UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended November 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-73552
PLASTIPAK HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Michigan 52-2186087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
41605 Ann Arbor Road, Plymouth, Michigan 48170
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(Address of principal executive offices)
(734) 455-3600
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(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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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 November 1, 2003 was 28,316.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PLASTIPAK HOLDINGS, INC.
FORM 10-K INDEX
PART I .................................................................................
Item 1. Business ........................................................................
Item 2. Properties ......................................................................
Item 3. Legal Proceedings ...............................................................
Item 4. Submission of Matters to a Vote of Security Holders .............................
PART II .................................................................................
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................................
Item 6. Selected Financial Data .........................................................
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................................
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .....................................................................
Item 8. Financial Statements and Supplementary Data .....................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .............................................
Item 9A. Controls and Procedures .........................................................
PART III .................................................................................
Item 10. Directors and Executive Officers of the Registrant ..............................
Item 11. Executive Compensation ..........................................................
Item 12. Security Ownership of Certain Beneficial Owners
and Management ..................................................................
Item 13. Certain Relationships and Related Transactions ..................................
Item 14. Principal Accountant Fees and Services ..........................................
PART IV .................................................................................
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K .............................................................
i
PART I
ITEM 1. BUSINESS
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 majority of the equity interests of Plastipak Packaging do Brasil, Ltda
("Plastipak Brazil"), 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 Brazil.
Whiteline is a trucking company which serves 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. TABB
owns real estate and leases it to Packaging, Whiteline, and Clean Tech.
Plastipak Brazil produces injection-molded plastic performs and blow molds rigid
plastic packaging in Paulinia and Manaus. Plastipak Brazil also maintains a
sales office in Buenos Aires, Argentina. Other than Plastipak Brazil and its
subsidiaries, all of the Plastipak group of companies are headquartered in
Plymouth, Michigan.
Plastipak is a leading manufacturer of plastic packaging containers for
many of the world's largest consumer products companies. During fiscal 2003, we
manufactured and distributed approximately 7.4 billion containers worldwide for
over 450 customers. In North America, we are the exclusive supplier of plastic
containers to Procter & Gamble for heavy-duty, liquid laundry detergents and the
largest supplier of plastic containers to Kraft Foods for their salad dressings,
barbecue sauces and grated cheeses. We are recognized by our customers as an
innovator in blow-molded package design and manufacturing, and we have obtained
over 130 U.S. patents, many of which are registered in foreign countries, for
our state-of-the-art, package-manufacturing processes. For 36 years, we have
worked as a strategic partner with our customers in the early stages of their
new marketing initiatives. We provide integrated transportation and logistics
services, and satisfy our customers' needs for recycling, reliability and
dependability in plastic packaging. For the year ended November 1, 2003, our
revenue was $897.8 million, our earnings were $4.4 million and our EBITDA was
$102.2 million. For reconciliation between net earnings and EBITDA see
"Managements Discussion and Analysis of Financial Condition and Results from
Operations".
We have increased our revenue between 1999 and 2003 at a compounded
annual growth rate (CAGR) of approximately 12.2%. Further, all of our revenue
growth has been organic. This continued growth is being driven by the advantages
of plastic over glass and metal (e.g., weight, strength and shatter resistance),
customer preferences for plastic and technological advances. We believe that we
are well positioned to capitalize on the conversion trend and to increase our
market share in our product categories.
We locate our manufacturing plants near the filling sites of our key
customers. In addition to our track record of innovative design, superior
customer service and low-cost manufacturing processes, the proximity of our
locations to our key customers helps us retain our major customers. To meet the
demand of our diverse customer base, we operate thirteen plants in the United
States and Brazil. The total square footage of our manufacturing and warehousing
facilities is in excess of five million square feet. Our expansion in Brazil has
given us additional customer service capability and access to South America's
rapidly expanding plastic packaging market. We plan to use our relationships
with key customers to create new opportunities in North and South America.
Our principal executive offices are located at 41605 Ann Arbor Road,
Plymouth, Michigan 48170. Our mailing address is P.O. Box 2500C, Plymouth,
Michigan 48170-0907, and our telephone number is (734) 455-3600.
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-K MAY NOT PROVE TO BE
ACCURATE.
This Form 10-K contains certain "forward-looking statements,"
including, in particular, the statements about our plans and strategies, under
the headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and "Business." Although we believe that our plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, we cannot assure you that such plans, intentions or expectations
will be achieved. Important factors that could cause actual results to differ
materially from our forward looking statements are set forth above in this "Risk
Factors" section and elsewhere in this Form 10-K. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements.
1
OVERVIEW
Because our broad range of product lines serves customers in diverse
industries and geographic regions, we believe our revenue and cash flow are
relatively predictable, reducing our exposure to market or economic
fluctuations. We have increased revenue organically between 1999 and 2003 at a
CAGR of approximately 12.2%. To support our revenue growth, we have invested
approximately $350.0 million in facilities, machinery and equipment over the
last five years. We believe our commitment to investing in state-of-the-art
facilities, machinery and equipment has resulted in significant additional
capacity to serve our customers' needs, and enables us to produce plastic
containers at competitive prices.
In the year ended November 1, 2003, 68.9% of our revenue was generated
by our top ten customers, all of whom are under contracts having terms of
between one and five years. We or the customer, however, may terminate these
contracts earlier under certain circumstances. Terms and conditions of our
customer contracts vary, but in general the contracts are requirements contracts
that do not obligate the customer to purchase any given amount of product from
us.
Our primary raw materials consist of PET and HDPE resins. Although
revenue is affected by fluctuations in resin prices, our gross margin is, in
general, substantially unaffected by these fluctuations. In general, industry
practice and contractual arrangements historically have permitted us to pass
price increases through to our customers by means of corresponding changes in
product pricing. As a result, we believe that our gross profits are relatively
insulated from resin price fluctuations.
We design, manufacture and distribute plastic containers in four
product categories:
- carbonated and non-carbonated beverage;
- consumer cleaning;
- food and processed juices; and
- industrial, automotive and agricultural.
OUR PRODUCT CATEGORIES
CARBONATED AND NON-CARBONATED BEVERAGE
We are a leader in the beverage packaging industry. Our carbonated and
non-carbonated beverage business has continued to grow, as plastic has continued
to make inroads in replacing other packaging materials. This product category
includes carbonated soft drinks ("CSD"), bottled water, juice drinks and beer.
We have seen significant growth in non-CSD demand for PET bottles, which are
clear and light-weight, and have become the standard for the bottled water
industry. We are one of the largest suppliers of PET bottles used for Pepsi's
Aquafina and Dr Pepper's Deja Blue water. In addition, we were awarded a
long-term contract from the Buffalo Rock Company, the largest independently
owned Pepsi franchise, to supply CSD and bottled water containers. This business
is being serviced out of our new facility in McCalla, Alabama.
We are also a leading producer of bottles for the CSD industry, where
production complexity is relatively low and production runs are relatively long.
We are a leading supplier to Pepsi Cola Bottlers of PET bottles for all of its
Pepsi brands, including Pepsi, Diet Pepsi and Mountain Dew. Our other large CSD
customers include AmBev (South America's largest brewer), Beverage Associates
(Cadbury Beverages), Dr Pepper/Seven Up Bottling Group, and National Beverage.
Carbonated and non-carbonated beverage sales provided 45.0% of our revenue for
the year ended November 1, 2003.
CONSUMER CLEANING
Procter & Gamble and Reckitt Benckiser are among our largest customers
in this product category. We are the sole supplier for all of Procter & Gamble's
branded heavy-duty, liquid laundry detergent containers in North America,
including Tide, Cheer, Era and Gain. We also supply containers for various
household products, such as Procter & Gamble's Bounce and Febreze and Reckitt's
Lysol, Resolve and Electrasol. We partner with many of our customers to create
distinctive containers such as Procter & Gamble's award-winning 300-oz. Tide
dispenser bottle launched in 2000. We have long been an industry leader in
developing new proprietary plastic packaging for consumer cleaning products. In
1984, also with Procter & Gamble, we developed the system for applying the "Drip
Proof" spout for Tide liquid laundry detergent. We also use many of our patents
for value-added features such as in-mold labeling, where a plastic or paper
brand label is molded
2
into and becomes part of the actual plastic container in a single process,
replacing glued-on, post-manufacture labeling. We use a sophisticated
preferential heating process to produce oval PET bottles suitable for trigger
spray applications, a product with growing popularity among consumers. We are
pursuing significant growth opportunities associated with the continued
conversion to HDPE and PET packaging of household cleaners. We continue to grow
as liquid detergents, which are primarily packaged in plastic, capture market
share from powdered detergents, which are primarily packaged in cardboard.
Consumer cleaning container sales provided 30.8% of our revenue for the year
ended November 1, 2003.
FOOD AND PROCESSED JUICES
We produce HDPE, PET and polypropylene (PP) containers for customers in
the food industry, with a focus on customers for whom proprietary packaging
designs are critical to product identification and distinction. AC Humko,
Everfresh, Ken's Foods, Kraft Foods, The Kroger Company, Marzetti and Tropicana
are among our primary customers in this product category. We are the largest
supplier of plastic containers to Kraft Foods in North America for their salad
dressings, 10 and 18-oz. squeeze mayonnaise and Miracle Whip, barbecue sauces
and grated cheeses. We also produce plastic containers for such popular
processed foods as coffee creamers, relishes and vegetable oils.
Growth in this category has been driven by the continuing conversion
from metal, glass and paper containers to plastic bottles, as the functionality,
safety and improving economics of plastic became more apparent, and as consumer
preference for plastic packaging continued to grow. PET squeeze bottles for such
condiments as salad dressing and mayonnaise have proven extremely popular with
consumers who recognize the added convenience that plastic provides.
We are increasing our activity and presence in the production of PET
bottles required for the hot-fill packaging of shelf-stable juices and juice
drinks. The hot-fill process, in which bottles are filled at between 180 to 190
degrees Fahrenheit to kill bacteria, permits the shipment and display of juices
and juice drinks without refrigeration. The manufacturing process for hot-fill
PET packaging is more demanding than that used for cold-fill beverage
containers, and typically involves slower processing speeds, greater shape
complexity and heavier weights. Recently, we were awarded a long-term contract
from Pepsi to supply Gatorade bottles beginning in February 2004. This business
will be serviced out of our facility in Garland, Texas. Food and processed
juices container sales accounted for 12.7% of our revenue in the year ended
November 1, 2003.
INDUSTRIAL, AUTOMOTIVE AND AGRICULTURAL
Castrol, SOPUS Products (Equilon - Shell), Chevron/Texaco and Old World
Industries (Peak) are among our major customers in this product category. To
increase our product diversity, we have targeted end markets in this product
category, including motor oil, antifreeze, windshield washer fluid and other
specialty automotive aftermarket products. We also supply containers for BEHR
deck cleaners and BASF chemical products. Industrial, automotive and
agricultural container sales generated 5.5% of our revenue in the year ended
November 1, 2003.
OUR COMPETITIVE STRENGTHS
LONG-TERM RELATIONSHIPS WITH MAJOR CONSUMER PRODUCT COMPANIES IN DIVERSE, STABLE
INDUSTRIES
We enjoy long-standing relationships that average over 15 years with
our top ten customers, including Kraft Foods (over 15 years), Pepsi Cola (over
15 years), Procter & Gamble (over 25 years) and Reckitt Benckiser (over 25
years). With our key customers, we have strategic-supply arrangements, many of
which have three years or more remaining before renewal. We attribute these
close relationships to our creative design and engineering capabilities, high
level of customer service, high quality products, efficient manufacturing,
reliable delivery, speed to market and experienced and stable management team
and workforce. We supply several of these customers with 100% of their plastic
packaging needs nationally, regionally or for a specific brand, including Kraft
Foods salad dressings and Tide liquid laundry detergent.
Our long-term relationships with our customers are strengthened by our
ability to meet their need for cooperative package design and development
processes. Our skilled and creative engineering staff and location of plants
near key customers' filling facilities encourage continued customer loyalty.
STRATEGICALLY LOCATED, STATE-OF-THE-ART OPERATING FACILITIES
We serve our U.S. customers through a nationwide network of thirteen
strategically located, technologically advanced manufacturing facilities,
through our Productivity Center in Jackson Center, Ohio, through our Packaging
Development
3
Center in Medina, Ohio, and a network of strategically located warehouse
facilities. Brazil is served by manufacturing facilities in Paulinia and Manaus.
Our plants feature top quality injection molding machines, high speed blow
molders (including the multi-station GEM-PAK technology, which was developed and
patented by our manufacturing and engineering teams), computerized material and
inventory handling, and machines modified to allow the quick changeover of molds
to meet varying customer needs. Over the last five years, we have invested
approximately $350.0 million in our facilities and state-of-the-art production
equipment, which have significantly reduced our costs. Our facilities are
strategically located near the filling sites of most of our key customers, which
we believe enables us to facilitate just-in-time inventory management, eliminate
costly shipping and handling charges, reduce working capital needs and foster
the development of long-term manufacturing and distribution relationships. We
believe that locating our facilities near our key customers also creates entry
barriers for our competition. With our fleet of approximately 300 tractors and
1100 trailers, we offer same-day delivery to many of our customers.
TECHNOLOGY-DEVELOPMENT CAPABILITIES
We are proud of our industry leading engineering and design
capabilities and believe that we often earn and retain business as a result of
these skills. Our packaging development and productivity centers have secured
over 130 patents and continue to incorporate leading technology into
customer-driven applications. We also believe we have a sustainable competitive
advantage because we can produce prototypes of new designs with great speed and
creativity for our customers. We are able to design and deliver a prototype to a
customer just two weeks after they first explained their packaging concept to
us. We have re-engineered existing manufacturing equipment to allow quick mold
changeovers, reducing the changeover process from days to hours, giving us
greater production flexibility.
Our Packaging Development Center creates innovative product designs for
our customers, and our Productivity Center has developed major process
improvements in the manufacture of our containers. Our customers rely on our
design and technical expertise because brand distinctive package design is a
critical component in many of their marketing programs. We have centered a
substantial portion of our growth strategy on customers that require custom, as
opposed to stock, plastic containers as a critical component of their marketing
efforts.
CUSTOMER-ORIENTED CULTURE
In our 36 years in business, we have created a special culture focused
on customer service. Plastipak's engineering teams participate in the early
phases of our key customers' new marketing initiatives. As an integrated team,
we work alongside our customers to shape the design features of new packaging
containers and develop new processes and equipment to manufacture those
containers. Further, to ensure that our employees' incentives are aligned with
our customers' objectives, compensation for approximately 500 key manufacturing
employees with leadership responsibility is based on operating and logistics
performance measures. We believe these employee incentives will further enhance
our strong relationships with key customers, help us attract new customers and
allow us to control costs.
MANAGEMENT DEPTH AND EXPERIENCE
Our management team has an impressive track record of cultivating our
customer base of major consumer product companies, launching innovative product
designs and achieving profitable, organic growth. Our top 12 senior executives
have on average 23 years experience in the industry and 19 years experience at
Plastipak. Our executives are invested in our success through their over 90%
ownership of our equity. We believe our retention levels are among the highest
in the industry. Our management team includes engineers who have developed many
of the processes that we have patented and use to our competitive advantage.
OUR BUSINESS STRATEGY
Our strategy is to continue to increase our revenues and profitability
and to further enhance our leading industry positions. From fiscal 1999 to 2003,
we increased our revenues by 58.8% to $897.8 million, our EBITDA by
approximately $36.0 million to $102.2 million (see "Management's Discussion and
Analysis of Financial Condition and Results from Operations") and our production
volume by 42.2% to 7.4 billion units, all through organic growth. We will
continue to prudently invest in production equipment only after establishing
contracts with our customers and completing our normal rigorous internal review
process. The key components of our strategy include the following objectives:
4
CAPITALIZE ON CONTINUED INDUSTRY CONVERSION TO PLASTIC CONTAINERS
We expect the conversion of food products from glass, paper and cans to
plastic containers, which we believe is being driven by consumer preference,
favorable total packaging economics, technology advances and improved
functionality, will continue. We are well positioned to capitalize on the
continuation of these trends. For example, our new product initiatives include
PET pickle jars, coffee containers and various juice bottles.
In addition to opportunities in the domestic hot-fill PET arena, and
increased use of PET containers for household cleaners, we believe that
additional conversions to HDPE packaging will occur in various snack, dairy and
juice drink applications.
Additionally, we expect that over the next three to five years, as
barrier technology progresses, a portion of the single serving beer container
market will be converted to plastic, for use in venues where breakage is a
concern. Brewers in the beer industry are strongly committed to brand identity
and differentiation, and would prefer serving their product to customers in
stadiums, concerts, sporting events, and at pools and beaches, in a way that
permits them to maintain that identity (rather than in paper or plastic cups).
Single serving plastic beer bottles offer that method.
We also believe that as barrier technology for smaller size plastic
containers progresses, we will be positioned to compete for the conversion of
single serving CSD packaging from aluminum cans and 10-oz. glass to plastic, a
60 billion-unit market. Last year, a major soft drink manufacturer introduced a
500 ml package utilizing barrier containers Plastipak supplied.
Also, owing to environmental concerns about disposable plastic waste,
the industries we serve are requiring more high-quality, recycled content in
their plastic packaging. We have significant experience in producing high
quality HDPE and PET containers with recycled content for various customers. We
own a dedicated facility that produces post-consumer recycled plastic resin that
offers us a secure source for recycled resin for our products. We believe we are
well positioned to capitalize on this growing consumer interest toward
recycling.
CONTINUE DEVELOPING VALUE-ADDED SERVICES AND PRODUCTS
Supported by our technology and packaging development centers, we have
successfully researched, developed and launched new-patented technologies in our
marketplace. We believe our success in this area differentiates us from our
competitors and will enable us to continue to gain market share. For key
customers, our technology development is an integral part of their overall
marketing strategy and has helped our customers drive innovation in the
marketplace.
EXPAND MARKET SHARE WITH KEY CUSTOMERS
Our high-quality, low-cost manufacturing capabilities and track record
of focused customer service position us well to continue growing market share
with our customer base of major consumer product companies. As our customers
continue to acquire new businesses and brands, we believe that we will secure
additional long-term contracts with them and grow our product offerings. Central
to our strategy to expand market share with key customers are the continued:
- delivery of focused customer service;
- location of facilities close to customer plants;
- innovation in packaging design; and
- provision of low cost manufacturing processes.
We also intend to target strategic new customers who require our core
competencies in blow molding and injection molding.
