20,903,000
===========
</TABLE>
The Company purchased certain assets and assumed certain liabilities of
PurePlast, Inc. effective July 3, 1997, for approximately $2,292,000 in cash.
In conjunction with the acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.................. $1,802,000
Goodwill....................................... 1,734,000
Cash paid...................................... (2,292,000)
----------
Liabilities assumed............................ $1,244,000
==========
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PureTec Corporation
Ridgefield, New Jersey
We have audited the accompanying consolidated balance sheets of PureTec
Corporation and subsidiaries (the "Company") as of July 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended July 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based
on our audits. We did not audit the financial statements of Styrex Industries,
Inc. ("Styrex") (a consolidated subsidiary) for the year ended July 31, 1995,
which statements have been reclassified to discontinued operations and
represent 27% of the net loss for that year. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Styrex for the year ended July 31,
1995, is based solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of July 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended July 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
November 13, 1997
HOLTZ RUBENSTEIN & CO., LLP LETTERHEAD
Independent Auditors' Report
----------------------------
September 12, 1995 (except for Note 6, as
to which the date is November 9, 1995)
To the Board of Directors and Stockholders of
Styrex Industries, Inc.
We have audited the accompanying statements of operations and deficit and cash
flows of Styrex Industries, Inc. for the year ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Styrex Industries, Inc.'s operations and
its cash flows for the year ended July 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company is a wholly-
owned subsidiary of PTI Plastics, Inc. The Company has received funding from
its parent in the form of loans and advances and at July 31, 1995 advances from
its parent company approximated $3,373,000.
Holtz Rubenstein & Co., LLP
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
------------------------------------------------
July 31, 1996 July 31, 1997 January 31, 1998
------------- ------------- ---------------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 5,995 $ 6,745 $ 2,200
Accounts receivable, less allowance for doubtful accounts
of $980 as of July 31, 1996, $1,154 as of July 31, 1997
and $1,352 as of January 31, 1998.......................... 53,675 56,736 48,830
Inventories.................................................. 41,403 54,568 68,672
Prepaid expenses and other current assets.................... 3,955 3,962 2,513
------------- ----------- -----------
Total current assets....................................... 105,028 122,011 122,215
Property, plant and equipment, net.............................. 85,156 88,367 87,252
Goodwill, net of accumulated amortization of $3,168, $6,660
and $7,467 as of July 31, 1996 and 1997 and October 31,
1997, respectively........................................... 92,570 90,192 87,302
Other intangible assets, net.................................... 1,344 44 29
Other assets, net............................................... 12,592 11,209 10,470
------------- ----------- -----------
Total assets............................................... $ 296,690 $ 311,823 $ 307,268
============= =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings........................................ $ 20,170 $ 38,665 $ 49,759
Accounts payable............................................. 28,974 27,751 26,197
Accrued plant closing and disposal costs..................... 3,901 2,263 679
Accrued expenses............................................. 24,947 25,809 20,992
Current portion of long-term debt............................ 5,292 7,363 5,007
------------- ----------- -----------
Total current liabilities.................................... 83,284 101,851 102,634
Other long-term liabilities..................................... 2,923 3,464 3,483
Pension and post-retirement liabilities......................... 7,882 8,274 7,860
Deferred income taxes........................................... 1,280 1,457 1,462
Long-term debt.................................................. 130,587 129,504 127,942
------------- ----------- -----------
Total liabilities.......................................... 225,956 244,550 243,381
Commitments and contingencies (See notes 8, 9, 11, 18 and 20)...
Minority interest............................................... 26 96 52
Stockholders' equity:
Common stock, $.01 par value 50,000,000 authorized;
29,344,551, 31,574,199 and 31,605,707 shares issued;
29,197,051, 31,240,866 and 31,272,374 outstanding at
July 31, 1996 and 1997 and January 31, 1998,
respectively............................................... 293 315 316
Preferred stock, $.01 par value 1,000,000 authorized; and no
shares issued and outstanding.............................. -- -- --
Additional paid-in capital................................... 129,606 132,520 132,940
Accumulated deficit.......................................... (58,671) (61,462) (65,302)
Minimum pension liability.................................... (137) -- --
Cumulative foreign currency translation adjustment........... (383) (3,509) (3,432)
Treasury stock............................................... -- (687) (687)
------------- ----------- -----------
Total stockholders' equity................................. 70,708 67,177 63,835
------------- ----------- -----------
Total liabilities and stockholders' equity................. $ 296,690 $ 311,823 $ 307,268
============= =========== ===========
</TABLE>
See notes to consolidated financial statements.
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Years ended July 31, Six Months Ended January 31,
----------------------------------------- ------------------------------
1995 1996 1997 1997 - 1998
----------- ----------- ----------- --------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................................ $ 30,189 $ 326,344 $ 315,334 $ 123,430 $ 138,690
Costs and expenses:
Cost of goods sold.................... 25,353 260,891 248,419 97,663 110,561
Selling, general and administrative... 301 35,555 36,091 16,880 17,833
Amortization of intangible assets..... 2,148 3,705 3,553 1,747 1,591
Write-off of goodwill and obsolete
assets/facilities................... 7,403 4,636 -- -- --
Research and development.............. 1,268 689 654 327 324
----------- ----------- ----------- ----------- ------------
36,473 305,476 288,717 116,617 130,309
----------- ----------- ----------- ----------- ------------
Income (loss) from operations............ (6,284) 20,868 26,617 6,813 8,381
Other expenses (income):
Interest expense...................... 419 18,702 18,108 9,281 9,242
Debt issuance cost and discount
amortization........................ -- 2,180 1,641 1,188 907
Gain on sale and assignment of
seccurities......................... (1,000) -- -- -- --
Equity in loss of affiliates.......... 2,050 2,175 1,824 265 387
Other, net............................ (234) (419) 135 (93) (239)
----------- ----------- ----------- ----------- ------------
1,235 22,638 21,708 10,641 10,297
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations
before minority interest and income
taxes................................. (7,519) (1,770) 4,909 (3,828) (1,916)
Provision for income taxes............... -- 2,637 3,131 951 1,439
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing operations
before minority interest.............. (7,519) (4,407) 1,778 (4,779) (3,355)
Minority interest........................ -- -- (433) -- 44
----------- ----------- ----------- ----------- ------------
Income (loss) from continuing
operations............................ (7,519) (4,407) 1,345 (4,779) (3,311)
Discontinued operations:
Loss from discontinued operations..... (4,580) (1,525) (1,226) (1,191) (529)
Loss on disposal of discontinued
operations.......................... (4,809) (2,241) (2,910) -- --
----------- ----------- ----------- ----------- ------------
(9,389) (3,766) (4,136) (1,191) (529)
Net loss................................. $ (16,908) $ (8,173) $ (2,791) $ (5,970) $ (3,840)
=========== =========== =========== ============ ============
Income (loss) per common share:
Income (loss) from continuing
operations............................ $ (0.42) $ (0.18) $ 0.05 $ (0.16) $ (0.11)
Loss from discontinued operations........ $ (0.53) $ (0.14) $ (0.14) $ (0.04) $ (0.01)
----------- ----------- ----------- ----------- ------------
Net loss.............................. $ (0.95) $ (0.32) $ (0.09) $ (0.20) $ (0.12)
=========== =========== =========== ============ ============
Weighted average number of common
shares outstanding.................... 7,751,141 27,268,435 29,429,415 29,339,172 31,269,950
=========== =========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Common Shares Treasury Shares Preferred Shares
--------------------------------- ------------------- ----------------------
Class A $.01
$.01 par $.05 par Amount Shares Amount par Amount
---------- ----------- ------ --------- ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance July 31, 1994 -- 14,922,673 $ 746 -- -- $ -- $--
Issuance of common stock in
connection with acquisitions......... -- 533,191 27 350,000 -- -- --
Exercise of stock options.............. -- 33,534 2 -- -- -- --
Private placement, net of stock
issuance expense of $420............. -- 3,332,737 167 -- -- -- --
Debenture conversion -- 1,714,780 86 -- -- -- --
Issuance of common stock to settle
liabilities.......................... -- 113,890 5 -- -- -- --
Reclassifications and adjustments...... -- 76,636 3 -- -- -- --
Conversion of common stock in (20,727,441)
connection with Merger............... 20,727,441 (829) -- -- -- --
Issuance of common stock in
connection with Merger............... 5,705,555 -- 57 -- -- -- --
Issuance of common stock to settle
expenses of Merger................... 450,000 -- 5 -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- ----------- ------ --------- ------ ------------ ------
Balance July 31, 1995.................. 26,882,996 -- 269 350,000 -- -- --
Preferred stock conversion............. 1,606,688 -- 16 -- -- -- --
Private placement...................... 585,000 -- 6 -- -- -- --
Debenture conversion................... 227,273 -- 2 -- -- -- --
Issuance of common stock to settle
liabilities.......................... 9,286 -- -- -- -- -- --
Contract requirements.................. 33,308 -- -- -- -- -- --
Common stock sales by Equity
affiliate............................ -- -- -- (202,500) -- -- --
Minimum pension liability.............. -- -- -- -- -- -- --
Foreign Exchange....................... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- ----------- ------ --------- ------ ------------ ------
Balance July 31, 1996.................. 29,344,551 -- 293 147,500 -- -- --
Foreign exchange....................... -- -- -- -- -- -- --
Receipt of share in settlement of note
receivable........................... -- -- -- 333,333 $ (687) -- --
Common stock sales by equity
affiliate............................ -- -- -- (147,500) -- -- --
Other.................................. (5,382) -- -- -- -- -- --
Private placement--PST exchange
offer................................ 2,235,030 -- 22 -- -- -- --
Reversal of minimum pension
liability............................ -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- --
---------- ----------- ------ --------- ------ ------------ ------
Balance July 31, 1997.................. 31,574,199 -- 315 333,333 (687) -- --
Warrant/Option exercise
(unaudited).......................... 31,508 -- 1 -- -- -- --
Foreign exchange (unaudited)........... -- -- -- -- -- -- --
Net loss (unaudited)................... -- -- -- -- -- -- --
Balance January 31, 1998
---------- ----------- ------ --------- ------ ------------ ------
(unaudited).......................... 31,605,707 -- $ 316 333,333 $ (687) -- --
========== =========== ====== ========= ====== ============ ======
---------------------------------------------------------------
Additional Minimum Total
Paid-in Accumulated Foreign Pension Stockholders'
Capital Deficit Exchange Liability Equity
---------- ----------- -------- --------- --------------
<C> <C> <C> <C> <C>
Balance July 31, 1994 $ 66,607 $ (33,066) -- -- $ 34,287
Issuance of common stock in
connection with acquisitions......... 808 -- -- -- 835
Exercise of stock options.............. 44 -- -- -- 46
Private placement, net of stock
issuance expense of $420............. 12,573 -- -- -- 12,740
Debenture conversion 7,285 -- -- -- 7,371
Issuance of common stock to settle
liabilities.......................... 433 -- -- -- 438
Reclassifications and adjustments...... (3) -- -- -- --
Conversion of common stock in
connection with Merger............... 829 -- -- -- --
Issuance of common stock in
connection with Merger............... 32,122 -- -- -- 32,179
Issuance of common stock to settle
expenses of Merger................... 2,526 -- -- -- 2,531
Net loss............................... -- (16,908) -- -- (16,908)
---------- ----------- -------- --------- --------------
Balance July 31, 1995.................. 123,224 (49,974) -- -- 73,519
Preferred stock conversion............. 3,782 (524) -- -- 3,274
Private placement...................... 994 -- -- -- 1,000
Debenture conversion................... 998 -- -- -- 1,000
Issuance of common stock to settle
liabilities.......................... 121 -- -- -- 121
Contract requirements.................. -- -- -- -- --
Common stock sales by Equity
affiliate............................ 487 -- -- -- 487
Minimum pension liability.............. -- -- -- (137) (137)
Foreign Exchange....................... -- -- $ (383) -- (383)
Net loss............................... -- (8,173) -- -- (8,173)
---------- ----------- -------- --------- --------------
Balance July 31, 1996.................. 129,606 (58,671) (383) (137) 70,708
Foreign exchange....................... -- -- (3,126) -- (3,126)
Receipt of share in settlement of note
receivable........................... -- -- -- -- (687)
Common stock sales by equity
affiliate............................ -- -- -- -- --
Other.................................. -- -- -- -- --
Private placement--PST exchange
offer................................ 2,914 -- -- -- 2,936
Reversal of minimum pension
liability............................ -- -- -- 137 137
Net loss............................... -- (2,791) -- -- (2,791)
---------- ----------- -------- --------- --------------
Balance July 31, 1997.................. 132,520 (61,462) (3,509) -- 67,177
Warrant/Option exercise
(unaudited).......................... 420 -- -- -- 421
Foreign exchange (unaudited)........... -- -- 77 -- 77
Net loss (unaudited)................... -- (3,840) -- -- (3,840)
Balance January 31, 1998
---------- ----------- -------- --------- --------------
(unaudited).......................... $ 132,940 $(65,302) $(3,432) -- $ 63,835
========== =========== ======== ========= ==============
</TABLE>
See notes to consolidated financial statements.
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Six Months Ended January
Years ended July 31, 31,
------------------------------------- ------------------------------
1995 1996 1997 1997 1998
---------- ---------- --------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net cash flows from operating activities:
Income (loss) from continuing operations $ (7,519) $ (4,407) $ 1,345 $ (4,779) $(3,311)
Adjustments to reconcile net loss to net cash used
in operating activities from continuing
operations:
Depreciation and amortization 2,861 13,427 13,780 7,603 6,958
Gain (Loss) on disposal of property and
equipment........................................ (8) 598 (17) (10) --
Gain on sale and assignment of securities.......... (1,000) -- -- -- --
Write-off of obsolete equipment and costs.......... 4,617 4,636 -- -- --
Write-off of goodwill and other intangible
assets........................................... 6,493 -- 976 -- --
Bad debt allowance................................. 129 879 182 (143) 317
Deferred income tax benefit........................ (377) 80 471 (1,252) --
Minority interest in consolidated
subsidiaries..................................... (114) (3) 433 -- (44)
Equity in loss of affiliates....................... 2,050 2,175 1,824 -- --
Changes in operating assets and liabilities
net of effects from acquisition:
(Increase) decrease in assets:
Accounts receivable................................ (379) (8,381) (9,361) 8,621 5,531
Accounts receivable factored....................... -- -- 2,087 -- 2,087
Inventories........................................ 958 4,288 (15,864) (36,328) (14,116)
Prepaid expenses and other current
assets........................................... 833 (1,519) (20) 658 1,448
Other assets....................................... (2,335) 7,199 (2,770) (589) (24)
Increase (decrease) in liabilities:
Accounts payable................................. 1,594 4,226 1,804 (2,640) (1,541)
Accrued plant closing and disposal
costs.......................................... (2,350) (1,784) (1,638) (1,389) (1,584)
Accrued expenses................................... 1,461 9,272 1,183 (3,233) (4,396)
Other liabilities.................................. -- 768 2,636 (372) (196)
---------- ---------- --------- ------------ -------------
Net cash (used in) provided by operating
activities from continuing operations.......... 6,914 31,454 (2,949) (33,853) (8,871)
---------- ---------- --------- ------------ -------------
Loss from discontinued operations.................. (9,389) (3,766) (4,136) (1,191) (529)
Depreciation of discontinued injection
molding operation.............................. 1,291 1,123 754 -- --
Change in net operating assets of
discontinued operations........................ 2,773 -- 887 -- --
---------- ---------- --------- ------------ -------------
Net cash used in operating activities from (5,325) (2,643) (2,495) (1,191) (529)
discontinued operations
Net cash (used in) provided by operating
activities......................................... 1,589 28,811 (5,444) (35,044) (9,400)
---------- ---------- --------- ------------ -------------
Net cash flows from investing activities:
Additions to property, plant and equipment......... (2,387) (10,509) (11,291) (3,844) (3,562)
Additions to intangibles........................... (2,776) -- -- -- --
Purchase of net assets............................. (155) (22,328) -- -- --
Proceeds from the sale of property, plant, &
equipment...................................... -- 1,368 27 20 --
Purchase of Ozite Corporation, net of cash
acquired of $4,741............................. (8,759) -- -- -- --
Investment used for Burlington purchase............ -- -- -- -- --
---------- ---------- --------- ------------ -------------
Net cash used in investing activities............... (14,077) (31,469) (11,264) (3,824) (3,562)
Net cash flows from financing activities:
Borrowing (repayments) under revolving
credit facility and short-term borrowing,
net............................................ (869) (10,840) 19,964 36,196 11,094
Proceeds from long-term debt....................... 687 18,630 4,150 2,288 5,205
Repayments of long-term debt....................... (2,227) (7,056) (5,292) (3,349) (7,780)
Proceeds from private placements and sale
by equity affiliate............................ 12,758 1,487 -- -- --
Proceeds from warrant/option exercise.............. 46 -- 1 1 --
Proceeds from the sale of debentures............... 8,371 -- -- -- --
---------- ---------- --------- ------------ -------------
Net cash provided by financing activities........... 18,766 2,221 18,823 35,136 8,519
---------- ---------- --------- ------------ -------------
Effect of exchange rate changes on cash............. -- (665) (1,365) (855) (102)
---------- ---------- --------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents....................................... 6,278 (1,102) 750 (4,587) (4,545)
Cash and cash equivalents, beginning of the
period............................................ 819 7,097 5,995 5,995 6,745
---------- ---------- --------- ------------ -------------
Cash and cash equivalents, end of period............ $ 7,097 $ 5,995 $ 6,745 $ 1,408 $ 2,200
Supplemental disclosures of cash flow ========== ========== ========= ============ =============
information:
Cash paid during the year for:
Interest.......................................... $ 1,054 $ 22,113 $ 17,849 $ 9,304 $ 9,237
Income taxes...................................... -- 2,557 3,301 1,296 949
Non-cash transactions:
Debenture conversion.............................. -- 1,000 -- -- --
Preferred Stock conversion........................ -- (3,274) -- -- --
Issuance of common stock to settle
liabilities.................................... 438 121 -- -- --
Issuance of common stock in connection
with acquisitions.............................. 835 -- -- -- --
Issuance of common stock in connection
with the Merger................................ 34,710 -- -- -- --
Capitalized lease Colorite Europe Limited
premises....................................... -- -- 3,784 -- --
Acquisition of treasury stock to settle note
payable........................................ -- -- (687) -- --
Issuance of common stock in connection
with PS&T Exchange Offer....................... -- -- 2,936 -- --
Goodwill in connection with PS&T tender
offer.......................................... -- -- 2,316 -- --
Reduction of subordinated note regarding
Dalen settlement.................................. -- -- -- -- (1,320)
Adjustment of goodwill regarding Dalen
settlement........................................ -- -- -- -- 1,320
Exchange of equity investment stock for PureTec
stock (treasury).................................. -- -- -- 687 --
</TABLE>
See notes to consolidated financial statements.
