UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended May 1, 2004
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 333-73552
PLASTIPAK HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Michigan 52-2186087
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
41605 Ann Arbor Road, Plymouth, Michigan 48170
-----------------------------------------------
(Address of principal executive offices)
(734) 455-3600
(Registrant's telephone number, including area code)
(Former address: 9135 General Court, Plymouth, Michigan 48170)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The number of shares of the registrant's common stock, $1.00 par value,
outstanding as of May 1, 2004 was 28,316.
PLASTIPAK HOLDINGS, INC.
FORM 10-Q INDEX
PAGE
PART I - FINANCIAL INFORMATION .................................................................... 1
Item 1. Financial Statements.................................................................. 1
Condensed Consolidated Balance Sheets as of May 1, 2004 (unaudited)
and November 1, 2003 ................................................................. 1
Condensed Consolidated Statements of Earnings (unaudited) for the
Three Month and Six Month Periods Ended May 1, 2004 and May 3, 2003................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended May 1, 2004 and May 3, 2003.......................................... 4
Notes to Condensed Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 30
Item 4. Controls and Procedures............................................................... 31
PART II - OTHER INFORMATION ....................................................................... 31
Item 1. Legal Proceedings..................................................................... 31
Item 6. Exhibits and Reports on Form 8-K...................................................... 32
SIGNATURES ........................................................................................ 33
10-Q EXHIBIT INDEX................................................................................. 34
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 1, NOVEMBER 1,
2004 2003
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,096,150 $ 37,278,406
Accounts Receivable
Trade (net of allowance of $3,026,649 and $2,541,820
at May 1, 2004 and November 1, 2003) 57,525,266 54,531,831
Related parties 7,972,350 7,202,753
------------ ------------
65,497,616 61,734,584
Inventories 96,253,167 90,020,742
Prepaid expenses 11,970,151 13,039,269
Prepaid federal income taxes 2,551,175 2,793,980
Deferred income taxes 2,686,000 1,843,000
Other current assets 3,330,079 3,688,059
------------ ------------
Total Current Assets 190,384,338 210,398,040
PROPERTY, PLANT & EQUIPMENT- NET 407,706,462 366,920,226
OTHER ASSETS
Cash surrender value of life insurance 1,990,892 1,990,892
Deposits 11,760,054 10,716,360
Capitalized loan costs (net of accumulated amortization
of $4,309,469 and $3,449,524 at May 1, 2004
and November 1, 2003) 8,681,779 9,541,723
Intangible assets (net of accumulated amortization of
of $5,525,882 and $4,937,791 at May 1, 2004
and November 1, 2003) 9,673,877 6,429,468
Prepaids 864,241 936,658
Sundry 339,975 266,645
------------ ------------
Total Other Assets 33,310,818 29,881,746
------------ ------------
Total Assets $631,401,618 $607,200,012
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 1, NOVEMBER 1,
2004 2003
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $122,196,217 $115,125,413
Current portion of long term obligation 4,983,960 3,823,347
Accrued liabilities
Taxes other than income 6,214,753 4,740,907
Other accrued expenses 33,449,508 29,309,529
Income taxes 1,351,436 1,363,371
------------ ------------
Total Current Liabilities 168,195,874 154,362,567
SENIOR NOTES (NET OF UNAMORTIZED PREMIUM AND
FV OF SWAPS OF $2,0,77,044 AND ($5,764,638) AT MAY 1,
2004 AND $2,218,660 AND ($4,748,452) AT NOVEMBER 1, 2003) 321,312,405 322,470,208
LONG-TERM OBLIGATIONS 66,217,561 60,601,547
DEFERRED INCOME TAXES 19,712,000 16,483,000
OTHER NON-CURRENT LIABILITIES 4,458,568 4,030,943
OBLIGATIONS UNDER STOCK BONUS PLANS 9,259,447 8,306,882
STOCKHOLDERS' EQUITY
Common stock, no par value, 60,000 shares authorized;
28,316 shares issued and outstanding 28,316 28,316
Retained earnings 42,217,447 40,916,549
------------ ------------
Total Stockholders' Equity 42,245,763 40,944,865
------------ ------------
Total Liabilities and Stockholders' Equity $631,401,618 $607,200,012
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MAY 1, MAY 3, MAY 1, MAY 3,
2004 2003 2004 2003
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues $ 251,212,178 $ 227,328,604 $ 477,179,806 $ 426,873,405
Cost and expenses 214,179,373 189,789,851 417,735,401 364,520,151
------------- ------------- ------------- -------------
Gross profit 37,032,805 37,538,753 59,444,405 62,353,254
Selling, general and
administrative expenses 20,072,170 19,176,906 39,470,228 36,862,864
------------- ------------- ------------- -------------
Operating profit 16,960,635 18,361,847 19,974,177 25,490,390
Other expense (income)
Interest expense 8,773,466 8,731,773 17,717,630 19,019,604
Interest income (267,253) (261,663) (365,721) (559,202)
Royalty income (217,972) (367,741) (377,046) (580,246)
Loss on foreign
currency translation 283,419 597,113 12,404 786,425
Sundry expense (income) 64,552 (17,914) (152,470) (34,585)
------------- ------------- ------------- -------------
8,636,212 8,681,568 16,834,797 18,631,996
------------- ------------- ------------- -------------
Earnings before income taxes 8,324,423 9,680,279 3,139,380 6,858,394
Income tax expense (benefit)
Current 106,000 1,701,000 (981,000) 1,701,000
Deferred 2,909,000 1,558,000 2,386,000 557,000
------------- ------------- ------------- -------------
3,015,000 3,259,000 1,405,000 2,258,000
------------- ------------- ------------- -------------
Net earnings $ 5,309,423 $ 6,421,279 $ 1,734,380 $ 4,600,394
============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
----------------
MAY 1, MAY 3,
2004 2003
---- ----
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to $ 1,734,380 $ 4,600,394
net cash provided by operating activities:
Depreciation and amortization 31,418,928 27,168,479
Amortization of net premium on Senior Notes (141,619) (141,617)
Bad debt expense 602,082 494,712
Deferred salaries 489,139 193,800
Gain on sale of equipment (56,631) (200,533)
Deferred tax expense 2,386,000 557,000
Restricted stock option - compensation 519,083 920,377
Foreign currency translation (gain) loss (90,262) 931,839
Change in assets and liabilities:
Increase in accounts receivable (4,365,114) (2,279,438)
Increase in inventories (6,232,425) (11,267,819)
Decrease (increase) in prepaid expenses and other current assets 1,211,515 (75,488)
Decrease in prepaid federal income taxes 242,805 1,873,573
Increase in other liabilities 4,535,814 387,491
(Increase) decrease in deposits (1,043,694) 726,678
Increase in accounts payable 7,070,804 2,873,778
Increase in sundry other assets (73,330) (246,070)
Decrease in income taxes (11,935) (12,802)
------------ ------------
Net cash provided by operating activities 38,195,540 26,504,354
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES
Acquisition of property and equipment (62,799,402) (55,834,431)
Proceeds from sale of equipment 815,219 557,733
Acquisition of intangible assets (4,512,500) (275,000)
------------ ------------
Net cash used in investing activities (66,496,683) (55,551,698)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net borrowings under revolving credit facility 1,634,585 371,485
Principal payments on long-term obligations (3,133,736) (3,373,107)
Proceeds from long-term obligations 618,038 -
------------ ------------
Net cash used in financing activities (881,113) (3,001,622)
------------ ------------
Net decrease in cash and cash equivalents (29,182,256) (32,048,966)
Cash and cash equivalents at beginning of the year 37,278,406 66,196,262
------------ ------------
Cash and cash equivalents at end of the period $ 8,096,150 $ 34,147,296
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
MAY 1, MAY 3,
2004 2003
---- ----
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $20,313,000 $20,084,000
=========== ===========
Cash paid for income taxes $ - $ 723,000
=========== ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment through the assumption of
long-term obligations $ 7,748,000 $ 4,558,000
=========== ===========
Increase in Obligation Under Stock Bonus Plan $ 433,000 $ 1,071,000
=========== ===========
Decrease in fair value of interest rate swaps $ 1,016,000 $ 2,177,000
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING
POLICIES
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals and estimated provisions
for bonus and profit-sharing arrangements) considered necessary for a fair
presentation have been included. Operating results for the six months ended May
1, 2004 are not necessarily indicative of the results that may be expected for
the year ending October 30, 2004.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Form 10-K filed by Plastipak Holdings, Inc. (Plastipak) with
the Securities and Exchange Commission on January 29, 2004.
