<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 January 1, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from_________________to_________________
Commission file number 333-28157
TEKNI-PLEX, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3286312
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
201 Industrial Parkway (908) 722-4800
Somerville, New Jersey 08876 (Registrant's telephone number)
(Address of principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
<PAGE> 2
TEKNI-PLEX, INC.
<TABLE>
<CAPTION>
Page #
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of January 1, 1999
and July 3, 1998 ....................................................................................3
Consolidated Statement of Earnings for the six months and three
months ended January 1, 1999 and December 26, 1997...................................................4
Consolidated Statement of Cash Flows for the six months
ended January 1, 1999 and December 26, 1997...........................................................5
Notes to Consolidated Financial Statements...........................................................6-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................14-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................17
PART II. OTHER INFORMATION
Item 1. Legal proceedings....................................................................18
Item 2. Changes in securities................................................................18
Item 3. Defaults upon senior securities......................................................18
Item 4. Submission of matters to a vote of securities holders................................18
Item 5. Other information....................................................................18
Item 6. Exhibits and reports on Form 8-K............................... .....................18
</TABLE>
<PAGE> 3
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
JANUARY 1, 1999 July 3, 1998
(UNAUDITED)
--------- ---------
<S> <C> <C>
ASSETS
Current:
Cash $ 27,955 $ 29,363
Accounts receivable, net of allowance for
doubtful accounts of $1,242 and $1,326 respectively 53,790 88,778
Inventories 79,586 57,929
Deferred taxes 5,565 5,565
Prepaid and other current assets 10,257 9,642
--------- ---------
Total current assets 177,153 191,277
Property, plant and equipment, net 125,053 128,234
Intangible assets, net of accumulated amortization
of $23,036 and $15,030 respectively 185,460 193,849
Deferred charges, net of accumulated amortization
of $2,749 and $1,768 respectively 21,564 22,791
Deferred income taxes 7,065 7,065
Other assets 1,320 3,616
--------- ---------
$ 517,615 $ 546,832
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 4,729 $ 5,147
Line of credit 357 307
Accounts payable - trade 27,272 32,986
Accrued payroll and benefits 9,723 12,074
Accrued interest 9,212 8,884
Accrued liabilities - other 24,084 44,539
Income taxes payable -- 2,443
--------- ---------
Total current liabilities 75,377 106,380
Long-term debt 392,426 396,451
Other liabilities 8,015 5,328
--------- ---------
Total liabilities 475,818 508,159
--------- ---------
Stockholder's equity:
Common stock -- --
Additional paid-in capital 41,075 41,075
Cumulative currency translation adjustment 1,081 5
Retained earnings (359) (2,407)
--------- ---------
Total stockholder's equity 41,797 38,673
--------- ---------
$ 517,615 $ 546,832
========= =========
</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 Six months ended
January 1, December 26, January 1, December 26,
1999 1997 1999 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 94,004 $ 37,831 $ 202,073 $ 75,622
Cost of goods sold 69,126 27,367 150,104 55,224
--------- --------- --------- ---------
Gross profit 24,878 10,464 51,969 20,398
Operating expenses:
Selling, general and administrative 14,558 4,207 28,518 8,255
--------- --------- --------- ---------
Operating profit 10,320 6,257 23,451 12,143
Other income (expenses) (122) (87) (497) (159)
Interest expense (9,399) (2,227) (19,006) (4,336)
--------- --------- --------- ---------
Earnings before income taxes 799 3,943 3,948 7,648
Provision for income taxes 294 1,507 1,900 2,907
--------- --------- --------- ---------
Net income $ 505 $ 2,436 $ 2,048 $ 4,741
========= ========= ========= =========
</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>
Six months ended
January 1, 1999 December 26, 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,048 $ 4,741
