<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 333-28157
TEKNI-PLEX, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 22-3286312
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
201 Industrial Parkway (908) 722-4800
Somerville, New Jersey 08876 (Registrant's telephone number)
(Address of principal executive office)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
<PAGE> 2
TEKNI-PLEX, INC.
<TABLE>
<CAPTION>
Page #
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheet as of April 2, 1999
and July 3, 1998................................................................. 3
Consolidated Statement of Earnings for the nine months and three
months ended April 2, 1999 and March 27, 1998..................................... 4
Consolidated Statement of Cash Flows for the nine months
ended April 2, 1999 and March 27, 1998............................................ 5-6
Notes to Consolidated Financial Statements.............................................. 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................... 15-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 18
PART II. OTHER INFORMATION
Item 1. Legal proceedings..................................................... 19
Item 2. Changes in securities................................................. 19
Item 3. Defaults upon senior securities....................................... 19
Item 4. Submission of matters to a vote of securities holders................. 19
Item 5. Other information..................................................... 19
Item 6. Exhibits and reports on Form 8-K...................................... 19
</TABLE>
<PAGE> 3
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
April 2, 1999 July 3, 1998
(Unaudited)
------------- ------------
<S> <C> <C>
ASSETS
Current:
Cash $ 12,225 $ 29,363
Accounts receivable, net of allowance for
doubtful accounts of $2,117 and $1,326 respectively 82,738 88,778
Inventories 81,102 57,929
Deferred taxes 5,388 5,565
Prepaid and other current assets 7,621 9,642
--------- ---------
Total current assets 189,074 191,277
Property, plant and equipment, net 127,451 128,234
Intangible assets, net of accumulated amortization
of $27,336 and $15,030 respectively 199,096 193,849
Deferred charges, net of accumulated amortization
of $3,820 and $1,768 respectively 20,333 22,791
Deferred income taxes 7,065 7,065
Other assets 2,270 3,616
--------- ---------
$ 545,289 $ 546,832
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 4,476 $ 5,147
Line of credit 361 307
Accounts payable - trade 23,635 32,986
Accrued payroll and benefits 13,917 12,074
Accrued interest 2,492 8,884
Accrued liabilities - other 28,679 44,539
Income taxes payable 718 2,443
--------- ---------
Total current liabilities 74,278 106,380
Long-term debt 416,946 396,451
Other liabilities 7,928 5,328
--------- ---------
Total liabilities 499,152 508,159
--------- ---------
Stockholder's equity:
Common stock -- --
Additional paid-in capital 41,075 41,075
Cumulative currency translation adjustment (428) 5
Retained earnings 5,490 (2,407)
--------- ---------
Total stockholder's equity 46,137 38,673
--------- ---------
$ 545,289 $ 546,832
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 2, March 27, April 2, March 27,
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 129,754 $ 68,388 $ 331,827 $ 144,010
Cost of goods sold 92,074 51,236 242,178 106,460
--------- -------- --------- ---------
Gross profit 37,680 17,152 89,649 37,550
Operating expenses:
Selling, general and administrative 16,407 9,714 44,925 17,969
--------- -------- --------- ---------
Operating profit 21,273 7,438 44,724 19,581
Other income (expenses) (164) (276) (661) (435)
Interest expense (9,860) (4,526) (28,866) (8,862)
--------- -------- --------- ---------
Earnings before income taxes 11,249 2,636 15,197 10,284
Provision for income taxes 5,400 1,385 7,300 4,292
--------- -------- --------- ---------
NET INCOME $ 5,849 $ 1,251 $ 7,897 $ 5,992
========= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 2, 1999 March 27, 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,897 $ 5,992
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 24,966 8,167
Deferred income taxes 177 674
Changes in operating assets and liabilities:
Accounts receivable 5,948 (7,010)
Inventories (23,208) (1,683)
Prepaid expenses and other current assets 2,013 (2,510)