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Information for January 31, 1998 and 1997 is unaudited)
1. Organization, Description of Business and Acquisitions
PureTec's principal businesses are the manufacturing of garden hose, specialty
plastic compounds and fabricated precision plastic components for niche
consumer and industrial markets, the manufacturing of dispersion (plastisol)
and specialty suspension (copolymer and blending) polyvinyl chloride ("PVC")
resins and the recycling of plastics. The Company services its markets through
its network of 21 manufacturing facilities, located in key points throughout
the United States, with three locations in Europe and one in Canada.
At the shareholders' meeting on May 1, 1996, Pure Tech International Inc.,
changed its name to PureTec Corporation. PureTec Corporation (the "Company" or
"PureTec") was formed in July 1994 for the express purpose of becoming the
parent of PTI Plastics, Inc. ("PTIP") and Ozite Corporation ("Ozite"). On July
26, 1995, the respective shareholders of PTIP and Ozite approved the merger of
each of their corporations with wholly-owned subsidiaries of the Company (the
"Merger"), effective at the close of business on July 31, 1995. PTIP and Ozite
are now wholly-owned subsidiaries of the Company. For accounting purposes the
Merger has been accounted for as a purchase of Ozite by PureTec. For financial
reporting purposes, the results of operations, and the statement of cash flows
for the year ended July 31, 1995 are those of PTIP. The balance sheet
information as of July 31, 1997 and 1996 and the results of operations and the
statement of cash flows for the years ended July 31, 1997 and 1996 reflect the
combined entities, including Ozite.
In connection with these mergers, holders of Ozite Common Stock received an
aggregate of 1,028,915 shares of PureTec Common Stock. Holders of Ozite
Preferred Stock received an aggregate of 4,627,317 shares of PureTec Common
Stock. A portion of the securities otherwise issuable to Ozite preferred
stockholders were instead issued to creditors of Ozite. Holders of Ozite
Preferred Stock also received 5,000 shares, with a $5,000 redemption value, of
a new class of PureTec's non-convertible preferred stock (See Note 13 (a)) and
$3,750 in 10-year subordinated notes. The principal of the subordinated notes
will be payable at maturity. Interest on the subordinated notes will accrue at
7% and is payable quarterly, except that no interest will accrue during the
first four years. PTIP owned 300,000 shares of Ozite Class A Preferred Stock
and did not participate in the distribution of PureTec securities pursuant to
the Merger.
Holders of PTIP Common Stock received PureTec's Common Stock on a one-for-one
basis for approximately 78% of PureTec's total outstanding voting securities
after the Merger.
In connection with the Merger, PureTec issued 450,000 shares of Common Stock
in consideration for investment banking and finders services, 15,684 shares of
Common Stock to Ozite directors and officers in satisfaction of outstanding
options to acquire Ozite Common Stock and 33,639 shares of Common Stock to
holders of certain Ozite warrants who elected to receive such shares in
exchange for their Ozite warrants.
A summary of the transaction is as follows (reflecting the final adjustments
to the transaction made in 1996):
<TABLE>
<S> <C>
Fair Value of Net Assets Acquired:
Current assets...................................... $ 90,086
Non-current assets.................................. 72,368
Liabilities assumed................................. (189,036)
----------
(26,582)
Consideration Given:
6,155,555 Common shares including expenses.......... 34,710
Preferred Stock and subordinated notes issued....... 4,393
Cash and other amounts due.......................... 26,022
----------
65,125
----------
Goodwill (being amortized over 30 years)................. $ 91,707
==========
</TABLE>
Ozite is the majority stockholder of Plastic Specialties and Technologies,
Inc. ("PST") and a 100% shareholder of Burlington Resins, Inc. (See below). On
June 27, 1997, PureTec completed a private placement offer for most of the
stock of PST not already owned, in exchange for new unregistered shares of
PureTec common stock that were privately placed by PureTec. Prior to the
completion of the exchange offer, PureTec, through its ownership of Ozite,
indirectly owned 82.7% of the outstanding common stock of PST. In the exchange
offer, PureTec, through Ozite offered to exchange two new unregistered shares
of PureTec common stock for each share of PST common stock validly tendered.
In total, 1,117,515 shares, or 13.4%, of the PST common stock outstanding were
accepted for exchange by Ozite in the private exchange offer. The transaction
was accounted for as a step-acquisition by the Company, and resulted in an
increase to goodwill of approximately $2,300. As of July 31, 1997, Ozite owned
approximately 96% of the outstanding common stock of PST.
Burlington Resins, Inc. ("Burlington") is a special purpose subsidiary of the
Company. Burlington was formed on September 26, 1994 for the express purpose
of acquiring substantially all of the assets and assuming all of the
liabilities of Occidental Chemical Corporation's ("OxyChem") specialty PVC
resin manufacturing facility location in Burlington, New Jersey. On August 18,
1995, Burlington completed the acquisition from OxyChem, which was accounted
for as a purchase, and commenced operations.
In June 1997, the Company filed suit against OxyChem, alleging that certain
post-retirement benefit liabilities were substantially understated at the
acquisition date. In August 1997, the Company and OxyChem agreed to settle this
litigation. Pursuant to the terms of the settlement agreement, the Company has
agreed to release OxyChem from any claim related to this liability in exchange
for OxyChem's agreement to settle a $4 million subordinated term loan
including accrued interest ("seller financing") for $3 million. A portion of
the settlement has been accounted for as an adjustment to the purchase price,
with the offset recorded against goodwill, with the remainder adjusting accrued
interest based upon the seller financing. A summary of the original
transaction and the adjustments made as of July 31, 1997 are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------
As originally As reported
recorded Adjustments herein
--------------- -------------- --------------
<S> <C> <C> <C>
Fair Value of Net Assets Acquired:
Current assets................................ $ 8,217 -- $ 8,217
Non-current asset............................. 21,495 -- 21,495
Liabilities assumed........................... (5,877) -- (5,877)
--------------- -------------- --------------
23,835 -- 23,835
--------------- -------------- --------------
Consideration Given:
Seller financing.............................. 4,000 (1,476) 2,524
Cash and other amounts due.................... 22,934 -- 22,934
--------------- -------------- --------------
26,934 (1,476) 25,458
--------------- -------------- --------------
Goodwill (being amortized over 30 years)............ $ 3,099 $ (1,476) $ 1,623
=============== ============== ==============
</TABLE>
Under the terms of the Asset Transfer Agreement, OxyChem has indemnified
Burlington for a period of eight years from any environmental liability
arising from conditions existing prior to August 18, 1995. Any liabilities
arising in the first five years subsequent to August 18, 1995 will be 100%
indemnified, and any liability through year eight will be 50% indemnified.
Management has not identified any material environmental matter, nor has
Burlington been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and corresponding state acts, in connection with any such matter.
As discussed in Note 18, on November 11, 1997 the Company entered into a
Merger Agreement with Tekni-Plex, Inc. ("Tekni-Plex"). Subject to the approval
of a majority of the shareholders at a shareholders' meeting that the Company
will arrange, the Merger Agreement contemplates Tekni-Plex (i) purchasing all
of the Company's outstanding Common Stock for cash consideration of $3.50 per
share, and (ii) assuming or refinancing all of the Company's debt. The Merger
Agreement and the Acquisition have been unanimously approved and recommended
to shareholders for adoption by the Company's Board of Directors.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. All significant intercompany accounts and
transactions are eliminated.
(b) Interim Financial Information
The unaudited balance sheet as of October 31, 1997, the unaudited consolidated
statements of earnings and cash flows for the three month periods ended
October 31, 1996 and 1997, and the unaudited statement of stockholders' equity
for the three month period ended October 31, 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. In the opinion of management, all adjustments (which include normal
recurring accruals) necessary to present fairly the financial position,
results of operations and cash flows at October 31, 1996 and 1997 and for the
three month periods presented, have been included.
The results of operations for the three months ended October 31, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits, commercial paper, time
deposits, and cash on hand. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
(e) Goodwill
Goodwill, which relates primarily to the acquisition of Ozite, is being
amortized on a straight-line basis over the period expected to benefit, which
is estimated to be 30 years for current acquisitions and 10 to 40 years for
acquisitions prior to July 31, 1995.
The Company continually assesses the recoverability of its intangible assets
by determining whether the amortization of the excess of the cost of the
investment balance over its remaining useful life can be recovered through
projected undiscounted future cash flows. The amount of goodwill impairment,
if any, is measured based on projected undiscounted future cash flows in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." Based on the Company's projected results of operations
over the remaining useful life, management believes that there has not been
an impairment in the value of the goodwill.
(f) Property, Plant and Equipment
Property, plant and equipment is stated at cost and is primarily depreciated
by the straight-line method over the estimated useful lives of the related
assets. Repairs and maintenance are charged to expense as incurred. Leasehold
improvements are depreciated over the lesser of the term of the lease,
including renewal options, or the useful life of the asset. Depreciation is
calculated using the modified units of production method for Burlington
machinery and equipment. Costs of the construction of certain long-term assets
include capitalized interest which is amortized over the estimated useful life
of the related asset. The Company capitalized interest costs of $290 and $220
in 1997 and 1996, respectively.
The principal estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements........................... 20-31 years
Machinery and equipment............................. 5-15 years
Office equipment, furniture and fixtures............ 5-10 years
</TABLE>
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated fair value associated with the asset
would be compared to the asset's carrying amount to determine if a write-down
to fair value is required.
(g) Intangible Assets
Other intangible assets are amortized using the straight-line method over the
following periods (See Note 6):
<TABLE>
<S> <C>
Process technology....................... 10-20 years
Customer list............................ 7 years
Other.................................... 5 years
</TABLE>
(h) Deferred Financing Costs
The financing costs incurred in securing debt are deferred and amortized over
the life of the related debt (See Notes 7, 8 and 11).
(i) Income Taxes
The Company files a consolidated federal income tax return including all of
its qualifying domestic subsidiaries. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
(j) Revenue Recognition
The Company recognizes revenue when goods are shipped to customers. The
Company provides for returned goods and volume rebates on an estimated basis.
(k) Foreign Subsidiaries
The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the end of the period exchange rate and
statement of operations accounts at the average exchange rate for the period.
Translation gains and losses are recorded in stockholders equity, and
transaction gains and losses are reflected in income.
(l) Foreign Exchange Contracts
During fiscal 1997, the Company's Belgian subsidiary entered into forward
foreign exchange contracts to hedge intercompany payables and non Belgian
Franc accounts receivables and payables. Market value gains and losses on such
contracts are currently recognized, and the resulting credit or debit offsets
foreign exchange gains or losses on the related balance sheet accounts. No
significant forward foreign exchange contracts were outstanding at July 31,
1997 and July 31, 1996.
(m) Stock Based Compensation
In 1997, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123 addresses the financial accounting and reporting
standards for stock based compensation plans and permits an entity to record
the effects of stock based employee compensation plans in its financial
statements or present Pro forma disclosures in the notes to the financial
statements. Compensation expense associated with awards to non-employees is
required to be measured using a fair value method. The Company has elected to
continue to account for employee compensation plans in accordance with
Accounting Principles Board Opinion No. 25 and has provided appropriate
disclosures in the notes to the consolidated financial statements.
(n) Income (Loss) Per Common Share
Income (loss) per common and common equivalent share is computed based upon
the weighted-average number of shares and common share equivalents outstanding
during the period. The calculation does not give effect to the conversion of
options and warrants to purchase common stock when such securities have an
anti-dilutive effect. Net loss per common share is based upon the
weighted-average number of shares outstanding, as the impact of common share
equivalents is anti-dilutive. Primary earnings per share and fully diluted
earnings per share, are the same for all periods presented.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". This new standard, which supersedes APB
Opinion No. 15, requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the income statement and a reconciliation of the
income available to common stockholders and weighted-average shares of the
basic EPS computation to the income available to common stockholders and
weighted-average shares plus dilutive potential common shares of the diluted
EPS computation. The objective of the statement is to make the computation
more comparable with international accounting standards. SFAS 128 is effective
for periods ending after December 15, 1997 (the Company's 1998 fiscal year).
SFAS No. 128 will require the Company to restate amounts previously reported
as EPS to comply with the new pronouncement. Had SFAS No. 128 been in effect
for the years ended July 31, 1997, 1996 and 1995, reported EPS would not have
been different from that reported under APB Opinion No. 15.
(o) Other Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129").
SFAS No. 129 requires companies to disclose descriptive information about
securities and information about the liquidation preferences of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997 (the Company's fiscal 1998 year).
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 requires
companies to display, with the same prominence as other financial statements,
the components of other comprehensive income. SFAS No. 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 (the Company's 1999 fiscal year).
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 requires that an enterprise disclose certain
information about operating segments. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997 (the Company's 1998
fiscal year).
The Company has not determined the impact, if any, on the financial statements
or related matters of adopting these pronouncements.
(p) Investment in Unconsolidated Affiliates
The Company's investments in affiliated companies which are not majority owned
or controlled are accounted for using the equity or cost method. Investments
recorded under these methods and the percentage interest owned consist of
Masplas International (25%), Les Plastiques Petco, Inc. (49%), and Evolutions,
Inc. (42%).
(q) Environmental Costs
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations and that do not contribute to current or future
revenue generation are expensed. No costs relating to existing conditions
caused by past operations were incurred by the Company during the periods
ended July 31, 1997, 1996, or 1995.