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OUR CUSTOMERS
Substantially all of our sales are made to major branded consumer
products companies, primarily in the United States. Our customers demand a high
degree of packaging design and engineering to accommodate complex bottle shapes,
performance requirements, materials, speed to market and reliable delivery. As a
result, many customers opt for long-term contracts, many of which have terms of
one to five years. All of our top ten customers are under contracts with terms
between one and five years. These contracts, however, may be terminated earlier
by us or our customer upon a material breach of the contract or, in some cases,
in the event we determine it is not in our best interest to change our terms and
conditions through the procedures outlined in the contract to meet competitive
prices. Our customers have requested competitive price reductions from time to
time in the past under their contracts with us.
In many cases, we are the sole supplier of all of a customer's custom
plastic bottle requirements nationally, regionally or for a specific brand. Our
largest customer is Procter & Gamble. For fiscal 2001, 2002 and 2003, Procter &
Gamble accounted for approximately 23%, 25% and 27% of our revenue,
respectively. Our largest customers include:
CUSTOMER
CUSTOMER PRODUCT CATEGORY SINCE (a)
- -------------------------------- --------------------------------------- -----------
Procter & Gamble Consumer Cleaning Mid 1970s
Reckitt Benckiser Consumer Cleaning Mid 1970s
Kraft Foods Food and Processed Juices Mid 1980s
Old World Industrial, Automotive and Agricultural Mid 1980s
The Kroger Company Carbonated and Non-Carbonated Beverage, Late 1980s
Food and Processed Juices
National Beverage Carbonated and Non-Carbonated Beverage Late 1980s
Pepsi COBO Carbonated and Non-Carbonated Beverage Late 1980s
AC Humko Food and Processed Juices Early 1990s
PepsiAmerica Carbonated and Non-Carbonated Beverage Early 1990s
AmBev Carbonated and Non-Carbonated Beverage Mid 1990s
Beverage Associates Cooperative Carbonated and Non-Carbonated Beverage Mid 1990s
(Cadbury Beverages)
Dr Pepper Bottling Group Carbonated and Non-Carbonated Beverage Mid 1990s
Pepsi CPG Carbonated and Non-Carbonated Beverage Mid 1990s
SOPUS Products Industrial, Automotive and Agricultural Late 1990s
Polar Beverages Carbonated and Non-Carbonated Beverage Late 1990s
Buffalo Rock Company Carbonated and Non-Carbonated Beverage Late 2003
(a) These companies include their predecessors, if applicable.
While our business is concentrated with our major customers, we believe
that our technological skills and low-cost position, coupled with long-term
"partnering" relationships with our customers, make the complete loss of any of
these major customers less likely. Our ten largest customers have been
associated with us for an average of over 15 years.
RAW MATERIALS
Resin and energy, the principal raw materials of our plastics business,
have remained widely available to our U.S. operations, though subject to
considerable price volatility. The majority of Plastipak's customer contracts
allow us to pass through resin price increases on 30 days' notice. Since we
usually receive 30 days' notice of price increases from our resin suppliers, we
are generally able to tolerate price increases without substantial harm to
profits, although contracts containing pass-through provisions may not be
available to us in the future. See "Risks Related to Our Business." As a major
consumer of resin, we also leverage our bulk purchasing power to gain the best
possible pricing and terms we can obtain.
Clean Tech has continued to be able to meet almost all of our needs for
post-consumer recycled material. Post-consumer recycled material prices tend to
fluctuate in tandem with the virgin resin markets, since demand for
post-consumer recycled material increases as prices for virgin material rise
above those for post-consumer recycled material.
Trade restrictions and currency devaluations have driven up the cost of
imported resin in Brazil. See "Risks Related to Our Business."
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MANUFACTURING AND DISTRIBUTION
We serve our customers with a wide range of state-of-the-art
manufacturing capabilities and services. Our thirteen manufacturing facilities
are strategically located near the filling sites of our key customers. We
believe that our proximity to key customers enables us to work closely with our
customers, to facilitate just-in-time inventory management, to eliminate costly
shipping and handling charges, to reduce working capital needs and to foster the
development of long-term manufacturing and distribution relationships.
We continue to be an industry leader in production technologies for
plastic containers by:
- efficiently manufacturing containers with specialized features, such as
multiple layers, barrier coatings, in-mold labeling and bottles designed
to accommodate trigger sprayers;
- improving manufacturing technology to allow ever increasing production
volumes without increasing the need for floor space (including the
multi-station GEM-PAK, which we developed and patented and which
significantly increases production capability as compared to older
blow-molding machines); and
- making innovative modifications to our blow molders to effect tooling
changes in a matter of hours, instead of days, allowing quick shifts in
product mix.
To meet demand and reduce our inventory costs, our facility managers
receive real-time order and forecasting information from some of our customers.
We have completed the implementation of phase I and phase II of our SAP
enterprise software project, which has integrated, automated and streamlined
many of our supply chain operations. As a result, we will better serve our
customers' needs.
Our subsidiary, Whiteline, is a fully licensed ICC common carrier, and
serves approximately 70% of our transportation needs. With Whiteline's fleet of
approximately 300 tractors and 1100 trailers, we offer same-day delivery to many
of our customers.
PACKAGING DEVELOPMENT
Our Productivity and Packaging Development Centers create innovative
product designs for our customers and process improvements in the manufacture of
our containers. Our customers rely on our design and technical expertise because
package design is a critical component in many of their marketing programs. We
have an in-house staff of approximately 70 employees at our Productivity and
Packaging Development Centers dedicated to product development and improvement.
These professionals work closely with customers to develop new products and
designs, often using sophisticated computer-aided design software.
We are capable of generating new product designs within weeks of
customer requests. We also believe that our customized designs help our
customers differentiate their products in the marketplace while also improving
the appeal and performance of their products. We believe that these capabilities
have given us a significant competitive advantage in certain high-margin niche
container product markets where the ability to produce sophisticated package
designs and deliver high quality graphics at a reasonable cost is crucial to a
product's success. Additionally, we have the engineering capabilities in-house
to create new machines, which can more efficiently produce the proprietary
products developed for our customers. Packaging development expenses were
approximately $7.1 million, $8.6 million and $8.0 million for fiscal 2001, 2002
and 2003, respectively.
SALES AND MARKETING
We reach our large and diversified base of over 450 customers primarily
through our direct field sales force. A large number of our sales
representatives focus their work on particular product lines and national
accounts, while the remaining field sales staff covers specific geographic
territories. We believe that our direct field sales force is able to focus on
target markets and create strong, enduring customer relationships. A direct
sales force also allows us to coordinate centralized pricing strategies.
7
FOREIGN OPERATIONS
Since 1996, we have expanded our operations into South America. We are
working to leverage our relationships with new customers in Brazil into new
opportunities in North and South America. Our initial operation was a plant
located in suburban Sao Paulo (Paulinia), Brazil. We have a facility in Manaus,
an area with favorable tax incentives in the state of Amazonia, Brazil. We also
have a sales office in Buenos Aires, Argentina. Our Brazilian net revenue has
grown from $8.0 million in 1996 to $86.5 million for the year ended November 1,
2003. We believe that the global trend in the conversion of glass, metal and
paper to plastic packaging will continue, particularly in the developing world,
as consumer economies expand and industrialization continues.
We are establishing three small entities in Central Europe, Plastipak
Slovakia, s.r.o., Plastipak Czech Republic, s.r.o., and Clean Tech Slovakia,
s.r.o. Plastipak Slovakia will serve as the technical and design center and
provide sales, marketing and administrative services for Central Europe. We are
currently negotiating contract terms and conditions with a major customer to
support the Plastipak Czech Republic site. If we are unsuccessful in these
negotiations, we will not be investing a significant dollar amount in this
entity. If we are successful, it is anticipated that the initial investment will
be approximately $7 to $10 million.
With respect to Clean Tech Slovakia, we will be applying for a
government grant from a recycling fund established by the Slovakian government
and this application is due by January 31, 2004. We presently intend to supply
recycled material for various applications out of this new site. It is unknown
at this time how much we will invest in this entity and this will depend on the
success of the grant application from the recycling fund.
COMPETITION
We face substantial competition throughout our product categories from
a number of well-established national and regional companies. Our primary
national competitors include Amcor, American National Can, Inc., Ball Plastics,
Consolidated Container Company, Constar International, Graham Packaging Company,
Liqui-Box Corporation, Owens-Illinois, Inc., and Silgan Holdings, Inc. In
addition, we face substantial competition from a number of captive packaging
operations with significant in-house bottling and blow-molding capacity, such as
Dean Foods, The Kroger Company, The Perrier Group of America and Suiza Foods.
INTELLECTUAL PROPERTY
We own over 130 U.S. patents, and have over 74 patent applications
currently pending at the United States Patent and Trademark Office. In addition,
over 270 foreign patents have been issued and are currently active, and
approximately 170 are pending, although not all of our U.S. patents are
registered in foreign countries. Our patents include patents for our GEM-PAK
molding system, a gas clamping electronically controlled molding machine.
We are continually developing new patents. Because our patented
packaging designs create goodwill and result in product differentiation, we
believe that these intellectual property assets are important to our business.
Our business is not dependent on any one of these patents, since plastics
manufacturing technology continues to move forward rapidly. Patent licensing,
however, serves to keep the new technologies we develop proprietary, giving us a
short, but important, window of competitive advantage.
In addition, we rely on proprietary know-how, continuing technological
innovation and other trade secrets to develop products and maintain our
competitive position. We attempt to protect our proprietary know-how and our
other trade secrets by executing, when appropriate, confidentiality agreements
with our customers and employees. We cannot assure you that our competitors will
not discover comparable or the same knowledge and techniques through independent
development or other means.
We have also licensed or sub-licensed certain of our intellectual
property rights to third parties. These range from trimming systems that
eliminate any plastic waste or "chips" from containers to our unique "in-mold
labeling" equipment for bottle decoration. Many bottle designs are also licensed
for revenue generation. In some cases, patented bottle designs are assigned or
used by our customers, as their needs arise. Since our unique customer
relationships allow us to be in on the ground floor in bottle design
development, our customers often attain patent coverage for our joint design
efforts.
8
ENVIRONMENTAL COMPLIANCE
We are subject to national, state, local and foreign laws and
regulations that impose limitations and prohibitions on the discharge and
emission of, and establish standards for the use, disposal, and management of,
some kinds of materials and waste, and impose liability for the costs of
investigating and cleaning up, and damages resulting from, present and past
spills, disposals, or other releases of hazardous substances or materials.
Environmental laws and regulations can be complex and may change often.
Compliance with these laws and regulations can require significant capital
expenditures, and violations may result in substantial fines and penalties. In
addition, environmental laws in the United States, such as the Comprehensive
Environmental Response, Compensation and Liability Act, impose liability on
several grounds for the investigation and cleanup of contaminated soil,
groundwater, and buildings, and for damages to natural resources, at a wide
range of properties. For example, contamination at properties formerly owned or
operated by us, as well as at properties we currently own or operate, and
properties to which hazardous substances were sent by us, may result in
liability for us under these environmental laws and regulations. As a
manufacturer, we also have an inherent risk of liability under environmental
laws and regulations regarding ongoing operations.
From time to time, we have been subject to claims asserted against us
by regulatory agencies for environmental matters relating to the generation and
disposal of hazardous substances and wastes. Some of these claims have related
to properties or business lines acquired by us after a release has occurred. In
each known instance, however, we believe that the claims asserted against us, or
obligations incurred by us, will not result in a material adverse effect upon
our business, financial position or results of operations. Nonetheless, there
can be no assurance that activities at these facilities or facilities acquired
in the future, or changes in environmental laws and regulations, will not result
in additional environmental claims being asserted against us or additional
investigations or remedial actions being required.
In addition, a number of governmental authorities in the United States
and in other countries have enacted and are expected to continue to enact
legislation aimed at reducing the amount of disposed plastic wastes. These
programs have included, for example, mandating rates of recycling and/or the use
of recycled materials, imposing deposits or taxes on plastic packaging material,
and/or requiring retailers or manufacturers to take back packaging used for
their products. This legislation, as well as voluntary initiatives similarly
aimed at reducing the level of plastic wastes, could reduce the demand for some
plastic packaging, result in greater costs for plastic packaging manufacturers
or otherwise affect our business. To date, these initiatives and developments
have not materially and adversely affected us. Some consumer products companies
(including some of our customers) have responded to these governmental
initiatives and to perceived environmental concerns of consumers by, for
example, using bottles made in whole or in part of recycled plastic. Our
subsidiary, Clean Tech, is among the top 20 suppliers of post-consumer recycled
materials in the United States. Clean Tech supplies the majority of Plastipak's
post-consumer recycled materials needs.
EMPLOYEES
We have approximately 3,600 non-union employees in the U.S. and 153
employees in Brazil. Given the seasonality of the plastic bottling industry, we
expect to continue to employ temporary and seasonal workers during peak
production months, in both the United States and Brazil. We have not had any
material labor disputes in the past five years and consider our relations with
our employees to be good.
RISKS RELATED TO OUR BUSINESS
COMPETITION -- WE FACE CONSIDERABLE COMPETITIVE RISKS.
We face substantial competition from a number of well-established
national and regional companies. Our primary national competitors include Amcor,
American National Can, Inc., Ball Plastics, Consolidated Container Company,
Constar International, Graham Packaging Company, Liqui-Box Corporation,
Owens-Illinois, Inc., and Silgan Holdings, Inc. In addition, we face substantial
competition from a number of captive packaging operations with significant
in-house bottling and blow-molding capacity, such as Dean Foods, The Kroger
Company, The Perrier Group of America and Suiza Foods. Many of our competitors
have financial and other resources that are substantially greater than ours. In
order to compete successfully, we will need to continue to make substantial
capital expenditures to develop new products and streamline our manufacturing
processes. Competition in our industry could negatively affect our business
operations.
9
CONCENTRATION OF CUSTOMERS -- WE HAVE SEVERAL MAJOR CUSTOMERS, THE LOSS OF WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
For the fiscal year ended November 1, 2003, our largest single customer
accounted for approximately 27% of our revenue. Our ten largest customers
accounted for approximately 68.9% of our revenue. The termination by any of
these customers of their relationship with us could have a material adverse
effect on our business and results of operations. All of our top ten customers
are under contracts with terms of between one and five years. In general, these
contracts are requirements contracts that do not obligate our customers to
purchase any specific minimum product from us. These contracts may be terminated
by us or by our customer prior to their expiration dates upon a material breach
of the contract or, in some cases, in the event we determine it is not in our
best interest to change our terms and conditions through the procedures outlined
in the contract to meet competitive prices. Our customers have requested
competitive price reductions from time to time in the past under their contracts
with us.
ECONOMIC AND POLITICAL RISK IN SOUTH AMERICA -- WE HAVE SPECIAL RISKS ASSOCIATED
WITH OUR SOUTH AMERICAN OPERATIONS.
We have significant operations in Brazil. We currently have two plants
located in Brazil. We also have a sales office in Buenos Aires, Argentina. For
the year ended November 1, 2003, net sales of our Brazilian subsidiaries totaled
approximately $86.5 million, representing approximately 9.2% of our worldwide
revenue for such period. We experienced a net loss of approximately $8.3 million
on our Brazilian sales for the year ended November 1, 2003.
Our results to date in Brazil have been less than we expected, as
currency devaluations, high interest rates, inflation, import restrictions and a
legal system which makes it difficult to enforce contracts have reduced both
revenue and profits. Import duties on equipment needed to upgrade our production
capabilities in Brazil are significant. We are working diligently to improve and
expand our operations in Brazil to make them profitable, but we cannot assure
you that our Brazilian operations will ever become profitable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Foreign Operations."
The following factors create higher risks to our South American
operations than we experience in the United States:
- continuing high nominal interest rates;
- limitations on conversion of foreign currencies into U.S.
dollars or remittance of dividends and other payments;
- imposition or increase of withholding and other taxes on
remittances and other payments;
- inability to fully utilize foreign tax credits and fully pass
through foreign losses here in the U.S. due to limitations
imposed by U.S. tax laws;
- the potential for political instability and inflation and the
imposition or increase of restrictions on investments and
other restrictions by foreign governments;
- inability of our foreign subsidiaries to enforce certain of
their key agreements through the legal systems in South
America; and
- recent changes in Brazilian tax laws.
CURRENCY FLUCTUATIONS -- WE HAVE SIGNIFICANT FOREIGN EXCHANGE RISKS WITH RESPECT
TO OUR BRAZILIAN OPERATIONS THAT WE CANNOT CONTROL.
Our Brazilian contracts are priced in U.S. dollars; however, we invoice
our customers in the Brazilian Real. Following several significant devaluations
of Brazil's currency, despite "make whole" agreements in our contracts, some of
our customers agreed to only partial price increases. These increases accounted
for only a portion of the cost to us of devaluation, leading to a reduction in
our gross margin in Brazil.
Fluctuations in the value of the U.S. dollar may adversely affect our
results of operations. Because our consolidated financial results are reported
in dollars, if we generate sales or earnings in other currencies the translation
of those results into dollars can result in a significant increase or decrease
in the amount of those sales or earnings. In addition, our debt
10
service requirements are primarily in U.S. dollars, even though a portion of our
cash flow is generated in the Brazilian Real. Significant changes in the value
of the Brazilian Real relative to the U.S. dollar could have a material adverse
effect on our financial condition and our ability to meet interest and principal
payments on U.S. dollar denominated debt, including the exchange notes and
borrowings under the Amended Credit Agreement. Given the volatility of exchange
rates, we may not be able to effectively manage our currency transaction and/or
translation risks. It is expected that the volatility in currency exchange rates
will continue to have a material effect on the financial condition or results of
operations of our foreign subsidiaries. We expect that the portion of our
revenue denominated in non-dollar currencies will continue to increase in future
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Effects of Changes in Exchange Rates." In addition, the
value of our investment in Plastipak Brazil is partially a function of the
currency exchange rate between the U.S. dollar and the Brazilian Real. We have
not executed hedge transactions to endeavor to reduce our exposure to foreign
currency exchange rate risks, and do not believe that hedging is a viable option
for us in the immediate future.
FUTURE CAPITAL REQUIREMENTS -- IF WE CANNOT OBTAIN THE FUNDS TO MAKE THE
SIGNIFICANT CAPITAL EXPENDITURES THAT OUR BUSINESS WILL REQUIRE, WE MAY NOT BE
ABLE TO MAINTAIN OUR CURRENT LEVEL OF OPERATIONS OR GROW OUR BUSINESS.
To fund our growth plans and maintain our current level of operations,
we will continue to make substantial capital expenditures for product
development and improvements in our manufacturing processes. In fiscal 2002 and
2003, we made capital expenditures of approximately $85.0 million and $107.3
million, respectively. We estimate that capital expenditures in each of fiscal
2004 and 2005 will be approximately $120.0 million and $70.0 million,
respectively. In addition, we may be required to make additional investments as
the demands of our industry and our customers evolve. We may not be able to fund
any necessary investments, and the failure to do so could have a material
adverse effect on our business, financial condition and results of operations.