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 16,061 4,793
Deferred income taxes -- 40
Changes in operating assets and liabilities:
Accounts receivable 34,988 (1,454)
Inventories (21,657) (225)
Prepaid expenses and other current assets (615) 147
Income taxes (2,443) 2,458
Accounts payable (5,714) (1,206)
Accrued interest 328 81
Accrued expenses and other liabilities (17,885) (4,409)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,111 4,966
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,023) (1,939)
Acquisition costs (88) (2,292)
Deposits and other assets 1,909 (2,778)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (3,202) (7,009)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments/borrowings of long-term debt (4,443) (30)
Repayments/borrowings under line of credit 50 213
Foreign currency translation 1,076 --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,317) 183
-------- --------
NET INCREASE IN CASH (1,408) (1,860)
CASH, BEGINNING OF PERIOD 29,363 11,095
-------- --------
CASH, END OF PERIOD $ 27,955 $ 9,235
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 18,580 $ 4,236
-------- --------
Income taxes 5,822 409
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
Tekni-Plex is a global, diversified manufacturer of packaging, products, and
materials for the healthcare, consumer, and food packaging industries. The
Company has built a leadership position in its core markets, and focuses on
vertically integrated production of highly specialized products. The Company's
operations are aligned under four primary business groups: Healthcare Packaging,
Products, and Materials; Consumer Packaging and Products; Food Packaging; and
Specialty Resins and Compounds. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. For further
information please refer to the audited financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
July 3, 1998.
NOTE 2 - INVENTORIES
Inventories as of January 1, 1999 and July 3, 1998 are summarized as follows:
<TABLE>
<CAPTION>
January 1, 1999 July 3, 1998
-------------------- ------------------
<S> <C> <C>
Raw materials $ 26,057 $ 24,427
Work-in-process 5,305 5,136
Finished goods 48,224 28,366
-------------------- ------------------
$ 79,586 $ 57,929
-------------------- ------------------
</TABLE>
6
<PAGE> 7
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 3 - LONG-TERM DEBT
Long-term debt as of January 1, 1999 and July 3, 1998 consists of the following:
<TABLE>
<CAPTION>
January 1, 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 -- --
Term notes 112,638 114,213
PS&T term notes at 11-1/4%, Senior Secured Notes
due December 1, 2003 -- 1,550
Loan Promissory Note collateralized by a building
in Newark, NJ 141 211
7% Subordinated Notes issued in connection
with an acquisition by PureTec, due July 1, 2005 -- 662
Foreign Term Loans payable in Belgium Francs 1,085 1,265
Foreign Term Loans payable in Italian Lira 1,978 2,032
Foreign Term Loans and capitalized lease
obligations, payable in British Pounds 5,942 6,055
Foreign Line of Credit payable in British Pounds 292 492
PurePlast Line of Credit payable in Canadian
Dollars 357 307
PurePlast Term Loan payable in Canadian Dollars 41 67
Other, primarily equipment financing 38 51
-------- --------
397,512 401,905
Less: Current maturities 5,086 5,454
-------- --------
$392,426 $396,451
-------- --------
</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.
7
<PAGE> 8
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 4 - CONTINGENCIES
(a) In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $2,032 (75,247 Belgian
Francs) for the disallowance of certain foreign tax credits and
investment losses claimed for the years ended July 31, 1990 and 1991.
Additionally, in January 1995, the subsidiary received an income tax
assessment of approximately $866 (32,083 Belgian francs) for the year
ended July 31, 1992. By Belgian law, these assessments are capped at the
values above and do not continue to accrue additional penalties or
interest. Although the future outcome of these matters is uncertain, the
Company believes that its tax position was appropriate and that the
assessments are without merit. Therefore, the Company has appealed the
assessments. Based on advice of legal counsel in Belgium, the Company
believes that the assessment appeals will be accepted by the tax
authorities in Belgium, although there can be no assurance whether or
when such appeals will be accepted.