Reserves for estimated costs are recorded when environmental remedial efforts
are probable and the costs can be reasonably estimated. In determining the
reserves, the Company uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost sharing arrangements. No environmental reserves
are required at July 31, 1997 and 1996.
(r) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
(s) Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
3. Investments
(a) In June 1994, the Company acquired an 80% interest in Evolutions, Inc.
("Evolutions"), a marketing company focusing on consumer apparel products
manufactured from recycled material. The Company acquired newly issued shares
of Evolutions for cash and 153,850 shares of the Company's common stock,
valued at $4.55 per share (aggregating approximately $700). The aggregate
value of the acquisition was approximately $850. On March 1, 1995, the Company
acquired an additional interest in Evolutions, bringing its ownership up to
88%. The additional investment was 350,000 shares of the Company's common
stock, valued at $1,925 and provided for the cancellation of any and all stock
options outstanding prior to the acquisition. All shares issued by the Company
for the investment are considered as treasury shares until sold to third
parties. Such shares are then recognized as issued. During fiscal 1996, the
Company's ownership percentage fell below 50% and the Company began accounting
for this investment using the equity method. The statements of operations for
all periods presented have been restated to reflect this change in the
reporting entity. As a result of evaluating the operations and financial
position of Evolutions, the Company wrote-off the carrying value of its
investment in Evolutions, recording a charge of approximately $800 to equity
in loss of affiliates during 1997.
(b) In August 1994, the Company completed a transaction whereby it
acquired a 49% interest in Les Plastiques Petco, Inc., a Canadian
corporation ("Petco"). In consideration for this interest, the Company
issued 183,191 shares of Common stock valued at $817 (and issued an
additional 33,308 shares in fiscal 1996 as the market price of the stock
did not meet certain market price requirements), canceled $800 owed to the
Company for equipment previously sold to Petco and its affiliate by the
Company and agreed to provide additional equipment valued at $250. During
fiscal 1995, the Company made an additional cash investment in Petco of
$155. The Company and Petco also entered into a ten-year supply agreement
whereby Petco, in exchange for the cancellation of approximately $783 owed
to the Company by a Petco affiliate, will make available to the Company at
least six million pounds of post-consumer PET annually. The carrying value
of the supply contract was reduced to zero during 1997 as the future
benefit to be provided by the asset was uncertain. During 1997, the
Company's investment in Petco increased by $446 due to the conversion of a
note receivable into additional preferred shares. Prior to 1997, the
Company accounted for this investment using the equity method. During
1997, due to the level of influence the Company exerts over the operations
of Petco, the Company changed its method of accounting from the equity to
the cost basis.
(c) In August 1994, the Company completed a transaction whereby it acquired
a 25% interest in Masplas International, Compose de Plastique Inc. a Canadian
corporation ("Masplas") by converting $375 of a note receivable. Masplas is a
recycler of post-consumer PET, and is controlled by the same majority
shareholder as Petco. Prior to 1997, the Company accounted for this investment
using the equity method. During 1997, due to the level of influence the
Company exerts over the operations of Masplas, the Company changed its method
of accounting from the equity to the cost basis.
4. Inventories
<TABLE>
<CAPTION>
------------------------------------------------
July 31, 1996 July 31, 1997 January 31, 1998
------------- ------------- ----------------
(unaudited)
<S> <C> <C> <C>
Raw materials and supplies.. $ 16,028 $ 22,353 $ 20,403
Recycled material........... 1,944 779 733
Work-in-process............. 2,074 1,288 1,607
Finished goods.............. 21,357 30,148 45,929
------------- ------------- ----------------
$ 41,403 $ 54,568 $ 68,672
============= ============= ================
</TABLE>
5. Property, Plant and Equipment
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Land and land improvements.............. $ 13,138 $ 12,336
Buildings and leasehold improvements.... 15,361 18,416
Machinery and equipment................. 60,610 64,116
Furniture and fixtures.................. 2,727 2,577
Construction in progress................ 5,312 5,466
Property under lease.................... 1,200 1,200
--------------- ---------------
98,348 104,111
Accumulated depreciation................ (13,192) (15,744)
--------------- ---------------
$ 85,156 $ 88,367
=============== ===============
</TABLE>
6. Intangible Assets
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Process Technology............. $ 1,179 $ 108
Customer list.................. 770 770
Other.......................... 870 87
--------------- ---------------
2,819 965
Accumulated amortization....... (1,475) (921)
--------------- ---------------
$ 1,344 $ 44
=============== ===============
</TABLE>
During fiscal 1997, the Company has written off the Petco supply contract in
the amount of $541 (net of $242 of accumulated amortization) and licenses
related to the bottlewash system in the amount of $380 (net of accumulated
amortization of $691).
7. Other Assets
<TABLE>
<CAPTION>
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Deferred financing costs (net of accumulated amortization of $3,769 and $2,688
at July 31, 1997 and 1996, respectively)............................................ $ 4,566 $ 3,826
Investments in affiliates(1)......................................................... 3,097 2,635
Other................................................................................ 2,419 2,608
Grants(2)............................................................................ -- 985
Notes receivable..................................................................... 1,405 45
Notes and interest receivable from officers(3)....................................... 1,105 1,110
--------------- ---------------
$ 12,592 $ 11,209
=============== ===============
</TABLE>
- ------------
(1) Represents the investment in Masplas International and Petco. (See Note 3.)
(2) Represents a grant receivable from a government agency in Northern
Ireland, related to the start-up of Colorite Europe Limited.
(3) The notes and interest receivable from current and former officers of
$393 and $388 at July 31, 1997 and 1996, respectively, are due on
demand and bear interest at rates generally ranging from 75% of the
prime rate to the prime rate of interest. These notes receivable
relate primarily to the purchase of common and preferred stock of the
predecessor of Ozite, un-reimbursed moving expenses and a personal
loan. In addition, a note and interest receivable of $717 is due from
a stockholder of PureTec and a former director of Ozite.
8. Short-Term Borrowings
(a) Revolving Credit Advances:
On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement (the
"Agreement") with a commercial lending company ("CLC"). The Agreement contains
covenants, the most restrictive of which are maintenance of certain financial
ratios, prohibition of the occurrence of additional indebtedness, the payment
of dividends, certain related party transactions and limitations on capital
expenditures. Borrowings under the Agreement are secured by substantially all
the domestic current assets of PST. Additionally, the CLC has a security
interest in PST's intangible assets, and this security interest ranks pari
passu with the security interest of the Senior Secured Notes (see Note 11) in
PST's intangible assets. Revolving credit advances under the Agreement are
based on eligible receivables and inventory.
Effective January 31, 1997, PST amended this Agreement with the CLC ("Amended
Agreement"), representing the fourth amendment to the Agreement. The Amended
Agreement provides, among other things, for revolving credit advances of up to
$50,000 through July 31, 2000 and letters of credit of up to $1,000. The
Amended Agreement provides for certain pricing performance adjustments based
on defined Performance Ratios. The Company will pay interest at a defined
Index Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to
0.25%) or, at the election of PST, the LIBOR Rate plus the Applicable LIBOR
Margin (ranging from 2.50% to 3.00%). The Amended Agreement also provides that
outstanding revolving credit advances shall not exceed $20,000 for 30
consecutive days during the period from July 1 to September 30 for each year.
Furthermore, the Amended Agreement provides that domestic capital expenditures
are limited to $8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and
1999 (and each fiscal year thereafter), respectively. The Company also has the
right to cancel the Agreement on 30 days written notice and pay the CLC an
early termination fee of $175 if such cancellation occurs prior to January 31,
1998, and $100 if cancellation occurs on or after January 31, 1998 and prior
to September 30, 1998.
At July 31, 1997, the Company was not in compliance with certain of the
covenants of the Amended Agreement, including the requirement to reduce
borrowing to $20 million and the limitation on capital expenditures. The CLC
has provided a waiver of this non-compliance as of July 31, 1997.
At July 31, 1997 and 1996, borrowings under the Amended Agreement with the CLC
totaled $36,772 and $14,138, respectively. Amounts outstanding are classified
as current liabilities.
In addition, on January 31, 1997, PST signed a Receivables Agreement with the
CLC that provides PST with the ability to sell a 100% ownership interest,
without recourse, in certain Eligible Receivables generated by PST. The CLC's
commitment to purchase said receivables from PST are restricted to the period
beginning each February 1 and ending on each May 31. The aggregate invoice
face amount of purchased receivables will not exceed $12,000. PST is obligated
to service the Eligible Receivables that it sells to the CLC. At July 31,
1997, PST is obligated to collect and remit $2,087 to the CLC for Eligible
Receivables sold without recourse. The CLC owes PST $422 related to such
receivables.
(b) Revolving Credit Facility:
In connection with the acquisition from OxyChem, Burlington has entered into a
Credit Agreement (the "Agreement") with a bank that includes a revolving
credit facility for up to $5,500 based on specified levels of eligible
inventory and accounts receivable. Interest on this facility, which expires on
August 18, 2002, is the prime rate plus 1.25% and is due quarterly. The
Agreement also contains a contingent fee agreement, payable annually, based on
earning levels obtained. The Agreement has been amended by Burlington and the
bank to provide for certain developments at Burlington. Outstanding borrowings
are $1,893 and $2,193 at July 31, 1997 and 1996, respectively.
The Agreement contains certain covenants, the most restrictive of which
pertain to the maintenance of certain financial ratios, prohibition of the
incurrence of additional indebtedness, the payment of dividends, and certain
related party transactions. Borrowings under the Agreement are secured by
substantially all the assets of Burlington. As of July 31, 1997, Burlington
was not in compliance with certain covenants of the Agreement. The Company has
received a waiver for the period of time that the default existed. The Company
intends to repay the borrowings outstanding under the Agreement during fiscal
1998, and as such, has included the revolving credit facility as a current
liability at July 31, 1997.
9. Plant Closing Costs
In October 1993, the Company decided to consolidate its plastic recycling
operations. In connection with this consolidation, the Company closed
substantially all of its operations in Lawrence Township, New Jersey. Costs
associated with the shut down of this facility consisted of labor during the
phase-out period, rubbish removal and clean-up costs and associated overhead
for the dismantling and moving of equipment as well as future rental costs
under noncancellable operating leases. In July 1995, the Company adjusted the
carrying value of all remaining assets to their net realizable value including
the write-off of $3,262 of costs associated with the Lawrence Township Plant
which no longer have any value. In addition, in July 1995, the Company wrote
off $210 of abandoned equipment relating to its old corporate office located
at the Lawrence Township location as a result of the move to its new quarters.
At July 31, 1997 and 1996, the Company has $196 and $430 accrued,
respectively, relating to the lease which expires on June 30, 1998. This
reserve is included in accrued plant closing and disposal costs.
In July 1995, the Company wrote off equipment of $1,145 at its Springfield,
Massachusetts plant related to the original wash system as the Plant was
completely modified with an expansion of the "Pure Tech Process" system in
fiscal 1995. The Company has no future plans for the old system, and was
unsuccessful in attempts to sell the system.
In July 1996, the Company evaluated the operations of its Springfield plant
and decided to close it. In connection with this plant closing, the Company
ceased substantially all operations except for minor production and clean-up
that was completed in fiscal 1997. The Company accrued for all costs
associated with the shut down of this facility, which consisted of clean-up
costs, the breakdown of machinery and equipment, and future rental costs under
a noncancellable operating lease. In July 1996, the Company adjusted the
carrying value of all remaining assets to be disposed to their net realizable
value. The total loss incurred on the shut down of the Springfield operations
of $4,236 is included on the consolidated statement of operations in the
write-off of goodwill and obsolete assets/facilities. At July 31, 1997 and
1996, the Company has accrued $1,397 and $2,387, respectively, relating to the
closure of this facility. The reserve is included in accrued plant closing and
disposal costs. The reserve at July 31, 1997 was predominantly related to the
remaining lease liability, which was settled subsequent to July 31, 1997. The
Company holds assets from the facility with a net realizable value of $1,910,
which are to be transferred to the new West Virginia facility in fiscal 1998.
In September 1994, the Company sold 40% of the capital stock of Multiple
Container Recycler, Inc. ("MCR") to a company owned by the son of a director
and officer of the Company. The sale price was $1,000. The Company received
a note for a total of $1,000 plus accrued interest payable in twelve equal
principal installments beginning October 1995, with a subsequent agreement
extending the due date six months until April 1996 (see below). All acquired
shares in MCR and 175,000 shares of previously acquired PureTec common stock
(which had a value approximating the note as of the date of sale) have been
pledged as collateral against the loan. The Company recognized a gain of
$1,000 on this transaction.
In fiscal year 1997, the Company agreed to transfer the net assets of MCR to
its minority owners. Under the terms of the agreement, the operations and all
existing assets were transferred effective September 1, 1996. The existing
liabilities as of that date were retained by the Company. Liabilities
remaining at July 31, 1997 were approximately $100. Upon consummation of the
agreement, 333,333 shares of PureTec stock were transferred to the Company in
satisfaction of the $1,000 note. The Company incurred a loss of $312 in
conjunction with this transaction, which was provided for in the prior year.
The above amounts include management's best estimates of the net realizable
value of certain fixed assets to be retained by the Company and estimated
expenditures to be incurred. The ultimate amounts could differ materially in
the near term from the amounts assumed in arriving at the loss on the shut
down of these facilities.
10. Accrued Expenses
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Salaries and wages................................................ $ 6,714 $ 4,519
Accrued interest.................................................. 3,317 3,569
Accrued expenses related to discontinued operations............... 566 656
Other(1).......................................................... 14,350 17,065
--------------- ---------------
$ 24,947 $ 25,809
=============== ===============
</TABLE>
- ------------
(1) Included in other in 1997 and 1996 is a $3,000 disputed note payable
which arose in connection with Ozite's acquisition of Dalen Trading Co.
("Dalen") in 1987. The note payable and related accrued interest
alleged to be due to Dalen's previous owner were in dispute and the
subject of litigation since 1987. Subsequent to July 31, 1997, this
litigation was settled (See Note 20(b)).
11. Long-Term Debt
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
11 1/4% Senior Secured Notes due December 1, 2003(1) (discounted at an
estimated effective interest rate of 12.7%)......................................... $ 117,017 $ 118,248
7% Subordinated Notes (principal amount of $3,750) issued in connection with
the acquisition of Ozite (discounted at an estimated effective interest rate of
16%) (See Note 1)(2)................................................................ 1,606 1,860
7 1/10% Foreign Term Loan payable in Belgian Francs, with quarterly interest
payments, eight semi-annual principal payments of approximately $550 and a
balloon payment of $693 due on January 31, 1997. The loan is secured by a
pledge of working capital and a lien on certain fixed assets of the Company's
foreign operations.................................................................. 693 --
Mortgage payable, bearing interest at prime plus 1 1/2%, payable in monthly
installments of $4, plus interest with a balloon payment of $322 due in
January, 2000....................................................................... 372 329
Equipment financing loans and other notes payable in monthly installments
through October 1998 at interest ranging from 10.4% to 11.1%........................ 256 198
5.25% Direct Loan Promissory Note, payable in 24 equal monthly installments of
interest only commencing March 1996; and thereafter payable by 12 equal
monthly installments of $10 plus interest, commencing March 1998 through
February 1999....................................................................... 347 251
Term loan(6)......................................................................... 2,692 --
Equipment financing loans and other notes payable in monthly installments
through 1997 at interest rates ranging from 6 3/4% to 16%........................... 676 --
6.10% Foreign Term Loan payable in Belgium Francs, with interest in twenty
quarterly installments from June 1996 through March 2001 1,263 822
3.75% Foreign Term Loan payable in Belgium Francs, with five equal yearly
installments with first payment commencing December 1997............................ -- 791
9.93% Foreign Term Loan payable in Italian Lira...................................... 956 --
9.78% Foreign Term Loan payable in Italian Lira...................................... 1,090 --
8.40% Foreign Term Loan payable in Italian Lira, repayable semi-annually
including principal and interest through 2001....................................... -- 1,295
5.30% Foreign Term Loan payable in Italian Lira, with five equal yearly
installments with first payment commencing May 1998. Interest is payable
quarterly........................................................................... -- 1,065
Foreign Term Loan payable in British Pounds, in 13 equal semi-annual
installments of $151, commencing June 1998, with a final payment due
December 2004 at 1.75% plus LIBOR (approximately 7.75% at July 31,
1997)(3)............................................................................ -- 2,302
Capitalized Lease Obligation, 20 years, commencing February 1997..................... -- 3,841
Bank financing(4).................................................................... 4,911 3,341
Occidental Chemical Corporation(5)................................................... 4,000 2,524
--------------- ---------------
Less: current portion................................................................ 5,292 7,363
--------------- ---------------
$ 130,587 $ 129,504
=============== ===============
</TABLE>
- ------------
As described below, substantially all assets of the Company are pledged as
security under outstanding debt agreements.