ACQUISITION STRATEGY -- WE COULD FACE CONSIDERABLE BUSINESS AND FINANCIAL RISKS
IN IMPLEMENTING OUR ACQUISITION STRATEGY.
Our growth strategy may include acquisitions of other consumer goods
packaging businesses, although we do not currently have any commitments or
agreements with respect to any such acquisitions. Risks we could face with
respect to acquisitions include:
- problems in assimilating operations, technologies, services
and products;
- diversion of management's attention from existing business
concerns; and
- incurrence of debt and contingent liabilities.
Any of these risks could have a material adverse effect upon our
business, financial condition and results of operations. We may not be
successful in consummating future acquisitions on favorable terms or at all.
EXPOSURE TO FLUCTUATIONS IN RESIN PRICES AND DEPENDENCE ON RESIN SUPPLIERS -- WE
ARE EXPOSED TO THE RISKS ASSOCIATED WITH FLUCTUATIONS IN THE PRICES OF RESIN.
We face the risk that our access to resin is interrupted or that we may
not be able to purchase it at competitive prices. We use large quantities of
plastic resins in manufacturing our products. Plastic resins accounted for a
major portion of our cost of goods sold in fiscal 2003. Plastic resins are
subject to substantial price fluctuations caused by shortages in supply and
changes in the prices of natural gas, crude oil and other petrochemical products
from which these resins are produced. We may experience supply interruptions in
the future. Our purchases of raw materials are subject to market prices.
Although we generally have pass through provisions in many of our customer
contracts, market conditions may not permit us to pass through any future raw
material price increases. The inability to procure resin or significant
increases in resin prices, coupled with an inability to promptly pass such
increases on to customers, would have a material adverse effect on our financial
condition and results of operations. Furthermore, a significant increase in
resin prices could slow the pace of conversion from paper, glass and metal
containers to plastic containers to the extent that these costs are passed on to
the customer. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Raw Materials."
11
DEPENDENCE ON KEY PERSONNEL -- WE ARE DEPENDENT ON SEVERAL KEY SENIOR MANAGERS,
THE LOSS OF WHOM COULD HAVE A MATERIAL EFFECT ON OUR BUSINESS AND DEVELOPMENT.
Our business and our future success depend to a significant extent upon
the continued service of our executive officers and senior managers. In
particular, the loss of the services provided by William C. Young, William A.
Slat, Michael J. Plotzke, Gene W. Mueller, Pradeep Modi, Thomas Busard, Frank
Pollock, Richard Darr, J. Ronald Overbeck, Leann M. Underhill and David
Daugherty, among others, could have a material adverse effect on our business
and results of operations. Our failure to retain such key personnel could have a
material adverse effect on our business, financial condition and results of
operations.
OTHER RISKS
CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK -- WE ARE CONTROLLED BY THE YOUNG
FAMILY.
William C. Young, our Chief Executive Officer, and members of his
immediate family own over 90% of our common stock on a fully-diluted basis and,
therefore, control our board of directors. As a result, the Young family will
continue to have the ability to elect and remove directors and determine the
outcome of matters presented for approval by our shareholders. Circumstances may
occur in which the interests of the Young family could be in conflict with the
interests of the holders of our 10.75% Senior Notes.
REGULATION -- OUR OPERATIONS AND PRODUCTS ARE SUBJECT TO SUBSTANTIAL
ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS.
Our operations and properties are subject to stringent federal, state,
local and foreign laws and regulations relating to pollution, environmental
protection and workplace health and safety. Such laws and regulations frequently
change, are different in every jurisdiction, and can impose substantial fines
and sanctions for violations. Our operations must comply with these laws, and
must adapt to regulatory requirements in all jurisdictions in which we operate
as these requirements change.
Environmental laws generally impose liability for costs to investigate
and remediate contamination without regard to fault and, under certain
circumstances, liability may be joint and several resulting in one responsible
party being held responsible for the entire obligation. We have incurred, and
may continue to incur, such costs related to at least two of our properties.
Although we believe our operations and properties are substantially in
compliance, new laws and regulations, stricter enforcement or interpretation of
existing laws and regulations or the discovery of previously unknown
contamination or previously unknown off-site liability, the imposition of new
clean-up requirements, or claims for property damage or personal injury arising
from environmental matters could require us to incur costs or become the basis
for the new or increased liabilities that could have a material adverse effect
on our business, financial condition or results of operations.
Legislation concerning mandatory rates of recycling, mandatory use of
recycled materials, deposits or taxes on plastic packaging material or
requirements that retailers or manufacturers take back packaging used for their
products could reduce the demand for certain plastic packaging, result in
greater costs for plastic packaging manufacturers and, therefore, have a
material adverse effect on our business, financial condition and results of
operations.
PRODUCTS LIABILITY RISK -- WE FACE PRODUCTS LIABILITY RISK. IN ADDITION, OUR
BUSINESS IS EXPOSED TO THE PRODUCTS LIABILITY RISK OF OUR CUSTOMERS.
Because our plastic containers are used for consumer products, our
business is exposed to products liability risk and the risk of negative
publicity. The amount and scope of our product liability insurance may not be
adequate to cover a products liability claim that is successfully asserted
against us.
In addition, we are exposed to the products liability risk and negative
publicity of our customers and suppliers. Because many of our customers are
carbonated soft drink, dairy, water and branded consumer products companies,
with their own products liability risk, our sales may decline if any of our or
our competitors' customers are sued on a products liability claim. We may also
suffer a decline in sales from the negative publicity associated with such a
lawsuit or with adverse public perceptions in general regarding our products or
our customers' products in our containers.
12
INTELLECTUAL PROPERTY PROTECTION -- WE ENJOY LIMITED PROTECTION FOR OUR
INTELLECTUAL PROPERTY, AND ARE SUBJECT TO A PATENT INFRINGEMENT CLAIM.
We have a number of patents covering design and construction of our
products and manufacturing equipment. Patents do not ensure that competitors
will not develop competing products or infringe upon our patents, or that the
patents will withstand challenge in litigation. The costs of litigation to
defend our patents could be substantial and may outweigh the benefits of
enforcing our rights under our patents. Patent laws of foreign countries may
offer less protection than the patent laws of the United States.
We also rely on unpatented proprietary technology, trade secrets and
know-how. Others may independently develop the same or similar technology or
otherwise obtain access to our unpatented technology. If we are unable to
maintain the proprietary nature of our technologies, we could be materially
adversely affected.
In 1999, North American Container filed a lawsuit against us and 41
other defendants claiming some of our products infringe one of their patents and
requesting an unspecified amount in damages. See "Business -- Legal
Proceedings". Discovery has been completed. The Court has issued its order
eliminating a significant portion of NAC's claims. This ruling is subject to the
appeal process. If we do not prevail in the litigation, our business and
financial condition could be materially adversely affected.
13
ITEM 2. PROPERTIES
We occupy a number of owned and leased properties located throughout
the United States, Brazil and Argentina for our technical centers, manufacturing
plants, corporate headquarters and sales offices. We currently utilize 40
facilities, 15 of which we own and 25 of which we lease. Our interests in all of
our U.S. facilities are pledged to secure our current credit facility.
The following table lists the location, square footage, principal use and
ownership interest in our facilities.
LOCATION SQUARE FOOTAGE PRINCIPAL USE OWNED/LEASED
-------- -------------- ------------- ------------
Jackson Center, OH 66,000 Productivity Center Owned
Medina, OH 74,000 Packaging & Development Center Owned
Champaign, IL 614,500 Manufacturing Owned
Dundee, MI 135,300 Manufacturing Owned
East Longmeadow, MA 262,700 Manufacturing Owned
Garland, TX 113,400 Manufacturing Owned
Highland, TX 72,200 Manufacturing Owned
Jackson Center, OH 970,000 Manufacturing Owned
Manaus, Brazil 70,000 Manufacturing Owned
McCalla, AL 281,000 Manufacturing Owned
Medina, OH 213,700 Manufacturing Owned
Paulinia, Brazil 161,000 Manufacturing Owned
Plant City, FL 78,500 Manufacturing Owned
Westland, MI 198,300 Manufacturing Owned
Lima, OH 126,600 Warehouse Owned
Alsip, IL 204,000 Manufacturing, Warehouse Leased
Alsip, IL 100,000 Warehouse Leased
Atlanta, GA 76,800 Warehouse Leased
Ayer, MA 77,000 Warehouse Leased
Canton, MI 35,000 Warehouse Leased
Champaign, IL 187,000 Warehouse Leased
Champaign, IL 208,630 Warehouse Leased
Champaign, IL 85,000 Warehouse Leased
Champaign, IL 145,000 Warehouse Leased
Champaing, IL 8,285 Warehouse Leased
Dallas, TX 168,712 Warehouse Leased
Garland, TX 200,000 Warehouse Leased
Houston, TX 140,000 Warehouse Leased
Lakeland, FL 63,008 Warehouse Leased
Lima, OH 100,000 Warehouse Leased
Lima, OH 100,000 Warehouse Leased
Medina, OH 178,000 Warehouse Leased
Medina, OH 6,000 Warehouse Leased
Medina, Ohio 74,000 Warehouse Leased
Plymouth, MI 2,880 Warehouse Leased
Romulus, MI 246,750 Warehouse Leased
Westland, MI 12,000 Warehouse Leased
Plymouth, MI 9,000 Office Leased
Plymouth, MI 32,000 Truck Garage Leased
Plymouth, MI 160,800 Headquarters Leased
We believe that our plants, which are of varying ages and types of
construction, are in good condition, are suitable for our operations and
generally provide sufficient capacity to meet our requirements for the
foreseeable future.
14
ITEM 3. LEGAL PROCEEDINGS
We are a party to various litigation matters arising in the ordinary
course of our business. We cannot estimate with certainty the ultimate legal and
financial liability of this litigation but we believe, based on our examination
of these matters, experience to date and discussions with counsel, that the
ultimate liability will not be material to our business, financial condition or
results of operations.
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 is spending approximately $75,000 per month to
vigorously defend this suit for the alleged patent infringement of NAC's
"plastic container." The discovery phase of the litigation has been completed.
The Court issued an order that eliminated a significant portion of NAC's claims.
This order is subject to the appeal process. Our future cost of defending this
action for a protracted period of time could exceed $1.0 million.
Camplas, one of Plastipak Brazil's customers, failed to pay for bottles
supplied to it by Plastipak Brazil. In 1998, Plastipak Brazil filed suit for
payment. In response to Plastipak Brazil's suit, Camplas filed a counterclaim
alleging that the bottles were defective. Camplas seeks damages from Plastipak
Brazil in the amount of approximately R$12,200,000 (reais). The litigation is
progressing through their legal system. We do not believe this litigation
presents the risk of a material adverse effect on our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public market for Plastipak Holdings common equity.
15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the four fiscal
years ended November 1, 2003 were derived from our audited consolidated
financial statements. The following selected financial data for the year ended
October 30, 1999 were derived from audited combined financial statements of the
predecessor companies. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements and the related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial information included elsewhere in this Form
10-K.
YEAR ENDED
--------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(dollar amounts in thousands)
STATEMENTS OF OPERATIONS DATA:
Total Revenues ......................... $ 565,527 $ 701,872 $ 809,774 $ 812,190 $ 897,829
Costs and expenses ..................... 491,009 625,691 709,012 697,001 777,670
Gross Profit ................. 74,518 76,181 100,762 115,189 120,159
Selling, general and
administrative expenses ............ 50,253 50,958 64,477 68,506 74,965
Operating profit ............. 24,265 25,223 36,285 46,683 45,194
Interest expense ....................... 26,021 27,028 28,956 35,099 36,902
Other income (a) ....................... (2,510) (1,418) (3,102) (1,840) (612)
Earnings (loss) before income taxes
and change in accounting principle.. 754 (387) 10,431 13,424 8,904
INCOME TAXES:
Current ............................ (270) 223 2,111 20 (485)
Deferred ........................... 1,967 (2,403) 1,173 4,811 5,028
--------- --------- --------- --------- ---------
$ 1,697 $ (2,180) $ 3,284 $ 4,831 $ 4,543
Earnings (loss) before
cumulative effect of change in
accounting principle ............... (943) 1,793 7,147 8,593 4,361
Cumulative effect of change in
accounting principle (b) ........... - 3,125 - - -
--------- --------- --------- --------- ---------
Net earnings (loss) .......... $ (943) $ 4,918 $ 7,147 $ 8,593 $ 4,361
========= ========= ========= ========= =========
SUPPLEMENTAL MEASURES:
EBITDA (c) ............................. $ 66,166 $ 68,886 $ 84,099 $ 96,541 $ 102,156
Ratio of net debt to EBITDA (d) ........ 4.09x 3.73x 3.32x 3.33x 3.42x
Ratio of EBITDA to interest expense .... 2.54x 2.55x 2.90x 2.75x 2.77x
BALANCE SHEET DATA (AT END OF PERIOD):
Adjusted working capital (e) ........... $ 41,872 $ 23,920 $ 31,480 $ 31,772 $ 22,580
Total assets ........................... 398,997 421,108 505,055 569,598 607,200
Total debt ............................. 278,917 260,200 333,062 387,815 386,895
Stockholders' equity ................... 17,861 22,592 29,467 37,284 40,945
(a) Included in other income for 1999 is a $5,749,000 charge related to a
reclassification pursuant to SFAS No. 145, "Rescission of FASB
Statements No. 4, 64, and 144, Amendment of FASB Statement No. 13 and
Technical Corrections". An extraordinary loss related to early
extinguishment of debt has been reclassified and the associated tax
benefit of $1,955,000 has been reclassified to current tax expense
(benefit).
(b) A gain was recorded for a change in accounting principle due to a
change in accounting for parts and supplies. Through October 30, 1999,
Packaging expensed parts and supplies utilized in its manufacturing
facilities. Effective October 31, 1999, these items are inventoried and
are charged to expense when used. Due to increased volume of purchases
of such items, management believes that this method is preferable and
it provides for a better matching of revenues and expenses. The
financial statements for the years preceding the fiscal year ended
October 28, 2000 have not been restated. See Note N to the consolidated
financial statements included in Plastipak's 10-K for fiscal year
ending November 2, 2002 filed on January 31, 2003.
16
(c) EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is not presented as, and
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 our competitors.
(d) Net debt equals total debt less cash and cash equivalents.
(e) Adjusted working capital represents current assets less cash and cash
equivalents minus current liabilities less short-term debt and current
portion of long-term debt.
ITEM 7. 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 "Risk Related to Our Business" section 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-K, 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 Brazil, Ltda
("Plastipak Brazil"), 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 Brazil.
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. TABB owns real
estate and leases it to Packaging, Whiteline, and Clean Tech. Plastipak Brazil
produces injection-molded plastic preforms, blow molds rigid plastic packaging
in Paulinia and produces injection-molded plastic preforms in Manaus. Plastipak
Brazil also maintains a sales office in Buenos Aires, Argentina. Other than
Plastipak Brazil and its subsidiaries, all of the Plastipak group of companies
are headquartered in Plymouth, Michigan.
17
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
fiscal years ended November 1, 2003 and November 2, 2002 were 52 weeks long. The
fiscal year ended November 3, 2001 was 53 weeks long.
Listed in the table below are our revenue and related percentages of
revenue for the years ended November 1, 2003, November 2, 2002 and November 3,
2001. Our revenue has been achieved organically due to increased business with
new and existing customers.
CONSOLIDATED REVENUE BY PRODUCT CATEGORY
------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 3, 2001 (a)
---------------- ---------------- --------------------
(dollar amounts in thousands)
Carbonated and non-carbonated beverage revenue $404,179 45.0% $362,678 44.7% $373,091 46.0%
Consumer cleaning revenue $276,325 30.8% $242,106 29.8% $233,223 28.8%
Food and processed juice revenue $114,092 12.7% $110,146 13.6% $109,892 13.6%
Industrial, agricultural and automotive revenue $ 49,003 5.5% $ 41,752 5.1% $ 45,280 5.6%
Other revenue (b) $ 54,230 6.0% $ 55,508 6.8% $ 48,289 6.0%
-------- ----- -------- ----- -------- -----
Total revenue $897,829 100.0% $812,190 100.0% $809,775 100.0%
======== ===== ======== ===== ======== =====
(a) The periods ended November 1, 2003 and November 2, 2002 were 52 weeks
long. The period ended November 3, 2001 contained 53 weeks.
(b) Other revenue includes Clean Tech (recycling), Whiteline
(transportation and logistics), health, personal care and distilled
spirits revenue and other miscellaneous sources of revenue.
YEAR ENDED NOVEMBER 1, 2003 COMPARED TO YEAR ENDED NOVEMBER 2, 2002
REVENUE
Solid gains were delivered in the year ended November 1, 2003 with
revenue for the full year at $897.8 million, up 10.5% over the same period in
2002. Sales volume in 2003 increased to 7.4 Billion units, up 9.0% over 2002
levels. Our four key product categories, Beverage, Consumer Cleaning, Food and
Industrial and Automotive, all reported unit and revenue increases for the year.
Brazil represented approximately 26.4% of our unit volume growth in 2003 and
approximately 22.5% of our sales revenue increase in 2003.
Resin prices (which represent a significant cost of the product)
increased during the year ended November 1, 2003 as compared to the year ended
November 2, 2002. Using industry standard price data, we estimate that higher
resin prices resulted in approximately a $39.0 million increase in revenue for
the year ended November 1, 2003.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue increased 11.4%
to $404.2 million in 2003 with unit volume up 9.7% over 2002.
Revenue gains for 2003 were evenly split between the U.S. and
Brazil, each up approximately $20.0 million. Unit volume grew
at a higher rate in Brazil, driven by strong preform sales,
with Brazil unit volume up 26.4% and U.S. unit volume up 4.8%
during 2003. The difference between the revenue and unit
volume increases posted was largely attributable to higher
average raw material prices for the period that were passed
through to customers in the form of higher selling prices.
- Consumer cleaning revenue increased 14.1% to $276.3 million
during the year ended November 1, 2003 with unit volume up
9.0% over 2002 levels. These gains were primarily a result of
two factors: new product and customer
18
sales during the year combined with solid gains by current
customers in the liquid detergent and household cleaner
markets. In addition, higher HDPE material prices which
converted into higher selling prices contributed to the
increase in consumer cleaning revenue as compared to the year
ended November 2, 2002.
- Our food and processed juice product category reported higher
unit and dollar sales in 2003. For the year ended November 1,
2003, unit volume increased 8.5% and sales revenue increased
3.6% over 2002. The addition of new products in the juice,
cooking oil and condiments areas, combined with consistent
performance from our core product offerings, were key to our
success in this area for the year ended November 1, 2003.