Income taxes (1,729) 1,815
Accounts payable (9,379) 3,117
Accrued interest (6,400) 4,163
Accrued expenses and other liabilities (11,429) 5,286
-------- ---------
NET CASH PROVIDED BY ( USED IN) OPERATING ACTIVITIES (11,144) 18,011
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,976) (3,184)
Acquisition costs (17,571) (309,668)
Purchase of treasury stock -- (377)
Deposits and other assets 1,746 (39)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (25,801) (313,268)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments/borrowings of long-term debt 19,754 314,996
Repayments/borrowings under line of credit 53 209
Debt financing costs -- (17,978)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,807 297,227
-------- ---------
NET INCREASE (DECREASE) IN CASH (17,138) 1,970
CASH, BEGINNING OF PERIOD 29,363 11,095
-------- ---------
CASH, END OF PERIOD $ 12,225 $ 13,065
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 28,191 $ 4,308
-------- ---------
Income taxes 7,119 3,268
-------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
INVESTING ACTIVITIES:
The Company purchased certain assets and assumed certain liabilities
of Tri-Seal International, Inc., effective January 26, 1999. The
acquisition was recorded as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 10,758
Goodwill 12,955
Cash paid (20,303)
--------
Liabilities assumed $ 3,410
--------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
Tekni-Plex is a global, diversified manufacturer of packaging, products, and
materials for the healthcare, consumer, and food packaging industries. The
Company has built a leadership position in its core markets, and focuses on
vertically integrated production of highly specialized products. The Company's
operations are aligned under four primary business groups: Healthcare Packaging,
Products, and Materials; Consumer Packaging and Products; Food Packaging; and
Specialty Resins and Compounds.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. For further information please refer to the
audited financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended July 3, 1998.
NOTE 2 - INVENTORIES
Inventories as of April 2, 1999 and July 3, 1998 are summarized as follows:
<TABLE>
<CAPTION>
April 2, 1999 July 3, 1998
------------- ------------
<S> <C> <C>
Raw materials $ 28,465 $ 24,427
Work-in-process 5,024 5,136
Finished goods 47,613 28,366
-------- --------
$ 81,102 $ 57,929
-------- --------
</TABLE>
7
<PAGE> 8
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 3 - LONG-TERM DEBT
Long-term debt as of April 2, 1999 and July 3, 1998 consists of the following:
<TABLE>
<CAPTION>
April 2, July 3,
1999 1998
-------- --------
<S> <C> <C>
Senior Subordinated Notes issued March 3, 1998 at 9 -1/4% due March 1,
2008 $200,000 $200,000
Senior Subordinated Notes issued April 4, 1997 at 11 -1/4% due April 1,
2007 75,000 75,000
Senior Debt:
Revolving line of credit 26,000 --
Term notes 111,850 114,213
PS&T term notes at 11 -1/4%, Senior Secured Notes due December 1, 2003
-- 1,550
Loan Promissory Note collateralized by a building in Newark, NJ
-- 211
7% Subordinated Notes issued in connection with an acquisition by
PureTec, due July 1, 2005 -- 662
Foreign Term Loans payable in Belgium Francs 947 1,265
Foreign Term Loans payable in Italian Lira 1,635 2,032
Foreign Term Loans and capitalized lease obligations, payable in British
Pounds 5,635 6,055
Foreign Line of Credit payable in British Pounds 285 492
PurePlast Line of Credit payable in Canadian Dollars 361 307
PurePlast Term Loan payable in Canadian Dollars 30 67
Tri-Seal 6.9% Loan due Jan.1, 2002 24 --
Other, primarily equipment financing 16 51
-------- --------
421,783 401,905
Less: Current maturities 4,837 5,454
-------- --------
$416,946 $396,451
-------- --------
</TABLE>
On November 30, 1998, the Company redeemed its 7% Subordinated Notes, due July
1, 2005. On December 1, 1998, the Company redeemed its 11 1/4% Senior Secured
Notes, due December 1, 2003. On February 1, 1999, a Loan Promissory Note,
collateralized by a building in Newark, NJ, matured and was redeemed.
8
<PAGE> 9
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 4 - CONTINGENCIES
(a) In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $2,009 (75,247 Belgian
Francs) for the disallowance of certain foreign tax credits and
investment losses claimed for the years ended July 31, 1990 and 1991.