(1) In November 1993, PST issued $125,000 principal amount of Senior
Secured Notes due 2003 (the "Senior Secured Notes"). Interest payments
on the Senior Secured Notes, at a rate of 11 1/4% are payable
semiannually and commenced June 1, 1994. For the years ended July 31,
1997 and 1996, the Company recorded $1,231 and $1,095, respectively, in
interest expense relating to the accretion of these notes.
The Senior Secured Notes are senior secured obligations of PST, ranking
pari passu in right of payment with all existing and future senior
indebtedness of PST and senior to all subordinated indebtedness of PST, if
any. The Senior Secured Notes are secured by substantially all real
property, machinery, equipment, general intangibles and other intellectual
property now owned or hereafter acquired by PST and by a pledge of all
outstanding capital stock of Plastic Specialties and Technologies
Investments, Inc., a wholly- owned subsidiary of PST. The indenture for the
Senior Secured Notes contains covenants which restrict, among other
matters, the ability of PST and its subsidiaries to incur additional
indebtedness, pay dividends (except as described in the indenture), redeem
capital stock, prepay subordinated indebtedness, create liens, dispose of
certain assets, engage in sale and merger transactions, make contributions,
loans or advances and enter into transactions with affiliates. At July 31,
1997, PST is unable to pay dividends.
(2) For the years ended July 31, 1997 and 1996, the Company recorded $254 and
$487, respectively, in interest expense relating to the accretion of these
notes.
(3) The Agreement with the UK Commercial Bank is payable in 13 equal
semi-annual installments of $151 commencing June 20, 1998 with a final
payment of $158 on December 31, 2004.
(4) The Term Loan Agreement with a Commercial Bank that Burlington has
entered into contains a $5,500 term loan payable in 28 quarterly
installments of approximately $196 plus interest accrued at the prime
rate plus 1.25% commencing October 31, 1995. In addition, the Company
is required to make yearly mandatory cash flow prepayments, as defined
in the Agreement. The loan is secured by the property, plant, and
equipment acquired from OxyChem. As described in Note 8(b), Burlington
is not in compliance with certain covenants of the Agreement for which
it has obtained a waiver. Additionally, as the Company intends to
repay the borrowings outstanding under the Agreement during 1998, the
entire amount has been classified in current portion of long-term debt
at July 31, 1997.
(5) As described in Note 1, this amount represents the renegotiated Seller
Financing, arising from the purchase of Burlington from OxyChem. This
loan was repaid subsequent to July 31, 1997 and as such has been
classified as a current liability.
(6) In February 1996, Styrex and Pure Tech Plastics, Inc. and subsidiaries
("PTP") entered into a Loan and Security Agreement with a bank
("Styrex/PTP Loan") providing an aggregate revolving credit line of
$7,500 and an aggregate term loan of $5,000. The proceeds of the loan
were used to pay off existing debt. As of July 31, 1996, there was
$3,839 outstanding under the revolving credit line, and $2,692 under
the term loan. In September 1996, the Company repaid the amount
outstanding at that time relating to PTP. Styrex subsequently paid off
its loans to the bank on November 11, 1996 when it signed a new Loan
and Security Agreement (the "Styrex Loan Agreement") with a Finance
Company for a period of three years. The Styrex Loan Agreement
provides for a term loan and revolving loans up to a maximum of $6,000
and letters of credit of up to $1,000 and is secured by all of the
assets of Styrex. Advances under the agreement bear interest at the
rate of prime plus 1 1/2%. The initial term loan of $1,360 has
scheduled repayments of $23 per month beginning December 1, 1996. As
of July 31, 1997 and 1996 the revolving loan and the term loan balances
were $1,086 and $1,156, respectively. The operations of Styrex were
sold in August 1997. Accordingly, these amounts are included in net
assets held for sale in the consolidated balance sheet which is
included in other current assets.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Years Ending July 31,
- ---------------------
<S> <C>
1998....................................... $ 7,363
1999....................................... 1,626
2000....................................... 1,446
2001....................................... 1,308
2002....................................... 646
Thereafter................................. 124,478
---------
$ 136,867
=========
</TABLE>
12. Income Taxes
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
------------------------------------
Years Ended July 31,
------------------------------------
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
Current Tax Provision
Federal....................... $ -- $ -- $ --
Foreign....................... -- 2,269 2,804
State......................... -- 288 150
---------- --------- ---------
-- 2,557 2,954
---------- --------- ---------
Deferred Tax Provision (Benefit)
Federal....................... -- -- --
Foreign....................... -- 80 177
State......................... -- -- --
---------- --------- ---------
-- 80 177
---------- --------- ---------
Total.............................. $ -- $ 2,637 $ 3,131
========== ========= =========
</TABLE>
The Company's tax provision for the year ended July 31, 1997 and 1996 are
primarily due to the Company's foreign operations. The Company's tax benefit
for the year ended July 31, 1995 reflects the reduction in previously recorded
temporary differences. The tax provision does not reflect the expected 34%
benefit based on existing federal tax rates due to the sizable operating
losses experienced in its domestic operations. The Company has not anticipated
the tax benefits of such losses as it is more likely than not that such
deferred tax asset would not be realizable at this time.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, net of operating losses
and income tax credit carryforwards. The income tax effects of significant
items comprising the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------
July 31, 1996 July 31, 1997
---------------------------- ------------------------
Current Non-current Current Non-current
----------- --------------- ------- -------------
<S> <C> <C> <C> <C>
Assets
Net operating loss carry forward $ -- $ 31,363 $ -- $ 27,200
Expenses currently not deductible 2,044 -- 3,308 1,518
Allowance for doubtful accounts................... 200 -- 235 --
Capitalization of inventory costs................. 421 -- 556 --
Employee benefits liabilities..................... -- 2,218 -- 1,956
Pension........................................... -- 570 -- 638
Liabilities
Difference between book and tax basis of property
and equipment........................................ -- (11,531) -- (10,186)
Discount.......................................... -- (3,193) -- (2,701)
--------- ---------- ------- ----------
Net deferred tax asset.................................. 2,665 19,427 4,099 18,425
Less valuation allowance................................ (2,665) (20,707) (4,099) (19,882)
--------- ---------- ------- ----------
Net deferred income taxes............................... $ -- $ (1,280) $ -- $ (1,457)
========= ========== ======= ==========
</TABLE>
The net deferred tax asset has been subject to a valuation allowance except
for the net deferred tax liability as of July 31, 1997 and 1996 of $1,457 and
$1,280 which relates to income taxes in foreign jurisdictions which can not be
offset against U.S. income taxes. The valuation allowance has changed in the
current year due to revisions of previously estimated amounts, changes in the
deferred tax amounts and additions to the net operating losses, which are fully
reserved. The domestic net operating losses are subject to matters discussed
below and are subject to change due to the restructuring occurring at the
corporate subsidiary level, as well as adjustment for the timing of inclusion
of expenses and losses in the federal returns as compared to amounts included
for financial statement purposes.
Net Operating Losses
The Company and its U.S. subsidiaries will file a consolidated tax return for
the year ended July 31, 1997. The net operating loss ("NOL") carryforwards
involve complex issues of federal tax law and are subject to various
limitations as follows:
$55,200 Subject to IRC Section 382 annual limitation of approximately $3,900;
this includes $4,700 of losses incurred prior to 1992 which are
subject to additional limitations. Approximately $26,000 of these
losses were incurred after the IRC Section 382 change of ownership
occurred and are not subject to Section 382 limitations; expire
2001-2010.
$20,800 Subject to IRC Section 382 annual limitation of approximately $3,100,
Separate Return Limitation Year ("SRLY") as to Ozite Corporation;
expire 1997-2005.
$4,000 Subject to IRC Section 382 annual limitation of approximately $3,100.
(This is part of, and not in addition to, $3,100 IRC Section 382
limitation discussed immediately above). SRLY as to Ozite and Subs.;
expires 2009.
To the extent the Ozite amounts of NOL's are subsequently recognized, they
will cause changes in the goodwill arising from the transaction. In addition
to the domestic NOL balances, the Company has incurred losses relating to CEL,
a subsidiary of the Company, taxable in Northern Ireland. Fiscal 1997 losses
aggregated $1,430 which have no expiration date. The Company believes that it
is more likely than not that this deferred tax asset will not be realized and
has recorded a full valuation allowance on these amounts. Such temporary
differences do not include deferred United States income taxes on
undistributed earnings of approximately $25,833 of Ozite's foreign
subsidiaries as the Company has the ability and intent to permanently reinvest
such earnings.
See Note 20(b) for a discussion of Ozite's Belgian subsidiary income tax
assessment.
13. Stockholders' Equity
(a) Capitalization
The Company's authorized capital consists of 50,000,000 shares of common
stock, $.01 par value and 1,000,000 shares of preferred stock, $.01 value.
The holders of the Company's common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. The
holders of the Company's common stock have no cumulative voting rights in the
election of directors. Subject to the prior rights of the holders of the
Company's preferred stock, all holders of common stock are entitled to share
equally in dividends from sources available therefor when, as and if declared
by the Board of Directors, and upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the
Company available for distribution to stockholders. Stockholders have no
preemptive rights. There is no cumulative voting, redemption right or right of
conversion in existence with respect to the common stock. All outstanding
shares issued are fully paid and non-assessable and legally issued. The Board
of Directors is authorized to issue additional common stock within the limits
authorized by the Company's charter and without stockholder action.
The authorized shares of preferred stock, $.01 par value, are issuable at any
time and from time to time, by action of the Board of Directors without
further authorization from the stockholders, except as otherwise required by
applicable law or regulations, to such persons and for such consideration (but
not less than the par value thereof) as the Board of Directors determines. The
Board of Directors can fix the exact terms of each series of preferred stock,
including number of shares, designation, preferences, privileges, restriction
and rights with respect to dividends, conversion, voting, redemption and other
matters, at or before the time such series is to be sold or issued based upon
factors such as market conditions and negotiations with respective purchasers
existing at that time. There were 5,000 shares of preferred stock to be issued
which were considered outstanding at July 31, 1995 in connection with the
Ozite Merger. Such shares were issued in fiscal 1996.
Effective as of July 31, 1996, the holders of the then outstanding redeemable
preferred stock entered into an agreement with the Company to convert such
shares into 1,606,688 shares of common stock of the Company (the "Exchange
Agreement"). The exchange rate of this conversion was 321.3368 shares of
common stock for each preferred share, with fractional shares rounded up to
the next whole share. Of the total shares issued, 50%, or 803,344, were
delivered to the holders of the Preferred Stock and are restricted from sale
until October 1, 2001 (the "Exchange Shares"). The remaining 50% were
delivered to an escrow agent pending release as described below (the "Escrow
Shares").
Under the terms of the Exchange Agreement, Escrow Shares will be released back
to the Company if such specified litigation is settled prior to July 31, 2001
in excess of amounts defined in the Exchange Agreement. The shares released to
the Company will be based on an exchange price of $3.2016 per share or the
then market price of the common stock, whichever is greater. If the
incremental cost to the Company exceeds the released value of the Escrow
Shares, the Company will obtain Exchange Shares, valued as indicated above,
for the cost of the settlement in excess of the released value of the Escrow
Shares. Escrow Shares not released to the Company as indicated above by July
31, 2001, will then be released to the holders of the Preferred Stock. The
Exchange and Escrow Shares must be registered within 180 days of the
settlement of the specified litigation or July 31, 2001, whichever occurs
first.
In addition, pursuant to the terms of the Company's 7% Subordinated Notes (see
Note 11), the Company also has the ability to offset principal payments due on
these Subordinated Notes against any excess cost of settlement in the
litigation referred to above. See further discussion at Note 20(b).
The Exchange Shares have been valued by the Company at the date of conversion
at the five day trailing market price of the Company's common stock. The
Escrow Shares have been valued based on such price, less a liquidity discount
due to the nature of such shares. The total value of the Exchange and Escrow
Shares approximated the value of the Preferred Stock on the date of
conversion, July 31, 1996. Therefore, the above transaction has had no effect
on the net equity position of the Company.
(b) Stock Issuances
(i) Private Placements
Common Stock:
During the period from October 1994 to July 1995, the Company issued an
aggregate of 3,332,737 shares of common stock under three private placements
made entirely to foreign persons and companies under Regulation S of the
Securities Act of 1933. Net proceeds from these placements aggregated $13,160
before expenses.
In January 1996, the Company made a private placement of 250,000 shares of
common stock for proceeds of $500. In March 1996, the Company made an
additional private placement of 250,000 shares of common stock for proceeds of
$500. In both cases, the proceeds were used to reduce outstanding debt.
As described in Note 1, on June 27, 1997, PureTec completed a private
placement through Ozite, of 2,235,030 shares of its common stock, in exchange
for 1,117,515 shares, or an additional 13.4%, of PST common stock outstanding.
Convertible Debentures:
During the period from February 1995 to June 1995, the Company received $8,371
and, in exchange, issued Convertible Debentures in the same amount. The
debentures matured at various times from December 1, 1995 to February 1996 and
bore interest at 3% per annum. The holders of the debentures were entitled, at
their option, at any time after a three-month holding period, to convert the
principal amount, or any portion of the debenture, into shares of common stock
of the Company at 80% of the market price of the Company's common stock. As of
July 31, 1995, debentures in the amount of $7,371 were converted into
1,714,780 shares of the Company's common stock. In August 1995, the remaining
$1,000 was converted into 227,273 shares of common stock.
(ii) Other Issuances
In March 1995, the Company acquired an additional interest in Evolutions for
350,000 shares of common stock. The issued shares are accounted for by the
Company as Treasury stock. During 1996, Evolutions sold 202,500 shares of the
Company's common stock, resulting in an increase to paid-in capital of $487.
The Company issued 113,890 shares of Common Stock as the result of a
settlement of a lawsuit in October 1995. The value of the shares approximated
$438 at such date and has been charged to expense in 1995.
During fiscal 1997, 333,333 shares of common stock were transferred to the
Company in settlement of a $1,000 note in conjunction with the transfer of the
MCR Vending operations to its minority owners.
(c) Stock Option Plans
As part of the Merger, the Company has adopted a stock option plan (the "1995
Plan") covering 5,000,000 shares of the Company's common stock, par value
$.01, pursuant to which officers, directors, employees and consultants are
eligible to receive options. The options issued under this plan may be ISOs or
non-statutory options. No options may be granted after December 31, 2002. Each
option granted under the 1995 Plan may be exercised for a period of not more
than ten years after the date of grant, or until the expiration of the plan,
whichever occurs first. The option price must not be less than fair market
value for ISOs and 85% of fair market value for non-statutory options. In
total, options to acquire 1,068,366 shares of Company common stock have been
transferred from previously existing Pure Tech plans to the 1995 Plan at
exercise prices ranging from $2.03 to $6.88 per share.
In March 1995, the Company reclassified options to acquire 154,571 shares of
common stock as "plan" options. These options have exercise prices ranging
from $2.03 to $7.50.
In fiscal 1996, the Company issued 1,236,500 plan options at an exercise price
of $3.00 per share and 300,000 plan options with an exercise price of $4.25.
In fiscal 1997, the Company issued 840,000 plan options at an exercise price
of $2.25 per share.