- Industrial, agricultural and automotive revenue increased in
both units and dollar sales for 2003. Revenue in this category
increased 17.4% to $49.0 million with unit sales increasing
12.2% during the year ended November 1, 2003. These increases
were driven primarily from increased large bottle sales used
in the multi-quart oil market and anti-freeze market along
with new volume awards in the product category.
- Other revenue decreased 2.3% to $54.2 million. Other revenue,
which includes our health, personal care, distilled spirits,
freight and other miscellaneous revenue, posted decreases in
both revenue and sales units during 2003. This decrease is
attributable mainly to a decrease in sales volume in the
health, personal care and distilled spirits revenue.
GROSS PROFIT
Gross profit increased 4.3% to $120.2 million for the year ended
November 1, 2003. The increase in gross profit is primarily attributable to
higher unit sales volume and improved operating performance related to our South
American operations, offset by increased operating costs associated with the
start-up of several new product lines, the addition of two new facilities and
the expansion of two existing facilities. Price reductions implemented to extend
customer contracts and expand our business also offset the increase in gross
profit. We have not been able, through efficiencies in production to date, to
totally offset implemented price reductions. The collective impact of the price
reductions was approximately $5.8 million for the year ended November 1, 2003.
Gross profit as a percent of revenue decreased to 13.4% as compared to 14.2% in
the prior period. The erosion of gross profit as a percentage of revenue was
also due to higher resin costs that increased revenue without increasing
associated gross profit.
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, industry practice and
contractual arrangements with our customers permit price changes to be passed
through to customers. As a result, we experienced revenue changes without
corresponding changes in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for the year ended
November 1, 2003 increased 9.4% to $75.0 million. As a percentage of revenue,
selling, general and administrative expenses decreased to 8.3% for the year
ended November 1, 2003 from 8.4% in the year ended November 2, 2002. Increases
in insurance, legal and professional fees and depreciation expenses of
approximately $4.0 million were the primary factors contributing to the change.
Increases in compensation and benefits and travel expenses contributed $2.0
million to the increase in SG&A. The increase in SG&A was offset by a $0.7
decrease in overall SG&A associated with our South American operations.
INTEREST EXPENSE
Interest expense increased 5.1% to $36.9 million. The increase was
primarily due to the sale, on September 25, 2002, of $50.0 million of the 10.75%
Senior Notes. Interest expense for the year ended November 1, 2003 reflects a
full year of interest expense for the $50.0 million Senior Notes as compared to
the prior year ended November 2, 2002. The increase in interest expense related
to the Senior Notes was partially offset by interest earned from interest rate
swaps and a decrease in interest rates and interest expense associated with our
South American operations.
OTHER (INCOME) AND EXPENSE
Other income decreased by $1.2 million to $0.6 million for the year
ended November 1, 2003 as compared to $1.8 million for the year ended November
2, 2002. The decrease was primarily attributable to a $1.1 million increase in
foreign currency exchange rate losses related to our South American operations.
A loss of $0.5 million on the disposition and sale
19
of fixed assets, and a decrease in interest income offset by an increase in
royalty income of $0.4 million, also contributed to the change in other income
over the prior period.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $4.5 million expense for the year ended
November 1, 2003 as compared to a $4.8 million expense for the year ended
November 2, 2002. Earnings before taxes were $8.9 million for the year ended
November 1, 2003 compared to $13.4 million of earnings for the year ended
November 2, 2002. The effective rate was 51.0% and 36.0% for the years ending
November 1, 2003 and November 2, 2002, respectively. The increase in the
effective tax rate for the year ended November 1, 2003 is due to the accounting
of a change in estimate of prior year book and tax differences and the
settlement of prior period tax liabilities.
NET EARNINGS
Net earnings decreased by $4.2 million to net earnings of $4.4 million
for the year ended November 1, 2003 from net earnings of $8.6 million for the
year ended November 2, 2002. As previously discussed, start-up costs associated
with new product lines, the addition of two new facilities and expansion of two
existing facilities along with an increase in selling, general and
administrative expenses, an increase in interest expense and other factors
mentioned above resulted in a reduction in net earnings over the prior period.
YEAR ENDED NOVEMBER 2, 2002 COMPARED TO YEAR ENDED NOVEMBER 3, 2001
REVENUE
Revenue increased 0.3% to $812.2 million for the year ended November 2,
2002 while unit sales increased 5.1% for the period to 6.8 billion units
compared to the year ended November 3, 2001. The relatively flat revenue growth
is due to several factors. First, the year ended November 2, 2002 contained only
52 weeks, while the year ended November 3, 2001 contained 53 weeks. If 2002
revenue were restated for 53 weeks, 2002 revenue would have increased over the
prior period by approximately 2.4%. Second, resin prices (which represent a
significant cost of the product) have decreased in the year ended November 2,
2002 as compared to the year ended November 3, 2001. Lower resin prices were
passed on to our customers in the form of lower sales prices for the products we
sell. We estimate that lower resin prices resulted in approximately a $28.0
million reduction in revenue for fiscal year 2002. Finally, we exited a piece of
business through an asset sale in fiscal year 2001 which resulted in lower sales
revenue for fiscal year 2002.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue decreased 2.8%
to $362.7 million while unit sales during the year ended
November 2, 2002 increased by 7.6% over the year ended
November 3, 2001. Unit sales growth was attributable to the
U.S. market where unit sales increased 7.6% from 2001.
Increased business in Brazil resulted in an increase of 7.4%
of unit sales over 2001. Increased activity in the water
market continues to drive increased unit volume. While unit
sales increased, revenue declined in this category due to
lower average raw material prices, a product mix shift to more
single service packages that have lower selling prices, and
currency devaluations in Brazil.
- Consumer cleaning revenue increased 3.8% to $242.1 million.
Unit sales increased 3.0% over the prior year. Sales growth
was driven by several new packaging initiatives in this
category.
- Food and processed juices revenue increased 0.2% to $110.1
million. Unit sales during the year ended November 2, 2002
decreased 4.0% over the year ended November 3, 2001. The
decrease in sales units was primarily the result of the sale
of production assets in this category during the second
quarter of fiscal year 2001.
- Industrial, agricultural and automotive revenue decreased 7.8%
to $41.8 million, while unit sales for the year ended November
2, 2002 increased 2.6% over the same period in 2001. New
product awards in this category primarily drove unit sales
growth. In addition, the market successes of large multi-use
containers provided incremental volume growth in a category
that is otherwise flat. Dollar sales were impacted by the
change in resin pricing with revenue down for fiscal year 2002
compared to the same period in 2001.
20
- Other revenue increased 14.9% to $55.5 million. This increase
is attributable mainly to an increase in freight, recycling,
and other miscellaneous revenue. The increase was offset by a
decrease in health, personal care and distilled spirits
revenue due to our exit from a piece of business in this
sector.
GROSS PROFIT
Gross profit increased 14.3% to $115.2 million for the year ended
November 2, 2002. Gross profit as a percent of revenue improved to 14.2% from
12.4% in the prior period. The improvement in gross profit as a percent of
revenue was partially due to lower resin costs that decreased revenue without
decreasing associated gross profit. Gross profit increases were the result of
improved manufacturing reliability and throughput in fiscal 2002. In addition,
current process redesign initiatives helped generate increased gross profit.
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, substantially unaffected by these fluctuations. In general, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 6.2% to $68.5
million for year ended November 2, 2002. As a percentage of revenue, selling,
general and administrative expenses increased slightly to 8.4% in the year ended
November 2, 2002 from 8.0% in the year ended November 3, 2001. The increase was
related to the reclassification of $1.3 million of site management wages from
manufacturing expenses and a $1.2 million increase related to the implementation
of SAP. Increases in corporate labor contributed approximately $2.2 million to
the increase. The increase in corporate labor is mainly due to compensation
expense recorded for restricted stock options in the amount of approximately
$2.4 million.
The increase in selling, general and administrative expenses was offset
by a decrease in bad debt expense. Bad debt expense decreased approximately 53%
to $1.8 million for the year ended November 2, 2002 from $3.7 million in the
prior period. The decrease in bad debt is mainly attributable to the economic
crisis in Brazil and Argentina during fiscal 2001. As a result of the economic
crisis, we incurred bad debt expenses of approximately $3.2 million for the year
ended November 3, 2001. Improved economic conditions in both Brazil and
Argentina and tighter credit controls led to a decrease in bad debt expense for
the year ended November 2, 2002. The decrease in bad debt expense represents 65%
of the increase in earnings before taxes between fiscal year 2002 and 2001.
INTEREST EXPENSE
Interest expense increased by 21.2% to $35.1 million. The increase was
due to the sale of $275.0 million and $50 million of the 10.75% Senior Notes in
August 2001 and September 2002, respectively. In addition, our debt level was
approximately $54.8 million higher as compared to the prior year ending November
3, 2001.
OTHER (INCOME) AND EXPENSE
Other income decreased by $1.3 million to $(1.8) million principally
due to $0.8 decrease in sundry income and a $0.6 million decrease in foreign
currency exchange rate losses that were principally related to the devaluation
of the Peso in Argentina.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $4.8 million expense for the year
ended November 2, 2002 as compared to a $3.3 million expense for the year ended
November 3, 2001. Earnings before taxes were $13.4 million for the year ended
November 2, 2002 compared to $10.4 million of earnings for the year ended
November 3, 2001. The effective rate was 36.0% and 31.5% for the years ending
November 2, 2002 and November 3, 2001 respectively.
NET EARNINGS
Net earnings increased by $1.5 million from net earnings of $7.1
million for the year ended November 1, 2001 to net earnings of $8.6 million for
the year ended November 2, 2002. The increase in net earnings was primarily due
to improvements in operating profit.
21
YEAR ENDED NOVEMBER 3, 2001 COMPARED TO YEAR ENDED OCTOBER 28, 2000
REVENUE
Revenue increased 15.4% to $809.8 million for the year ended November
3, 2001. Unit sales for the year ended November 3, 2001 increased 12.6% to
approximately 6.5 billion units from the year ended October 28, 2000. The
increases in revenue and unit sales are due to a number of factors:
- Carbonated and non-carbonated beverage revenue increased 16.2%
to $373.1 million. Additional growth was driven by increased
demand for water containers along with new business
commitments in the Northeast. Also, we continue to develop the
plastic beer bottle market with increased sales to several
regional breweries.
- Consumer cleaning revenue increased 24.1% to $233.2 million.
The increase in revenue was attributable primarily to our
sales of corrugated boxes and labels to Procter & Gamble.
Procter & Gamble previously purchased corrugated boxes and
labels from another supplier, but requested in June 2000 that
we begin to sell these materials to them in order to
streamline their production process. As a result, we now ship
our plastic containers to Procter & Gamble in corrugated boxes
with labels in place. Procter & Gamble simply fills and caps
the containers, seals the cartons and ships the filled
containers to their customers. We began this arrangement with
Procter & Gamble by purchasing their existing inventory of
corrugated boxes and labels, and we now purchase these items
from vendors approved by Procter & Gamble. The prices we
charge Procter & Gamble include an amount to cover our costs
of boxing and labeling the plastic containers we sell them. We
estimate that $83 million of our increased revenue for 2001
was attributable to this new arrangement with Procter &
Gamble. Additional growth was attributable to broad-based
volume increases across all customers within the category.
- Food and processed juices revenue increased 4.9% to $109.9
million. This growth is attributable to increased business in
juice-type products, pourable dressings, and squeezable
mayonnaise containers. These volume gains were partially
offset by the divestiture of volume previously supplied to
Sunny Delight.
- Industrial, agricultural and automotive revenue increased
31.1% to $45.3 million. This increase was driven by growth
primarily from F Style gallons, motor oil quarts and our
proprietary Handi-Grip container.
- Other revenue decreased 10.0% to $48.3 million. This decrease
is attributable to reduced business activity with customers
within the health, personal care and distilled spirits
category and a shift to smaller, lower priced packages within
our product mix. This decrease is attributable to less project
revenue with existing customers.
GROSS PROFIT
Gross profit increased 32.3% to $100.8 million for the year ended
November 3, 2001. The increase in gross profit resulted primarily from the
higher sales unit volume as compared to the prior year period. Gross profit
increases were also the result of improved manufacturing reliability and
throughput in fiscal 2001. In addition, current process redesign initiatives
generated increased gross profit.
Gross profit as a percent of revenue improved to 12.5% from 10.9% in
the prior period. The improvement in gross profit as a percent of revenue was
partially due to lower resin costs which decreased revenue without decreasing
associated gross profit. Gross profit as a percent of revenue was also improved
by increased gross profit generated by current process redesign initiatives.
Increases in gross profit as a percent of revenue were partially offset by $50.3
million of additional sales of corrugated boxes and labels to Procter and
Gamble. These sales did not increase gross profit and therefore negatively
affected gross profit as a percent of revenue.
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, substantially unaffected by these fluctuations. In general, industry
practice and contractual arrangements with our customers permit price changes to
be passed through to customers by means of generally corresponding changes in
product pricing. As a result, we have in the past experienced revenue changes
without corresponding changes in gross profit.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 26.5% to $64.5
million for the year ended November 3, 2001. As a percentage of revenue,
selling, general and administrative expenses increased to 8.0% in the year ended
November 3, 2001 from 7.3% in the year ended October 28, 2000. The increase was
related to non-recurring charges including expenses related to the SAP
implementation and an increase in our reserve for doubtful accounts by
approximately $2.0 million related to our operations in South America. The
increase was also the result of higher spending on property taxes, state and
local taxes, deferred salary continuation, legal expenses and employee wages.
INTEREST EXPENSE
Interest expense increased by 7.1% to $29.0 million. The increase was
due to an increase in our working capital borrowings required to support our
revenue growth. The increase was also due to the sale on August 20, 2001 of
$275.0 million of the outstanding notes. The average interest rate for the year
ended November 3, 2001 was approximately 9.44% compared to an average interest
rate of approximately 8.38% for the prior period.
OTHER (INCOME) AND EXPENSE
Other income increased to $3.1 million principally due to improvement
in foreign currency exchange rates.
INCOME TAX EXPENSE (BENEFIT)
Our provision for income taxes for 2001 was $3.3 million, which
represents an effective tax rate for fiscal 2001 of 31.5%. This compares to a
tax benefit of $2.2 million, which represents an effective tax rate of 563% in
fiscal 2000. The effective tax rates for both periods were reduced by
utilization of research and experimentation tax credits that we determined were
applicable to our operations in fiscal 2000.
NET EARNINGS
Net earnings increased $2.2 million from net earnings of $4.9 million
for the year ended October 28, 2000 to net earnings of $7.1 million for the year
ended November 3, 2001. This increase is largely due to increased gross profit
generated by additional sales unit volume and reduced manufacturing costs and
improved performance.
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 operations, additional debt and additional operating leases.
Future capital expenditures will be used in the same manner as past
expenditures.
During the year ended November 1, 2003, we spent approximately $100.8
million and assumed $6.5 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 using technology that will allow us to pursue opportunities in
the condiment, sauce and beverage markets. South America provides significant
opportunities with our current customer base. Additionally, we are in the
process of establishing three small facilities in Central Europe. Our 2004
capital expenditure budget incorporates the opening of these facilities. See
"Business - Foreign Operations".
We had positive cash flow from operating activities of $75.4 million,
which in part funded our capital expenditures of approximately $100.8 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
23
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 a major portion of our cost of goods sold in
the year ended November 1, 2003, 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 three-year agreements with our resin
suppliers, and our purchases of raw materials are subject to market prices and
inflation.
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. Exchange rate fluctuations resulted in a loss of
approximately $1.0 million for the year ended November 1, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased 45.5% to $75.4
million for the fiscal year ended November 1, 2003 as compared to the fiscal
year ended November 2, 2002. The increase is in part due to adjusted net working
capital and other asset and liability changes of $17.6 million for the year
ended November 1, 2003. The changes in working capital and other assets and
liabilities resulted primarily from increases in accounts payable, accounts
receivable and inventories and a decrease in deposits for equipment purchases.
An increase in purchases for raw materials mainly due to new business and new
facilities was the main factor contributing to the increase in accounts payable,
accounts receivable and inventories for fiscal 2003. An increase in
depreciation, amortization and foreign currency translation loss contributed
approximately $10.2 million to the increase. The increase in non-cash expenses
was offset by a decrease in operating performance of $4.2 million.
During the fiscal year ended November 2, 2002 net cash generated from
operations increased 18.3% to $51.9 million. The increase in 2002 was primarily
the result of a $6.4 million increase in non-cash expenses that include items
such as depreciation and amortization, bad debt expense, deferred income tax
expense, and foreign currency translation. Bad debt expense decreased
approximately 53% to $1.8 million for the year ended November 2, 2002 from $3.7
million in the prior period. The decrease in bad debt is mainly attributable to
the economic crisis in Brazil and Argentina during fiscal year 2001. As a result
of the economic crisis, we incurred bad debt expenses of approximately $3.2
million for the year ended November 3, 2001. Improved economic conditions in
both Brazil and Argentina and tighter credit controls led to a decrease in bad
debt expense for the year ended November 2, 2002. The decrease in bad debt
represents 65% of the increase in earnings before income taxes between fiscal
year 2002 and 2001. Net working capital and other asset and liability changes
increased net cash by $3.6 million. Improved operating performance of $1.5
million also contributed to the 2002 increase in cash.
For the fiscal year ended November 3, 2001 net cash generated from
operations was $43.8 million. The decrease in 2001 was primarily the result of
net working capital and other asset and liability changes. The increase in
working capital resulted primarily from decreases in accounts payable and
accounts receivable. The reductions were partially offset by improved operating
performance with net earnings increasing $2.2 million from fiscal 2000. The
decrease was also offset by an increase in depreciation and amortization of $2.5
million and an increase deferred tax expense of $2.0 million from fiscal 2000.
Net cash used in investing activities was $101.3 million and $89.6
million for fiscal 2003 and 2002, respectively. Investing activities were
primarily attributed to the acquisition of property and equipment. During fiscal
2003, cash used for the acquisition of intangible assets of $1.8 million was
partially offset by proceeds from the sale of equipment of $1.3 million. In
addition, acquisition of intangible assets decreased by $5.6 million to $1.8
million for the year ending November 1, 2003. The decrease is primarily related
to customer contracts acquired by our South American operations in fiscal 2002.
For the years ended November 1, 2003 and November 2, 2002, property and
equipment acquisitions were $100.8 million and $82.1 million, respectively. For
the fiscal year 2001 net cash used in investing activities was $52.8
24
million. Investing activities were primarily attributed to the acquisition of
property and equipment. In 2001, property and equipment acquisitions was $50.5
million. During fiscal year 2003, 2002 and 2001, we acquired equipment through
the assumption of capital lease obligations of $6.5 million, $2.4 million and
$5.5 million, respectively.