Reclassifications
Certain reclassifications have been made to the 2003 financial information
in order for them to conform to the classifications at May 1, 2004.
Employee Compensation Plans
The Company has two stock-based employee compensation plans. The Company
accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The plans are considered to be variable plans and therefore,
stock-based employee compensation cost is reflected in net income as a component
of general and administrative expenses, as all options granted under those plans
had an exercise price less than the market value of the underlying common stock
on the date of grant. Amounts expensed approximate that which would have been
expensed had the value of the options granted been computed under provisions of
FAS 123.
NOTE B - FISCAL PERIOD
Plastipak has elected a 52/53 week fiscal period for tax and financial
reporting purposes. Plastipak's fiscal period ends on the Saturday closest to
October 31. The three month periods ended May 1, 2004 and May 3, 2003 contained
13 weeks. The six month periods ended May 1, 2004 and May 3, 2003 contained 26
weeks.
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
clarifies the applications of Accounting Research Bulletin 51, Consolidated
Financial Statements, for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. In December 2003, the Financial Accounting Standards
Board issued FASB Interpretation 46(R), Consolidation of Variable Interest
Entities. FIN 46(R) replaces FIN 46 and clarifies the accounting for interests
in variable interest entities.
6
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
FIN 46(R) should be applied to entities considered to be Special Purpose
Entities (SPE's) no later than the end of the first reporting period after
December 15, 2003 and by the end of the first reporting period that ends after
March 15, 2004 to entities other than SPE's. The adoption of this standard did
not have an impact on the Company's financial position or results of operations.
NOTE D - INVENTORIES
Inventories consisted of the following at:
MAY 1, NOVEMBER 1,
2004 2003
---- ----
Raw Materials $35,203,716 $34,835,429
Finished Goods 47,260,552 41,984,322
Parts & Supplies 13,788,899 13,200,991
----------- -----------
$96,253,167 $90,020,742
=========== ===========
NOTE E - LEGAL PROCEEDINGS
The Company is a party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of this
litigation cannot be estimated with certainty, but management believes, based on
their examination of these matters, experience to date and discussions with
counsel, that the ultimate liability will not be material to the Company's
business, financial condition or results of operations.
NOTE F - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by Financial
Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," requires companies to recognize all
of their derivative instruments as either assets or liabilities at fair value in
the statement of financial position. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and further,
on the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge or a cash flow hedge.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. The Company currently uses only fair value
hedge accounting.
7
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE F - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - CONTINUED
On March 11, 2003, the Company entered into two interest rate swap
agreements. In connection with the Senior Notes, the Company exchanged fixed
rate interest of 10.75% for variable rate interest. The interest rate swap
agreements have notional amounts of $50,000,000 each. The variable rates are
equal to six month LIBOR plus 6.46% and 6.66%, respectively, for an 8-year
period ending September 1, 2011. As of May 1, 2004, the Company recorded an
increase of $5,764,638 in other accrued expenses to recognize the fair value of
the swap and a $5,764,638 decrease in the Senior Notes to recognize the
difference between the carrying value and fair value of the related hedged
liability.
NOTE G - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
The Senior Notes are unsecured, and guaranteed by each of Plastipak's
current and future material domestic subsidiaries.
The following condensed consolidating financial information presents:
(1) Condensed consolidating balance sheets as of May 1, 2004 and
November 1, 2003, statements of operations for the three months and
six months ended May 1, 2004 and May 3, 2003 and statements of cash
flows for the six months ended May 1, 2004 and May 3, 2003 of (a)
Plastipak the parent; (b) the guarantor subsidiaries (North American
Operating Segment); (c) the nonguarantor subsidiaries (South
American Operating Segment and European Operating Segment); (d)
Plastipak on a consolidated basis, and
(2) Elimination entries necessary to consolidate Plastipak Holdings,
Inc., the parent, with the guarantor (North American Operating
Segment) and nonguarantor (South American Operating Segment and
European Operating Segment) subsidiaries.
Each subsidiary guarantor is wholly-owned by Plastipak, all guarantees are
full and unconditional and all guarantees are joint and several.
8
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 1, 2004
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------ ------------ ------------ ------------ -----
CURRENT ASSETS
Cash $ 2,050,988 $ 2,988,398 $ 3,056,764 $ 8,096,150
Accounts receivable 8,127,613 52,166,136 11,513,997 (6,310,130) 65,497,616
Inventories - 80,648,811 15,604,356 96,253,167
Prepaid expenses - 6,399,097 5,571,054 11,970,151
Prepaid federal income taxes 1,956,392 498,234 96,549 2,551,175
Deferred income taxes (2,836,000) 2,997,000 2,525,000 2,686,000
Other current assets - 2,304,009 1,026,070 3,330,079
------------- ------------- ------------- ------------- -------------
Total Current Assets 9,298,993 148,001,685 39,393,790 (6,310,130) 190,384,338
PROPERTY, PLANT &
EQUIPMENT- NET - 357,531,008 50,325,454 (150,000) 407,706,462
OTHER ASSETS
Cash surrender value
of life insurance - 1,990,892 - - 1,990,892
Deposits - 11,760,054 - - 11,760,054
Investment in and advances
to affiliates 363,129,837 (295,361,131) - (67,768,706) -
Capitalized loan costs 959,497 7,722,282 - 8,681,779
Intangible assets - 7,386,420 2,287,457 - 9,673,877
Deferred tax asset -long term (429,556) 429,556 - - -
Prepaids - 864,241 - - 864,241
Sundry - 6,200,000 339,975 (6,200,000) 339,975
------------- ------------- ------------- ------------- -------------
Total Other Assets 363,659,778 (259,007,686) 2,627,432 (73,968,706) 33,310,818
------------- ------------- ------------- ------------- -------------
Total Assets $ 372,958,771 $ 246,525,007 $ 92,346,676 $ (80,428,836) $ 631,401,618
============= ============= ============= ============= =============
9
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
AS OF MAY 1, 2004
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
CURRENT LIABILITIES
Accounts payable $ - $ 90,522,905 $ 37,966,227 $ (6,292,915) $ 122,196,217
Current portion of long
term obligation - 4,044,061 939,899 4,983,960
Taxes other than income - 4,905,187 1,309,566 6,214,753
Other accrued expenses 11,308,367 18,936,460 3,222,645 (17,964) 33,449,508
Income taxes (168,440) 1,519,876 - 1,351,436
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 11,139,927 119,928,489 43,438,337 (6,310,879) 168,195,874
SENIOR NOTES 324,337,732 (3,025,327) - - 321,312,405
LONG-TERM OBLIGATIONS - 10,791,434 61,626,127 (6,200,000) 66,217,561
DEFERRED INCOME TAXES (14,024,098) 31,211,098 2,525,000 - 19,712,000
OTHER NON-CURRENT
LIABILITIES - 3,966,774 491,794 - 4,458,568
OBLIGATIONS UNDER
STOCK BONUS PLAN 9,259,447 - - - 9,259,447
STOCKHOLDERS'
EQUITY (DEFICIT) 42,245,763 83,652,539 (15,734,582) (67,917,957) 42,245,763
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 372,958,771 $ 246,525,007 $ 92,346,676 $ (80,428,836) $ 631,401,618
============= ============= ============= ============= =============
10
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 1, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