(b) The Company is a party to various other legal proceedings arising in
the normal conduct of business. Management believes that the final
outcome of these proceedings will not have a material adverse effect on
the Company's financial position.
8
<PAGE> 9
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 5 - SEGMENT INFORMATION
The Company operates in four industry segments: healthcare packaging, products,
and materials; consumer packaging and products; food packaging; and specialty
resins and compounds. The healthcare packaging, products, and materials segment
principally produces pharmaceutical packaging, medical tubing and medical device
materials. The consumer packaging and products segment principally produces
precision tubing and gaskets, and garden and irrigation hose products. The food
packaging segment produces foamed polystyrene packaging products for the
poultry, meat and egg industries. The specialty resins and compounds segment
produces specialty PVC resins. The healthcare packaging, products, and materials
and consumer packaging and products segments have operations in the United
States, Europe and Canada. Prior to 1998, the Company operated principally in
the food packaging segment.
Financial information concerning the Company's business segments and the
geographic areas in which it operated for the three and six month periods ended
January 1, 1999 is as follows:
<TABLE>
<CAPTION>
Net Sales: Three months Six months
<S> <C> <C>
Healthcare Packaging, Products, and Materials:
Domestic $ 25,873 $ 56,008
Foreign 2,793 4,924
Consumer Packaging and Products:
Domestic 17,715 41,766
Foreign 6,678 15,075
Food packaging 24,422 48,154
Specialty Resins and Compounds 16,523 36,146
Corporate & eliminations -- --
--------- ---------
Total Net Sales $ 94,004 $ 202,073
--------- ---------
Operating Income:
Healthcare Packaging, Products, and Materials:
Domestic $ 4,768 $ 9,994
Foreign 332 387
Consumer Packaging and Products:
Domestic 961 4,720
Foreign 1,307 3,735
Food packaging 4,149 6,940
Specialty Resins and Compounds 2,367 4,277
Corporate & eliminations (3,564) (6,602)
--------- ---------
Total Operating Income $ 10,320 $ 23,451
--------- ---------
</TABLE>
9
<PAGE> 10
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
<TABLE>
<S> <C> <C>
Depreciation and Amortization:
Healthcare Packaging, Products, and Materials:
Domestic $ 1,712 $ 2,996
Foreign 78 204
Consumer Packaging and Products:
Domestic 3,938 5,594
Foreign 500 878
Food packaging 875 3,647
Specialty Resins and Compounds 1,261 2,596
Corporate & eliminations (202) 146
--------- ---------
Total Depreciation and Amortization $ 8,162 $ 16,061
--------- ---------
Capital Expenditures:
Healthcare Packaging, Products, and Materials:
Domestic $ 528 $ 1,037
Foreign -- 64
Consumer Packaging and Products:
Domestic 558 952
Foreign 256 459
Food packaging 1,465 2,055
Specialty Resins and Compounds 311 382
Corporate & eliminations 56 74
--------- ---------
Total Capital Expenditures $ 3,174 $ 5,023
--------- ---------
Identifiable Assets:
Healthcare Packaging, Products, and Materials:
Domestic $ 56,300
Foreign 12,732
Consumer Packaging and Products:
Domestic 168,996
Foreign 46,028
Food packaging 134,025
Specialty Resins and Compounds 89,822
Corporate & eliminations 9,712
---------
Total Identifiable Assets $ 517,615
---------
</TABLE>
10
<PAGE> 11
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Consolidated Statement of Earnings
(Unaudited)
For the three months ended January 1, 1999
<TABLE>
<CAPTION>
Non-
Total Issuer Guarantors Guarantors
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 94,004 $ 35,370 $ 49,163 $ 9,471
Cost of goods sold 69,126 25,293 37,185 6,648
-------- -------- -------- --------
Gross profit 24,878 10,077 11,978 2,823
Operating expenses