Net cash (used in) provided by financing activities was $(3.1) million
and $50.4 million for the years ended November 1, 2003 and November 2, 2002,
respectively. In the year ended November 1, 2003, net cash of $6.3 million was
used to make principal payments on long-term obligations. The use of cash was
offset by net proceeds from long-term obligations of $3.2 million. For the year
ended November 2, 2002 net cash provided by financing activities was $50.4
million. Net cash of $9.1 million was used to make principal payments on
long-term obligations. The use of cash was primarily offset by net proceeds from
long-term obligations of $58.7 million. In the year ended November 2, 2002, net
cash provided from borrowings was partially used to finance property and
equipment acquisitions. The remaining net cash provided from borrowings was used
for general corporate purposes, including working capital and capital
expenditures in fiscal year 2003. For the fiscal year 2001 net cash (used in)
provided from financing activities was $59.1 million. In 2001, cash provided
from borrowings was partially used to finance property and equipment
acquisitions.
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. We continue to use the net proceeds from the September
25, 2002 sale of Senior Notes for general corporate purposes, including working
capital, capital expenditures and technology development.
On August 20, 2001, in conjunction with our first sale of Senior Notes,
we entered into an Amended Credit Agreement 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 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 November 1,
2003, $57.9 million in letters of credit were outstanding under the Amended
Credit Agreement and we had $92.1 million available for borrowing.
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 November 1, 2003,
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.
25
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:
YEARS ENDED
------------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
------------ ------------ ------------
Net earnings (per GAAP basis) $ 4,361,056 $ 8,592,810 $ 7,147,376
Income tax expense 4,543,000 4,831,000 3,284,000
Interest expense 36,902,209 35,099,265 28,955,895
Depreciation 49,859,253 44,070,064 40,701,846
Amortization 6,490,262 3,947,529 4,009,775
------------ ------------ ------------
EBITDA $102,155,780 $ 96,540,668 $ 84,098,892
============ ============ ============
We have contractual obligations and commercial commitments that may
affect our financial condition. The following tables identify material
obligations and commitments as of November 1, 2003.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------------------
LESS THAN 1 1-3 3-5 MORE THAN
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR YEARS YEARS 5 YEARS
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Long Term Debt Obligations $ 55,823,878 $ 785,137 $ 55,038,741 $ -- $ --
Capital Lease Obligations 8,601,016 3,038,210 4,149,792 1,413,014 --
Operating Lease Obligations 56,301,494 21,567,716 26,857,878 7,007,412 868,488
Capital Expenditure Commitments 26,750,000 26,750,000 -- -- --
Revolving Credit Facility (a) -- -- -- -- --
Salary Continuation Plan 3,475,432 -- -- -- 3,475,432
Obligations Under Stock Bonus Plans 8,306,882 -- -- -- 8,306,882
Senior Notes 325,000,000 -- -- -- 325,000,000
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $484,258,702 $ 52,141,063 $ 86,046,411 $ 8,420,426 $337,650,802
============ ============ ============ ============ ============
COMMITMENT EXPIRATION BY PERIOD
------------------------------------------------------------------------------------
LESS THAN 1 1-3 3-5 MORE THAN
OTHER COMMERCIAL COMMITMENTS TOTAL YEAR YEARS YEARS 5 YEARS
- ----------------------------- ------------ ------------ ------------ ------------ ------------
Standby Letters of Credit $ 57,852,048 $ 57,852,048 $ -- $ -- $ --
Revolving Credit Facility (b) 92,147,952 -- 92,147,952 -- --
------------ ------------ ------------ ------------ ------------
Total Commercial Commitments $150,000,000 $ 57,852,048 $ 92,147,952 $ -- $ --
============ ============ ============ ============ ============
(a) The revolving credit facility's actual outstanding balance as of
November 1, 2003. The revolving credit facility expires in August 2006.
(b) The revolving credit facility's unused borrowing balance as of
November 1, 2003.
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. Our new sites in Florida and
Alabama began production in December 2002 and March 2003, respectively. In
addition, 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 the net proceeds of the offering of $50.0 million
principal amount of 10.75% Senior Notes due 2011 that closed in September 2002,
and to cover any shortfalls with borrowings under the Amended Credit Agreement.
26
In negotiations with major customers for substantial new business and
the extension of current business, we agreed to price reductions. These price
reductions totaled approximately $5.8 million for the year ended November 1,
2003. We estimate that these price reductions will average approximately $4.3
million per quarter for the next three to five years. We believe we will be able
to partially or fully offset the negative effect on our margins of these price
reductions with the expansion of our business with these customers and making
our manufacturing process more efficient. We are currently opening up new
facilities with updated equipment, and updating existing facilities and
manufacturing processes to minimize the cost of producing our products. If we
are unable to offset the effects of these price reductions through the expansion
of our business with these customers and through making our products more
efficiently, or otherwise offset the effects of such price reductions, our
margins will likely be materially adversely affected.
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 November 1, 2003, we had approximately $37.3 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.
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.
The preparation of these financial statements requires that we make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Our critical accounting policies are discussed in Note A
of our annual financial statements. These critical 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
On November 3, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), Accounting for Goodwill and Other
Intangibles, which requires that goodwill and certain other intangible assets no
longer be amortized to earnings but instead be reviewed periodically for
potential impairment and Statement Financial Accounting Standards No. 144 ("SFAS
144"), Accounting for the Impairment or Disposal of Long-Lived Assets which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The Company determined that the intangible assets had finite
lives and there was no change in the lives, therefore, there is no pro forma
disclosure requirement. On November 3, 2002 the Company also adopted, Statement
of Financial Accounting Standards No. 148 ("SFAS 148"), Accounting for Stock
Based Compensation-Transition and Disclosure, which addresses financial
accounting and reporting for stock-based employee compensation plans. The
adoption of these standards did not have a material impact on the Company's
financial position or results of operations.
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
27
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 Company does not believe that the adoption of this standard will have a
material impact on its financial position or results of operations.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149
requires that contracts with comparable characteristics be accounted for
similarly. This Statement is effective for contracts entered into or modified
after June 30, 2003. All provisions of this Statement should be applied
prospectively, except as stated below and for hedging relationships designated
after June 30, 2003. All provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE CONTRACTS
At November 1, 2003 we had no material foreign exchange contracts. We
do not enter into foreign exchange contracts for trading or speculative
purposes.
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 November 1, 2003, we
recorded an increase of $4,748,452 in other accrued expenses to recognize the
decrease in fair value of the swaps and a $4,748,452 reduction in the Senior
Notes to recognize the difference between the carrying value and fair value of
the related hedge liability.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
FOR THE YEARS ENDING NOVEMBER 1, 2003, NOVEMBER 2, 2002 AND NOVEMBER 3, 2001
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Plastipak Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Plastipak Holdings, Inc. and Subsidiaries as of November 1, 2003 and November 2,
2002 and the related consolidated statements of earnings, stockholders' equity
and cash flows for the three years in the period ended November 1, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Plastipak Holdings,
Inc. and Subsidiaries as of November 1, 2003 and November 2, 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended November 1, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Southfield, Michigan
January 5, 2004
30
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, NOVEMBER 2,
ASSETS 2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 37,278,406 $ 66,196,262
Accounts Receivable
Trade (net of allowance of $2,541,820 and $2,166,430
at November 1, 2003 and November 2, 2002) 54,531,831 46,086,007
Related parties 7,202,753 6,228,360
------------ ------------
61,734,584 52,314,367
Inventories 90,020,742 78,730,293
Prepaid expenses 13,039,269 12,023,505
Prepaid federal income taxes 2,793,980 3,808,730
Deferred income taxes 1,843,000 2,732,000
Other current assets 3,688,059 4,427,893
------------ ------------
Total current assets 210,398,040 220,233,050
PROPERTY, PLANT & EQUIPMENT- NET 366,920,226 310,913,565
OTHER ASSETS
Cash surrender value of life insurance 1,990,892 1,788,374
Deposits 10,716,360 15,711,204
Capitalized loan costs (net of accumulated amortization
of $3,449,524 and $1,729,634 at November 1, 2003
and November 2, 2002) 9,541,723 11,261,613
Intangible assets (net of accumulated amortization
of $4,937,791 and $3,785,318 at November 1, 2003
and November 2, 2002) 6,429,468 8,768,184
Prepaids 936,658 910,466
Sundry 266,645 11,894
------------ ------------
Total Other Assets 29,881,746 38,451,735
------------ ------------
Total Assets $607,200,012 $569,598,350
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 1, NOVEMBER 2,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------ ------------
CURRENT LIABILITIES
Accounts payable - trade $115,125,413 $ 90,223,335
Current portion of long term obligation 3,823,347 5,180,231
Accrued liabilities
Taxes other than income 4,740,907 4,943,876
Other accrued expenses 29,309,529 25,709,607
Income taxes 1,363,371 1,388,244
------------ ------------
Total Current Liabilities 154,362,567 127,445,293
SENIOR NOTES (NET OF UNAMORTIZED PREMIUM AND
FV OF SWAPS OF $2,218,660 AND ($4,748,452) AT NOVEMBER 1,
2003 AND $2,501,893 AND $0 AT NOVEMBER 2, 2002) 322,470,208 327,501,893
LONG-TERM OBLIGATIONS 60,601,547 55,132,393
DEFERRED INCOME TAXES 16,483,000 12,344,000
OTHER NON-CURRENT LIABILITIES 4,030,943 3,785,884
OBLIGATIONS UNDER STOCK BONUS PLANS 8,306,882 6,104,850
STOCKHOLDERS' EQUITY
Common stock, no par value, 60,000 shares authorized;
28,316 shares issued and outstanding 28,316 28,316
Retained earnings 40,916,549 37,255,721
------------ ------------
Total Stockholders' Equity 40,944,865 37,284,037
------------ ------------
Total Liabilities and Stockholders' Equity $607,200,012 $569,598,350
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
32
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED
-------------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
(52 WEEKS) (52 WEEKS) (53 WEEKS)
------------- ------------- -------------
Revenues $ 897,828,780 $ 812,190,068 $ 809,774,598
Cost and expenses 777,669,890 697,000,995 709,012,933
------------- ------------- -------------
Gross profit 120,158,890 115,189,073 100,761,665
Selling, general and administrative
expenses 74,964,793 68,505,788 64,476,989
------------- ------------- -------------
Operating profit 45,194,097 46,683,285 36,284,676
Other expense (income)
Equity in earnings
of affiliates - - (38,437)
Interest expense 36,902,209 35,099,265 28,955,895
Interest income (987,548) (1,221,145) (915,237)
Royalty income (1,117,959) (760,857) (883,599)
Loss (gain) on foreign
currency translation 970,726 128,510 (468,105)
Sundry loss (income) 522,613 13,702 (797,217)
------------- ------------- -------------
36,290,041 33,259,475 25,853,300
------------- ------------- -------------
Earnings before income taxes 8,904,056 13,423,810 10,431,376
Income tax expense (benefit)
Current (485,000) 20,000 2,111,000
Deferred 5,028,000 4,811,000 1,173,000
------------- ------------- -------------
4,543,000 4,831,000 3,284,000
------------- ------------- -------------
Net earnings $ 4,361,056 $ 8,592,810 $ 7,147,376
============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON RETAINED
STOCK EARNINGS TOTAL
------------ ------------ ------------
Balance, October 28, 2000 $ 27,753 $ 22,564,535 $ 22,592,288
Net earnings - 7,147,376 7,147,376
Increase in stock redemption value - (273,000) (273,000)
------------ ------------ ------------
Balance, November 3, 2001 27,753 29,438,911 29,466,664
Net earnings - 8,592,810 8,592,810
Issuance of shares of common stock 563 - 563
Increase in stock redemption value - (776,000) (776,000)
------------ ------------ ------------
Balance, November 2, 2002 28,316 37,255,721 37,284,037
Net earnings - 4,361,056 4,361,056
Increase in stock redemption value - (700,228) (700,228)
------------ ------------ ------------
Balance, November 1, 2003 $ 28,316 $ 40,916,549 $ 40,944,865
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
34
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
---------------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
(52 WEEKS) (52 WEEKS) (53 WEEKS)
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,361,056 $ 8,592,810 $ 7,147,376
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 56,349,515 48,017,593 44,711,621
Amortization of net (premium) /
discount on Senior Notes (283,235) 296,582 82,062
Bad debt expense 1,082,219 1,762,463 3,714,141
Deferred salaries 387,600 403,832 1,264,000
Loss (gain) on sale of equipment 155,360 (39,253) 10,862
Deferred tax expense 5,028,000 4,811,000 1,173,000
Restricted stock option - compensation 1,501,804 2,387,530 -
Loss on investment in affiliate - - 722,413
Equity in affiliates' earnings - - (38,437)
Foreign currency translation loss (gain) 1,004,194 (2,660,787) (3,096,129)
Change in assets and liabilities:
(Increase) decrease in accounts receivable (10,826,888) 3,692,593 11,243,219
Increase in inventories (11,290,449) (799,406) (12,047,595)
(Increase) decrease in prepaid expenses
and other current assets (958,778) (1,905,718) (4,385,648)
Increase in cash surrender value (202,518) (137,529) (83,765)
Decrease (increase) in prepaid federal income taxes 1,014,750 (2,708,730) (829,366)
(Decrease) Increase in other liabilities (1,496,649) 2,392,731 6,307,863
Decrease (increase) in deposits 4,994,844 (9,644,799) (2,060,410)
Increase (decrease) in accounts payable 24,902,078 (5,425,846) (8,807,414)
(Increase) decrease in sundry other assets (254,751) 2,517,842 (2,108,758)
(Decrease) increase in income taxes (24,873) 306,684 920,560
------------- ------------- -------------
Net cash provided by operating activities 75,443,279 51,859,592 43,839,595
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (100,813,016) (82,148,295) (50,469,057)
Proceeds from sale of equipment 1,324,171 - -
Acquisition of intangible assets (1,775,000) (7,414,600) (2,287,917)
------------- ------------- -------------
Net cash used in investing activities (101,263,845) (89,562,895) (52,756,974)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
35
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED
---------------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
(52 WEEKS) (52 WEEKS) (53 WEEKS)
------------- ------------- -------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) under
revolving credit facility 3,196,044 5,381,858 (174,547,855)
Principal payments on long-term obligations (6,343,879) (9,103,298) (29,265,504)
Proceeds from long-term obligations 50,545 53,271,503 273,142,417
Settlement of interest rate swap - 3,012,000 -
Issuance of common stock - 563 -
Capitalized loan costs - (2,146,450) (10,275,260)
------------- ------------- -------------
Net cash (used in) provided by
financing activities (3,097,290) 50,416,176 59,053,798
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (28,917,856) 12,712,873 50,136,419
Cash and cash equivalents at beginning of the year 66,196,262 53,483,389 3,346,970
------------- ------------- -------------
Cash and cash equivalents at end of the year $ 37,278,406 $ 66,196,262 $ 53,483,389
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 41,100,000 $ 37,600,000 $ 26,500,000
============= ============= =============
Cash paid for income taxes $ 1,412,000 $ 2,475,000 $ 2,120,000
============= ============= =============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment through the assumption of
long-term obligations $ 6,532,000 $ 2,413,850 $ 5,491,086
============= ============= =============
Increase in Obligation Under Stock Bonus Plan $ 700,000 $ 776,000 $ 273,000
============= ============= =============
Decrease in fair value of interest rate swaps $ 4,748,452 $ - $ -
============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
36
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING
POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Plastipak Holdings, Inc. ("Plastipak") is a privately held Michigan corporation
that was formed in 1998 to act as a holding company for several companies which
were under common control. On October 30, 1999, Plastipak acquired all of the
equity interests in Plastipak Packaging, Inc. ("Packaging"), W.P. Young
Marketing, TABB Investments, Inc., 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 Brazil"),
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 Brazil. Whiteline is a trucking
company which serves 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. TABB owns real estate and
leases it to Packaging, Clean Tech and Whiteline. Plastipak Brazil produces
injection-molded plastic preforms and blow molds rigid plastic packaging in
Paulinia and Manaus. Plastipak Brazil also maintains a sales office in Buenos
Aires, Argentina. Other than Plastipak Brazil and its subsidiaries, all of the
Plastipak group of companies are headquartered in Plymouth, Michigan.
The accompanying consolidated financial statements include the accounts of
Plastipak and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows.
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 periods ended November 1, 2003 and November 2, 2002 contained 52 weeks. The
period ended November 3, 2001 contained 53 weeks.
CASH EQUIVALENTS
For purposes of the statement of cash flows, all investments purchased with an
original maturity of three months or less are considered to be cash equivalents.
37
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Plastipak provides an allowance for losses on accounts receivable based on a
review of the current status of existing receivables, historical collection
experience and management's evaluation of the effect of existing economic
conditions. Significant changes in customer profitability or general economic
conditions may have a significant effect on the Company's allowance for doubtful
accounts.
Changes in the Company's allowance for doubtful accounts are as follows:
NOVEMBER 1, NOVEMBER 2,
2003 2002
----------- -----------
Beginning balance $ 2,166,430 $ 6,111,236
Bad debt expense 1,082,219 1,762,463
Accounts written-off (a) (706,829) (5,829,536)
Recoveries - 122,267
----------- -----------
Ending balance $ 2,541,820 $ 2,166,430
=========== ===========
(a) For the year ended November 1, 2003, accounts written-off includes a
$324,000 increase attributable to remeasurement of allowance for
doubtful accounts in South America. For the year ended November 2,
2002, accounts written-off includes a $2,168,000 decrease attributable
to remeasurement of allowance for doubtful accounts in South America.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) method
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost net of accumulated depreciation
and amortization. Depreciation is provided principally on 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 lesser of the useful lives of the
improvements or the terms of the various leases. Capital lease amortization for
equipment is included in depreciation expense.
Upon sale or retirement of assets, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the
results of operations.
Interest costs associated with construction in process of approximately
$2,892,000, $1,418,000 and $1,550,000 were capitalized during the years ending
November 1, 2003, November 2, 2002 and November 3, 2001, respectively.
CAPITALIZED LOAN COSTS
Capitalized loan costs are amortized over the term of the related debt
agreement.
38
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Periodically, Packaging acquires exclusive manufacturing contracts from a
customer. Consideration paid by Packaging for these arrangements is recorded as
an intangible asset and amortized over the term of the related contract. A
certain portion of these exclusive manufacturing contracts incorporate customer
short falls on previous "take-or pay" contracts in Brazil which are being
amortized on a straight-line basis.