CURRENT ASSETS
Cash $ 23,104,119 $ 12,750,772 $ 1,423,515 $ - $ 37,278,406
Accounts receivable 9,090,858 47,835,342 11,085,537 (6,277,153) 61,734,584
Inventories - 71,520,128 18,500,614 - 90,020,742
Prepaid expenses - 10,075,312 2,963,957 - 13,039,269
Prepaid federal income taxes 975,392 1,719,048 99,540 - 2,793,980
Deferred income taxes (3,679,000) 2,997,000 2,525,000 - 1,843,000
Other current assets - 3,336,833 351,226 - 3,688,059
------------- ------------- ------------- ------------- -------------
Total Current Assets 29,491,369 150,234,435 36,949,389 (6,277,153) 210,398,040
PROPERTY, PLANT &
EQUIPMENT- NET - 315,739,770 51,430,456 (250,000) 366,920,226
OTHER ASSETS
Cash surrender value
of life insurance - 1,990,892 - - 1,990,892
Deposits - 10,716,360 - - 10,716,360
Investment in and advances
to affiliates 337,670,382 (271,963,985) - (65,706,397) -
Capitalized loan costs 1,024,917 8,516,806 - - 9,541,723
Intangible assets - 3,527,915 2,901,553 - 6,429,468
Deferred tax asset - long term (429,556) 429,556 - - -
Prepaids - 936,658 - - 936,658
Sundry - 5,001,699 264,946 (5,000,000) 266,645
------------- ------------- ------------- ------------- -------------
Total Other Assets 338,265,743 (240,844,099) 3,166,499 (70,706,397) 29,881,746
------------- ------------- ------------- ------------- -------------
Total Assets $ 367,757,112 $ 225,130,106 $ 91,546,344 $ (77,233,550) $ 607,200,012
============= ============= ============= ============= =============
11
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
AS OF NOVEMBER 1, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
CURRENT LIABILITIES
Accounts payable $ 17,159 $ 85,093,312 $ 36,292,095 $ (6,277,153) $ 115,125,413
Current portion of long
term obligation - 2,970,955 852,392 - 3,823,347
Taxes other than income - 4,006,848 734,059 - 4,740,907
Other accrued expenses 10,207,937 17,755,822 1,345,770 - 29,309,529
Income taxes (168,440) 1,531,811 - - 1,363,371
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 10,056,656 111,358,748 39,224,316 (6,277,153) 154,362,567
SENIOR NOTES 325,701,807 (3,231,599) - - 322,470,208
LONG-TERM OBLIGATIONS - 5,562,807 60,038,740 (5,000,000) 60,601,547
DEFERRED INCOME TAXES (17,253,098) 31,211,098 2,525,000 - 16,483,000
OTHER NON-CURRENT
LIABILITIES - 3,480,939 550,004 - 4,030,943
OBLIGATIONS UNDER
STOCK BONUS PLAN 8,306,882 - - - 8,306,882
STOCKHOLDERS'
EQUITY (DEFICIT) 40,944,865 76,748,113 (10,791,716) (65,956,397) 40,944,865
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 367,757,112 $ 225,130,106 $ 91,546,344 $ (77,233,550) $ 607,200,012
============= ============= ============= ============= =============
12
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 1, 2004
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
Revenues $ - $ 230,474,726 $ 22,559,797 $ (1,822,345) $ 251,212,178
Cost and expenses - 194,859,204 21,192,513 (1,872,344) 214,179,373
------------- ------------- ------------- ------------- -------------
Gross profit - 35,615,522 1,367,284 49,999 37,032,805
Selling, general and
administrative expenses 472,281 17,426,880 2,173,009 - 20,072,170
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (472,281) 18,188,642 (805,725) 49,999 16,960,635
Other expense (income)
Equity in (earnings) loss
of affiliates (8,223,072) 407,216 - 7,815,856 -
Interest expense 7,854,497 175,022 783,514 (39,567) 8,773,466
Interest income (8,293,129) 8,224,148 (237,839) 39,567 (267,253)
Royalty income - (217,972) - - (217,972)
Loss on foreign currency
translation - - 283,419 - 283,419
Sundry (income) expense (135,000) 211,358 (11,806) - 64,552
------------- ------------- ------------- ------------- -------------
(8,796,704) 8,799,772 817,288 7,815,856 8,636,212
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 8,324,423 9,388,870 (1,623,013) (7,765,857) 8,324,423
Income taxes 3,015,000 - - - 3,015,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 5,309,423 $ 9,388,870 $ (1,623,013) $ (7,765,857) $ 5,309,423
============= ============= ============= ============= =============
13
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 3, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
Revenues $ - $ 206,154,040 $ 20,822,396 $ 352,168 $ 227,328,604
Cost and expenses - 171,077,622 18,680,062 32,167 189,789,851
------------- ------------- ------------- ------------- -------------
Gross profit - 35,076,418 2,142,334 320,001 37,538,753
Selling, general and
administrative expenses 70,708 17,610,254 1,225,944 270,000 19,176,906
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (70,708) 17,466,164 916,390 50,001 18,361,847
Other expense (income)
Equity in (earnings) loss
of affiliates (10,251,395) 91,948 - 10,159,447 -
Interest expense 8,054,342 (300,501) 861,189 116,743 8,731,773
Interest income (7,418,934) 7,352,637 (78,623) (116,743) (261,663)
Royalty income - (367,741) - - (367,741)
Loss on foreign currency
translation - - 597,113 - 597,113
Sundry (income) expense (135,000) 120,631 (3,545) - (17,914)
------------- ------------- ------------- ------------- -------------
(9,750,987) 6,896,974 1,376,134 10,159,447 8,681,568
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 9,680,279 10,569,190 (459,744) (10,109,446) 9,680,279
Income taxes 3,259,000 - - - 3,259,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 6,421,279 $ 10,569,190 $ (459,744) $ (10,109,446) $ 6,421,279
============= ============= ============= ============= =============
14
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 1, 2004
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
Revenues $ - $ 427,691,941 $ 51,375,351 $ (1,887,486) $ 477,179,806
Cost and expenses - 368,684,212 51,039,426 (1,988,237) 417,735,401
------------- ------------- ------------- ------------- -------------
Gross profit - 59,007,729 335,925 100,751 59,444,405
Selling, general and
administrative expenses 675,143 34,625,669 4,169,416 - 39,470,228
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (675,143) 24,382,060 (3,833,491) 100,751 19,974,177
Other expense (income)
Equity in (earnings) loss
of affiliates (2,932,076) 1,236,834 - 1,695,242 -
Interest expense 15,753,438 308,730 1,735,031 (79,569) 17,717,630
Interest income (16,365,885) 16,175,393 (254,798) 79,569 (365,721)
Royalty income - (377,046) - - (377,046)
Loss on foreign currency
translation - - 12,404 - 12,404
Sundry (income) expense (270,000) 133,723 (16,193) - (152,470)
------------- ------------- ------------- ------------- -------------
(3,814,523) 17,477,634 1,476,444 1,695,242 16,834,797
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 3,139,380 6,904,426 (5,309,935) (1,594,491) 3,139,380
Income taxes 1,405,000 - - - 1,405,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 1,734,380 $ 6,904,426 $ (5,309,935) $ (1,594,491) $ 1,734,380
============= ============= ============= ============= =============
15
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 3, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
REVENUES $ - $ 386,198,725 $ 42,665,831 $ (1,991,151) $ 426,873,405
COST AND EXPENSES
- 327,681,382 38,879,921 (2,041,152) 364,520,151
------------- ------------- ------------- ------------- -------------
Gross profit - 58,517,343 3,785,910 50,001 62,353,254
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 165,619 34,019,484 2,677,761 - 36,862,864
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (165,619) 24,497,859 1,108,149 50,001 25,490,390
OTHER EXPENSE (INCOME)
Equity in (earnings) loss
of affiliates (8,527,761) 291,837 - 8,235,924 -
Interest expense 16,711,820 446,170 1,946,976 (85,362) 19,019,604
Interest income (14,938,072) 14,451,971 (158,463) 85,362 (559,202)
Royalty income - (580,246) - - (580,246)
Loss on foreign currency
translation - - 786,425 - 786,425
Sundry (income) expense (270,000) 243,012 (7,597) - (34,585)
------------- ------------- ------------- ------------- -------------
(7,024,013) 14,852,744 2,567,341 8,235,924 18,631,996
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 6,858,394 9,645,115 (1,459,192) (8,185,923) 6,858,394
INCOME TAXES 2,258,000 - - - 2,258,000