Selling, General and administrative 14,558 8,508 4,866 1,184
-------- -------- -------- --------
Operating profit 10,320 1,569 7,112 1,639
Other income (expenses) (122) (15) 81 (188)
Interest expense (9,399) (9,248) (76) (75)
-------- -------- -------- --------
Earnings before income taxes 799 (7,694) 7,117 1,376
Provision for income taxes 294 (4,010) 3,554 750
-------- -------- -------- --------
Net income $ 505 $ (3,684) $ 3,563 $ 626
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the six months ended January 1, 1999
<TABLE>
<CAPTION>
Non-
Total Issuer Guarantors Guarantors
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 202,073 $ 71,396 $ 110,678 $ 19,999
Cost of goods sold 150,104 52,442 83,867 13,795
--------- --------- --------- ---------
Gross profit 51,969 18,954 26,811 6,204
Operating expenses
Selling, General and administrative 28,518 14,975 11,461 2,082
--------- --------- --------- ---------
Operating profit 23,451 3,979 15,350 4,122
Other income (expenses) (497) (95) 406 (808)
Interest expense (19,006) (18,757) (128) (121)
--------- --------- --------- ---------
Earnings before income taxes 3,948 (14,873) 15,628 3,193
Provision for income taxes 1,900 (7,600) 8,000 1,500
--------- --------- --------- ---------
Net income $ 2,048 $ (7,273) $ 7,628 $ 1,693
========= ========= ========= =========
</TABLE>
12
<PAGE> 13
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
January 1, 1999
Non-
Total Eliminations Issuer Guarantors Guarantors
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current assets $ 177,153 $ (1,185) $ 48,815 $ 89,384 $ 40,139
Property, plant and equipment, net 125,053 -- 40,022 68,541 16,490
Intangible assets 185,460 -- 27,196 156,811 1,453
Investment in subsidiaries -- (342,819) 342,819 -- --
Deferred charges 21,564 -- 21,096 -- 468
Other assets 8,385 (98,485) 106,172 488 210
--------- --------- --------- --------- ---------
Total assets $ 517,615 $(442,489) $ 586,120 $ 315,224 $ 58,760
========= ========= ========= ========= =========
Current liabilities $ 75,377 $ (1,185) $ 24,507 $ 36,302 $ 15,753
Long-tern debt 392,426 -- 384,488 -- 7,938
Other long-term liabilities 8,015 (100,219) 131,152 (38,552) 15,634
--------- --------- --------- --------- ---------
Total liabilities 475,818 (101,404) 540,147 (2,250) 39,325
--------- --------- --------- --------- ---------
Additional paid-in capital 41,075 (312,408) 41,076 296,766 15,641
Retained earnings (359) (28,677) 4,897 20,708 2,713
Cumulative currency translation adjustment
1,081 -- -- -- 1,081
--------- --------- --------- --------- ---------
Total equity 41,797 (341,085) 45,973 317,474 19,435
--------- --------- --------- --------- ---------
Total liabilities and equity $ 517,615 $(442,489) $ 586,120 $ 315,224 $ 58,760
========= ========= ========= ========= =========
</TABLE>
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SECOND QUARTER OF FISCAL 1999 COMPARED WITH THE SECOND QUARTER OF FISCAL 1998
Net Sales increased to $94.0 million for the three months ended January 1, 1999
from $37.8 million for the three months ended December 26, 1997. This represents
an increase of $56.2 million or 148.5%. The increased sales are primarily
attributed to the acquisition of PureTec in March 1998.
Cost of Goods Sold increased to $69.1 million for the three months ended January
1, 1999 from $27.4 million for the three months ended December 26, 1997,
primarily due to the acquisition of PureTec. Expressed as a percentage of net
sales, cost of goods sold increased to 73.5% for the three months ended January
1, 1999 from 72.3% for the three months ended December 26, 1997. The increase in
cost of goods sold as a percentage of net sales was due primarily to the
different sales mix associated with the purchase of PureTec.