The following summarize the carrying amounts of intangible assets and related
amortization:
NOVEMBER 1, NOVEMBER 2,
2003 2002
------------ ------------
Gross Carrying Amount
Beginning balance $ 12,553,502 $ 10,307,872
Additions 1,775,000 7,414,600
Deletions (2,961,243) (5,168,970)
------------ ------------
Ending balance 11,367,259 12,553,502
Accumulated Amortization
Beginning balance 3,785,318 7,025,570
Additions 4,113,716 1,928,718
Deletions (2,961,243) (5,168,970)
------------ ------------
Ending balance 4,937,791 3,785,318
------------ ------------
Net Carrying Amount $ 6,429,468 $ 8,768,184
============ ============
The annual estimated amortization expense for intangible assets is as follows:
2004 $ 2,724,607
2005 2,047,520
2006 1,110,987
2007 313,021
Thereafter 233,333
------------
$ 6,429,468
============
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and the effects of tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
SELF-INSURANCE
Plastipak is self-insured for health costs and workers' compensation up to a
certain stop loss level. The estimated liability is based upon review by
Plastipak and an independent insurance consultant of claims filed and claims
incurred but not reported.
39
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Plastipak's financial instruments include accounts receivable, accounts payable
and long-term obligations. The carrying amounts of financial instruments
approximate their fair values.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs were approximately $8,000,000, $8,600,000 and $7,100,000,
respectively for the years ended November 1, 2003, November 2, 2002 and November
3, 2001, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for Plastipak Brazil is the U.S. dollar. The financial
statements for Plastipak Brazil are maintained in the functional currency. Gains
and losses associated with exchange rate fluctuations are reflected in
operations.
INDUSTRY SEGMENTS
Plastipak reports information about operating segments pursuant to SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." Plastipak
is organized and managed on a geographic basis in two operating segments: North
America and South America. See Note O.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 consolidated
financial statements in order for them to conform to the 2003 presentation.
40
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
On November 3, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), Accounting for Goodwill and Other Intangibles,
which requires that goodwill and certain other intangible assets no longer be
amortized to earnings but instead be reviewed periodically for potential
impairment and Statement of Financial Accounting Standards No. 144 ("SFAS 144"),
Accounting for the Impairment or Disposal of Long-Lived Assets which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The Company determined that the intangible assets had finite lives and
there was no change in the lives, therefore, there is no pro forma disclosure
requirement. On November 3, 2002 the Company also adopted, Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), Accounting for Stock Based
Compensation-Transition and Disclosure, which addresses financial accounting and
reporting for stock-based employee compensation plans. The adoption of these
standards did not have a material impact on the Company's financial position or
results of operations.
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 Company does not believe that the adoption of this standard will have a
material impact its financial position or results of operations.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149
requires that contracts with comparable characteristics be accounted for
similarly. This Statement is effective for contracts entered into or modified
after June 30, 2003. All provisions of this Statement should be applied
prospectively, except as stated below and for hedging relationships designated
after June 30, 2003. All provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
41
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consisted of the following at:
NOVEMBER 1, NOVEMBER 2,
2003 2002
------------ ------------
Raw Materials $ 34,835,429 $ 29,585,642
Finished Goods 41,984,322 37,753,695
Parts & Supplies 13,200,991 11,390,956
------------ ------------
$ 90,020,742 $ 78,730,293
============ ============
NOTE C - PROPERTY, PLANT AND EQUIPMENT
The principal categories of property, plant and equipment are as follows:
NOVEMBER 1, NOVEMBER 2,
2003 2002
------------- -------------
Land $ 7,597,023 $ 6,974,961
Buildings 87,863,727 73,969,116
Machines and equipment 421,470,747 358,790,352
Tooling 93,434,596 80,733,626
Auto, trucks and trailers 4,898,033 3,702,463
Furniture and fixtures 3,324,034 2,805,098
Lease acquisition costs 289,956 299,293
Computer equipment 22,303,822 19,153,629
Leasehold improvements 28,492,054 26,621,058
Construction in process 35,454,900 30,137,512
------------- -------------
705,128,892 603,187,108
Less accumulated depreciation and amortization 338,208,666 292,273,543
------------- -------------
$ 366,920,226 $ 310,913,565
============= =============
Construction in process represents expenditures for assets, which have not been
placed in service. No depreciation or amortization expense is taken on these
assets until they become operational.
Depreciation and amortization for property, plant and equipment was
approximately $49,859,000, $44,070,000 and $41,702,000 for the years ended
November 1, 2003, November 2, 2002 and November 3, 2001, respectively.
At November 1, 2003 the Company has obligations to purchase approximately
$26,750,000 in equipment.
42
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LONG-TERM OBLIGATIONS
NOVEMBER 1, NOVEMBER 2,
2003 2002
------------- -------------
Revolving credit facility pursuant to which Plastipak is permitted to borrow up
to $150,000,000. Interest is payable quarterly at Eurodollar (plus an additional
margin) or prime-based rates, which varied from 4.25% to 5.25% at November 1,
2003. The company is required to pay quarterly facility fees during the year.
All the assets of Plastipak secure the credit facility. $ - $ -
Notes payable to banks with interest rates varying from 5.0% to 10.1%, are due
at various times through August 2006. Borrowings are primarily collateralized by
letters of credit. 54,660,590 50,956,307
Notes payable with interest rates varying from 4.0% to 9.4% due in various
installments at various dates through 2004, collateralized by certain equipment
and, in part, by letters of credit. 1,163,285 2,573,822
Subordinated note payable to a former stockholder due in quarterly installments
through October 2003 at an interest rate of 10%. - 107,400
Capital Leases with interest rates varying from 3.1% to 9.4% due in various
installments at various dates through 2008. 8,601,019 6,675,095
------------ ------------
64,424,894 60,312,624
Less current portion 3,823,347 5,180,231
------------ ------------
$ 60,601,547 $ 55,132,393
============ ============
Minimum principal payments on long-term obligations to maturity as of November
1, 2003 are as follows:
2004 $ 3,823,347
2005 2,625,410
2006 56,563,123
2007 1,236,910
2008 176,104
------------
$ 64,424,894
============
The revolving credit facility contains various covenants pertaining to
maintenance of net worth, debt to equity ratios, leverage ratios and various
other restrictions.
At November 1, 2003 and November 2, 2002, Plastipak had outstanding letters of
credit aggregating $57,900,000 and $54,100,000, respectively.
43
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - SENIOR NOTES
In September 2002 and August 2001, the Company issued $50,000,000 and
$275,000,000, respectively, of 10.75% senior notes due in 2011. Interest is
payable semi-annually. The indenture under which the notes were issued places
restrictions on the payment of dividends, the acquisition of our common stock,
the payment of indebtedness that is subordinate to the notes, asset sales, the
incurrence of debt and the issuance of preferred stock. The senior notes are
unconditionally guaranteed by all of the Company's domestic subsidiaries. Prior
to September 1, 2004, subject to certain limitations, in the event of a common
stock offering, the Company may redeem up to 35% of the outstanding notes at a
redemption price of 110.75% of the principal amount plus accrued interest. After
September 1, 2006, the Company may redeem all or any portion of the outstanding
notes at premiums, which decline from 105.375% at September 1, 2006 to 101.792%
at September 1, 2008. On or after September 1, 2009, the notes may be redeemed
at par. The net proceeds received, after underwriting discounts and premiums,
other fees and expenses, were approximately $51,800,000 and $263,200,000 for the
years ending November 2, 2002 and November 3, 2001, respectively.
The carrying amounts of the senior notes were approximately $322,470,000 and
$327,500,000 as of November 1, 2003 and November 2, 2002, respectively. Based
upon current market rates primarily provided by outside investment bankers, the
fair value of the senior notes at November 1, 2003 and November 2, 2002 was
estimated at $358,000,000 and $334,000,000, respectively.
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" and by Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
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.
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 million 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 November 1, 2003, the Company recorded an increase of
$4,748,452 in other accrued expenses to recognize the fair value of the swaps
and a $4,748,452 decrease in the Senior Notes to recognize the difference
between the carrying value and fair value of the related hedge liability.
On July 16, 2002, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged fixed rate interest in connection with the Senior
Notes discussed in Note E on a notional amount of $100,000,000 for a variable
rate equal to six months LIBOR plus 5.165% for a 9 year period ending September
1, 2011. On September 11, 2002 pursuant to an agreement between the Company and
the bank to terminate the interest rate swap agreement entered into on July 16,
2002, the bank paid the Company $3,012,000. The proceeds have been recorded as
an increase in the senior notes and are being amortized over the term of the
notes.
44
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - INCOME TAXES
The components of earnings (loss) before income taxes are as follows:
YEARS ENDED
--------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
------------ ------------ ------------
United States $ 16,112,588 $ 26,225,605 $ 23,957,855
Foreign (7,208,532) (12,801,795) (13,526,479)
------------ ------------ ------------
$ 8,904,056 $ 13,423,810 $ 10,431,376
============ ============ ============
Deferred income tax assets and liabilities consist of the following:
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
------------ ------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 9,271,000 $ 2,852,000 $ 2,254,000
Insurance - - 1,122,000
Allowance for doubtful accounts 863,000 1,020,000 2,077,000
Vacation 33,000 117,000 229,000
Inventory 695,000 577,000 589,000
Restricted stock options 878,000 367,000 368,000
Accrued expenses 2,569,000 1,313,000 575,000
Foreign tax credit - 1,007,000 901,000
Contributions 29,000 78,000 -
Deferred salary 1,044,000 912,000 775,000
U.S. tax credits 6,188,000 5,924,000 5,797,000
Deposits received - - 1,278,000
Parts and supplies inventory 339,000 - -
Loss in affiliates - 139,000 -
Interest swap 852,000 995,000 -
------------ ------------ ------------
22,761,000 15,301,000 15,965,000
Deferred tax liabilities:
Earnings in affiliates - - (513,000)
Depreciation (33,346,000) (21,546,000) (15,266,000)
Repairs and maintenance (461,000) (461,000)
Foreign exchange gain (1,677,000) (1,543,000) (1,543,000)
Capitalized Interest (183,000) (183,000) (183,000)
Parts and supplies inventory - (212,000) (2,861,000)
Loss in affiliates (7,000) - -
Prepaids (105,000) (402,000) -
VEBA (300,000) (346,000) -
Renegotiated contracts (1,176,000) - -
Other (146,000) (220,000) (400,000)
------------ ------------ ------------
(37,401,000) (24,913,000) (20,766,000)
------------ ------------ ------------
Net deferred tax liability $(14,640,000) $ (9,612,000) $ (4,801,000)
============ ============ ============
Net operating loss carryforwards expire in years ending through 2023.
45
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - INCOME TAXES (CONTINUED)
A reconciliation of the actual federal income tax expense to the expected
amounts computed by applying the statutory tax rate percent to earnings or
losses before income taxes is as follows:
YEARS ENDED
--------------------------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 3,
2003 2002 2001
------------ ------------ ------------
Expected federal income tax (benefit) $ 3,027,000 $ 4,565,000 $ 3,547,000
Effect of non-deductible items 61,000 643,000 46,000
Research and experimentation credits (175,000) (300,000) (320,000)
Foreign tax credit - (167,000) -
Internal Revenue audit settlement 329,600 - -
Tax paid with 2001 amended federal tax return 440,400 - -
Reverse of foreign tax credits to deductions 614,000 - -
Other 246,000 90,000 11,000
------------ ------------ ------------
$ 4,543,000 $ 4,831,000 $ 3,284,000
============ ============ ============
NOTE H - COMMITMENTS
Plastipak leases office, equipment and warehouse and manufacturing facilities
under operating leases, which expire at various dates through 2008. Long-term
lease commitments are as follows:
YEAR ENDING
- -----------
2004 $ 21,567,716
2005 15,077,745
2006 11,780,133
2007 4,790,618
2008 2,216,794
Thereafter 868,488
The total rent expense for the years ended November 1, 2003, November 2, 2002
and November 3, 2001 was approximately $29,634,000, $31,132,000 and $36,154,000,
respectively.
NOTE I - RELATED PARTY TRANSACTIONS
Included in revenues for the periods ended November 1, 2003, November 2, 2002
and November 3, 2001 are approximately $22,225,000, $17,834,000 and $20,363,000,
respectively, of sales to companies affiliated through common ownership.
Included in accounts receivable at November 1, 2003 and November 2, 2002 are
approximately $6,887,000 and $6,228,000, respectively, of receivables from these
companies.
A company affiliated through common ownership provides engineering services and
customizes machinery. During the fiscal years ended 2003, 2002 and 2001,
Packaging was invoiced $3,936,000, $6,431,000 and $2,385,000, respectively.
46
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - PROFIT SHARING/401(k) PLAN
Plastipak has a profit sharing plan and a 401(k) plan which cover substantially
all employees. Contributions to the plan are divided into profit sharing and
matching contributions. Profit sharing contributions are at the discretion of
the board of directors. Matching contributions are a discretionary percentage
determined annually. The profit sharing expense for the periods ended November
1, 2003, November 2, 2002 and November 3, 2001 was approximately $2,823,000,
$2,505,000 and $2,365,000, respectively.
NOTE K - MAJOR CUSTOMERS
During the years ended November 1, 2003, November 2, 2002 and November 3, 2001
one customer in each year generated revenues representing approximately 27%, 25%
and 23% of total revenues, respectively. Accounts receivable for this customer
at November 1, 2003 and November 2, 2002, amounted to approximately $7,772,000
and $5,979,000, respectively.
NOTE L - STOCK COMPENSATION PLANS
Plastipak sponsors two Restricted Stock Bonus Plans. Pursuant to the terms of
the Amended and Restated Stock Bonus Plan (as amended in 2002), the Company has
reserved 5,450 common shares for issuance. Vesting under the plan ranges from
0-10 years at the discretion of the Board of Directors. Pursuant to the terms of
awards granted in 1985, 1,379 shares (as adjusted for the reorganization
discussed in Note A) had been acquired in 1990 pursuant to the terms of this
plan. At November 3, 2001 there were options outstanding to acquire 1,199 shares
at a nominal per share price. During the year ended November 2, 2002 the Company
granted options to acquire an additional 872 shares, and options for 263 shares
were exercised. At November 1, 2003 and November 2, 2002 options to acquire
1,808 shares were outstanding.
The Company adopted the 2002 Restricted Stock Bonus Plan on October 16, 2002.
Pursuant to the terms of this plan, the Company has reserved 5,450 shares for
issuance of which options to acquire 1,000 shares were granted at a nominal per
share price. The options vest over a period from 0-10 years at the discretion of
the Board of Directors. During the year ending November 2, 2002 certain
employees exercised options to acquire 300 shares of common stock. There were no
options exercised during the year ending November 1, 2003.
Each of the above-referenced plans require the Company, subject to certain
limitations, to repurchase the shares issued under the plans at a price based
upon a book value computation plus certain formula adjustments. Increases in the
per share redemption value associated with shares issued under the plans are
treated as a reduction of retained earnings and an increase to obligations under
stock bonus plans. Included in general and administrative expenses for the years
ended November 1, 2003, November 2, 2002 and November 3, 2001 is $1,501,804,
$2,387,530 and $0, respectively, representing the excess of the redemption value
over the exercise price for options granted during the year and the increase in
redemption value associated with unexercised options.
Amounts expensed approximate that which would have been expensed had the value
of the options granted been computed under the provisions of FAS 123.
NOTE M - SALARY CONTINUATION PLAN
Packaging sponsors a nonqualified salary continuation plan that provides for the
payment of normal retirement and death benefits, and in some cases early
retirement benefits, to participants, as specified in the participant's adoption
agreement. An adoption agreement between the participant and Packaging sets
forth the age, years of service and other requirements a participant must attain
in order to receive a particular benefit. The plan provides a monthly benefit,
as defined by the participants' contract for a stated period of time, upon
reaching the age of 65. This Plan is noncontributory, although certain life
insurance policies have been acquired for the purpose of funding these benefits.
The life insurance policies are not assets of the Plan. The accumulated
postretirement obligation for the periods ended November 1, 2003 and November 2,
2002 was approximately $3,475,000 and $3,088,000, respectively.
47
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - 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 O - 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 financial statements as of November 1,
2003 and November 2, 2002 and the three years in the period
ending November 1, 2003, November 2, 2002 of (a) Plastipak the
parent; (b) the guarantor subsidiaries (North American
Operating Segment); (c) the nonguarantor subsidiaries (South
American 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) subsidiaries.
Each subsidiary guarantor is wholly-owned by Plastipak, all guarantees are full
and unconditional and all guarantees are joint and several.