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 4,600,394 $ 9,645,115 $ (1,459,192) $ (8,185,923) $ 4,600,394
============= ============= ============= ============= =============
16
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 1, 2004
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash provided by
operating activities $ 1,474,248 $ 34,277,945 $ 2,443,347 $ - $ 38,195,540
CASH FLOWS (USED IN) PROVIDED
BY INVESTING ACTIVITIES
Acquisition of property
and equipment - (59,856,767) (2,942,635) - (62,799,402)
Proceeds from sale of equipment - 815,219 - - 815,219
Investment in and advances
to affiliates (22,527,379) (367,069) - 22,894,448 -
Acquisition of intangible assets - (4,512,500) - - (4,512,500)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by investing activities (22,527,379) (63,921,117) (2,942,635) 22,894,448 (66,496,683)
CASH FLOWS PROVIDED BY
(USED IN) FINANCING ACTIVITIES
Net borrowings under revolving credit facility - - 1,634,585 - 1,634,585
Principal payments on long-term
obligations - (2,646,581) (487,155) - (3,133,736)
Proceeds from long-term obligations - 22,527,379 618,038 (22,527,379) 618,038
Capital increases - - 367,069 (367,069) -
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing activities - 19,880,798 2,132,537 (22,894,448) (881,113)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash (21,053,131) (9,762,374) 1,633,249 - (29,182,256)
Cash and cash equivalents at
the beginning of the year 23,104,119 12,750,772 1,423,515 - 37,278,406
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
the end of the period $ 2,050,988 $ 2,988,398 $ 3,056,764 $ - $ 8,096,150
============ ============ ============ ============ ============
17
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 3, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----- ------------ ------------ ------------ -----
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities $ (2,704,603) $ 30,073,174 $ (864,217) $ - $ 26,504,354
CASH FLOWS (USED IN) PROVIDED
INVESTING ACTIVITIES
Acquisition of property
and equipment - (54,044,489) (1,789,942) - (55,834,431)
Proceeds from sale of equipment - 557,266 467 - 557,733
Investment in and advances
to affiliates (11,100,000) (400,000) - 11,500,000 -
Acquisition of intangible assets - (275,000) - - (275,000)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by investing activities (11,100,000) (54,162,223) (1,789,475) 11,500,000 (55,551,698)
CASH FLOWS PROVIDED BY
(USED IN) FINANCING ACTIVITIES
Net borrowings under revolving credit facility - - 371,485 - 371,485
Principal payments on long-term
obligations - (2,189,497) (1,183,610) - (3,373,107)
Proceeds from long-term obligations - 9,500,000 - (9,500,000) -
Capital increases - - 2,000,000 (2,000,000) -
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities - 7,310,503 1,187,875 (11,500,000) (3,001,622)
------------ ------------ ------------ ------------ ------------
Net decrease in cash (13,804,603) (16,778,546) (1,465,817) - (32,048,966)
Cash and cash equivalents at
the beginning of the year 44,619,480 19,388,938 2,187,844 - 66,196,262
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
the end of the period $ 30,814,877 $ 2,610,392 $ 722,027 $ - $ 34,147,296
============ ============ ============ ============ ============
18
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE G- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
SUPPLEMENTAL CASH FLOW INFORMATION
GUARANTOR NONGUARANTOR
SUBSIDIARIES SUBSIDIARIES TOTAL
------------ ------------ -----
DEPRECIATION AND AMORTIZATION EXPENSE
PERIOD ENDED
05/01/04 $26,757,197 $ 4,661,731 $31,418,928
=========== =========== ===========
05/03/03 $22,407,344 $ 4,761,135 $27,168,479
=========== =========== ===========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Management's discussion and analysis should be read in conjunction with
the consolidated financial statements and the accompanying notes. Please refer
to the "Risks Related to Our Business" section, in our Form 10-K for the year
ended November 1, 2003, for a summary of factors that could cause actual results
to differ materially from those projected in a forward-looking statement. As you
read the material below, we urge you to carefully consider our financial
statements and related information provided herein.
All statements other than statements of historical fact included in this
Form 10-Q, including statements regarding our future financial position,
economic performance and results of operations, as well as our business
strategy, budgets and projected costs and plans and objectives of management for
future operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe",
or "continue" or the negative thereof or variations thereon or similar
terminology. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include, without
limitation, risks associated with our Brazilian operations, competition in our
product categories (including the impact of possible new technologies and the
impact of such competition on pricing, revenues and margins), our high degree of
leverage and substantial debt service obligations, the restrictive covenants
contained in instruments governing our indebtedness, our exposure to
fluctuations in resin and energy prices, our dependence on significant customers
and the risk that customers will not purchase our products in the amounts we
expect, our dependence on key management and our labor force and the material
adverse effect that could result from the loss of their services. All
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the cautionary statements set forth
in this paragraph.
OVERVIEW
Plastipak Holdings, Inc. ("Plastipak") is a privately held Michigan
corporation that was formed in 1998 to act as a holding company for several
related companies. On October 30, 1999, Plastipak acquired all of the equity
interests in Plastipak Packaging, Inc. ("Packaging"), Whiteline Express, Ltd.
("Whiteline"), Clean Tech, Inc. ("Clean Tech") and TABB Realty, LLC ("TABB"),
and a portion of the equity interests of Plastipak Packaging do Brasil, Ltda
("Plastipak Brasil"), through a reorganization (the "Reorganization").
Packaging, our principal operating company whose business commenced operations
in 1967, designs and manufactures rigid plastic containers, and was incorporated
in Delaware in 1982. Packaging also owns the remainder of Plastipak Brasil. In
2003, Plastipak Czech Republic, s.r.o. was established as a wholly-owned
subsidiary of Packaging. This entity will serve as a bottle manufacturing
facility in Central Europe. Whiteline is a trucking company serving our
transportation and logistics needs, and was incorporated in Delaware in 1982.
Clean Tech, a plastics recycling operation, provides a source of clean, high
quality post-consumer recycled plastic raw material, and was incorporated in
Michigan in 1989. In 2003, Clean Tech Slovakia, s.r.o. was established as a
wholly-owned subsidiary of Clean Tech. Clean Tech Slovakia, s.r.o. will serve as
a post-consumer recycling operation in Central Europe. TABB owns real estate and
leases it to Packaging, Whiteline, and Clean Tech. Plastipak Brasil produces
injection-molded plastic preforms and blow molds rigid plastic packaging in
Paulinia, Brazil and produces injection-molded plastic preforms in Manaus,
Brazil. Plastipak Brasil also maintains a sales office in Buenos Aires,
Argentina. Other than Plastipak Czech Republic, s.r.o., Clean Tech Slovakia,
s.r.o. and Plastipak Brasil and its subsidiaries, all of the Plastipak group of
companies are headquartered in Plymouth, Michigan.
20
RESULTS OF OPERATIONS
We report our results of operations on the basis of a 52-53 week period.
Our fiscal year end is the closest Saturday to October 31 each year. The three
months ended May 1, 2004 and May 3, 2003 were 13 weeks long. The six months
ended May 1, 2004 and May 3, 2004 were 26 weeks long.
Listed in the table below are our revenues and related percentages of
revenue for the three and six months ended May 1, 2004 and May 3, 2003 in each
of our product categories.