Gross Profit as a result, increased to $24.9 million or 26.5% of net sales for
the three months ended January 1, 1999, from $10.5 million or 27.7% of net sales
for the three months ended December 26, 1997.
Selling, general and administrative expenses increased to $14.6 million or 15.5%
of net sales for the three months ended January 1, 1999 from $4.2 million or
11.1% of net sales for the three months ended December 26, 1997. Selling,
general and administrative expenses increased as a percentage of net sales due
primarily to higher amortization of goodwill resulting from the acquisition of
PureTec.
Operating profit increased to $10.3 million or 11.0% of net sales for the three
months ended January 1, 1999, from $6.3 million or 16.5% for the three months
ended December 26, 1997, due primarily to the different sales mix associated
with the purchase of PureTec as stated above.
Interest expense increased to $9.4 million or 10.0% of net sales for the three
months ended January 1, 1999, from $2.2 million or 5.9% of net sales for the
same period in the prior year. This is due to the issuance of bonds and notes to
acquire PureTec.
Provision for income taxes decreased to $0.3 million or 0.3% of net sales for
the three months ended January 1, 1999, from $1.5 million or 4.0% for the same
period in the prior year. The Company's effective tax rate was 37% for the three
months ended January 1, 1999 compared to 38% for the same period in the prior
year. The decrease in effective tax rate between the first and second quarters
of fiscal 1999 was made to more accurately reflect the annualized rate of income
tax.
Net income decreased to $0.5 million or 0.5% of net sales for the three months
ended January 1, 1999, from $2.4 million or 6.4% of net sales for the same
period in the prior year, due primarily to the impact of acquiring PureTec, and
in particular, the garden hose product line. The garden hose business is highly
seasonal with approximately 75% of sales occurring in the spring and early
summer months. This seasonality tends to have an impact on the Company's
financial results from quarter to quarter, with the second fiscal quarter
historically being the least profitable.
14
<PAGE> 15
FIRST SIX MONTHS OF FISCAL 1999 COMPARED WITH THE FIRST SIX MONTHS OF FISCAL
1998
Net Sales increased to $202.1 million for the six months ended January 1, 1999
from $75.6 million for the six months ended December 26, 1997. This represents
an increase of $126.5 million or 167.2%. The increased sales are primarily
attributed to the acquisition of PureTec in March 1998.
Cost of Goods Sold increased to $150.1 million for the six months ended January
1, 1999 from $55.2 million for the six months ended December 26, 1997, primarily
due to the acquisition of PureTec. Expressed as a percentage of net sales, cost
of goods sold increased to 74.3% for the six months ended January 1, 1999 from
73.0% for the six months ended December 26, 1997. The increase in cost of goods
sold as a percentage of net sales was due primarily to the different sales mix
associated with the purchase of PureTec.
Gross Profit as a result, increased to $52.0 million or 25.7% of net sales for
the six months ended January 1, 1999, from $20.4 million or 27.0% of net sales
for the six months ended December 26, 1997.
Selling, general and administrative expenses increased to $28.5 million or 14.1%
of net sales for the six months ended January 1, 1999 from $8.3 million or 10.9%
of net sales for the six months ended December 26, 1997. Selling, general and
administrative expenses increased as a percentage of net sales due primarily to
higher amortization of goodwill resulting from the acquisition of PureTec.
Operating profit increased to $23.5 million or 11.6% of net sales for the six
months ended January 1, 1999, from $12.1 million or 16.1% for the six months
ended December 26, 1997, due primarily to the different sales mix associated
with the purchase of PureTec as stated above.
Interest expense increased to $19.0 million or 9.4% of net sales for the six
months ended January 1, 1999, from $4.3 million or 5.7% of net sales for the
same period in the prior year. This is due to the issuance of bonds and notes to
acquire PureTec.