Additionally, in January 1995, the subsidiary received an income tax
assessment of approximately $857 (32,083 Belgian francs) for the year
ended July 31, 1992. By Belgian law, these assessments are capped at the
values above and do not continue to accrue additional penalties or
interest. Although the future outcome of these matters is uncertain, the
Company believes that its tax position was appropriate and that the
assessments are without merit. Therefore, the Company has appealed the
assessments. Based on advice of legal counsel in Belgium, the Company
believes that the assessment appeals will be accepted by the tax
authorities in Belgium, although there can be no assurance whether or
when such appeals will be accepted.
(b) The Company is a party to various other legal proceedings arising in
the normal conduct of business. Management believes that the final
outcome of these proceedings will not have a material adverse effect on
the Company's financial position.
9
<PAGE> 10
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 5 - SEGMENT INFORMATION
The Company operates in four industry segments: healthcare packaging, products,
and materials; consumer packaging and products; food packaging; and specialty
resins and compounds. The healthcare packaging, products, and materials segment
principally produces pharmaceutical packaging, medical tubing and medical device
materials. The consumer packaging and products segment principally produces
precision tubing and gaskets, and garden and irrigation hose products. The food
packaging segment produces foamed polystyrene packaging products for the
poultry, meat and egg industries. The specialty resins and compounds segment
produces specialty PVC resins. The healthcare packaging, products, and materials
and consumer packaging and products segments have operations in the United
States, Europe and Canada. Prior to 1998, the Company operated principally in
the food packaging segment.
Financial information concerning the Company's business segments and the
geographic areas in which it operated for the three and nine month periods ended
April 2, 1999 is as follows:
<TABLE>
<CAPTION>
Net Sales: Three months Nine months
------------ -----------
<S> <C> <C>
Healthcare Packaging, Products, and Materials:
Domestic $ 33,272 $ 89,280
Foreign 2,811 7,735
Consumer Packaging and Products:
Domestic 42,071 83,837
Foreign 9,353 24,428
Food packaging 26,784 74,938
Specialty Resins and Compounds 15,463 51,609
Corporate & eliminations -- --
--------- ---------
Total Net Sales $ 129,754 $ 331,827
--------- ---------
Operating Income:
Healthcare Packaging, Products, and Materials:
Domestic $ 7,177 $ 17,171
Foreign 409 796
Consumer Packaging and Products:
Domestic 8,003 12,723
Foreign 2,492 6,227
Food packaging 7,295 14,235
Specialty Resins and Compounds 1,376 5,653
Corporate & eliminations (5,479) (12,081)
--------- ---------
Total Operating Income $ 21,273 $ 44,724
--------- ---------
</TABLE>
10
<PAGE> 11
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
<TABLE>
<CAPTION>> Three Months Nine Months
<S> <C> <C>
Depreciation and Amortization:
Healthcare Packaging, Products, and Materials:
Domestic $ 2,097 $ 5,093
Foreign 101 305
Consumer Packaging and Products:
Domestic 2,677 8,271
Foreign 337 1,215
Food packaging 2,313 5,960
Specialty Resins and Compounds 1,337 3,933
Corporate & eliminations 43 189
-------- -------
Total Depreciation and Amortization $ 8,905 $24,966
-------- -------
Capital Expenditures:
Healthcare Packaging, Products, and Materials:
Domestic $ 1,752 $ 2,789
Foreign 394 458
Consumer Packaging and Products:
Domestic 766 1,718
Foreign 729 1,188
Food packaging 925 2,980
Specialty Resins and Compounds 293 675
Corporate & eliminations 94 168
-------- -------
Total Capital Expenditures $ 4,953 $ 9,976
-------- -------
Identifiable Assets:
Healthcare Packaging, Products, and Materials:
Domestic $ 80,519
Foreign 12,857
Consumer Packaging and Products:
Domestic 182,868
Foreign 46,576
Food packaging 127,164
Specialty Resins and Compounds 85,667
Corporate & eliminations 9,638
--------
Total Identifiable Assets $545,289
--------
</TABLE>
11
<PAGE> 12