Consolidated Revenue By Product Category
Three Months Ended May 1, 2004 Six Months Ended May 1, 2004
and May 3, 2003 and May 3, 2003
2004 % 2003 % 2004 % 2003 %
------------------------------------ ------------------------------------
(dollar amounts in thousands)
Carbonated and non-
carbonated beverage revenue $103,765 41.3% $ 98,112 43.2% $208,809 43.8% $184,938 43.3%
Consumer cleaning revenue $ 76,162 30.3% $ 70,874 31.2% $145,695 30.5% $134,999 31.6%
Food and processed juice
revenue $ 42,880 17.1% $ 32,121 14.1% $ 70,670 14.8% $ 58,376 13.7%
Industrial, agricultural and
automotive revenue $ 14,031 5.6% $ 12,706 5.6% $ 26,507 5.6% $ 24,742 5.8%
Other revenue (a) $ 14,374 5.7% $ 13,516 5.9% $ 25,499 5.3% $ 23,818 5.6%
-------- ----- -------- ----- -------- ----- -------- -----
Total revenue $251,212 100.0% $227,329 100.0% $477,180 100.0% $426,873 100.0%
======== ===== ======== ===== ======== ===== ======== =====
(a) Other revenue includes Clean Tech (recycling), Whiteline
(transportation and logistics), health, personal care and distilled
spirits revenue and other miscellaneous sources of revenue.
THREE MONTHS ENDED MAY 1, 2004 COMPARED TO THREE MONTHS ENDED MAY 3, 2003
REVENUE
Revenue for the second quarter increased 10.5% over the same period in
2003 to $251.2 million with unit sales increasing 16.4%. Significant increases
in our food and processed juice category, strong unit volume growth in Brazil
and consistent performance in our carbonated and non-carbonated beverage
category contributed to these results. Revenues in Brazil increased during the
period with revenue up 7.4% and unit sales increasing 26.7%. In the U.S., volume
gains were attributable primarily to the addition of new products and new
customers served by our new manufacturing facilities in Florida and Alabama. The
increases in revenue were partially offset by price reductions implemented for
new business and the extension of current business. Using industry standard
price data, we estimate that lower resin prices resulted in approximately $1.7
million in reduced revenues for the three months ended May 1, 2004 as compared
to the three months ended May 3, 2003. There was an increase in HDPE material
prices and a decrease in PET material prices that resulted in a net decrease in
resin prices.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
21
- Carbonated and non-carbonated beverage revenue increased 5.8% to
$103.8 million during the three-month period ended May 1, 2004 with
unit volume up 14.7% over the same period in 2003. This growth was a
result of strong preform sales in Brazil, where unit volume
increased more than 26.0%, combined with increased demand for water
containers in the U.S. market. Additionally, sales growth in our new
facilities in Alabama and Florida contributed to the volume increase
achieved during the second quarter of 2004. The higher growth in
unit volume compared to sales dollars was due to an increase in
preform sales in Brazil, a mix shift in the U.S. to smaller soft
drink containers and the expansion of lightweight water packages.
During the second quarter of 2004, the increase in revenue was
offset by a decrease in PET resin prices that were passed along to
customers in the form of lower selling prices.
- Consumer cleaning revenue increased 7.5% to $76.2 million in the
second quarter of 2004, with unit volume relatively unchanged from
the year ago period. The growth in revenue during the period was
attributable to primarily two factors: higher HDPE material prices
passed through to customers in the form of higher selling prices and
a mix shift towards larger and heavier containers sold primarily
through discount retailers. In addition, new product sales to
existing customers during the period that were not shipped in the
second quarter of 2003 contributed to the increase in revenue.
- Our food and processed juice category posted significant increases
in both revenue and unit volume for the second quarter compared to
the same period of 2003. During the second quarter, revenue in this
category increased 33.5% to $42.9 million, with unit volume up
34.3%. This performance was the result of broad based activity
across all customers combined with the start up of a new customer in
the hot fill sector that began shipping in the second quarter of
2004.
- Industrial, agricultural and automotive category revenue continued
its steady performance in the period with revenue increasing 10.4%
to $14.0 million. Unit sales for the three-month period ended May 1,
2004 increased 7.3% from the three-month period ended May 3, 2003.
These increases were the result of broad based demand across the
segment along with higher HDPE material prices that resulted in
higher selling prices during the period.
- Other revenue increased 6.3% to $14.4 million. Other revenue, which
includes our health, personal care, distilled spirits, freight and
other miscellaneous revenue, posted increases in both revenue and
sales units during the second quarter 2004. These changes were
primarily the result of the addition of a new piece of business,
which began shipping in the second quarter. Increases in freight and
other miscellaneous revenue contributed to the increase in other
revenue as well.
GROSS PROFIT
Gross profit decreased 1.3% to $37.0 million for the three-month period
ended May 1, 2004. The decrease in gross profit was attributable to price
reductions implemented to extend customer contracts. During the second quarter
of 2004, these price reductions were approximately $5.1 million. We have not
been able, through efficiencies in production to date, to fully offset price
reductions implemented. The decrease in gross profit was also attributable to
increased operating costs of approximately $0.5 million associated with the
start-up of several new product lines. A decrease in operating performance
related to our South American operations primarily due to increased material
costs contributed to the decrease as well. Gross profit as a percent of revenue
decreased to 14.7% as compared to 16.5% in the prior period. The erosion of
gross profit as a percentage of revenue was due to the factors mentioned above.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, unaffected by these fluctuations. In general, except where we have firm
pricing, industry practice and contractual arrangements with our customers
permit price changes to be passed through to customers. As a result, we have in
the past experienced revenue changes without corresponding changes in gross
profit. Currently, we have been notified of resin price increases which will
take effect in the third quarter of 2004.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
May 1, 2004 increased 4.7% to $20.1 million. Increases in benefits, taxes,
travel expenses and professional fees offset by a decrease in insurance and
legal fees were the primary factors contributing to the change. In addition, we
incurred approximately $0.1 million in administrative fees related to the start
up of our European operations. As a percentage of revenue, selling, general and
administrative expenses decreased to 8.0% for the three months ended May 1, 2004
from 8.4% for the three months ended May 3, 2003.
INTEREST EXPENSE
Interest expense remained flat at approximately $8.8 million and $8.7
million for the three months ended May 1, 2004 and May 3, 2003, respectively.
OTHER (INCOME) AND EXPENSE
Other income increased by $0.1 million to approximately $137,000 for the
three-month period ended May 1, 2004. The increase was related to a decrease of
$0.3 million in foreign currency exchange rate losses offset by a decrease in
royalty and sundry income of $0.2 million.
INCOME TAX EXPENSE
Provision for income taxes was a $3.0 million expense for the three months
ended May 1, 2004 as compared to a $3.3 million expense for the three months
ended May 3, 2003. Earnings before taxes were $8.3 million for the three months
ended May 1, 2004 compared to $9.7 million of earnings for the three months
ended May 3, 2003. In second quarter of 2004 and 2003, the effective tax rate
was 36.2% and 33.7%, respectively.
NET EARNINGS
Net earnings decreased by $1.1 million from net earnings of $6.4 million
for the three-month period ended May 3, 2003 to net earnings of $5.3 million for
the three-month period ended May 1, 2004. A decrease in gross profit and an
increase in selling, general and administrative expenses along with other
factors mentioned above resulted in a decrease in net income over the prior
period.
SIX MONTHS ENDED MAY 1, 2004 COMPARED TO SIX MONTHS ENDED MAY 3, 2003
REVENUE
Revenue increased 11.8% to $477.2 million for the six months ended May 1,
2004 with unit sales increasing 17.1%. Significant increases in our food and
processed juice category, strong unit volume growth in Brazil and consistent
performance in our carbonated and non-carbonated beverage category contributed
to these results. In the U.S., volume gains were attributable primarily to the
addition of new products and new customers served by our new manufacturing
facilities in Florida and Alabama. The increases in revenue were partially
offset by price reductions implemented for new business and the extension of
current business. In addition, resin prices have increased in the six-month
period ended May 1, 2004 as compared to the six-month period ended May 3, 2003.
Using industry standard price data, we estimate that higher resin prices
resulted in approximately an $8.3 million increase in revenues for the six
months ended May 1, 2004.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
23
- Carbonated and non-carbonated beverage revenue increased 12.9% to
$208.8 million during the six-month period ended May 1, 2004 with
unit volume up 17.8% over the same period in 2003. This growth was a
result of strong preform sales in Brazil, where unit volume finished
the first half of 2004 with an increase of more than 30%, combined
with increased demand for water containers in the U.S. market.