The following summarizes transactions under the employee stock option plan for
the years ended July 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
----------------------------------------
Weighted Average
Number of Shares Exercise Price
------------------ ------------------
<S> <C> <C>
Outstanding, June 30, 1994..... 710,404 $ 5.83
Granted........................ 427,000 5.97
Reclassified................... 154,571 5.83
Exercised and canceled......... (223,609) 5.83
--------- ---------------
Outstanding, July 31, 1995..... 1,068,366 3.62
Granted........................ 1,536,500 3.24
Canceled....................... (20,000) 6.57
--------- ---------------
Outstanding, July 31, 1996..... 2,584,866 3.32
Granted........................ 840,000 2.25
Canceled....................... (256,500) 3.49
--------- ---------------
Outstanding, July 31, 1997..... 3,168,366 $ 3.03
========= ===============
</TABLE>
At July 31, 1997 and 1996, approximately 1,372,000 and 923,000 options,
respectively, were vested and exercisable at weighted-average prices of $3.11
and $3.62, respectively.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock plans. Accordingly, no compensation cost has been recognized for
stock option grants issued under any of the Company's stock option plans. Had
compensation cost for stock option grants issued during 1997 and 1996 been
determined under the provisions of SFAS No. 123, the Company's net loss and
loss per share would have been $3,475 and $.12 in 1997 and $9,741 and $.36 in
1996. The pro forma effect on net loss and net loss per share in 1996 includes
the effect of modifying the terms of approximately 771,000 options that were
granted prior to July 31, 1995. In November 1996, all options outstanding at
the beginning of the year with an exercise price of $7.50 or greater were
modified to reduce the exercise price to $3 or $4.25 per share. The pro forma
effect on net loss and loss per share for 1997 and 1996 is not representative
of the pro forma effect on net income in future years, because it does not
take into consideration pro forma compensation expense related to all other
grants made prior to 1996.
The fair value of each stock option granted in 1997 and 1996 under the
Company's plans was estimated on the date of grant using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used to
value grants issued under the plans in 1997 and 1996:
<TABLE>
<CAPTION>
--------------------
1996 1997
-------- --------
<S> <C> <C>
Dividend yield.............................. N/A N/A
Volatility.................................. 34.36% 37.00%
Risk-free interest rate..................... 6.00% 6.00%
Expected term of options (in years)......... 9.80 8.30
</TABLE>
The weighted-average fair values per share of stock options granted during
1997 and 1996 were $1.29 and $.91, respectively.
The exercise price ranges and average remaining lives for options outstanding
and exercisable at July 31, 1997 were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Number of
Shares Weighted Number of Weighted-
Outstanding at Remaining Life Average Shares Average
Range of Exercise Prices 7/31/97 (in Yrs.) Exercise Price Exercisable Exercise Price
- --------------------------- ---------------- ---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
2.03 -- 3.00............... 2,749,700 7.90 $ 2.74 1,020,322 $ 2.96
3.44 -- 6.88............... 418,666 8.00 4.88 351,966 4.88
--------- ---- ---- --------- ----------------
Total:..................... 3,168,366 7.91 $ 3.03 1,372,288 $ 3.11
========= ==== ==== ========= ================
</TABLE>
(d) Stock Warrants/Options
The following options and warrants were issued to non-employees of the Company:
In August 1994, the Company issued non-plan options to acquire 100,000 shares
of common stock. These options have an exercise price of $6.88.
In January 1995, the Company issued non-plan options to acquire 685,000 shares
of common stock. These options have exercise prices ranging between $5.50 and
$5.62.
In March 1995, the Company reclassified non-plan options to acquire 154,571
shares of common stock. These options have exercise prices ranging from $2.03
to $7.50.
The above transactions did not result in any compensation cost or expenses, as
the exercise prices equaled or exceeded the fair market value of the stock. In
the case of the reclassified options, the exercise price at the time of
original issue equaled or exceeded the fair market value of the stock.
In December 1994, the Company entered into a settlement of certain litigation
which provides for the issuance of 450,000 warrants to acquire the Company's
common stock at an exercise price of $4.61 per share (See Note 20(b)).
The following table summarizes the status of stock options and warrants issued
to non-employees of the Company:
<TABLE>
<CAPTION>
---------------------------------------------
Number of Shares Options/ Warrant Prices
----------------- ------------------------
<S> <C> <C>
Outstanding, June 30, 1994.. 521,000 $2.03 -- $22.00
Granted..................... 1,235,000 4.64 -- 6.88
Reclassified................ (154,571) 2.03 -- 7.50
Exercised and canceled...... (32,985) 7.50
---------
Outstanding, July 31, 1995.. 1,568,444 2.03 -- 22.00
Canceled.................... (200,000) 5.50
---------
Outstanding, July 31, 1996.. 1,368,444 4.25 -- 22.00
Exercised................... (122) 4.61
Canceled.................... (56,000) 4.25
---------
Outstanding, July 31, 1997.. 1,312,322 $4.25 -- $22.00
=========
</TABLE>
At July 31, 1997, all of the stock options/warrants issued to non-employees of
the Company were exercisable, and expired at various dates during fiscal 1998
and 1999.
14. Retirement Plans
(a) PST Pension Plan:
PST maintains a noncontributory defined benefit pension plan. The plan covers
substantially all employees of PST and substantially all salaried employees of
Burlington who are not covered by a collective bargaining agreement, who have
completed one year of service and are not participants in any other pension
plan. The funding policy of the Company is to make contributions to the plan
based on actuarial computations of the minimum required contribution for the
plan year. The plan's assets are invested primarily in the Master Trust Fund
of PST in accordance with the investment agreements of the plan.
Net pension costs consist of the following:
<TABLE>
<CAPTION>
--------------------------
Years Ended July 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Service cost.................................... $ 647 $ 667
Interest cost on projected benefit obligation... 542 589
Actual return on plan assets.................... (557) (1,854)
Net amortization and deferrals.................. 88 1,287
----------- -----------
$ 720 $ 689
=========== ===========
</TABLE>
The funded status of the Plan is as follows:
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Vested benefit obligation............................................................. $ (5,831) $ (6,548)
============== ==============
Accumulated benefit obligation........................................................ $ (6,089) $ (6,843)
============== ==============
Projected benefit obligation.......................................................... $ (7,807) $ (8,540)
Plan assets at fair value............................................................. 6,029 8,339
Projected benefit obligation in excess of plan assets................................. (1,778) (201)
Unrecognized net gains................................................................ (415) (1,946)
Less unrecognized actuarial gains and losses and prior service costs attributable
to minority interest in PST.......................................................... 295 (15)
-------------- --------------
Accrued pension obligation............................................................ $ (1,898) $ (2,162)
============== ==============
</TABLE>
The expected long-term rate of return on plan assets of the plan was 9% for
all periods presented and the discount rate was 8% at July 31, 1997 and 1996.
(b) Burlington Hourly Pension Plan:
Burlington has a noncontributory defined benefit pension plan that covers
substantially all hourly compensated employees covered by a collective
bargaining agreement, who have completed one year of service. The funding
policy of the Company is to make contributions to this plan based on actuarial
computations of the minimum required contribution for the plan year. The
plan's assets are invested primarily in the Master Trust Fund of PST. Net
pension costs consist of the following:
<TABLE>
<CAPTION>
----------------------------
Years Ended July 31,
1996 1997
------------ ------------
<S> <C> <C>
Service cost........................................................... $ 108 $ 110
Interest cost on projected benefit obligation.......................... 278 309
Actual return on plan assets........................................... (165) (780)
Net amortization and deferrals......................................... (104) 487
------------ ------------
$ 117 $ 126
============ ============
Vested benefit obligation.............................................. $ (3,682) $ (4,103)
============ ============
Accumulated benefit obligation......................................... $ (3,888) $ (4,503)
============ ============
Projected benefit obligation........................................... $ (3,888) $ (4,503)
Plan assets at fair value.............................................. 3,222 4,169
------------ ------------
Projected benefit obligation in excess of plan assets.................. (666) (334)
Unrecognized net loss (gain)........................................... 180 (262)
Adjustment to recognize minimum required liability..................... (180) --
Unrecognized prior service cost........................................ -- 238
------------ ------------
Accrued pension costs.................................................. $ (666) $ (358)
============ ============
</TABLE>
The expected long-term rate of return on plan assets was 9% for the period and
the discount rate was 8% for the year ended July 31, 1997.
In July 1997, the Plan was amended due to an agreement reached with the labor
union representing the majority of hourly workers at Burlington. This
agreement increased retirement benefits from $25, multiplied by the number of
years of benefit service, to $26, effective June 1998, and $27, effective June
2000. These changes are reflected in the year-end disclosure information
above, with the increase in liability established as a prior service cost.
(c) Post-retirement Liabilities
In addition to providing pension benefits, the company also sponsors the
Burlington Retiree Welfare Plan, which provides certain health care benefits
for retired employees who were employed on an hourly basis and covered under a
collective bargaining agreement. Employees and their families become eligible
for these benefits after the employee completes five years of service, if
retiring at age fifty-five, or at age sixty-five, the normal retirement age.
Post retirement health care benefits paid during the year ended July 31, 1997
and 1996 amounted to $139 and $110, respectively.
Effective June 23, 1997, the plan was amended to provide a zero-premium
Medicare risk HMO coverage for all future post-age-65 retirees, as well as
many of the Company's current retirees. This amendment to the plan was
accounted for as a negative plan amendment pursuant to Statement of Financial
Accounting Standards No. 106. The resulting reduction in the accrued
post-retirement liability of $3,200 will be recognized and amortized as a
reduction of net periodic post retirement benefit cost over the next eight
years at the rate of $400 per year. The amortization period represents the
average period of time over which an under-55 employee attains full
eligibility for this post retirement benefit.
Net periodic post-retirement benefit cost for 1997 was $553 and was comprised
of $133 of service cost and $420 of interest cost. Net periodic
post-retirement benefit cost for 1996 was $513 and was comprised of $123 of
service cost and $390 of interest cost.
The funded status of the plan is as follows:
<TABLE>
<CAPTION>
----------------------------------
July 31, 1996 July 31, 1997
--------------- ---------------
<S> <C> <C>
Accumulated post-retirement benefit obligation
Retirees................................................................... $ (1,511) $ (1,099)
Fully eligible active plan participants.................................... (2,138) (408)
Other active participants.................................................. (1,672) (310)
--------------- ---------------
Total................................................................... (5,321) (1,817)
Unrecognized net gain...................................................... (19) (737)
--------------- ---------------
Sub-total............................................................... (5,340) (2,554)
Unrecognized prior service cost relating to negative plan amendment (see
above).................................................................. -- (3,200)
--------------- ---------------
Accrued Post retirement costs.............................................. $ (5,340) $ (5,754)
=============== ===============
</TABLE>
The accumulated post-retirement benefit obligation was determined using an 8%
discount rate for the years ended July 31, 1997 and 1996. The health care cost
trend rate for medical benefits was assumed to be 8% for 1996, gradually
declining until it reaches a constant annual rate of 5% in 2002. The health
care cost trend rate assumption has a significant effect on the amounts
reported. A 1% increase in health care trend rate would increase the
accumulated Post retirement benefit obligation by $943 and increase the
service and interest components by $100 at July 31, 1997.
(d) Savings Plans
Additionally, PST has a savings plan for all non-collective bargaining
employees whereby PST will match each employee's contribution up to 2% of the
employee's earnings. The savings plan is also made available to PST affiliates
who bear their respective costs. Such contribution amounted to approximately
$492 and $505 for the year ended July 31, 1997 and 1996, respectively.
Burlington employees who are covered under a collective bargaining agreement
participate in the Pure Tech International, Inc. Savings and Investment Plan
for Hourly Employees at Burlington, New Jersey. The Company will match each
employee's contribution up to 50% of the contributions not in excess of 6% of
the employee's compensation. Such contribution amounted to approximately $73
and $96 for the year ended July 31, 1997 and 1996, respectively.
15. Segment Information
The Company operates in three industry segments: plastic products, plastic
materials and recycling. The plastic products segment principally produces
lawn and garden hose, medical tubing and specialty tubing and gaskets. The
plastics materials segment principally produces recycled and general purpose
plastics and medical grade vinyl compounds. The recycling segment consists of
the operating of material recovery facilities and the recycling of plastics
and some aluminum. The plastic products segment has operations in the United
States, Europe and Canada (Canadian operations commencing in 1996, which are
included in the domestic amounts below). The plastic materials and recycling
segments operate principally in the United States.
Financial information concerning the Company's business segments and the
geographic areas in which it operates is as follows:
<TABLE>
<CAPTION>
-----------------------------------
Years ended July 31,
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Sales:
Plastic Products:
Domestic......................... $ -- $ 152,352 $ 149,083
Europe........................... -- 34,158 35,300
Plastic Material..................... -- 142,314 154,064
Recycling............................ 30,189 34,248 18,681
Corporate & elimination.............. -- (36,728) (41,794)
--------- --------- ---------
Total Net Sales................ $ 30,189 $ 326,344 $ 315,334
========= ========= =========
Operating Income (Loss):
Plastic Products:
Domestic......................... $ -- $ 19,366 $ 21,822
Europe........................... -- 6,375 8,276
Plastic Material..................... -- 5,907 6,533
Recycling............................ 1,020 (5,088) (197)
Corporate & elimination.............. (7,304) (5,692) (9,817)
--------- --------- ---------
Total Operating Income
(Loss)...................... $ (6,284) $ 20,868 $ 26,617
========= ========= =========
Depreciation and Amortization:
Plastic Products:
Domestic......................... $ -- $ 4,622 $ 4,998
Europe........................... -- 1,496 1,641
Plastic Material..................... -- 3,589 3,123
Recycling............................ 2,473 1,263 1,101
Corporate & elimination.............. 388 2,457 2,917
--------- --------- ---------
Total Depreciation & Amortization $ 2,861 $ 13,427 $ 13,780
========= ========= =========
Capital Expenditures:
Plastic Products:
Domestic......................... $ -- $ 2,440 $ 2,553
Europe........................... -- 3,804 1,852
Plastic Material..................... -- 1,726 9,502
Recycling............................ 2,727 916 717
Corporate and discontinued operations 216 1,623 451
--------- --------- ---------
Total Capital Expenditures..... $ 2,943 $ 10,509 $ 15,075
========= ========= =========
Identifiable Assets:
Plastic Products:
Domestic......................... $ 134,147 $ 135,095 $ 145,150
Europe........................... 36,667 37,907 36,760
Plastic Material..................... 73,708 85,900 103,998
Recycling............................ 27,998 19,520 10,186
Corporate and discontinued operations 17,601 18,268 15,729
--------- --------- ---------
Total Identifiable Assets...... $ 290,121 $ 296,690 $ 311,823
========= ========= =========
</TABLE>
Operating income (loss) is total sales less cost of goods sold and operating
expenses of each segment before deductions for general corporate expenses not
directly related to an individual segment. In computing operating income
(loss), none of the following items have been added or deducted: interest
expense, income taxes (benefit) and loss from discontinued operations.
Identifiable assets by industry are those assets that are used in the
Company's operation in each industry segment, including assigned value of
goodwill. Corporate identifiable assets consist primarily of cash, prepaid
expenses, fixed assets and deferred debt costs offset by the elimination of
intersegment profit in ending inventories.
16. Fourth Quarter Adjustments
During the fourth quarter of 1997, the Company recorded certain adjustments
aggregating $1,200. The Company recorded additional inventory of approximately
$1,800 based on the results of a book to physical reconciliation.
Additionally, the Company recorded a charge of approximately $600 as the
result of reconciling intercompany accounts. It cannot be specifically
determined to which quarters in the year these amounts relate.
Additionally, during the fourth quarter of 1997, the Company recorded certain
adjustments aggregating $3,158. These adjustments relate to the write-off of
licenses and a supply agreement ($920), the reversal of a portion of the Dalen
litigation reserve ($2,000), the recording of the Circuit Chemistry settlement
($1,988), and the loss on disposal of Styrex ($2,250).
During the fourth quarter of 1996, the Company recorded certain adjustments
aggregating approximately $7,194. These adjustments related to the shut down
of the Springfield location ($4,236), losses recorded in connection with
equity investments ($1,188), the final exit of the Ozite Mfg. location ($570)
and the decision to dispose of the MCR operations ($400). In addition to the
above, certain adjustments were recorded at Burlington in the fourth quarter
($800) that related to operations throughout the year. It cannot be
specifically determined what quarters in the year these amounts relate to.