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Consolidated Statement of Earnings
(Unaudited)
For the three months ended April 2, 1999
<TABLE>
<CAPTION>
Non-
Total Issuer Guarantors Guarantors
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 129,754 $ 38,873 $78,717 $ 12,164
Cost of goods sold 92,074 28,020 55,888 8,166
--------- -------- ------- --------
Gross profit 37,680 10,853 22,829 3,998
Operating expenses
Selling, General and administrative 16,407 7,500 7,810 1,097
--------- -------- ------- --------
Operating profit 21,273 3,353 15,019 2,901
Other income (expenses) (164) (249) 449 (364)
Interest expense (9,860) (10,468) 670 (62)
--------- -------- ------- --------
Earnings before income taxes 11,249 (7,364) 16,138 2,475
Provision for income taxes 5,400 (3,100) 7,300 1,200
--------- -------- ------- --------
Net income $ 5,849 $ (4,264) $ 8,838 $ 1,275
========= ======== ======= ========
</TABLE>
12
<PAGE> 13
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the nine months ended April 2, 1999
<TABLE>
<CAPTION>
Non-
Total Issuer Guarantors Guarantors
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 331,827 $ 110,269 $189,395 $ 32,163
Cost of goods sold 242,178 80,462 139,755 21,961
--------- --------- -------- --------
Gross profit 89,649 29,807 49,640 10,202
Operating expenses
Selling, General and administrative 44,925 22,475 19,271 3,179
--------- --------- -------- --------
Operating profit 44,724 7,332 30,369 7,023
Other income (expenses) (661) (344) 855 (1,172)
Interest expense (28,866) (29,225) 542 (183)
--------- --------- -------- --------
Earnings before income taxes 15,197 (22,237) 31,766 5,668
Provision for income taxes 7,300 (10,700) 15,300 2,700
--------- --------- -------- --------
Net income $ 7,897 $ (11,537) $ 16,466 $ 2,968
========= ========= ======== ========
</TABLE>
13
<PAGE> 14
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Condensed Consolidated Balance Sheet
(Unaudited)
April 2, 1999
<TABLE>
<CAPTION>
Non-
Total Eliminations Issuer Guarantors Guarantors
--------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Current assets $ 189,074 $ -- $ 40,967 $ 118,356 $ 29,751
Property, plant and equipment, net 127,451 -- 39,720 71,955 15,776
Intangible assets 199,096 -- 44,656 153,012 1,428
Investment in subsidiaries -- (351,198) 351,198 -- --
Deferred charges 20,333 -- 20,031 -- 302
Other assets 9,335 (102,059) 109,598 (10,380) 12,176
--------- --------- -------- --------- --------
Total assets $ 545,289 $(453,257) $606,170 $ 332,943 $ 59,433
========= ========= ======== ========= ========
Current liabilities $ 74,278 $ -- $ 24,209 $ 37,303 $ 12,766
Long-tern debt 416,946 -- 409,700 17 7,229
Other long-term liabilities 7,928 (102,059) 120,439 (30,689) 20,237
--------- --------- -------- --------- --------
Total liabilities 499,152 (102,059) 554,348 6,631 40,232
--------- --------- -------- --------- --------
Additional paid-in capital 41,075 (312,408) 41,076 296,766 15,641
Retained earnings 5,490 (38,790) 10,746 29,546 3,988
Cumulative currency translation adjustment (428) -- -- -- (428)
--------- --------- -------- --------- --------
Total equity 46,137 (351,198) 51,822 326,312 19,201
--------- --------- -------- --------- --------
Total liabilities and equity $ 545,289 $(453,257) $606,170 $ 332,943 $ 59,433
========= ========= ======== ========= ========
</TABLE>
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General - On March 3, 1998, Tekni-Plex acquired PureTec Corporation, whose sales
at the time were about twice those of Tekni-Plex. As a result, the third quarter
of fiscal 1998 includes approximately one month's results for the combined
operations, versus a full quarter's combined results in fiscal 1999. In
addition, significant sales in the Consumer Packaging and Products segment are
attributable to the garden hose product line that was acquired with PureTec. The
garden hose business is highly seasonal with approximately 75% of sales
occurring in the spring and early summer months. This seasonality has an impact
on the Company's financial results from quarter to quarter. These two factors
account for most of the year-over-year differences in the comparisons that
follow.