Additionally, sales growth in our new facilities in Alabama and
Florida contributed to the volume increase achieved during the first
half of 2004. The higher growth in unit volume compared to sales
dollars was due to the increase in preform sales in Brazil, a mix
shift in the U.S. to smaller soft drink containers and the expansion
of lightweight water packages.
- Consumer cleaning revenue increased 7.9% to $145.7 million for the
six months ended May 1, 2004, with unit volume up approximately
5.8%. The growth in revenue during the period was attributable to
primarily two factors: higher HDPE material prices passed through in
the form of higher selling prices and a mix shift towards larger and
heavier containers sold primarily through discount retailers. In
addition, new product sales to existing customers during the period
that were not shipped in the first half of 2003 contributed to the
increase in revenue.
- Our food and processed juice category reported significant increases
in both revenue and unit volume for the six months ended May 1, 2004
as compared to the same period of 2003. During the six months ended
May 1, 2004, revenue increased 21.1% with unit demand up by 22.0%
over the same period in 2003. This performance was the result of
broad-based activity across all customers combined with the start up
of a new customer in the hot fill sector that began shipping in the
second quarter of 2004.
- Industrial, agricultural and automotive category revenue continued
its steady performance with revenue increasing 7.1% to $26.5 million
during the six months ended May 1, 2004, while unit volume remained
flat for the period. The changes for the period were driven
primarily by a continued mix shift to larger multi-quart packages
sold primarily through "big box" retailers and a reduction in the
market for small quart-sized containers in this category. These
increases were also the result of broad-based demand across the
segment along with higher HDPE material prices that resulted in
higher selling prices during the period.
- Other revenue increased 7.1% to $25.5 million. Other revenue, which
includes our health, personal care, distilled spirits, freight and
other miscellaneous revenue, posted increases in both revenue and
sales units during the six months ended May 1, 2004 as compared to
the six months ended May 3, 2003. The increase was primarily
attributable to increases in freight and other miscellaneous
revenue. In addition, revenue from the sales of distilled spirit
containers contributed approximately $0.8 million to the increase in
other revenue. This increase was primarily a result of increases in
our shipments of distilled spirit containers as the market trend
shifts back towards distilled spirits and away from wine and beer.
GROSS PROFIT
Gross profit decreased 4.7% to $59.4 million for the six-month period
ended May 1, 2004. Gross profit was adversely affected by customer price
reductions implemented to extend customer contracts. The collective impact of
the price reductions was approximately $9.9 million for the six-month period
ended May 1, 2004. We have not been able, through efficiencies in production to
date, to fully offset price reductions implemented. The decrease in gross profit
was also attributable to increased operating costs of approximately $1.7 million
associated with the start-up of several new product lines. A decrease in
operating performance related to our South American operations contributed to
the decrease as well. Gross profit as a percent of revenue decreased to 12.5% as
compared to 14.6% in the prior period. The erosion of gross profit as a
percentage of revenue was due to the factors mentioned above and to higher resin
costs that increased revenue without increasing associated gross profit.
24
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, unaffected by these fluctuations. In general, except where we have firm
pricing, industry practice and contractual arrangements with our customers
permit price changes to be passed through to customers. As a result, we have in
the past experienced revenue changes without corresponding changes in gross
profit. Currently, we have been notified of resin price increases which will
take effect in the third quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for the six months
ended May 1, 2004 increased 7.1% to $39.5 million. Increases in compensation,
benefits, taxes, travel expenses and administrative fees related to the start up
of our European operations offset by a decrease in insurance and legal fees were
the primary factors contributing to the $2.6 million increase in SG&A. As a
percentage of revenue, selling, general and administrative expenses decreased to
8.3% for the six months ended May 1, 2004 from 8.6% for the six months ended May
3, 2003.
INTEREST EXPENSE
Interest expense decreased $1.3 million to $17.7 million for the six-month
period ended May 1, 2004, as compared to $19.0 million for the six-month period
ended May 3, 2003. The decrease in interest expense was primarily attributable
to interest earned from interest rate swaps entered into on March 11, 2003, an
increase in capitalized interest and a decrease in interest rates and interest
expense associated with our South American operations.
OTHER (INCOME) AND EXPENSE
Other income increased by $0.5 million to $0.9 million for the six-month
period ended May 1, 2004. The increase was related to a decrease of $0.8 million
in foreign currency exchange rate losses and a gain of approximately $0.1
million on the disposition and sale of fixed assets offset by a decrease in
interest and royalty income of $0.4 million.
INCOME TAX EXPENSE
Provision for income taxes was a $1.4 million expense for the six-month period
ended May 1, 2004 as compared to a $2.3 million expense for the six-month period
ended May 3, 2003. Earnings before taxes were $3.1 million for the six months
ended May 1, 2004 compared to $6.9 million of earnings for the six months ended
May 3, 2003. The effective rate was 44.8% in the first half of 2004 as compared
to 32.9% in the first half of 2003. The increase in the effective tax rate for
the first six months of 2004 is due to the accounting of a change in estimate
for prior year book and tax differences.
NET EARNINGS
Net earnings decreased by $2.9 million from net earnings of $4.6 million
for the six-month period ended May 3, 2003 to net earnings of $1.7 million for
the six-month period ended May 1, 2004. A decline in gross profit and an
increase in selling, general and administrative expenses offset by a decrease in
interest expense and favorable foreign currency exchange rates resulted in a
reduction in net earnings over the prior period.
FINANCIAL CONDITION
We intend to expand our business, both domestically and internationally.
We have a significant amount of financing capacity to fund the continued growth
of our business. Past expenditures have been used to maintain equipment and
expand capacity for revenue growth. These expenditures were funded with cash
flow from
25
operations, bank debt and additional operating and capital leases. Future
capital expenditures will be used in the same manner as past expenditures.
During the six months ended May 1, 2004, we spent approximately $62.8
million and assumed $7.7 million in capital lease obligations to cover the
capital requirements of our operations. We expect to incur capital expenditures
of approximately $120.0 million in fiscal 2004 and $70.0 million in 2005.
We are in the early stages of establishing three entities in Central
Europe, Plastipak Czech Republic, s.r.o., Plastipak Slovakia, s.r.o., and Clean
Tech Slovakia, s.r.o. Plastipak Czech Republic, s.r.o. will serve as a bottle
manufacturing facility. We have completed negotiating contract terms and
conditions with a major customer to support the Plastipak Czech Republic site.
The initial investment will be approximately $8.0 to $10.0 million. Production
is expected to begin in the fall of 2004. We plan to employ approximately 25
people to support the new site.
Plastipak Slovakia will serve as the technical and business center and
provide sales, marketing and administrative services for Central Europe. We
believe this to be one of a few dedicated rigid packaging technical centers
located in Central Europe. Our search is underway for top engineers and graphic
designers to assist us in the development of new Slovak suppliers for machinery
parts, machinery development, and bottle design. We expect to invest
approximately $3.6 million in this project.
Clean Tech Slovakia s.r.o. has completed our negotiations with the city of
Kechnec, in their modern industrial park, for a parcel of land on which we are
considering constructing a world class recycling operation for PET and HDPE
resins. The initial phase of this project will include a building of
approximately 7,500 sq. meters and an investment of approximately $15.0 million
contingent upon the amount of funds received from a government grant from a
recycling fund established by the Slovakian government. This initial phase will
be able to recycle over 14,000 metric tons of plastic bottles. Further expansion
is planned for PET preforms and additional recycling, subject to certain
standard incentives discussions that are ongoing. During this initial phase,
which is also subject to considerable growth with planned expansions, we will
employ 50 to 60 people. Our expansions will allow Slovakia to be a net exporter
of high grade, recycled plastics and a true technology leader to neighboring
European Union members.
We had positive cash flow from operating activities of $38.2 million,
which in part funded our capital expenditures of approximately $62.8 million.
The remaining balance of capital expenditures was covered by cash and cash
equivalents and by financing activities including the assumption of capital
lease obligations.