Provision for income taxes decreased to $1.9 million or 0.9% of net sales for
the six months ended January 1, 1999, from $2.9 million or 3.8% for the same
period in the prior year. The Company's effective tax rate was 48% for the six
months ended January 1, 1999 compared to 38% for the same period in the prior
year. The increase in effective tax rate between periods is due primarily to
non-deductible amortization and the depletion of tax carryover losses and
credits from prior acquisitions.
Net income decreased to $2.0 million or 1.0% of net sales for the six months
ended January 1, 1999, from $4.7 million or 6.3% of net sales for the same
period in the prior year, due primarily to the impact of acquiring PureTec, and
in particular, the garden hose product line. The garden hose business is highly
seasonal with approximately 75% of sales occurring in the spring and early
summer months. This seasonality tends to have an impact on the Company's
financial results from quarter to quarter, with the second fiscal quarter
historically being the least profitable.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended January 1, 1999, net cash provided by operating
activities was $5.1 million compared to $5.0 million for the same period in the
prior year. Although this net change is small, the more significant changes in
various components of cash flow were due primarily to the acquisition of
PureTec.
Working capital at January 1, 1999 was $101.8 million compared to $84.9 million
at July 3, 1998. The increase in working capital was due primarily to the
decrease in accounts payable, accrued expenses, and increased inventory,
partially offset by normal seasonal decreases in accounts receivable.
As of January 1, 1999 and July 3, 1998, there was no outstanding balance under
the $90 million revolving credit line of the Existing Credit Facility.
The Company's capital expenditures for the six months ended January 1, 1999 and
December 26, 1997 were $5.0 million, and $1.9 million respectively. Management
expects that annual capital expenditures will increase from historical levels
during the next few years as the Company makes improvements in the recently
acquired operations.
Apart from acquisitions, the Company's principal uses of cash for the next
several years will be debt service, capital expenditures and working capital
requirements. Management believes that cash generated from operations plus funds
from the credit facility will be sufficient to meet the Company's expected debt
service requirements, planned capital expenditures, and operating needs.
However, there can be no assurance that sufficient funds will be available from
operations or borrowings under the credit facility to meet the Company's cash
needs to the extent management anticipates. The credit facility will provide the
Company with the increased flexibility to make capital expenditures and
acquisitions that management believes will provide an attractive return on
investment. To the extent the Company pursues future acquisitions, the Company
may be required to obtain additional financing. There can be no assurance that
it will be able to obtain such financing in amounts and on terms acceptable to
it.
DEBT REDEMPTIONS
On November 30, 1998, the Company redeemed the remaining $194 thousand of its 7%
Subordinated Notes, due July 1, 2005. On December 1, 1998, the Company redeemed
the remaining $1.55 million its 11 1/4% Senior Secured Notes, due December 1,
2003.
SUBSEQUENT EVENTS
On December 23, 1998, a wholly-owned subsidiary of Tekni-Plex entered into a
definitive agreement to acquire substantially all of the assets of Tri-Seal
International, Inc., a privately-owned company, in a cash transaction. The
transaction was completed on January 26, 1999, at net purchase price of $ 17.8
million. The agreement also called for Tekni-Plex to assume Tri-Seal's $2.4
million of debt. Tekni-Plex elected to retire this debt on January 26, 1999.
YEAR 2000 ISSUES
Definition: "Year 2000 issues" refer to possible events resulting directly or
indirectly from the inability of digital computer equipment or software to
accurately and without interruption handle dates both before and after January
1, 2000 and to process the year 2000 as a leap year.
16
<PAGE> 17
Assessment: Tekni-Plex continues to evaluate the potential impact and
remediation costs of Year 2000 issues. Although this assessment is not yet
complete, the Company believes that, due to the nature of its manufacturing
processes and procedures, the Year 2000 issues will not have a material impact
on its business.