THIRD QUARTER OF FISCAL 1999 COMPARED WITH THE THIRD QUARTER OF FISCAL 1998
Net Sales increased to $129.8 million for the three months ended April 2, 1999
from $68.4 million for the three months ended March 27, 1998. This represents an
increase of $61.4 million or 89.7%. The increased sales are primarily attributed
to the acquisition of PureTec.
Cost of Goods Sold increased to $92.1 million for the three months ended April
2, 1999 from $51.2 million for the three months ended March 27, 1998, primarily
due to the acquisition of PureTec. Expressed as a percentage of net sales, cost
of goods sold decreased to 71.0% for the three months ended April 2, 1999 from
74.9% for the three months ended March 27, 1998. The decrease in cost of goods
sold as a percentage of net sales was due primarily to the Company's progress in
reorganizing and improving its acquired operations.
Gross Profit, as a result, increased to $37.7 million or 29.0% of net sales for
the three months ended April 2, 1999, from $17.2 million or 25.1% of net sales
for the three months ended March 27, 1998.
Selling, general and administrative expenses increased to $16.4 million or 12.6%
of net sales for the three months ended April 2, 1999 from $9.7 million or 14.2%
of net sales for the three months ended March 27, 1998. Selling, general and
administrative expenses increased primarily as a result of the acquisition of
PureTec. However, these expenses decreased as a percentage of net sales due
primarily to the reorganization of acquired operations, partially offset by
higher amortization of goodwill resulting from the acquisition of PureTec.
Operating profit, as a result, increased to $21.3 million or 16.4% of net sales
for the three months ended April 2, 1999, from $7.4 million or 10.9% for the
three months ended March 27, 1998.
Interest expense increased to $9.9 million or 7.6% of net sales for the three
months ended April 2, 1999, from $4.5 million or 6.6% of net sales for the same
period in the prior year. This is due to the issuance of bonds and notes to
acquire PureTec.
Provision for income taxes increased to $5.4 million or 4.2% of net sales for
the three months ended April 2, 1999, from $1.4 million or 2.0% for the same
period in the prior year. The Company's effective tax rate was 48.0% for the
three months ended April 2, 1999 compared to 52.5% for the same period in the
prior year. The decrease in effective tax rate is due primarily to the impact of
non-deductible goodwill in the prior year.
Net income increased to $5.8 million or 4.5% of net sales for the three months
ended April 2, 1999, from $1.3 million or 1.8% of net sales for the same period
in the prior year, due primarily to the impact of acquiring PureTec.
15
<PAGE> 16
FIRST NINE MONTHS OF FISCAL 1999 COMPARED WITH THE FIRST NINE MONTHS OF FISCAL
1998
Net Sales increased to $331.8 million for the nine months ended April 2, 1999
from $144.0 million for the nine months ended March 27, 1998. This represents an
increase of $187.8 million or 130.4%. The increased sales are primarily
attributed to the acquisition of PureTec.
Cost of Goods Sold increased to $242.2 million for the nine months ended April
2, 1999 from $106.5 million for the nine months ended March 27, 1998, primarily
due to the acquisition of PureTec. Expressed as a percentage of net sales, cost
of goods sold decreased to 73.0% for the nine months ended April 2, 1999 from
73.9% for the nine months ended March 27, 1998. The decrease in cost of goods
sold as a percentage of net sales was due primarily to the Company's progress in
reorganizing and improving its acquired operations, partially offset by the
different sales mix associated with the purchase of PureTec.
Gross Profit, as a result, increased to $89.6 million or 27.0% of net sales for
the nine months ended April 2, 1999, from $37.6 million or 26.1% of net sales
for the nine months ended March 27, 1998.
Selling, general and administrative expenses increased to $44.9 million or 13.5%
of net sales for the nine months ended April 2, 1999 from $18.0 million or 12.5%
of net sales for the nine months ended March 27, 1998. Selling, general and
administrative expenses increased as a percentage of net sales due primarily to
higher amortization of goodwill resulting from the acquisition of PureTec.
Operating profit, as a result, increased to $44.7 million or 13.5% of net sales
for the nine months ended April 2, 1999, from $19.6 million or 13.6% for the
nine months ended March 27, 1998.
Interest expense increased to $28.9 million or 8.7% of net sales for the nine
months ended April 2, 1999, from $8.9 million or 6.2% of net sales for the same
period in the prior year. This is due to the issuance of bonds and notes to
acquire PureTec.