SEASONALITY
The carbonated soft drink (CSD) and, to a lesser extent, the other
beverage portions of our business are highly seasonal, with peak demand during
warmer summer months, and reduced demand during the winter. We normally add
temporary staff and build inventory of products for our CSD and water customers
in anticipation of seasonal demand in the quarter preceding the summer.
INFLATION
We use large quantities of plastic resins in manufacturing our products.
These resins accounted for a major portion of our cost of goods sold in the
six-month period ended May 1, 2004, and are subject to substantial price
fluctuations resulting from shortages in supply and changes in the prices of
natural gas, crude oil and other petrochemical products from which these resins
are produced. We generally enter into multi-year agreements with our resin
suppliers, and our purchases of raw materials are subject to market prices and
inflation.
26
EFFECT OF CHANGES IN EXCHANGE RATES
In general, our results of operations are partially affected by changes in
foreign exchange rates. We invoice our Brazilian and Argentine customers in the
Brazilian Real and Argentine Peso, respectively. A portion of those invoices are
pegged to the U.S. exchange rate. As a result, subject to market conditions, a
decline in the value of the U.S. dollar relative to the Brazilian Real and to a
lesser extent the Argentine Peso can have a favorable effect on our
profitability. Conversely, an increase in the value of the dollar relative to
the Brazilian Real and to a lesser extent the Argentine Peso can have a negative
effect on our profitability. In addition, any change in value of the Euro as
compared to the U.S. dollar may impact start-up costs associated with our new
entities in Central Europe. Exchange rate fluctuations resulted in a loss of
approximately $12,000 for the period ended May 1, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased by 44.1% to $38.2
million for the six months ended May 1, 2004 as compared to the six months ended
May 3, 2003. The increase in cash was primarily the result of approximately $9.4
million in net working capital and other asset and liability changes. The
changes in net working capital and other asset and liability changes were due to
decreased spending on inventories, a decrease in prepaid expenses and other
assets along with an increase in both accounts payable and other liabilities
offset by an increase in accounts receivable and deposits for equipment
purchases and a decrease in prepaid federal income taxes.
Net cash used in investing activities was $66.5 million and $55.6 million
for the six months ended May 1, 2004 and May 3, 2003, respectively. Investing
activities were primarily attributable to the acquisition of property, plant and
equipment for new business, new facilities and the expansion of existing
facilities. For the six months ended May 1, 2004 and May 3, 2003, property,
plant and equipment acquisitions using cash were $62.8 million and $55.8
million, respectively. During the first half of 2004, we also acquired $4.5
million in intangible assets related to the extension of customer contracts.
Net cash used in financing activities was $0.9 million and $3.0 million
for the six months ended May 1, 2004 and May 3, 2003, respectively. During the
first half of 2004 and 2003, net cash of $3.1 million and $3.4 million,
respectively, was used to make principal payments on long-term obligations. In
the six months ended May 1, 2004 and May 3, 2003, cash was provided from
long-term obligations of $2.3 million and $0.4 million, respectively.
On August 20, 2001 and September 25, 2002, we sold an aggregate total
principal amount of $275 million and $50 million, respectively, of 10.75% Senior
Notes to qualified institutional buyers. The notes have a maturity date of
September 1, 2011, and we have the option to redeem all or a portion of the
notes at any time on or after September 1, 2006. Interest under the notes is
payable on September 1 and March 1 of each year. The indenture under which the
notes were issued places restrictions on our ability to declare or pay
dividends, purchase or acquire equity interests of Plastipak, and retire
indebtedness that is subordinate to the notes. The notes also have covenants
that place restrictions on the incurrence of debt, the issuance of stock, and
granting of liens.
The proceeds from the Senior Notes sold on August 20, 2001 were used to
pay off existing debt. During fiscal 2003 we used the net proceeds from the
September 25, 2002 sale of Senior Notes for general corporate purposes,
including working capital, capital expenditures and technology development.
In conjunction with our first sale of Senior Notes, we entered into an
Amended Credit Agreement effective August 20, 2001 which allows us to borrow up
to $150 million, subject to a borrowing base consisting of 85% of eligible
domestic accounts receivable, 65% of the value of eligible domestic inventory
and 50% of the value of domestic property, plant and equipment. The Amended
Credit Agreement has a five-year term. Interest under the Amended Credit
Agreement is payable at 200 to 350 basis points per annum over Eurodollar or at
prime
27
rates, as we select. The Amended Credit Agreement is secured by substantially
all of our assets, including pledges of the stock of Plastipak and all of its
material foreign subsidiaries. Packaging, Whiteline, Clean Tech, and TABB are
the borrowers and guarantors under the Amended Credit Agreement and Plastipak
guarantees obligations under the Amended Credit Agreement. As of May 1, 2004,
$58.3 million in letters of credit were outstanding under the Amended Credit
Agreement and we had $91.7 million available for borrowing subject to covenant
restrictions.
Under the Amended Credit Agreement we are required to calculate EBITDA
because covenants in our debt agreement are tied to ratios based on that
measure. For instance, the covenants under the Amended Credit Agreement
incorporate EBITDA for the most recent last four fiscal quarters (last twelve
months), as a component of the following ratios: debt service ratio (minimum
1.25 to 1), senior secured debt ratio (maximum 2.00 to 1), leverage ratio
(maximum 4.25 to 1) and interest coverage ratio (minimum 2.25 to 1). Our ability
to incur additional debt is tied to our bank covenants. As of May 1, 2004, we
were in compliance with our covenants. EBITDA should not be considered an
alternative measure of operating results or cash flows from operations (as
determined by generally accepted accounting principles), but it is a widely
accepted financial indicator of a company's ability to incur and service debt.
While commonly used, however, EBITDA is not identically calculated by companies
presenting EBITDA and is, therefore, not necessarily an accurate means of
comparison and may not be comparable to similarly titled measures disclosed by
other companies.
Our Amended Credit Agreement defines EBITDA as net earnings (loss) plus
income tax expense, interest expense, depreciation and amortization. A
reconciliation between net earnings and EBITDA is calculated as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MAY 1, MAY 3, MAY 1, MAY 3,
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (per GAAP basis) $ 5,309,423 $ 6,421,279 $ 1,734,380 $ 4,600,394
Income tax expense 3,015,000 3,259,000 1,405,000 2,258,000
Interest Expense 8,773,466 8,731,773 17,717,630 19,019,604
Depreciation 15,026,605 11,973,691 29,002,893 23,934,889
Amortization 1,246,810 1,616,797 2,416,035 3,233,590
----------- ----------- ----------- -----------
EBITDA $33,371,304 $32,002,540 $52,275,938 $53,046,477
=========== =========== =========== ===========
YEARS ENDED LAST TWELVE MONTHS (LTM)
----------- ------------------------
NOVEMBER 1, NOVEMBER 2, MAY 1, MAY 3,
2003 2002 2004 2003
---- ---- ---- ----
Net earnings (per GAAP basis) $ 4,361,056 $ 8,592,810 $ 1,495,042 $ 7,006,729
Income tax expense 4,543,000 4,831,000 3,690,000 4,389,000
Interest Expense 36,902,209 35,099,265 35,600,235 36,215,463
Depreciation 49,859,253 44,070,064 54,927,257 46,876,423
Amortization 6,490,262 3,947,529 5,672,707 5,376,231
------------ ------------ ------------ ------------
EBITDA $102,155,780 $ 96,540,668 $101,385,241 $ 99,863,846
============ ============ ============ ============
28
We have contractual obligations and commercial commitments that may affect
our financial condition. The following tables identify material obligations and
commitments as of May 1, 2004.