During the fourth quarter of 1995, the Company recorded certain adjustments
aggregating approximately $11,110. These adjustments were related to the
write-off of obsolete equipment ($4,617) and the write-off of intangibles
($6,493). The write-off of intangibles included $3,707 related to Styrex.
17. Discontinued Operations
The following table summarizes the loss from operations and disposal of
discontinued operations of the Company for the years ended July 31, 1997, 1996
and 1995:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Glass operations(1)
Loss from discontinued operations................... $ -- $ -- $ --
Loss on disposal from discontinued operations....... (4,809) -- --
----------- ----------- -----------
$ (4,809) $ -- $ --
=========== =========== ===========
Ozite Manufacturing(2)
Loss from discontinued operations................... $ -- $ (979) $ --
Loss on disposal from discontinued operations....... -- (2,241) (672)
----------- ----------- -----------
$ -- $ (3,220) $ (672)
=========== =========== ===========
Injection molding operations (Styrex)(3)
Loss from discontinued operations................... $ (4,580) $ (546) $ (1,226)
Loss on disposal from discontinued operations....... -- -- (2,250)
----------- ----------- -----------
$ (4,580) $ (546) $ (3,476)
=========== =========== ===========
Circuit Chemistry(4)
Loss from discontinued operations................... -- -- --
Loss on disposal from discontinued operations....... -- -- (1,988)
----------- ----------- -----------
$ -- $ -- $ (1,988)
=========== =========== ===========
Dalen(5)
Loss from discontinued operations................... -- -- --
Gain on disposal from discontinued operations....... -- -- 2,000
----------- ----------- -----------
$ -- $ -- $ 2,000
=========== =========== ===========
Total discontinued operations
Loss from discontinued operations................... $ (4,580) $ (1,525) $ (1,226)
Loss on disposal from discontinued operations....... (4,809) (2,241) (2,910)
----------- ----------- -----------
$ (9,389) $ (3,766) $ (4,136)
=========== =========== ===========
</TABLE>
- ------------
(1) Glass operations
During 1994 and 1995, the Company discontinued and arranged for the
disposal of its various glass, metal, and material recovery facility
("MRF") operations. In April 1995, the Company leased its Newark, New
Jersey glass processing and MRF facilities to Automated Recycling
Technologies, Inc. ("ARTS") for an initial period of two years. At
the conclusion of the initial two-year period, ARTS had the right, to
extend at its option, the lease agreement for eight consecutive one-
year periods. ARTS exercised that right and extended the lease at the
Newark glass processing operation, while vacating the MRF facility.
The Company has accrued $1,216 and $1,660 for various liabilities
related to these operations at July 31, 1997 and 1996, respectively.
These reserves are included in accrued plant closing and disposal costs
in current liabilities and long-term debt. These liabilities relate
primarily to rent, clean-up costs, and mortgage and equipment financing
loans.
(2) Ozite Manufacturing
On December 21, 1995, PST entered into an Asset Purchase Agreement with
Foss Manufacturing Company, Inc. ("Foss") for the sale of certain
assets of PST's Ozite Manufacturing Division ("Ozite Mfg.") in
Libertyville, Illinois to Foss as of January 31, 1996. Under the terms
of this agreement, Foss purchased Ozite Mfg's accounts receivable and
inventory, net of reserves, as well as certain prepaid expenses, trade
names, trademarks, and patents for approximately $3,025, which was
received by PST on February 12, 1996. Furthermore, the agreement
provided for the company to receive a minimum of $450 for all of its
machinery and equipment at the facility. During the fourth quarter of
fiscal 1996, adjustments were made to increase by $570 the estimated
loss on disposal recorded in the second quarter due to the final shut
down of these facilities.
Accordingly, the Ozite Mfg. operations have been reflected as
discontinued operations in the statement of operations for all periods
presented. Net sales generated from these operations amounted to
$4,882 and $11,714 for the years ended July 31, 1996 and 1995,
respectively. During fiscal 1997, the Company settled certain
litigation related to Ozite Mfg. (see Note 20(b)). These settlements
resulted in charges of $672. Certain litigation remains ongoing,
however management believes any potential exposure to the Company is
covered by insurance.
(3) Styrex
Styrex Industries, Inc. ("Styrex") was a wholly owned subsidiary of
the Company engaged in thermoplastic and injection molding operations.
In August 1997, the operations of Styrex were sold. In connection
therewith, the Company recorded a loss on disposal of $2,250.
Accordingly, operating results for Styrex have been shown as a
discontinued operation within the consolidated statement of operations
for the years 1997, 1996 and 1995. Net sales for this operation were
$14,767, $17,979 and $21,713 for the years ended July 31, 1997, 1996
and 1995, respectively. The net loss for this operation of $1,226 for
this operation for fiscal 1997 was also included within discontinued
operations. In addition, the net assets for Styrex of $270 have been
included in other current assets on the consolidated balance sheet at
July 31, 1997. The measurement date for this discontinued operation is
April 30, 1997. In August 1997, the operations of Styrex were sold for
cash. The Company has accrued $656 for various liabilities related to
the closing of this operation, which are included in accrued expenses.
(4) Relates to K&B Liquidating Corp. Lawsuit (see Note 20).
(5) Relates to reduction of accrued expenses for Dalen lawsuit (see Note 20).
18. Subsequent Events
In August 1997, the operations of Styrex were sold and the operating results
of Styrex for fiscal 1997 were included within discontinued operations (see
Note 17). Accordingly, results for fiscal 1996 and 1995 were also reclassed to
discontinued operations.
In September 1997, Burlington Resins, Inc. settled a lawsuit it had filed
against OxyChem. The result of this settlement was to reduce goodwill at
Burlington by $1,476. (See Note 1).
In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry, and
Ozite settled the Dalen litigation. The impact of both settlements was
accounted for as adjustments to previously recorded discontinued operations
(see Notes 20(b) and Note 17).
On November 11, 1997, the Company announced that it had signed an Agreement
and Plan of Merger ("Agreement") with Tekni-Plex, Inc., ("Tekni-Plex") a
privately-owned company, pursuant to which the Company would, through a merger
("Merger") become a wholly-owned subsidiary of Tekni-Plex. The Agreement
provides that the owner of each share of common stock of the Company would
receive $3.50 in cash for that share in the Merger. The Agreement and the
Merger will be submitted to the shareholders of the Company for approval at
the Company's annual shareholders' meeting expected to be held in January
1998. The Agreement and the Merger have been unanimously approved, and
recommended to shareholders for adoption, by the Company's Board of Directors.
Officers and directors of the Company owning approximately 10% of the
outstanding common stock of the Company have agreed to vote their shares in
favor of the Merger.
The Agreement contains a number of conditions which must be satisfied in order
for the Merger to occur, including the successful completion of a consent
solicitation and tender offer for PST's 11.25% Senior Secured Notes due 2003,
the receipt of all necessary governmental and regulatory approvals, and the
absence of any changes occurring prior to the closing date which would have a
material adverse significance with respect to the value of the Company and its
subsidiaries, taken as a whole.
The Agreement also requires that the outstanding minority common shareholders'
interest in PST be eliminated, either through purchase or a short-form merger
procedure under Delaware law, not later than immediately prior to completion
of the Merger, at a price of $7.00 per share of PST common stock.
The Merger is further subject to the receipt by Tekni-Plex of sufficient
financing to pay for the Company shares, purchase the PST Notes tendered in
the tender offer, and fund all other cash requirements of the Merger.
Tekni-Plex has received commitments from Morgan Guaranty Trust Company of New
York to provide senior bank financing and subordinated bridge loans in an
aggregate amount which the parties believe will be sufficient to complete the
Merger, subject to a number of conditions.
The Agreement is terminable by Tekni-Plex, the Company, or either of them
under certain circumstances. In the event the Agreement is terminated because
the Company's Board of Directors withdraws or materially modifies its approval
or recommendation of the Merger or the Agreement or another person, entity or
group acquires beneficial ownership of 50% or more of the outstanding shares
of the Company's Common Stock, the Company is obligated to pay a fee of $10
million to Tekni-Plex and to reimburse Tekni-Plex for up to $5 million of its
expenses in connection with the Agreement and related transactions. The
Company expects the Merger to be completed in February 1998, but cannot assure
that all of the conditions to the Merger will be satisfied.
Concurrently with execution of the Merger Agreement, Tekni-Plex purchased a
Convertible Note issued by PureTec in the amount of $5 million. The loan will
assist PureTec and PST in meeting expected cash requirements in the period
prior to completion of the Merger. The Convertible Note bears interest at 13%
and is convertible at any time following the 60th day after any termination of
the Agreement into a number of shares of Common Stock sufficient to retire the
principal amount of the Note plus accrued interest or in any event at a base
conversion rate of one share of Common Stock per $2.72 of obligations owed
under the Note. The Company is required to file a registration statement with
respect to the Common Stock issuable upon conversion promptly following a
termination of the Merger Agreement. The Convertible Note matures on September
30, 1998. The Convertible Note is subject to prepayment by the Company in cash
at any time, and contains covenants and events of default customary for a debt
instrument of this type.
19. Fair Value of Financial Instruments and Concentration of Credit Risk
The estimated fair value of cash and cash equivalents, accounts receivable,
notes and interest receivable from officers, short-term borrowings, accounts
payable and long-term debt, excluding those items discussed below, approximate
those amounts reflected in the balance sheet based on pertinent information
available to management. Management estimates the fair value of the Senior
Secured Notes approximates $135,000 as these notes were trading at a price of
approximately 108 at July 31, 1997. Management estimates the fair value of the
OxyChem notes at July 31, 1997 approximates the carrying value.
In connection with the acquisition from OxyChem, Burlington entered into two
separate supply agreements and one supply and license agreement with OxyChem
to supply certain critical components and chemicals utilized in production of
the Company's products. These agreements extend for varying periods of time
and each contain specified purchase prices and minimum purchase requirements
for such materials. Burlington is entitled to search for new suppliers for
these components, but is required to allow OxyChem to requote the price of the
components if the price quote obtained in the market is more favorable to
Burlington. Management believes that other suppliers could provide similar
components to Burlington on comparable terms. During the years ended July 31,
1997 and 1996, Burlington purchased approximately $20,800 and $18,000,
respectively of products from OxyChem under such agreements. Amounts due to
OxyChem at July 31, 1997 and 1996 amounted to approximately $5,300 and $2,700,
respectively. In addition, Burlington recorded sales to OxyChem in the year
ended July 31, 1997 and 1996 of approximately $1,200 and $1,000, respectively.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Although credit risk
related to the Company's trade receivables is limited due to the large number
of customers in differing industries and geographic areas, sales to one
customer accounted for approximately 12.7%, 16.9% and 19.8% of the Company's
net sales for the years ended July 31, 1997, 1996 and 1995, respectively.
20. Commitments and Contingencies
(a) Leases
The Company leases certain facilities under non-cancelable operating leases
expiring through the year 2020. The Company is responsible for all taxes,
insurance and maintenance on the facilities.
Rent expense from continuing operations under operating leases approximated
$4,479, $5,250 and $1,855 for the years ended July 31, 1997, 1996 and 1995,
respectively. Included in rent expense for each year is approximately $150,
attributable to a lease from a related party.
A summary of the future minimum lease payments for continuing operations is as
follows:
<TABLE>
<S> <C>
Years Ending July 31,
- ---------------------
1998........................................ $ 4,719
1999........................................ 4,344
2000........................................ 4,112
2001........................................ 3,932
2002........................................ 3,302
Thereafter.................................. 3,735
----------
$ 24,144
==========
</TABLE>
(b) Litigation
On February 18, 1993, the Ware Chemical Co. ("Ware Chemical"), a former PST
subsidiary (now dormant) was served with a third party complaint in the matter
of United States v. Davis ("Davis"). In Davis, the United States has alleged
that certain private entities are liable, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA"), for cleanup
costs that have been incurred, and will be incurred in the future, with
respect to the remediation of the Davis Landfill site in Rhode Island. Ware
Chemical was owned by Dart Industries (now Kraft, Inc.) during the time in
question (1975 -- 1977), and Kraft has agreed to assume all responsibility.
In June 1997, the Company filed suit against Occidental Chemical Corporation
("OxyChem"), alleging that certain post-retirement benefit liabilities were
substantially understated when Burlington acquired the acquisition from
OxyChem (see Note 1). In August 1997, the Company and OxyChem agreed to settle
this litigation. Pursuant to the terms of the settlement agreement, the
Company has agreed to release OxyChem from any claim related to this liability
in exchange for OxyChem's agreement to settle a $4 million subordinated term
loan including accrued interest ("seller financing") for $3 million. A portion
of the settlement has been accounted for as an adjustment to the purchase
price, with the offset recorded against goodwill, with the remainder adjusting
accrued interest based upon the seller financing. This settlement was paid in
the first quarter of fiscal 1998.
Ozite is also engaged in litigation in which it seeks damages from the former
owner of Dalen, a discontinued segment of Ozite. In December 1987, Ozite
commenced legal proceedings against the seller of Dalen, seeking monetary
damages and other equitable relief from the seller for various
misrepresentations made in its financial statements and other miscellaneous
information presented on which Ozite elected to proceed with the purchase of
such assets. The seller has counterclaimed for the enforcement of the seller's
rights in the subject matter and for recovery of the balance of the purchase
price in an amount approximately equal to $3,000 plus accrued interest,
amounts claimed to be due under a consulting agreement, and punitive damages.
Subsequent to July 31, 1997, the Dalen litigation has been settled. The impact
of the settlement of the Dalen litigation has been reflected in the Company's
net loss from discontinued operations as of July 31, 1997, as Ozite had
previously reported the Dalen business which it had acquired as a discontinued
operation in 1988. The settlement agreement with Dalen provided for Ozite to
make two (2) payments of $500 each by October 15, 1997, and a payment for
$2,250 by January 31, 1998. Interest accrues on the final payment of $2,250
from October 15, 1997, until it is paid at the rate of 8% per annum. If Ozite
fails to make the payments required on October 15 and January 31, and such
failure continues for 30 days after notice to Ozite, then following procedural
steps, Ozite will be deemed to have confessed judgement on the amount due plus
interest and the court will be free to pursue any available remedy in order to
collect the amount due. Management believes that it has a number of
alternatives available to finance the settlement payments to Dalen, and
therefore it expects to be able to meet these final payment obligations by
January 31, 1998. The Company has adjusted the previously established reserves
for this litigation as the Company deems the settlement probable.
Pursuant to the terms of the Exchange Agreement and 7% Subordinated Notes,
upon the settlement of the Dalen litigation in excess of defined amounts, the
Company has the ability to reclaim Exchange and Escrow shares or to reduce
principal payments due on the 7% Subordinated Notes (see Note 13(a)). The
Dalen litigation was settled for approximately $2,800 in excess of the amount
defined in the agreements. At October 31, 1997 the Company recorded the effect
of the reduction of the principal amount of the 7% Subordinated Notes as a
result of the final determination of the excess costs of the Dalen settlement.
The principal amount of the 7% was reduced by $2,555, and unamortized discount
was reduced by $1,235 for a net reduction in the carrying value of the 7%
Subordinated Notes of $1,320. The Company also recorded a $1,320 reduction of
goodwill at October 31, 1997. As a result of these reductions, the
amortization expense and the interest expense recognized in connection with
goodwill and the 7% Subordinated Note will be reduced in the future.
In January 1993 and 1994, the Company's Belgian subsidiary received income tax
assessments aggregating approximately $2,114 (75,247,000 Belgian Francs) for
the disallowance of certain foreign tax credits and investment losses claimed
for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the
subsidiary received an income tax assessment of approximately $902 (32,083,000
Belgian Francs) for the year ended July 31, 1992. Although the future outcome
of these matters are uncertain, the Company believes that its tax position was
appropriate and that the assessments are without merit. Therefore, the Company
has appealed and has not paid or accrued for the assessments. Based on the
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.
PureTec Plastics ("PTIP"), certain of its directors, three former directors
and its President were defendants in a lawsuit brought in 1989 in New Jersey
Superior Court and are currently defendants in a lawsuit brought in 1989 in
New Jersey Superior Court by Frank Tammera, Sr., a stockholder and former
officer and director of PTIP and Frank Tammera, Jr., a former officer of PTIP.