48
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- 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
============= ============= ============= ============= =============
49
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- 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
Deferred income tax
liability current - - - - -
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
============= ============= ============= ============= =============
50
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 44,619,480 $ 19,388,938 $ 2,187,844 $ - $ 66,196,262
Accounts receivable 5,086,992 44,941,401 8,757,490 (6,471,516) 52,314,367
Inventories - 62,985,057 15,745,236 - 78,730,293
Prepaid expenses - 9,773,988 2,249,517 - 12,023,505
Prepaid federal income taxes 796,000 3,012,730 - - 3,808,730
Deferred income taxes (2,019,000) 2,226,000 2,525,000 - 2,732,000
Other current assets - 4,057,036 370,857 - 4,427,893
------------- ------------- ------------- ------------- -------------
Total Current Assets 48,483,472 146,385,150 31,835,944 (6,471,516) 220,233,050
PROPERTY, PLANT &
EQUIPMENT- NET - 255,598,323 55,715,242 (400,000) 310,913,565
OTHER ASSETS
Cash surrender value
of life insurance - 1,788,374 - - 1,788,374
Deposits - 15,711,204 - - 15,711,204
Investment in and advances
to affiliates 316,666,208 (254,504,681) - (62,161,527) -
Capitalized loan costs 1,155,757 10,105,856 - - 11,261,613
Intangible assets - 4,504,210 4,263,974 - 8,768,184
Deferred tax asset - long term (86,000) 86,000 - - -
Prepaids - 910,466 - - 910,466
Sundry - 5,011,894 - (5,000,000) 11,894
------------- ------------- ------------- ------------- -------------
Total Other Assets 317,735,965 (216,386,677) 4,263,974 (67,161,527) 38,451,735
------------- ------------- ------------- ------------- -------------
Total Assets $ 366,219,437 $ 185,596,796 $ 91,815,160 $ (74,033,043) $ 569,598,350
============= ============= ============= ============= =============
51
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
AS OF NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT LIABILITIES
Accounts payable $ - $ 65,472,597 $ 31,222,254 $ (6,471,516) $ 90,223,335
Current portion of long
term obligation - 3,459,728 1,720,503 - 5,180,231
Taxes other than income - 4,392,901 550,975 - 4,943,876
Deferred income tax
liability current (118,000) 118,000 - - -
Other accrued expenses 5,481,483 16,638,057 3,590,067 - 25,709,607
Income taxes (168,440) 1,556,684 - - 1,388,244
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 5,195,043 91,637,967 37,083,799 (6,471,516) 127,445,293
SENIOR NOTES 331,146,037 (3,644,144) - - 327,501,893
LONG-TERM OBLIGATIONS - 2,981,314 57,151,079 (5,000,000) 55,132,393
DEFERRED INCOME TAXES (11,798,000) 22,705,000 1,437,000 - 12,344,000
OTHER LONG-TERM
LIABILITIES - 3,147,418 638,466 - 3,785,884
OBLIGATIONS UNDER
STOCK BONUS PLAN 4,392,320 1,712,530 - - 6,104,850
STOCKHOLDERS'
EQUITY (DEFICIT) 37,284,037 67,056,711 (4,495,184) (62,561,527) 37,284,037
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 366,219,437 $ 185,596,796 $ 91,815,160 $ (74,033,043) $ 569,598,350
============= ============= ============= ============= =============
52
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 1, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
REVENUES $ - $ 814,914,674 $ 86,540,390 $ (3,626,284) $ 897,828,780
COST AND EXPENSES - 698,309,286 83,136,889 (3,776,285) 777,669,890
------------- ------------- ------------- ------------- -------------
Gross profit - 116,605,388 3,403,501 150,001 120,158,890
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 380,106 68,500,904 6,083,783 - 74,964,793
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (380,106) 48,104,484 (2,680,282) 150,001 45,194,097
OTHER EXPENSE (INCOME)
Equity in loss (earnings)
of affiliates (3,204,174) 1,659,306 - 1,544,868 -
Interest expense 32,263,521 872,445 3,932,076 (165,833) 36,902,209
Interest income (30,391,967) 29,582,502 (343,916) 165,833 (987,548)
Royalty income - (1,117,959) - - (1,117,959)
Loss on foreign currency
translation - - 970,726 - 970,726
Sundry (income) loss (540,072) 1,093,321 (30,636) - 522,613
------------- ------------- ------------- ------------- -------------
(1,872,692) 32,089,615 4,528,250 1,544,868 36,290,041
------------- ------------- ------------- ------------- -------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 1,492,586 16,014,869 (7,208,532) (1,394,867) 8,904,056
INCOME TAXES (2,868,470) 6,323,470 1,088,000 - 4,543,000
------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ 4,361,056 $ 9,691,399 $ (8,296,532) $ (1,394,867) $ 4,361,056
============= ============= ============= ============= =============
53
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- ------------- ------------ ------------
REVENUES $ - $ 748,587,324 $ 65,946,063 $ (2,343,319) $812,190,068
COST AND EXPENSES - 630,435,701 68,638,613 (2,073,319) 697,000,995
----------- ------------- ------------- ------------ ------------
Gross profit (loss) - 118,151,623 (2,692,550) (270,000) 115,189,073
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 63,487 61,909,025 6,803,276 (270,000) 68,505,788
----------- ------------- ------------- ------------ ------------
Operating (loss) profit (63,487) 56,242,598 (9,495,826) - 46,683,285
OTHER EXPENSE (INCOME)
Equity in (earnings) loss
of affiliates (5,017,029) 2,560,359 - 2,456,670 -
Interest expense 29,491,925 1,590,376 4,219,069 (202,105) 35,099,265
Interest income (28,781,238) 27,860,531 (502,543) 202,105 (1,221,145)
Royalty income - (760,857) - - (760,857)
Loss on foreign currency
translation - - 128,510 - 128,510
Sundry (income) loss (671,955) 824,724 (539,067) 400,000 13,702
----------- ------------- ------------- ------------ ------------
(4,978,297) 32,075,133 3,305,969 2,856,670 33,259,475
----------- ------------- ------------- ------------ ------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 4,914,810 24,167,465 (12,801,795) (2,856,670) 13,423,810
INCOME TAXES (BENEFIT) EXPENSE (3,678,000) 8,509,000 - - 4,831,000
----------- ------------- ------------- ------------ ------------
NET EARNINGS (LOSS) $ 8,592,810 $ 15,658,465 $ (12,801,795) $ (2,856,670) $ 8,592,810
=========== ============= ============= ============ ============
54
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 3, 2001
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
----------- ------------- ------------- ------------ ------------
REVENUES $ - $ 738,056,186 $ 74,218,412 $ (2,500,000) $ 809,774,598
COST AND EXPENSES - 638,015,102 73,414,294 (2,416,463) 709,012,933
----------- ------------- ------------- ------------ -------------
Gross profit (loss) - 100,041,084 804,118 (83,537) 100,761,665
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES - 54,787,063 9,053,926 636,000 64,476,989
----------- ------------- ------------- ------------ -------------
Operating profit (loss) - 45,254,021 (8,249,808) (719,537) 36,284,676
OTHER EXPENSE (INCOME)
Equity in (earnings) loss
of affiliates (3,692,343) 2,617,859 - 1,036,047 (38,437)
Interest expense 6,240,972 16,827,424 6,248,803 (361,304) 28,955,895
Interest income (6,186,005) 5,365,248 (455,784) 361,304 (915,237)
Royalty income - (883,599) - - (883,599)
Gain on foreign currency
translation - - (468,105) - (468,105)
Sundry (income) - (748,974) (48,243) - (797,217)
----------- ------------- ------------- ------------ -------------
(3,637,376) 23,177,958 5,276,671 1,036,047 25,853,300
----------- ------------- ------------- ------------ -------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 3,637,376 22,076,063 (13,526,479) (1,755,584) 10,431,376
INCOME TAXES (BENEFIT) EXPENSE (3,510,000) 7,039,000 (245,000) 3,284,000
----------- ------------- ------------- ------------ -------------
NET EARNINGS (LOSS) $ 7,147,376 $ 15,037,063 $ (13,281,479) $ (1,755,584) $ 7,147,376
=========== ============= ============= ============ =============
55
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR NOVEMBER 1, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------- ------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash (used in) provided
by operating activities $ (3,715,361) $ 79,589,181 $ (430,541) $ - $ 75,443,279
CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of property
and equipment - (97,084,357) (3,728,659) - (100,813,016)
Proceeds from sale of equipment - 1,271,717 52,454 - 1,324,171
Investment in and advances
to affiliates (17,800,000) (400,000) - 18,200,000 -
Acquisition of intangible assets - (1,775,000) - - (1,775,000)
------------ ------------ ---------- ------------- ------------
Net cash (used in) provided
by investing activities (17,800,000) (97,987,640) (3,676,205) 18,200,000 (101,263,845)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net borrowings under revolving credit facility - - 3,196,044 - 3,196,044
Principal payments on long-term
obligations - (4,439,707) (1,904,172) - (6,343,879)
Proceeds from long-term obligations - 16,200,000 50,545 (16,200,000) 50,545
Capital increases 2,000,000 (2,000,000) -
------------ ------------ ---------- ------------- ------------
Net cash (used in) provided
by financing activities - 11,760,293 3,342,417 (18,200,000) (3,097,290)
------------ ------------ ---------- ------------- ------------
Net decrease in cash (21,515,361) (6,638,166) (764,329) - (28,917,856)
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 $ 23,104,119 $ 12,750,772 $ 1,423,515 $ - $ 37,278,406
============ ============ ============ ============= ============
56
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ --------------- ------------ ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities $ 2,529,702 $ 50,753,541 $ (483,602) $ (940,049) $ 51,859,592
CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of property
and equipment - (76,509,171) (8,016,798) 2,377,674 (82,148,295)
Proceeds from sale of equipment - - 1,977,673 (1,977,673) -
Investment in and advances
to affiliates (12,997,198) (3,088,950) - 16,086,148 -
Acquisition of intangible assets - (3,000,000) (4,414,600) - (7,414,600)
------------ --------------- ------------ ------------- -------------
Net cash (used in) provided
by investing activities (12,997,198) (82,598,121) (10,453,725) 16,486,149 (89,562,895)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net borrowings under revolving credit facility - - 5,354,340 27,518 5,381,858
Principal payments on long-term
obligations - (9,358,164) (6,145,134) 6,400,000 (9,103,298)
Proceeds from long-term obligations 53,250,000 10,084,668 21,503 (10,084,668) 53,271,503
Settlement of interest rate swap 3,012,000 - - - 3,012,000
Capitalized loan costs (1,176,587) (969,863) - - (2,146,450)
Capital increases 563 - 11,888,950 (11,888,950) 563
------------ --------------- ------------ ------------- -------------
Net cash provided by (used in)
financing activities 55,085,976 (243,359) 11,119,659 (15,546,100) 50,416,176
------------ --------------- ------------ ------------- -------------
Net increase (decrease) in cash 44,618,480 (32,087,939) 182,332 - 12,712,873
Cash and cash equivalents at
the beginning of the year 1,000 51,476,877 2,005,512 - 53,483,389
------------ --------------- ------------ ------------- -------------
Cash and cash equivalents at
the end of the period $ 44,619,480 $ 19,388,938 $ 2,187,844 $ - $ 66,196,262
============ =============== ============ ============= =============
57
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O- GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 3, 2001
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ --------------- ------------ ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities $ 3,692,342 $ 52,410,552 $ (7,710,392) $ (4,552,907) $ 43,839,595
CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of property
and equipment - (38,775,401) (11,693,656) - (50,469,057)
Proceeds from sale of equipment -
Investment in and advances
to affiliates (278,691,342) (5,000,000) - 283,691,342 -
Acquisition of intangible assets - (2,287,917) - - (2,287,917)
------------- --------------- ------------ ------------- -------------
Net cash (used in) provided
by investing activities (278,691,342) (46,063,318) (11,693,656) 283,691,342 (52,756,974)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net (repayments) borrowings under
line of credit - (190,633,463) 16,085,608 - (174,547,855)
Principal payments on long-term
obligations - (22,627,228) (7,478,276) 840,000 (29,265,504)
Proceeds from long-term obligations 275,000,000 266,860,259 2,281,983 (270,999,825) 273,142,417
Capitalized loan costs - (10,275,260) - - (10,275,260)
Capital increases - - 8,978,610 (8,978,610) -
------------- --------------- ------------ ------------- -------------
Net cash provided by (used in)
financing activities 275,000,000 43,324,308 19,867,925 (279,138,435) 59,053,798
------------- --------------- ------------ ------------- -------------
Net increase in cash 1,000 49,671,542 463,877 - 50,136,419
Cash and cash equivalents at
the beginning of the year - 1,805,335 1,541,635 - 3,346,970
------------- --------------- ------------ ------------- -------------
Cash and cash equivalents at
the end of the period $ 1,000 $ 51,476,877 $ 2,005,512 $ - $ 53,483,389
============= =============== ============ ============= =============
58
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- -------------- ------------- --------------
FISCAL YEAR ENDED NOVEMBER 1, 2003
Revenues $ 199,544,801 $ 227,328,604 $ 237,355,017 $ 233,600,358
Gross profit 24,814,501 37,538,753 29,410,424 28,395,212
Net (loss) earnings (1,820,885) 6,421,279 410,650 (649,988)
FISCAL YEAR ENDED NOVEMBER 2, 2002
Revenues $ 187,502,416 $ 203,394,217 $ 208,359,282 $ 212,934,153
Gross profit 26,116,907 34,670,554 27,554,918 26,846,694
Net (loss) earnings (492,500) 6,678,975 3,052,898 (646,563)
FISCAL YEAR ENDED NOVEMBER 3, 2001
Revenues $ 197,794,121 $ 207,255,264 $ 205,539,141 $ 199,186,072
Gross profit 19,724,317 31,602,123 21,566,573 27,868,652
Net (loss) earnings (473,693) 6,661,282 582,804 376,983
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
executive officers, directors and certain key employees of Plastipak and its
subsidiaries.
NAME AGE POSITION
- -------------------------------- --------- ---------------------------------------------------------------------------
William C. Young 63 Chairman and Director, President & Chief Executive Officer, Manager
William A. Slat 53 Vice President--Operations and Manufacturing
Michael J. Plotzke 46 Chief Financial Officer, Vice President--Finance and Treasurer and
Assistant Secretary
Gene W. Mueller 46 Vice President--Sales and Marketing
Thomas Busard 52 President--Clean Tech
Pradeep Modi 48 Vice President--Controller and Strategic Operation Planning
Frank Pollock 48 Vice President--International Sales/Marketing
Richard Darr 54 Vice President--Packaging Development
J. Ronald Overbeck 55 Vice President--Product Supply
Leann M. Underhill 58 Corporate Legal Counsel and Secretary
David Daugherty 48 Chief Information Officer
Thomas L. Schellenberg 57 Director
William J. Schlageter 63 Director
WILLIAM C. YOUNG has been the Chairman of the Board, President and the
Chief Executive Officer of Plastipak since its inception in 1998, and has been
Chairman and Chief Executive Officer of Packaging, Whiteline and Clean Tech
since he founded each company. Mr. Young has been the sole Manager of TABB since
its inception in 1999. Mr. Young is a Trustee of the University of Detroit --
Mercy, where he serves as chairman of the Enrollment Committee. He is also a
Director of Midwest Guaranty Bank.
WILLIAM SLAT has been our Vice President -- Operations and
Manufacturing since 1982. Prior to that he was Manufacturing Manager. He has
been with us for 31 years and served in various capacities ranging from customer
service to plant and regional management. Mr. Slat holds more than 30 domestic
patents with corresponding international patents. Mr. Slat is a senior member of
Society of Plastic Engineers.
MICHAEL J. PLOTZKE, CPA has served as our Chief Financial Officer, Vice
President of Finance and Treasurer since 1988. Throughout his 19 years with us,
Mr. Plotzke has served in many capacities including his current role as
Treasurer for Packaging, Whiteline, Clean Tech and TABB, all of which he has
held since 1992. Mr. Plotzke serves on the President's
60
Advisory Council of Walsh College. Prior to joining us, Mr. Plotzke worked for
Deloitte & Touche and KPMG -- Peat Marwick where he served as a Manager in the
Financial Services division of the consulting practice.
GENE W. MUELLER joined us in February 1997 and has served as our Vice President
- -- Sales and Marketing since 1999. Before coming to us, Mr. Mueller worked for
Constar, a subsidiary of Crown, Cork & Seal for 18 years, where he served as the
Vice President of Sales until 1997.
THOMAS BUSARD is President -- Clean Tech and has served in that position since
1989. Mr. Busard has been with us for over 27 years. Mr. Busard is a member of
the Board of the Michigan Recycling Coalition and is our representative to the
Council on Plastics and Packaging in the Environment. Mr. Busard is a member of
the Michigan Plastic Recycling Development Fund Consortium.
PRADEEP MODI has been our Vice President -- Controller and Strategic Operation
Planning since 1999. Prior to that he was Vice-President/Controller since 1993.
He has been with us for 19 years and has served in various capacities. Prior to
joining us, Mr. Modi was a partner with Ampee Marble. Prior to that he worked
for Southland Corporation, a retail chain.
FRANK POLLOCK has served as our Vice President -- International Sales/Marketing
since 1997. He has been with us for seven years. Prior to joining us, Mr.
Pollock worked for Constar International, a subsidiary of Crown, Cork and Seal,
for 18 years, where he held positions as Sales Representative, District Sales
Manager and Regional Sales Manager, the latter until 1994.
RICHARD DARR, our Vice President -- Packaging Development since 1993, is our
chief design and packaging engineer. He has worked in research and development
during his 24-year tenure with us.
J. RONALD OVERBECK, our Vice President -- Product Supply, has worked in that
position since 1999 and has been with us for over 27 years. Prior to joining us,
Mr. Overbeck worked for Anchor Glass where he served as a Marketing Manager.
LEANN M. UNDERHILL, J.D., has served as our Corporate Legal Counsel since 1985
and, since 1999, has served as Secretary to Plastipak, Packaging, Whiteline, and
TABB. She has been with us since 1984. Prior to joining us, Ms. Underhill was in
private law practice.
DAVID DAUGHERTY has served as our Chief Information Officer since February 2000.
Prior to joining us, from 1977 to January 2000, Mr. Daugherty was Manager of
Data Processing for both Earle Equipment Corporation and Safran Printing
Corporation. He was IT Manager for Mohawk Liqueur Company, Director of the New
York Data Center for McKesson Corporation and held several positions with Allied
Domecq Spirits and Wine of Windsor, Ontario, Canada, including Director of ADSW
Global I.T. Development and Director of Global I.T. Architecture.
THOMAS L. SCHELLENBERG has been a Director of Plastipak since its inception and
has served as a Director of Packaging since 1996, of Whiteline since 1999 and of
Clean Tech since 1998. Mr. Schellenberg is a tax attorney, certified public
accountant and President of Schellenberg & Associates, P.C., a tax and business
consulting firm. Prior to founding Schellenberg & Associates, Mr. Schellenberg
worked for Deloitte & Touche for over 8 years. He is also a director of The
Private Bank, Bloomfield Hills, Michigan.
WILLIAM J. SCHLAGETER joined Plastipak as a Director in December 2003. Mr.
Schlageter is founder and President of Communications Technologies, Ltd. He also
serves as the Chairman of the Board and a director of Ukrainian Wave Ltd., a
digital wireless telephone company in western Ukraine, and of Hatwave Hellenic
American Telecommunications Wave, Ltd., a Cypriot company that is affiliated
with Ukrainian Wave Ltd. Prior to forming Communications Technologies, Ltd. in
1993, Mr. Schlageter served as Vice President of Sales and Service for Ameritech
Ohio Bell for 7 years. He was responsible for sales, service operations and
capital growth. Prior to joining Ameritech Ohio Bell, he held senior level
operating, engineering and financial positions at Ameritech Michigan Bell,
including Vice President of Finance and Chief Financial Officer.
AUDIT COMMITTEE FINANCIAL EXPERT
The full Board of Directors functions as Plastipak's audit committee.
At the present time, no member of the Board of Directors meets the SEC's
definition of an audit committee financial expert. The Board consists of three
directors, only one of whom is independent. Nevertheless, we believe the
experience and education of the directors qualifies them to monitor the
integrity of our financial statements, with legal and regulatory requirements,
the public accountants'
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qualifications and independence, the performance of our internal audit function,
and our compliance with the Sarbanes-Oxley Act and the rules and regulations
thereunder. In addition, the Board has the ability on its own to retain
independent accountants, financial advisors or other consultants, advisors and
experts whenever it deems appropriate. We believe the directors' qualifications
and experience, and ability to utilize outside advisors and experts as they
consider appropriate, affords them sufficient background and expertise to
fulfill their obligations without the necessity of including a financial expert
at the present time.
Management has the primary responsibility for the financial statements
and the reporting process. Our independent auditors are responsible for
expressing an opinion on the conformity of our financial statements with
accounting principles generally accepted in the United States of America and
whether our financial statements fairly present the financial position and
results of operations of Plastipak.
The Board has approved the audited financial statements to be included
in our Annual Report on From 10-K for the year ended November 1, 2003, for
filing with the Securities and Exchange Commission.