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 1-3 3-5 MORE THAN
TOTAL YEARS YEARS YEAR 5 YEARS
------------ ------------ ------------ ------------ ------------
CONTRACTUAL CASH OBLIGATIONS
Long Term Debt Obligations $ 57,566,026 $ 939,899 $ 56,626,127 $ - $ -
Capital Lease Obligations 13,635,495 4,044,061 9,041,021 550,413 -
Operating Lease Obligations 43,568,063 18,346,707 23,507,678 1,713,678 -
Capital Expenditure Commitments 13,143,656 13,143,656 - - -
Revolving Credit Facility (a) - - - - -
Salary Continuation Plan 3,964,571 - - - 3,964,571
Obligations Under Stock Bonus Plans 9,259,447 - - - 9,259,447
Senior Notes 325,000,000 - - - 325,000,000
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $466,137,258 $ 36,474,323 $ 89,174,826 $ 2,264,091 $338,224,018
============ ============ ============ ============ ============
COMMITMENT EXPIRATION BY PERIOD
-------------------------------
LESS THAN 1 1-3 3-5 MORE THAN
TOTAL YEAR YEAR YEARS 5 YEARS
------------ ------------ ------------ ------------ ------------
OTHER COMMERCIAL COMMITMENTS
Standby Letters of Credit $ 58,329,217 $ 58,329,217 $ - $ - $ -
Revolving Credit Facility (b) 91,670,783 - 91,670,783 - -
------------ ------------ ------------ ------------ ------------
Total Commercial Commitments $150,000,000 $ 58,329,217 $ 91,670,783 $ - $ -
============ ============ ============ ============ ============
(a) The revolving credit facility's actual outstanding balance as of May
1, 2004. The revolving credit facility expires in August 2006.
(b) The revolving credit facility's unused borrowing balance as of May
1, 2004.
Looking forward, we have the following short-term and medium-term capital
needs. Our overall capital expenditure budget in fiscal 2004 is approximately
$120.0 million and $70.0 million in 2005, a majority of which is expected to be
discretionary capital expenditures. We expect to have a new site in Louisiana
beginning production in mid to late fiscal 2004. We expect to finance all of our
capital expenditures with operating cash flows and to cover any shortfalls with
borrowings under the Amended Credit Agreement.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that cash flow from operations and available
cash, together with available borrowings under the Amended Credit Agreement,
will be adequate to meet our future liquidity needs for at least the next few
years. As of May 1, 2004, we had approximately $8.1 million in cash and cash
equivalents. It is possible, however, that our business will not generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will not be realized or that future borrowings will not
be available under the Amended Credit Agreement in an amount sufficient to
enable us to service our indebtedness, or to fund our other liquidity needs. In
addition, we may not be able to refinance any of our indebtedness, including the
Amended Credit Agreement or the 10.75% Senior Notes due 2011, on commercially
reasonable terms or at all.
OFF-BALANCE SHEET ARRANGEMENTS
As of May 1, 2004, we had no off-balance sheet arrangements.
29
CRITICAL ACCOUNTING POLICIES
Discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that we make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Please refer to Note A of our annual audited
financial statements included in the "Financial Statements and Supplementary
Data" section, in our Form 10-K for the year ended November 1, 2003, for a
description of our significant accounting policies. These accounting policies
are subject to judgments and uncertainties, which affect the application of
these policies. We base our estimates on historical experience and on various
other assumptions believed to be reasonable under the circumstances. On an
on-going basis, we evaluate estimates. In the event estimates or assumptions
prove to be different from actual results, adjustments are made in subsequent
periods to reflect more current information. The material accounting policies
that we believe are most critical to the understanding of our financial position
and results of operations that require significant management estimates and
judgments are discussed below.
Losses on accounts receivable are based upon their current status,
historical experience and management's evaluation of existing economic
conditions. Significant changes in customer profitability or general economic
conditions may have a significant effect on our allowance for doubtful accounts.
Property, plant and equipment represent a significant portion of our total
assets. We record property, plant and equipment at cost. Depreciation is
computed principally using the straight-line method based upon estimated useful
lives ranging from 3 to 10 years for machinery and equipment and up to 39 years
for buildings. Amortization of leasehold improvements is provided over the terms
of the various leases. These estimates require assumptions that are believed to
be reasonable. Long-lived assets are tested for impairment annually and when an
event occurs that indicates impairment may exist.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
clarifies the applications of Accounting Research Bulletin 51, Consolidated
Financial Statements, for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. In December 2003, the Financial Accounting Standards
Board issued FASB Interpretation 46(R), Consolidation of Variable Interest
Entities. FIN 46(R) replaces FIN 46 and clarifies the accounting for interests
in variable interest entities. FIN 46(R) should be applied to entities
considered to be Special Purpose Entities (SPE's) no later than the end of the
first reporting period after December 15, 2003 and by the end of the first
reporting period that ends after March 15, 2004 to entities other than SPE's.
The adoption of this standard did not have an impact on our financial position
or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE CONTRACTS
At May 1, 2004 we had no material foreign exchange contracts. We do not
enter into foreign exchange contracts for trading or speculative purposes.
30
SHORT-TERM AND LONG-TERM DEBT
We are exposed to interest rate risk primarily through our borrowing
activities. Our policy has been to utilize United States dollar denominated
borrowings to fund our working capital and investment needs. Short-term debt, if
required, is used to meet working capital requirements, while long-term debt is
generally used to finance long-term investments. There is inherent rollover risk
for borrowings as they mature and are renewed at current market rates. The
extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and our future financing requirements.
On March 11, 2003, we entered into two interest rate swap agreements for
an 8-year period ending September 1, 2011. In connection with the Senior Notes,
we exchanged fixed rate interest of 10.75% for variable rate interest. The
interest rate swap agreements have notional amounts of $50.0 million each. The
variable rates are equal to six month LIBOR plus 6.46% and 6.66%, respectively;
except for the initial period from March 11, 2003 to September 1, 2003, which
was determined via linear interpolation. As of May 1, 2004, we recorded an
increase of $5,764,638 in other accrued expenses to recognize the decrease in
fair value of the swap and a $5,764,638 reduction in the Senior Notes to
recognize the difference between the carrying value and fair value of the
related hedged liability.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of our controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) of the Securities and Exchange Act of 1934, as amended) as of the
end of the period covered by this report, have concluded that as of such date
the disclosure controls and procedures were adequate and effective in ensuring
that material information relating to Plastipak would be made known to them by
others in the company.
There were no significant changes in internal controls or other factors
that could significantly affect Plastipak's disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in Plastipak's internal controls. As a
result, no corrective actions were required or undertaken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fall of 1999, North American Container, Inc. ("NAC") filed suit in the
U.S. District Court for the Northern District of Texas (Civil Action No.
3-99CV1749-D), claiming damages in an unspecified amount against Plastipak and
41 other defendants for the alleged infringement of NAC U.S. Patent No.
5,072,841. On April 4, 2000 this patent reissued as patent RE 36,639, with 14
new claims. The new claims were the primary focus of NAC's case against
Plastipak and the major manufacturers, as well as major food and beverage
distributors. Plastipak and the other defendants are vigorously defending this
claim on the bases of both the invalidity of the patent and on non-infringement.
On February 24, 2004, the U.S. District Court entered a judgment of
non-infringement of all accused containers for all defendants, and a judgment of
invalidity for some of the claims. North American Container has appealed this
judgment to U.S. Court of Appeals for the Fifth Circuit and the appeal is in
process. It is our continued belief that Plastipak and other defendants will
prevail on appeal in this case. As a conservative measure, however, the existing
reserve will be maintained, decreased, or increased based on contemporaneously
evaluating the status of the ongoing appeal.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 and Securities
and Exchange Commission Release 34-46427
31.2 Certification of Principal Financial Officer Pursuant Section
to 302 of the Sarbanes-Oxley Act of 2002 and Securities and
Exchange Commission Release 34-46427
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. None.
32
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.
PLASTIPAK HOLDINGS, INC.
Dated: June 14, 2004 By: /s/ William C. Young
-------------------------------------
William C. Young
President and Chief Executive Officer
By: /s/ Michael J. Plotzke
-------------------------------------
Michael J. Plotzke,
Treasurer and Chief Financial Officer
33
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange
Commission Release 34-46427
EX-31.2 Certification of Principal Financial Officer Pursuant Section to
302 of the Sarbanes-Oxley Act of 2002 and Securities and Exchange
Commission Release 34-46427
EX-32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
EX-32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
34