Trial of the Frank Tammera, Sr. lawsuit commenced in April 1991 and concluded
in 1995. In March 1996, the New Jersey Superior Court decided that PTIP did
not have to reinstate Mr. Tammera, Sr., that his termination had been for
cause, and in March 1996 a NJ Superior Court decided for PTIP on all matters
except that PTIP was obligated to pay him only approximately $30 of
indebtedness, which PTIP had acknowledged, and $14 in royalties. Final
judgement in the Frank Tammera, Sr. suit was entered on June 6, 1996. In
August 1996, Mr. Tammera, Sr. appealed the court's decision. The Frank
Tammera, Jr. lawsuit and two similar lawsuits from Michael and Albert Tammera,
have been stayed pending the resolution of the Frank Tammera, Sr. lawsuit.
In May 1992, PST and all of its directors as of 1988, as well as K and B
Liquidating Corp. (a former subsidiary of PST which is being liquidated) were
named in two lawsuits filed in the Minnesota state courts. The plaintiffs are
Douglass Hutchinson (since deceased) and James Czaja, both of whom were former
employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp.
("Circuit Chemistry"). The suits alleged several causes of action, all of which
center upon a claim that PST and/or other defendants did not adequately
disclose sufficient information to the plaintiffs in connection with the
acquisition from the plaintiffs by PST of their 20% equity interest in Circuit
Chemistry, and the termination of their employment agreements. Subsequent to
July 31, 1997, the cases brought by Czaja and Hutchinson have been settled by
PST. Previously, management had expected these cases to be litigated, and
management had expected that PST would win these cases. During fiscal 1997,
PST filed for a summary judgement to dismiss all claims from Czaja and
Hutchinson. This summary judgement motion was denied by the court. In light of
the growing costs of litigation, and the remaining uncertainty of the outcome
of a trial, management elected to settle these cases. The impact of the
settlement of these cases is reflected in the Company's net loss from
discontinued operations for the year ended July 31, 1997, as PST had
previously reported Circuit Chemistry as a discontinued operation as of 1989.
Total settlement payments to the plaintiffs in connection with this settlement
are $1,725, which are accrued together with related legal costs at October 31,
1997.
During February 1994, the Company and certain officers were named in five
lawsuits purporting to be class actions which essentially allege that the
Company failed to previously adequately disclose facts which resulted in
significant losses reported by the Company. The Company entered into a
settlement of these suits, whereby the Company (i) issued 450,000 warrants to
acquire the Company's common stock at an exercise price of $4.61 per share,
(ii) established an administration fund of $100 to cover the expenses and
costs of administering the settlement and (iii) paid certain out-of-pocket
costs not exceeding $50. The Company recorded $150 relating to items (ii) and
(iii) in the year ended July 31, 1995 and $100 in the year ended July 31,
1996, upon issuance of the warrants.
In the current year, litigation relating to Ozite Mfg. with MDC Wallcoverings
and Ashley Alsip was settled. (See Note 17)
Additionally, the Company is party to certain other litigations and
environmental proceedings in the ordinary course of business, none of which it
believes are likely to have a material adverse effect on its financial
position or results of operations.
(c) Employment Agreements
The following summarizes, in the aggregate, minimum annual salary and
consulting fees that are due under various agreements:
<TABLE>
<S> <C>
Minimum
Years Ending July 31, Commitment
- --------------------- ------------
1998....................................... $ 453
1999....................................... 175
2000....................................... 22
</TABLE>
(d) Letters of Credit
As of July 31, 1997, PST had available letters of credit of up to $1,000 from
the CLC, of which $353 was outstanding.
(e) Bonuses
Under the terms of the Asset Transfer Agreement with OxyChem, the Company is
required to pay annual bonuses to salaried employees still employed by the
Company through fiscal year 1998. For the years ended July 31, 1997 and 1996
these payments amounted to approximately $152 and $157, respectively.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Plastic Specialties and Technologies, Inc.
Ridgefield, New Jersey
We have audited the accompanying consolidated statements of operations,
stockholders' deficit, and cash flows of Plastic Specialties and Technologies,
Inc. (the "Company") for the year ended July 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of the Company for
the year ended July 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
November 13, 1997
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
------------------
Year ended July
31, 1995
------------------
<S> <C>
Net Sales................................................................................. $ 221,190
Costs and Expenses:
Cost of goods sold.................................................................. 171,194
Selling, general and administrative................................................. 26,673
Research and development............................................................ 872
Amortization of intangible assets................................................... 1,369
-------------
200,108
-------------
Income From Operations.................................................................... 21,082
-------------
Other Expense (Income):
Interest expense.................................................................... 17,033
Debt issuance cost and discount amortization........................................ 785
Foreign exchange (gain) loss........................................................ 116
Other, net.......................................................................... 145
-------------
18,079
-------------
Income From Continuing Operations Before Income Taxes..................................... 3,003
Provision for income taxes.......................................................... 1,807
-------------
Income From Continuing Operations......................................................... 1,196
-------------
Discontinued Operations:
Loss from discontinued operations (net of tax benefit $440 in 1995)................. (1,294)
-------------
Net Income (Loss)......................................................................... $ (98)
=============
Income (Loss) Per Common Share:
Income from continuing operations................................................... $ 0.14
Loss from discontinued operations................................................... $ (0.15)
-------------
Net income (loss) per common share.................................................. $ (0.01)
=============
Weighted Average Number of Common Shares Outstanding...................................... 8,319,833
=============
</TABLE>
See notes to consolidated financial statements.
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Receivable Cumulative
Receivable from Officer, Foreign
Additional from Including Minimum Currency
Common Paid-In Accumulated Majority Accrued Pension Translation
Stock Capital Deficit Stockholder Interest Liability Adjustment
------- ---------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1994.... $ 83 $ 12,107 $ (16,950) $ (3,553) $ (717) $ 153
Net loss............... -- -- (98) -- -- -- --
Foreign currency
translation
adjustment.......... -- -- -- -- -- -- 781
Minimum pension
liability........... -- -- -- -- -- (250) --
Increase in receivable -- -- -- 300 -- -- --
from majority
stockholder.........
====== ========== =========== ========== ========= ======= =========
Balance, July 31, 1995.. $ 83 $ -- $ 667,000 $ (3,853) $ (717) $ (250) $ 934
====== ========== =========== ========== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
PLASTIC SPECIALITIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------
Year Ended
July 31, 1995
-------------
<S> <C>
Net Cash Flows From Operating Activities:
Income from continuing operations...................................................................... $ 1,196
Adjustment to reconcile net income to net cash used in operating activities from continuing
operations:
Amortization..................................................................................... 2,148
Depreciation..................................................................................... 5,134
Deferred income taxes............................................................................ 455
Provision for losses on accounts receivable and other reserves................................... 1,081
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable............................................................................ (2,535)
Inventories.................................................................................... (15,411)
Prepaid expenses and other current assets...................................................... (801)
Other assets................................................................................... (25)
Notes and interest receivable from officers.................................................... (15)
Increase (decrease) in liabilities:
Accounts payable, other current liabilities, accrued interest, current deferred taxes and
current portion of long-term debt............................................................. (37)
Other long-term liabilities.................................................................... 166
------------
Net cash (used in) provided by operating activities from continuing operations................... (864)
------------
Loss from discontinued operations................................................................ (1,294)
------------
Net cash used in operating activities from discontinued operations............................... (1,294)
------------
Net cash (used in) provided by operating activities.......................................... (9,938)
------------
Cash Flows From Investing Activities:
Capital expenditures............................................................................. (7,251)
------------
Net cash used in investing activities........................................................ (7,251)
------------
Cash Flows From Financing Activities:
Borrowing (repayments) under revolving credit facility and short-term borrowing, net............. 19,478
Proceeds of term loans........................................................................... (1,185)
Advances to majority stockholders--Ozite Corporation............................................. (300)
------------
Net cash provided by (used in) financing activities.......................................... 17,993
Effect of exchange rate changes on cash................................................................ (360)
------------
Net increase in cash and cash equivalents.............................................................. 444
Cash and cash equivalents, beginning of the period..................................................... 4,297
------------
Cash and cash equivalents, end of period............................................................... $ 4,741
============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest......................................................................................... $ 17,068
Income taxes..................................................................................... 1,442
Non-cash financing transaction:
Changes in minimum pension liability............................................................. (250)
</TABLE>
See notes to consolidated financial statements.
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Organization
Plastic Specialties and Technologies Inc.'s ("PST" or the "Company") principal
businesses are the manufacturing of garden hose, specialty plastic compounds
and fabricated precision plastic components for niche consumer and industrial
markets, and the recycling of plastics. PST services its markets through its
network of 20 manufacturing facilities, located in key points throughout the
United States, with three locations in Europe and one in Canada.
The Company was formed in 1984 by its senior management to acquire the plastic
specialty sector of Dart & Kraft through a leveraged buy out. PST Holdings,
Inc. ("Holdings") was incorporated in March 1987 as a wholly-owned subsidiary
of Sage Group, Inc. ("Sage") for the purpose of acquiring PST. On August 24,
1990, Sage was merged with and into Ozite Corporation ("Ozite") with Ozite
being the surviving corporation. On October 29, 1993, Holdings was merged with
and into PST with PST surviving the merger (the "PST Merger"). Ozite merged
with PureTec Corporation ("PureTec"), formerly known as Pure Tech
International, Inc., at the close of business on July 31, 1995 (the "Merger").
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits, commercial paper, time
deposits, and cash on hand. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
(c) Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
(d) Goodwill
Goodwill is being amortized on a straight-line basis over the periods expected
to be benefitted, which is estimated to be 40 years. Goodwill resulted from
acquisitions which occurred prior to 1990.
The Company continually assesses the recoverability of its intangible assets
by determining whether the amortization of the goodwill over its remaining
useful life can be recovered through projected undiscounted future cash flows.
The amount of goodwill impairment, if any, is measured based on projected
undiscounted future cash flows in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, (Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of). Based on the
Company's projected results of operations over the remaining useful life,
management believes that there has not been an impairment in the value of the
goodwill.
(e) Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated by the
straight-line method over the estimated useful lives of the related assets.
Repairs and maintenance are charged to expense as incurred. Depreciation
is computed on the straight-line method over the following estimated useful
lives: buildings and improvements, 20 years; furniture and fixtures, 10
years; machinery and equipment, 10 years; and leasehold improvements, the
lesser of the term of the lease, including renewal options, or the useful
life of the asset (See Note 4). Costs of the construction of certain long-
term assets include capitalized interest which is amortized over the
estimated useful life of the related asset.
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated fair value associated with the asset
would be compared to the assets carrying amount to determine if a write-down
to fair value is required.
(f) Deferred Financing Costs
The financing costs incurred in securing debt have been deferred and are being
amortized over the life of the related debt.
(g) Income Taxes
For fiscal year 1995 and prior, PST and Ozite were parties to a tax sharing
agreement and filed a consolidated federal income tax return. The Company's
foreign subsidiaries file separate foreign income tax returns.
The Company files a consolidated federal tax return including all of its
qualifying domestic subsidiaries. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
(h) Revenue Recognition
The Company recognizes revenue when goods are shipped to customers. The
Company provides for returned goods and volume rebates on an estimated basis.
(i) Income (Loss) Per Common Share
Income (loss) per common and common equivalent share is computed based upon
the weighted-average number of shares outstanding during the period. Net loss
per common share is based upon the weighted-average number of shares
outstanding, as there are no common share equivalents outstanding. Primary
earnings per share and fully diluted earnings per share are the same for all
periods presented.
In February 1997, the Financial Accounting Standards Board ("FASB" issued SFAS
No. 128, "Earnings Per Share"). This new standard, which supersedes APB
Opinion No. 15, requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the income statement and a reconciliation of the
income available to common stockholders and weighted-average shares of the
basic EPS computation to the income available to common stockholders and
weighted average shares plus dilutive potential common shares of the diluted
EPS computation. The objective of the statement is to make the computation
more comparable with international accounting standards. SFAS 128 is effective
for periods ending after December 15, 1997 (the Company's 1998 fiscal year).
SFAS No. 128 will require the Company to restate amounts previously reported
as EPS to comply with the new pronouncement. Had SFAS No. 128 been in effect
for the year ended July 31, 1995, reported EPS would not have been different
from that reported under APB Opinion No. 15.
(j) Other Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 129, (Disclosure of Information about Capital Structure) ("SFAS 129").
SFAS 129 requires companies to disclose descriptive information about
securities and information about the liquidation preferences of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997 (the Company's fiscal 1998 year).
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, (Reporting Comprehensive Income) ("SFAS 130"). SFAS 130 requires
companies to display, with the same prominence as other financial statements,
the components of other comprehensive income. SFAS 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. SFAS 130 is effective for fiscal years
beginning after December 15, 1997 (the Company's 1999 fiscal year).
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, (Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 requires that an enterprise disclose certain
information about operating segments. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997 (the Company's 1999
fiscal year).
The Company has not determined the impact, if any, on the financial statements
of adopting these pronouncements.
(k) Receivable from Majority Stockholder--Ozite Corporation
Due from majority stockholder is comprised of $3,253 of expenditures paid by
the Company on behalf of a predecessor of Ozite in connection with the
acquisition of PST in fiscal 1987 and $300 of cash advances in both fiscal
1995 and 1994. The outstanding balance is due on demand and is non-interest
bearing.
(l) Foreign Subsidiaries
The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the end of the period exchange rate and
statement of operations accounts at the average exchange rate for the period.
Translation gains and losses are recorded in stockholders' equity, and
transaction gains and losses are reflected in income.
(m) Environmental Costs
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations and that do not contribute to current or future
revenue generation are expensed. No costs relating to existing conditions
caused by past operations were incurred by the Company during the period ended
July 31, 1995.
Reserves for estimated costs are recorded when environmental remedial efforts
are probable and the costs can be reasonably estimated. In determining the
reserves, the Company uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost sharing arrangements.
(n) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
3. Investments in Affiliates and Certain Related Party Transactions
The Company acquired from Bagcraft Corporation of America (Bagcraft) a $5,000
subordinated note bearing interest at a rate of 13 1/2% per annum and 50,000
shares of 13 1/2% cumulative redeemable preferred stock with a liquidation
preference of $5,000 in Bagcraft for $10,000 in 1987. Bagcraft is a
wholly-owned subsidiary of BCA Holdings, Inc. (ABCA) and BCA is wholly-owned
subsidiary of Artra Group, Inc. (Artra) an affiliated company. In March 1993,
the Company received 675 shares of BCA Preferred Stock having a liquidation
preference equal to the amount of interest due for the period from December 1,
1991 to November 30, 1992 ($675 in the aggregate) in lieu of receipt of payment
of interest from Bagcraft for such period.
In July 1993, the Company recorded an impairment of its investment in Bagcraft
by establishing a valuation reserve to write-off the $10,000 carrying value of
such investment as the Company was unable to determine, with reasonable
certainty, whether or when it would realize its investment in Bagcraft. On
December 28, 1993, PST received from Bagcraft $5,000 in cash and 3,000 shares
of BCA preferred stock as payment in full for the $5,000 subordinated note and
unpaid interest due from Bagcraft totaling $3,094, respectively. In 1994, the
Company recorded a $5,000 gain for the recovery of its investment in the
Bagcraft subordinated note. The interest due from Bagcraft had been fully
reserved and interest income was not recorded for the receipt of the BCA
preferred stock as such stock is not freely transferable. The cash received
was used to pay a portion of the PST dividend declared.
PST held 772,000 Artra Common Shares, which were accounted for on the equity
method (see 5a. above). Through the Company's recording of its share of the
net losses of Artra and other related items, the carrying value of the
investment in the Artra Common Shares had been reduced to zero.
In connection with the Merger (see Note 1), on July 13, 1995, PST declared a
dividend of the 772,000 Artra Common Shares and 3,675 shares of BCA preferred
stock to all stockholders of record as of July 31, 1995. Based on this
declaration, 638,444 shares of Artra common stock and 3,039.23 shares of BCA
preferred stock have been transferred to Ozite. The Company is in the process
of transferring 133,556 shares of Artra common stock and 635.77 shares of BCA
preferred stock to the minority stockholders that existed at the date of
declaration.