Manufacturing Infrastructure: The Company's basic operations involve certain
plastics converting processes. These processes involve primarily plastic
extrusion and compounding equipment of various forms. For the most part, this
equipment is controlled either manually or by means of mechanical and analog
devices. For equipment that does include microprocessors, the applications being
controlled are mechanical and not date-sensitive, and can be controlled manually
if necessary. In its investigations thus far, the Company has identified no
significant manufacturing processes that would be disabled by a total loss of
digital computer components.
Support Systems: The Company's assessment does indicate that there may be
support systems, such as accounting systems, that may be affected by the Year
2000 issues. The Company believes that it has identified most of the major
computers, software applications, and other equipment utilized by such support
systems that must be modified, upgraded, or replaced to minimize the possibility
of any disruption of business. The Company has commenced the process of
modifying, upgrading, and replacing major systems that may be adversely
affected, and expects to complete this process before the occurrence of any
significant disruption of business. However, to a large extent, this includes
replacing systems of acquired businesses, which was previously planned as part
of the Company's normal integration strategy. Therefore, additional costs that
will be incurred solely due to Year 2000 issues are not expected to be
significant. In addition, the Company does routine data backup of critical
systems during the normal course of business. This backup provides the ability
to recover data in the event of a catastrophic computer failure. It is the
Company's belief that its customers and suppliers, for the most part, have
similar data safeguards in place.
Suppliers: The Company is in the process of contacting its suppliers to identify
any potential disruption in the supply of raw materials. The Company expects to
resolve any significant Year 2000 issues before the occurrence of any business
disruptions, although the Company has limited or no control over the actions of
these suppliers. However, the Company believes that the supply of basic
chemicals and other raw materials used in its vertically integrated
manufacturing processes is unlikely to be significantly disrupted. In addition,
the Company, in the normal course of business, maintains adequate inventories of
such raw materials to protect against short-term delivery interruptions.
Customers: Tekni-Plex is committed to providing uninterrupted service to its
customers. In a few cases, the Company has direct interfaces with the computer
systems of its customers, primarily for "vendor managed inventory" applications.
The Company expects to resolve any significant Year 2000 issues with such
customers before the occurrence of any business disruptions, although the
Company has limited or no control over the actions of these customers. The
Company expects to maintain adequate finished goods inventories to protect
customers against the possibility of temporary computer interface interruptions,
if any.
Conclusion: Tekni-Plex expects to adequately prepare for all significant
internal Year 2000 issues that could adversely affect its business operations.
The Company does not anticipate that the cost of resolving such problems will be
material to its financial results. However, the Company does not believe that it
is possible to identify, with complete certainty, all potential Year 2000 issues
that may in some way affect the Company, its suppliers, or its customers. The
Company expects that any disputes arising as the result of such unidentified
Year 2000 issues will be resolved in the normal course of business.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
17
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to certain litigation in the ordinary course of
business, none of which the Company believes is likely to have a
material adverse effect on its consolidated financial position or
results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities holders
Not applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27
(b) Reports on Form 8-K
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEKNI-PLEX, INC.
February 10, 1999
By: /s/ F. Patrick Smith
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
By: /s/ Kenneth W.R. Baker
Kenneth W. R. Baker
President and Chief Operating Officer
and Principal Accounting and Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TEKNI-PLEX,
INC. STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JANUARY 1, 1999 AND BALANCE
SHEET AS AT JANUARY 1, 1999 AND IS QUALIFIED IN IS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-02-1999
<PERIOD-START> JUL-04-1998
<PERIOD-END> JAN-01-1999
<CASH> 27,955
<SECURITIES> 0
<RECEIVABLES> 55,032
<ALLOWANCES> 1,242
<INVENTORY> 79,586
<CURRENT-ASSETS> 177,153
<PP&E> 151,254
<DEPRECIATION> 26,201
<TOTAL-ASSETS> 517,615
<CURRENT-LIABILITIES> 75,377
<BONDS> 275,000
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 517,615
<SALES> 202,073
<TOTAL-REVENUES> 202,073
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