Provision for income taxes increased to $7.3 million or 2.2% of net sales for
the nine months ended April 2, 1999, from $4.3 million or 3.0% for the same
period in the prior year. The Company's effective tax rate was 48.0% for the
nine months ended April 2, 1999 compared to 41.7% for the same period in the
prior year. The increase in effective tax rate between periods is due primarily
to non-deductible amortization and the depletion of tax carryover losses and
credits from prior acquisitions.
Net income increased to $7.9 million or 2.4% of net sales for the nine months
ended April 2, 1999, from $6.0 million or 4.2% of net sales for the same period
in the prior year, due primarily to the impact of acquiring PureTec.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended April 2, 1999, net cash used in operating activities
was $11.1 million. This compares to $18.0 million provided by operating
activities during the same period in the prior year. This year-over-year
difference is caused primarily by factors related to the acquisition of PureTec.
The largest such factor is the increase in inventories, a significant portion of
which corresponds to the needs of the seasonal garden hose business. This
business requires a build up of inventory during the winter months in order to
meet customer demand in the spring and summer. Other factors include a reduction
of trade account payables, non-recurring acquisition restructuring charges, and
a change in the timing of interest payments on bonds from the prior year, which
caused a significant difference in accrued interest. These uses of cash were
partially offset by increased depreciation and amortization of goodwill.
16
<PAGE> 17
Working capital at April 2, 1999 was $114.8 million compared to $84.9 million at
July 3, 1998. The increase in working capital was due primarily to the decrease
in accounts payable, accrued expenses, and increased inventory, partially offset
by normal seasonal decreases in accounts receivable.
During the fiscal third quarter of 1999, the Company borrowed $26 million under
the $90 million revolving credit line of the Existing Credit Facility. The
proceeds were used primarily to fund the purchase of assets from Tri-Seal
International, Inc., and for the seasonal inventory requirements mentioned
above. At July 3, 1998, there was no outstanding balance under this revolving
credit line.
The Company's capital expenditures for the nine months ended April 2, 1999 and
March 27, 1998 were $10.0 million, and $3.2 million respectively. Management
expects that annual capital expenditures will increase from historical levels
during the next few years as the Company makes improvements in the recently
acquired operations.
Apart from acquisitions, the Company's principal uses of cash for the next
several years will be debt service, capital expenditures and working capital
requirements. Management believes that cash generated from operations plus funds
from the credit facility will be sufficient to meet the Company's expected debt
service requirements, planned capital expenditures, and operating needs.
However, there can be no assurance that sufficient funds will be available from
operations or borrowings under the credit facility to meet the Company's cash
needs to the extent management anticipates. The credit facility will provide the
Company with the increased flexibility to make capital expenditures and
acquisitions that management believes will provide an attractive return on
investment. To the extent the Company pursues future acquisitions, the Company
may be required to obtain additional financing. There can be no assurance that
it will be able to obtain such financing in amounts and on terms acceptable to
it.
DEBT REDEMPTIONS
On November 30, 1998, the Company redeemed the remaining $194 thousand of its 7%
Subordinated Notes, due July 1, 2005. On December 1, 1998, the Company redeemed
the remaining $1.55 million its 11 1/4% Senior Secured Notes, due December 1,
2003. On February 1, 1999, a $141 thousand Loan Promissory Note, collateralized
by a building in Newark, NJ, matured and was redeemed.
SUBSEQUENT EVENTS
On April 23, 1998, a wholly-owned subsidiary of Tekni-Plex acquired
substantially all of the assets of High Voltage Engineering Corporation's Natvar
division for approximately $26 million in cash. The Natvar operations are
engaged in the production of medical tubing and will be merged with Tekni-Plex's
Healthcare Packaging, Products, and Materials segment.
YEAR 2000 ISSUES
Definition: "Year 2000 issues" refer to possible events resulting directly or
indirectly from the inability of digital computer equipment or software to
accurately and without interruption handle dates both before and after January
1, 2000 and to process the year 2000 as a leap year.