PST is due $1,089 from Ozite relating to a tax sharing agreement. The Company
has fully reserved for this receivable from Ozite due to Ozite's current
inability to settle this obligation.
The notes and interest receivable from officers are due on demand and bear
interest at rates generally ranging from 75% of the prime rate to the prime
rate of interest. The notes receivable relate primarily to the purchase of
common and preferred stock of the predecessor of Ozite by several officers,
unreimbursed moving expenses and a personal loan.
4. Short-Term Borrowings
Revolving Credit Advances:
On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement (the
"Agreement") with a commercial lending company (CLC). The Agreement contains
covenants, the most restrictive of which are maintenance of certain financial
ratios, prohibition of the occurrence of additional indebtedness, the payment
of dividends, certain related party transactions and limitations on capital
expenditures. Borrowings under the Agreement are secured by substantially all
the domestic current assets of PST. Additionally, the CLC has a security
interest in PST' s intangible assets, and this security interest ranks pari
passu with the security interest of the Senior Secured Notes in PST's
intangible assets. Revolving credit advances under the Agreement are based on
eligible receivables and inventory.
Effective February 14, 1995, PST amended this Agreement with the CLC (the
"Amended Agreement"). The Amended Agreement also provides that outstanding
revolving credit advances shall not exceed $8,000 for 30 consecutive days
during the period from July 1 to September 30 for each year. Furthermore, the
Amended Agreement provides that domestic capital expenditures are limited to
$6,600 per year.
At July 31, 1995, the Company was not in compliance with certain of the
covenants of the Agreement, including the requirement to reduce borrowing to
$20 million and the limitation on capital expenditures. The CLC has provided a
waiver of this non-compliance as of July 31, 1995.
5. Long-Term Debt
<TABLE>
<CAPTION>
---------------
July 31, 1995
---------------
<S> <C>
11 1/4% Senior Secured Notes due December 1, 2003(1)................................................. $ 125,000
9.25% Foreign Term Loan payable in Belgian Francs, with quarterly interest payments, eight
semi-annual principal payments of approximately $550 which commenced January 31, 1993
and a balloon payment of $693 due on January 31, 1997. The loan was secured by a pledge of
working capital and a lien on certain fixed assets of the Company's foreign operations............... 2,012
---------------
127,012
Current Portion....................................................................................... 1,271
---------------
$ 125,741
===============
</TABLE>
- ------------
(1) The Senior Secured Notes, which require semi-annual interest payments
on June 1 and October 1, are senior secured obligations of PST, ranking
pari passu in right of payment with all existing and future senior
indebtedness of PST and senior to all subordinated indebtedness of PST,
if any. The Senior Secured Notes are secured by substantially all real
property, machinery, equipment, general intangibles and other
intellectual property now owned or hereafter acquired by PST and by a
pledge of all outstanding capital stock of Plastic Specialties and
Technologies Investments, Inc., a wholly-owned subsidiary of PST. The
indenture for the Senior Secured Notes contains covenants which
restrict, among other matters, the ability of PST and its subsidiaries
to incur additional indebtedness, pay dividends (except as described in
the indenture), redeem capital stock, prepay subordinated indebtedness,
create liens, dispose of certain assets, engage in sale and merger
transactions, make contributions, loans or advances and enter into
transactions with affiliates.
6. Income Taxes
The provision for income taxes from continuing operations consists of the
following:
<TABLE>
<CAPTION>
---------------
Year Ended
July 31, 1995
---------------
<S> <C>
Current Tax Provision (Benefit)
Federal...................................... $ (900)
Foreign...................................... 2,252
State........................................ --
---------------
1,352
---------------
Deferred Provision
Federal...................................... --
---------------
Foreign...................................... 455
Total......................................... $ 1,807
===============
</TABLE>
The following reconciles the provision for income taxes at the U.S.
statutory rate to the provision for income taxes from continuing
operations:
<TABLE>
<CAPTION>
-------------
Year Ended
July 31, 1995
-------------
<S> <C>
Computed tax provision at statutory rate.................................................. $ 581
Difference in foreign income tax rates.................................................... 397
Amortization of goodwill.................................................................. 464
Losses not currently deductible, foreign -- 1997, domestic -- 1995........................ 1,119
Reduction of previously provided taxes.................................................... (900)
Other nondeductible expenses.............................................................. 146
-----------
$ 1,807
===========
</TABLE>
Income (loss) from continuing operations before income taxes and
extraordinary items relating to foreign and domestic operations are as
follows:
<TABLE>
<CAPTION>
---------------
Year Ended
July 31, 1995
---------------
<S> <C>
United States......................... $ (3,791)
Europe................................ 6,794
---------------
$ 3,003
===============
</TABLE>
In January 1993 and 1994, the Company's Belgian subsidiary received income tax
assessments aggregating approximately $1,979 (75,247,000 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 $843 (32,083,000
Belgian Francs) for the year ended July 31, 1992. Although the future outcome
of these matters are uncertain, PST believes that its tax position was
appropriate and that the assessments are without merit. Therefore, PST has
appealed and has not paid or accrued for the assessments. Based on the advice
of legal counsel in Belgium, PST 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.
7. Employee Benefit Plans
The Company maintains a noncontributory defined benefit pension plan which
covers substantially all employees of PST not covered by a collective
bargaining agreement, who have completed one year of service and are not
participants in any other pension plan. The plan is also available to
affiliates of PST who bear their respective costs for their covered employees.
The funding policy of the Company is to make contributions to the plan based
on actuarial computations of the minimum required contribution for the plan
year. The plans' assets are invested primarily in the Master Trust Fund of PST
in accordance with the investment agreements of the plan.
Net pension costs consists of the following:
<TABLE>
<CAPTION>
---------------
Year Ended
July 31, 1995
---------------
<S> <C>
Service cost.......................................... $ 486
Interest cost on projected benefit obligation......... 360
Actual return on plan assets.......................... (259)
Net amortization and deferrals........................ (131)
---------------
$ 456
===============
</TABLE>
The expected long-term rate of return on plan assets of the plan was 9% and
the discount rate was 8% for the year ended July 31, 1995.
Additionally, PST has a savings plan for all non-collective bargaining
employees whereby PST will match each employee's contribution up to 2% of the
employee's earnings. The plan is also made available to PST affiliates who
bear their respective costs. Such contribution amounted to approximately $504
for the year ended July 31, 1995.
The Company has made contributions to multi-employer pension plans in the
amount of approximately $62 for the year ended July 31, 1995.
8. Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Although credit risk
related to the Company's trade receivables is limited due to the credit
standing of its largest customers and the diversity of the remaining
customers, sales to one major nationwide retailer accounted for approximately
22.1% of the Company's net sales for the year ended July 31, 1995.
9. Segment Information
The Company operates in three industry segments: plastic products, plastic
materials and recycling. The plastic products segment principally produces
lawn and garden hose, medical tubing and specialty tubing and gaskets. The
plastics materials segment principally produces recycled and general purpose
plastics and medical grade vinyl compounds. The recycling segment consists of
the operating of material recovery facilities and the recycling of plastics
and some aluminum. The plastic products segment has operations in the United
States and Europe. The plastic materials and recycling segments operate
principally in the United States.
<TABLE>
<CAPTION>
---------------
Year Ended
July 31, 1995
---------------
<S> <C>
Net Sales:
Plastic Products:
Domestic..................................... $ 130,215
Europe....................................... 31,995
Plastic Materials.............................. 88,665
Corporate & Eliminations....................... (29,685)
---------------
Total Net Sales................................. $ 221,190
===============
Operating Income:
Plastic Products:
Domestic..................................... $ 15,046
Europe....................................... 8,373
Plastic Materials.............................. 2,621
Corporate & Eliminations....................... (4,958)
---------------
Total Operating Income.......................... $ 21,082
===============
Depreciation & Amortization:
Plastic Products:
Domestic..................................... $ 3,534
Europe....................................... 875
Plastic Materials.............................. 1,676
Corporate & Eliminations....................... 1,197
---------------
Total Depreciation & Amortization............... $ 7,282
===============
Capital Expenditures:
Plastic Products:
Domestic..................................... $ 3,778
Europe....................................... 1,098
Plastic Materials.............................. 1,778
Corporate & Eliminations....................... 597
---------------
Total Capital Expenditures...................... $ 7,251
===============
Identifiable Assets:
Plastic Products:
Domestic..................................... $ 102,871
Europe....................................... 24,621
Plastic Materials.............................. 40,027
Corporate & Eliminations....................... 14,773
---------------
Total Identifiable Assets....................... $182,292
===============
</TABLE>
Operating income represents net sales less cost of goods sold and selling,
general and administrative expenses of each segment before deductions for
general corporate expenses not directly related to an individual segment and
the elimination of intercompany profits principally due to Plastic Material
sales to Plastic Products. In continuing operating income, none of the
following items have been added or deducted: interest expense, income taxes,
and loss from discontinued operations. Identifiable assets are those used in
the operations of each segment, including an allocation of goodwill. Corporate
identifiable assets consist primarily of cash, prepaid expenses, fixed assets
and deferred debt costs offset by the elimination of intersegment profit in
ending inventories.
10. Discontinued Operations
On December 21, 1995, PST entered into an Asset Purchase Agreement (the
"Agreement") with Foss Manufacturing Company, Inc. ("Foss") for the sale of
certain assets of PST's Ozite Manufacturing Division ("Ozite Mfg.") in
Libertyville, Illinois to Foss as of January 31, 1996. The Company had been
exploring a relocation alternative until this unsolicited offer was accepted.
Under the terms of the Agreement, Foss purchased Ozite Mfg.'s accounts
receivable and inventory, net of reserves, as well as certain prepaid
expenses, trade names, trademarks, and patents for approximately $3,025, which
was received by PST on February 12, 1996. Furthermore, the Agreement provided
for the Company to receive a minimum of $450 for all of its machinery and
equipment at the facility.
Accordingly, the Ozite Mfg. operations have been reflected as discontinued
operations in the statement of operations for all periods presented. Net sales
generated from these operations amounted to $11,714 for the year ended July 31,
1995.
11. Subsequent Event
On November 11, 1997, PureTec announced that it had signed an Agreement and
Plan of Merger (Agreement) with Tekni-Plex, Inc., ("Tekni-Plex") a
privately-owned company, pursuant to which PureTec would, through a merger
("Merger") become a wholly-owned subsidiary of Tekni-Plex. The Agreement
provides that the owner of each share of common stock of PureTec would receive
$3.50 in cash for that share in the Merger. The Agreement and the Merger will
be submitted to the shareholders of PureTec for approval at PureTec's annual
shareholders meeting expected to be held in January 1998. The Agreement and
the Merger have been unanimously approved, and recommended to PureTec
shareholders for adoption by PureTec's Board of Directors. Officers and
directors of PureTec owning approximately 10% of the outstanding common stock
of PureTec have agreed to vote their shares in favor of the Merger.
The Agreement contains a number of conditions which must be satisfied in order
for the Merger to occur, including the successful completion of a consent
solicitation and tender offer for PST's 11.25% Senior Secured Notes due 2003,
the receipt of all necessary governmental and regulatory approvals, and the
absence of any changes occurring prior to the closing date which would have a
material adverse significance with respect to the value of PureTec and its
subsidiaries, taken as a whole.
The Agreement also requires that the outstanding minority common shareholders'
interest in PST be eliminated, either through purchase or a short-form merger
procedure under Delaware law, not later than immediately prior to completion
of the Merger, at a price of $7.00 per share of PST common stock.
The Merger is further subject to the receipt by Tekni-Plex of sufficient
financing to pay for PureTec shares, purchase the PST Notes tendered in the
tender offer, and fund all other cash requirements of the Merger. Tekni-Plex
has received commitments from Morgan Guaranty Trust Company of New York to
provide senior bank financing and subordinated bridge loans in an aggregate
amount which the parties believe will be sufficient to complete the Merger,
subject to a number of conditions.
The Agreement is terminable by Tekni-Plex, PureTec, or either of them under
certain circumstances. In the event the Agreement is terminated because
PureTec's Board of Directors withdraws or materially modifies its approval or
recommendation of the Merger or the Agreement or another person, entity or
group acquires beneficial ownership of 50% or more of the outstanding shares
of PureTec's Common Stock, the Company is obligated to pay a fee of $10
million to Tekni-Plex and to reimburse Tekni-Plex for up to $5 million of its
expenses in connection with the Agreement and related transactions. PureTec
expects the Merger to be completed in February 1998, but cannot assure that
all of the conditions to the Merger will be satisfied.
Concurrently with execution of the Merger Agreement, Tekni-Plex purchased a
Convertible Note issued by PureTec in the amount of $5 million. The loan will
assist PureTec and PST in meeting expected cash requirements in the period
prior to completion of the Merger. The Convertible Note bears interest at 13%
and is convertible at any time following the 60th day after any termination of
the Agreement into a number of shares of PureTec Common Stock sufficient to
retire the principal amount of the Note plus accrued interest or in any event
at a base conversion rate of one share of Common Stock per $2.72 of
obligations owed under the Note. PureTec is required to file a registration
statement with respect to the Common Stock issuable upon conversion promptly
following a termination of the Merger Agreement. The Convertible Note matures
on September 30, 1998. The Convertible Note is subject to prepayment by
PureTec in cash at any time, and contains covenants and events of default
customary for a debt instrument of this type.
12. Commitments and Contingencies
(a) Leases
The Company rents various warehouse, office and manufacturing facilities and
certain equipment under lease agreement classified as operating leases. Rent
expense was approximately $2,563 for the year ended July 31, 1995.
(b) Litigation
On February 18, 1993, the Ware Chemical Co. ("Ware Chemical"), a former PST
subsidiary (now dormant) was served with a third party complaint in the matter
of United States v. Davis ("Davis"). In Davis, the United States has alleged
that certain private entities are liable, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA), for cleanup
costs that have been incurred, and will be incurred in the future, with
respect to the remediation of the Davis Landfill site in Rhode Island. Ware
Chemical was owned by Dart Industries (now Kraft, Inc.) during the time in
question (1975-1977), and Kraft has agreed to assume all responsibility.
In January 1993 and 1994, the Company's Belgian subsidiary received income tax
assessments aggregating approximately $1,979 (75,247,000 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 $843 (32,083,000
Belgian Francs) for the year ended July 31, 1992. Although the future outcome
of these matters are uncertain, the Company believes that its tax position was
appropriate and that the assessments are without merit. Therefore, the Company
has appealed and has not paid or accrued for the assessments. Based on the
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.
In May 1992, PST and all of its directors (as of 1988), as well as K&B
Liquidating Corp. (a former subsidiary of PST which is being liquidated) were
named in two lawsuits filed in the Minnesota state courts. The plaintiffs are
Douglass Hutchinson (since deceased) and James Czaja, both of whom were former
employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp.
("Circuit Chemistry"). The suits alleged several causes of action, all of which
center upon a claim that PST and/or other defendants did not adequately
disclose sufficient information to the plaintiffs in connection with the
acquisition from the plaintiffs by PST of their 20% equity interest in Circuit
Chemistry, and the termination of their employment agreements. Subsequent to
July 31, 1997, the cases brought by Czaja and Hutchinson have been settled by
PST. Previously, management had expected these cases to be litigated, and
management had expected that PST would win these cases. During fiscal 1997,
PST filed for a summary judgement to dismiss all claims from Czaja and
Hutchinson. This summary judgement motion was denied by the court. In light of
the growing costs of litigation, and the remaining uncertainty of the outcome
of a trial, management elected to settle these cases. The impact of the
settlement of these cases is reflected in the Company's net loss from
discontinued operations for the year ended July 31, 1997, as PST had
previously reported Circuit Chemistry as a discontinued operation as of 1989.
Total settlement payments to the plaintiffs in connection with this settlement
are $1,725, which are accrued for at July 31, 1997.
In the current year, litigation relating to Ozite Mfg. with MDC Wallcoverings
and Ashley Alsip was settled for $660 in the aggregate. The settlement of
these cases is reflected in the Company's net loss from discontinued
operations for the year ended July 31, 1997.
Additionally, the Company is party to certain other litigations and
environmental proceedings in the ordinary course of business, none of which it
believes are likely to have a material adverse effect on its financial
position or results of operations.