Assessment: Tekni-Plex continues to evaluate the potential impact and
remediation costs of Year 2000 issues. Although this assessment is not yet
complete, the Company believes that, due to the nature of its manufacturing
processes and procedures, the Year 2000 issues will not have a material impact
on its business.
17
<PAGE> 18
Manufacturing Infrastructure: The Company's basic operations involve certain
plastics converting processes. These processes involve primarily plastic
extrusion and fabrication equipment of various forms. For the most part, this
equipment is controlled either manually or by means of mechanical and analog
devices. For equipment that does include microprocessors, the applications being
controlled are mechanical and not date-sensitive, and can be controlled manually
if necessary. In its investigations thus far, the Company has identified no
significant manufacturing processes that will be disrupted by the Year 2000
issues.
Support Systems: The Company's assessment does indicate that there may be
support systems, primarily the accounting systems, that will be affected by the
Year 2000 issues. The Company believes that it has identified most of the major
computers, software applications, and other equipment utilized by such support
systems that must be modified, upgraded, or replaced to minimize the possibility
of any disruption of business. The Company has commenced the process of
modifying, upgrading, and replacing major systems that may be adversely
affected, and expects to complete this process before the occurrence of any
significant disruption of business. However, to a large extent, this includes
replacing systems of acquired businesses as part of the Company's normal
integration strategy. As a result, additional costs that will be incurred solely
due to Year 2000 issues are difficult to isolate. Nonetheless, the Company
estimates such additional costs will be less than $100,000 in the aggregate. In
addition, the Company does routine data backup of critical systems during the
normal course of business. This backup provides the ability to recover data in
the event of a catastrophic computer failure. It is the Company's belief that
its customers and suppliers, for the most part, have similar data safeguards in
place.
Suppliers: The Company has contacted its suppliers to identify any potential
disruption in the supply of raw materials. As a result, the Company believes
that the supply of basic chemicals and other raw materials used in its
vertically integrated manufacturing processes is unlikely to be significantly
disrupted. In addition, the Company, in the normal course of business, maintains
adequate inventories of such raw materials to protect against short-term
delivery interruptions.
Customers: Tekni-Plex is committed to providing uninterrupted service to its
customers. In a few cases, the Company has direct interfaces with the computer
systems of its customers, primarily for "vendor managed inventory" applications.
The Company expects to resolve any significant Year 2000 issues with such
customers before the occurrence of any business disruptions, although the
Company has limited or no control over the actions of these customers. The
Company expects to maintain adequate finished goods inventories to protect
customers against the possibility of temporary computer interface interruptions,
if any.
Conclusion: Tekni-Plex believes that it is taking adequate steps to address all
significant internal Year 2000 issues that could adversely affect its business
operations. Of course, it is not possible to identify, with complete certainty,
all potential Year 2000 issues that may in some way affect the Company, its
suppliers, or its customers. The Company expects that any disputes arising as
the result of such unidentified Year 2000 issues will be resolved in the normal
course of business.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
18
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to certain litigation in the ordinary course of
business, none of which the Company believes is likely to have a
material adverse effect on its consolidated financial position or
results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEKNI-PLEX, INC.
May 12, 1999
By: /s/ F. Patrick Smith
----------------------------------------------
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
By: /s/ Kenneth W.R. Baker
----------------------------------------------
Kenneth W.R. Baker
President and Chief Operating Officer
and Principal Accounting and Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEKNI-PLEX,
INC. STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED APRIL 2, 1999 AND BALANCE
SHEET AS AT APRIL 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> APR-02-1999
<CASH> 12,225
<SECURITIES> 0
<RECEIVABLES> 84,855
<ALLOWANCES> 2,117
<INVENTORY> 81,102
<CURRENT-ASSETS> 189,074
<PP&E> 157,186
<DEPRECIATION> 29,735
<TOTAL-ASSETS> 545,289
<CURRENT-LIABILITIES> 74,278
<BONDS> 275,000
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 545,289
<SALES> 331,827
<TOTAL-REVENUES> 331,827
<CGS> 242,178
<TOTAL-COSTS> 242,178
<OTHER-EXPENSES> 44,925
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,866
<INCOME-PRETAX> 15,197
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 7,897
<DISCONTINUED> 0
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<NET-INCOME> 7,897
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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