CODE OF ETHICS
Plastipak has adopted a Code of Business Conduct ("Code") which applies to all
representatives, Associates (defined as any person who is employed by Plastipak
and any of its subsidiaries), including but not limited to supervisors,
managers, consultants, directors, officers and any other persons whose business
activities are conducted for Plastipak and/or any of its subsidiaries. The Code
requires all of our Associates to act ethically when conducting business. The
Code provides a summary of the conduct required from all Associates, and is a
source for guidance, modification, accountability for, and enforcement of its
provisions. A complete copy of the Code has been posted on our Internet website
at www.plastipak.com and is included in Exhibit 14 of this Form 10-K. We will
satisfy any disclosure requirements under Item 10 of Form 8-K regarding an
amendment to, or waiver from, any provision of the Code with respect to our
principal executive officer, principal financial officer, principal accounting
officer and any persons performing similar functions by disclosing the nature of
such amendments or waiver on our web site.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation paid to the
Chief Executive Officer and the four other most highly compensated executives of
Plastipak (the "Named Executives") for services rendered in all capacities to
Plastipak and its subsidiaries during the last three fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY (a) BONUS
- --------------------------------------- ------ ----------- -------------
William C. Young 2003 $ 601,248 $ 790,504
Chairman and Director, President 2002 601,248 201,897
and Chief Executive Officer 2001 601,248 594,532
Michael J. Plotzke 2003 225,000 194,675
Chief Financial Officer, Vice 2002 213,667 182,248
President - Finance, and Treasurer 2001 202,667 188,000
Thomas Busard 2003 201,600 199,292
President--Clean Tech 2002 189,547 144,415
2001 178,313 154,700
William A. Slat 2003 219,560 170,915
Vice President -- Operations 2002 209,560 173,445
and Manufacturing 2001 204,560 178,550
Gene W. Mueller 2003 204,560 173,311
Vice President -- Sales 2002 183,537 153,123
and Marketing 2001 168,720 147,420
(a) Salary includes amounts deferred, if any, under our 401(k) plan.
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OPTION GRANTS IN FISCAL 2003
There were no options granted to any named executives during the year
ended November 1, 2003.
AGGREGATE OPTION EXERCISES IN FISCAL 2003 AND 2003 FISCAL YEAR-END OPTION VALUES
There were no options exercised during the fiscal year ended November
1, 2003. The following table sets forth, for each of the Named Executives
holding unexercised options, certain information regarding the value of options
held at November 1, 2003:
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR FISCAL YEAR END
ACQUIRED ON END (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE) (a)
- ------------------------------------------------------------------------------------------------------------
Michael J. Plotzke - $ - 500/0 $ 1,020,500 / 0
Gene W. Mueller - $ - 300/0 $ 612,300 / 0
Thomas Busard - $ - 100/327 $204,100 / $667,407
(a) None of Plastipak's common stock is currently publicly traded. The values
reflect the adjusted per share book value of Plastipak's common stock (as
defined in the Restricted Stock Bonus Plan under which these options were
granted) at November 1, 2003, less the exercise price.
RESTRICTED STOCK BONUS PLAN
The board of directors of Plastipak adopted the Restricted Stock Bonus
Plan (the "Restricted Stock Bonus Plan") effective as of October 30, 1999, as a
successor plan to the Plastipak Packaging, Inc. Restricted Stock Bonus Plan
adopted in 1985. The Restricted Stock Bonus Plan was amended and restated
effective July 31, 2002 and subsequently amended effective August 15, 2002 and
December 19, 2003. All of our employees are eligible to participate in the
Restricted Stock Bonus Plan, subject to the board's discretion. The board makes
all administrative decisions under the Restricted Stock Bonus Plan. The board
has reserved 5,450 shares of Plastipak's common stock for distribution under the
Restricted Stock Bonus Plan. As of November 1, 2003, 3,450 of the 5,450 reserved
shares had been allocated to our employees and 2,000 shares remain available for
allocation.
Once the board has allocated restricted shares to an employee, the
employee must satisfy all of the following terms and conditions prior to
receiving certificates representing bonus shares:
- The period of time specified by the board, in its sole
discretion, not to exceed five years, must have lapsed since
the date that the board allocated the shares to the employee;
- The employee must have remained in continuous employment with
us or one of our affiliates during this period;
- The employee must have paid us $1.00 for each bonus share; and
- If required, we must have received the written consent of our
secured creditors.
Shares issued under the Restricted Stock Bonus Plan are
non-transferable and, once received, the difference between the price paid for
the shares and the adjusted book value of the shares are taxed to the employee
as non-qualified deferred compensation.
Employees who have received certificates representing restricted stock
pursuant to the Restricted Stock Bonus Plan are required to sell those shares
back to us upon the occurrence of certain "trigger events". These "trigger
events" include the employee's death and the employee's employment termination,
whether because of resignation, retirement, dismissal or otherwise. The
redemption price is based upon our per share book value, subject to certain
adjustments.
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The amendment and restatement of the Restricted Stock Bonus Plan in
2002 effected the following material changes in the Plan:
- A "change in control" provision was added, which provides that
all bonus shares vest immediately upon change in control,
subject to the golden parachute payment limitations of Code
Section 280G.
- "Bring along" and "come along" provisions were added so that
holders of the restricted stock are (1) entitled to
participate in any voluntary sale of our capital stock; and
(2) required to participate in certain voluntary sales of our
capital stock.
- A covenant not to compete and a confidentiality agreement were
added as a condition to participation in the Restricted Stock
Bonus Plan.
- A provision was added granting employees who are issued bonus
shares under the plan certain "piggy back" registration rights
in the event we initiate an SEC registered public offering of
our common stock.
2002 RESTRICTED STOCK BONUS PLAN
The board of directors of Plastipak adopted the 2002 Restricted Stock
Bonus Plan (the "2002 Plan") on October 16, 2002 and subsequently amended
effective December 19, 2003. All of our employees (including employees who are
directors, as well as non-employees who serve as directors or who otherwise
provide services to us) are eligible to participate in the 2002 Plan. The Plan
is administered by the board (or any committee established by the board for that
purpose). The board has reserved 5,450 shares of Plastipak's common stock for
grant under the 2002 Plan. There are 1,000 of the 5,450 reserved shares that
have been granted to our employees, and 4,450 shares remain available for grant.
Participants in the 2002 Plan are required to pay us a per share purchase price,
as set by the board from time to time, for each restricted share.
The vested percentage of a participant's restricted stock award will be
no more restrictive than as follows:
YEARS OF PARTICIPATION VESTED
IN PLAN PERCENTAGE
- ------------------------------ ----------
Less than 6 years 0%
6 years but less than 7 years 20%
7 years but less than 8 years 40%
8 years but less than 9 years 60%
9 years but less than 10 years 80%
10 years or more 100%
The restrictions on outstanding restricted stock awards immediately lapse
(except as may be provided in the participant's restricted stock agreement with
us) in the event of a change of control, subject to the golden parachute payment
limitations of Code Section 280G. In addition, a participant's restricted stock
award becomes 100% vested in the event of his or her retirement at or after age
65, death or disability. During the restriction period, participants holding
shares of restricted stock granted under the 2002 Plan are entitled to exercise
full voting rights with respect to such shares, and to receive all dividends and
other distributions paid with respect to such shares.
Prior to the issuance of any common stock certificates under the 2002
Plan, participants are required to enter into a shareholder agreement with us
with "bring along" and "come along" provisions which (1) entitle the participant
to participate in any voluntary sale of our capital stock, and (2) require the
participant to participate in certain voluntary sales of our capital stock. In
addition, we may require a participant to enter into a confidentiality agreement
and/or a noncompetition agreement as a condition precedent to any award of
restricted stock under the 2002 Plan.
A participant's restricted stock award is subject to forfeiture if the
participant is "terminated for cause" as defined in the 2002 Plan. Participants
who have received certificates for restricted shares issued under the 2002 Plan
are required to sell those shares back to us upon the occurrence of certain
"trigger events." These trigger events include: termination of employment;
death; disability; institution of certain litigation against us; and the breach
or threatened breach of the participant's non-competition or confidentiality
agreement. The redemption price is based on our per share book value, subject to
certain adjustments; provided, however, that if the participant is "terminated
for cause" or if the participant
64
institutes certain litigation against us, the redemption price will be reduced
to $1.00 per share. A participant's obligation to sell his/her restricted stock
to us, and our obligation to purchase such restricted stock, terminates upon an
initial public offering of our common stock.
SALARY CONTINUATION PLAN
The board of directors of Packaging adopted a Salary Continuation Plan
effective September 1985, which has been amended from time to time (the "Salary
Continuation Plan"). The Salary Continuation Plan is a non-qualified deferred
compensation plan administered by an administrative committee comprised of
William C. Young and Michael J. Plotzke. All of Packaging's employees are
eligible to participate in the Salary Continuation Plan, subject to selection by
the administrative committee.
The Salary Continuation Plan provides for the payment of normal
retirement and death benefits, and in some cases early retirement benefits, to
participants, as specified in the participant's adoption agreement. An adoption
agreement between the participant and Packaging sets forth the age, years of
service and other requirements a participant must attain in order to receive a
particular benefit. In general, a participant must have participated in the
Salary Continuation Plan for at least 10 years, and must have attained the age
of at least 59, but not age 65, in order to receive early retirement benefits. A
participant generally must have participated in the Salary Continuation Plan for
at least 10 years, and must have attained the age of 65, in order to receive
normal retirement benefits. The Salary Continuation Plan does not specify
minimum age or years of service requirements for death benefits.
Following satisfaction of all eligibility requirements and a notice by
the participant or his or her representative requesting the payment of benefits,
we are required to pay the early retirement, normal retirement or death benefits
specified in the participant's adoption agreement. Participants do not vest
ratably in any benefit over the term of their employment with Packaging.
Participants are entitled to receive only one benefit (early retirement, normal
retirement or death), and each benefit is payable on a monthly basis for a
period of 180 months. Packaging's obligation to pay benefits to a participant
ceases if the participant violates the terms of a non-competition agreement
contained in his or her adoption agreement. Packaging may amend or terminate the
Salary Continuation Plan at any time, unless a participant has fully vested in
his or her benefits. All benefits payable under the Salary Continuation Plan are
paid out of Packaging's general assets, and Packaging has purchased life
insurance to fund death benefits for the participants.
Named Executives William A. Slat, Michael J. Plotzke, Gene W. Mueller
and Thomas Busard are participants in the Salary Continuation Plan, and Messrs.
Slat, Plotzke and Busard have each participated in the Salary Continuation Plan
for over 10 years and therefore are fully vested for purposes of retirement
benefits. Mr. Mueller began his 10-year vesting requirement for retirement
benefits in February 1997. The monthly early retirement and pre-retirement death
benefits for Messrs. Plotzke, Mueller and Busard currently are $5,292, $3,967
and $3,967, respectively, and the monthly pre-retirement death benefits for Mr.
Slat are $5,292. The monthly normal retirement and post-retirement death
benefits for Messrs. Slat, Plotzke, Mueller and Busard currently are $8,333,
$8,333, $6,250 and $6,250, respectively.
DIRECTOR COMPENSATION
Mr. Young receives no cash consideration for serving on the board of
directors of any of our companies. Mr. Schellenberg and Mr. Schlageter receive
compensation in the amount of $250.00 per hour and $25,000 per year,
respectively, for their services on the board of directors of our companies,
plus out-of-pocket expenses incurred in connection with their duties as a
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the year ended November 1, 2003, William C. Young, our President
and Chief Executive Officer determined compensation for our Named Executives.
For information regarding transactions between us and Mr. Young, his affiliates
and entities he controls, see "Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the outstanding capital stock of Plastipak with respect to the
following:
- each person known by Plastipak to own more than 5% of its outstanding
capital stock;
65
- each director;
- each Named Executive; and
- the directors and executive officers of Plastipak, as a group.
Each shareholder has sole voting and investment power with respect to
the shares beneficially owned. The address for each shareholder is c/o Plastipak
Holdings, Inc., 41605 Ann Arbor Road, Plymouth, Michigan 48170.
SHARES OF PERCENTAGE OF
NAME OF SHAREHOLDER COMMON STOCK COMMON STOCK
------------------- ------------ -------------
William C. Young 21,414(a) 75.63%
Multi-Investments Limited Partnership(b) 3,936 13.90%
William A. Slat 725 2.56%
Michael J. Plotzke 545(c) 1.89%
Thomas Busard 218(d) 0.77%
Gene W. Mueller 500(e) 1.75%
Thomas L. Schellenberg 0 0.00%
William J. Schlageter 0 0.00%
Directors and executive officers as a group (7 persons) 27,338(f) 93.57%
(a) Represents 21,414 shares held by the Revocable Trust Agreement of
William C. Young dated 12/23/88, as amended.
(b) Multi-Investments Limited Partnership is a Michigan limited partnership
that is owned by the Young family. The partnership is comprised of one
General Partner and four Limited Partners. The General Partner is
William C. Young, Trustee of the Revocable Trust Agreement of William C.
Young dated 12/23/88. The Limited Partners are: (i) W.C. Young Trust FBO
W. Patrick Young dated 12/23/89, or successors in trust, W.C. Young and
W. Patrick Young, Trustees; (ii) W.C. Young Trust FBO Amy L. Young dated
12/23/89, or successors in trust, W.C. Young and Amy L. Morgan,
Trustees; (iii) W.C. Young Trust FBO Tracey L. Young dated 12/23/89, or
successors in trust, W.C. Young and Tracey L. Deal, Trustees; and (iv)
W.C. Young Trust FBO Brittany M.G. Young dated 12/29/92, or successors
in interest, W. Patrick Young, Amy L. Morgan and Tracey L. Deal,
Trustees.
(c) Includes options to acquire 500 shares which are presently exercisable.
(d) Includes options to acquire 100 shares which are presently exercisable.
(e) Includes options to acquire 300 shares which are presently exercisable.
(f) Includes the presently exercisable options described in footnotes (c),
(d) and (e) above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BUSINESS RELATIONSHIPS AND TRANSACTIONS
We have maintained business relationships and entered into business
transactions with companies owned or controlled by Mr. William C. Young, our
Chief Executive Officer and largest shareholder, or managed by members of his
immediate family (each an "affiliate" and collectively "affiliates"). A brief
summary of the agreements, leases, and arrangements between the affiliates and
us follows. We believe, based on our general awareness of market pricing and
standards, that transactions with our affiliates are on terms no less favorable
to us than those that would be available to us in arm's-length transactions with
unaffiliated third parties for similar products and services, with the exception
of extended payment terms afforded to Absopure Water Company, Buffalo Don's and
Waters of America, LLC (as discussed below). As a result of the Reorganization,
as described in Item 1 of this Form 10-K, certain transactions which would
formerly have been transactions with affiliates are now intercompany
transactions among our subsidiaries, which are eliminated in consolidation in
our consolidated financial statements and are not disclosed separately in this
Form 10-K.
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FACILITIES, EQUIPMENT RENTAL AND MANUFACTURING, AND RELATED SERVICES
TABB owns and leases to us most of our manufacturing locations and some
warehouse facilities. Prior to the Reorganization, the real estate we now lease
from TABB had been owned by either William P. Young (William C. Young's father)
and William C. Young as partners, or by William C. Young individually. All of
these properties were transferred to TABB in anticipation of the Reorganization.
Written leases with terms expiring on December 31, 2004 are currently in effect
(the "Affiliate Real Estate Leases") for all of the properties now leased from
TABB (now an intercompany transaction eliminated in consolidation in our
consolidated financial statements). In addition, we lease a warehouse in
Westland, MI from WCY Realty, LLC, a limited liability company which is wholly
owned by a trust that is controlled by William C. Young. William C. Young is
also the manager (chief executive officer) of WCY Realty, LLC. Packaging made
lease payments to WCY Realty, LLC of $144,000 in fiscal 2003.
Packaging subleased warehouse space in Plymouth, Michigan to Absopure
Water Company on a rent pass-through basis for monthly rental payments of
$11,500. Recently, Whiteline has assumed the warehouse lease. Absopure is a
corporation owned by William C. Young, members of his immediate family and
trusts they control. William C. Young serves as President and a director of
Absopure. Members of his immediate family also serve as officers and directors
of Absopure.
WPY Co. is owned by the William C. Young family. William C. Young
serves as President and as a director of WPY Co. Pursuant to an agreement among
WPY Co., Packaging, Whiteline and Clean Tech, WPY Co. provides engineering,
planning, design, equipment manufacturing, marketing consultation, logistic
services and other technical services, as well as equipment rental on a
project-by-project basis. The fees WPY Co. charges Packaging, Whiteline and
Clean Tech for services are comparable to those it charges unaffiliated third
parties. WPY Co. invoiced Packaging $3,936,336 for engineering, technical and
machine services in fiscal 2003. There were no fees charged to Whiteline or
Clean Tech in fiscal year 2003.
TRANSPORTATION SERVICES
Whiteline, a fully licensed ICC common carrier, operates a fleet of
approximately 300 trucks and 1100 trailers and is Packaging's primary supplier
of trucking and shipping services. Whiteline services approximately 70% of
Packaging's trucking needs, and also leases trucks and provides empty trailers
under a "drop trailer" arrangement with Packaging to facilitate distribution and
transportation services to Packaging's customers. Whiteline also supplies
trucking and other transportation-related personnel to Packaging on an
as-requested basis.
Whiteline also provides shipping services to affiliates Absopure and
Buffalo Don's Artesian Wells, Ltd. Buffalo Don's is a corporation owned by
William C. Young, members of his immediate family and trusts they control.
William C. Young serves as Chairman and a director of Buffalo Don's. Members of
his immediate family are also officers and directors of Buffalo Don's. Whiteline
has entered into a transportation contract with each of Buffalo Don's and
Absopure under which it provides shipping services at standard rates comparable
to those it charges unaffiliated third parties. These transportation contracts
are terminable by either party upon 30 days' notice. Whiteline invoiced Buffalo
Don's $677,947 for services in fiscal 2003. Whiteline invoiced Absopure
$4,831,829 for services in fiscal 2003.
PLASTIC CONTAINER SALES
Packaging sells plastic containers to affiliate Absopure for its
bottled water business. The sales by Packaging to Absopure are not covered by a
written agreement; however, sales to Absopure are at prices no less favorable to
Packaging than those with unaffiliated third parties. Packaging invoiced
Absopure for containers in the amount of $11,403,852 in fiscal 2003. There is
currently an outstanding balance of $3,876,861 due from Absopure to Packaging,
out of which $937,949 was over 90 days old at November 1, 2003.
Packaging also sells plastic containers to affiliate Buffalo Don's
under a sales agreement dated February 2, 1993. The sales agreement has a term
of four years with automatic annual extensions, subject to a 90-day cancellation
notice. Sales to Buffalo Don's under the sales agreement are on terms no less
favorable to Packaging than those with unaffiliated third parties. Packaging
invoiced Buffalo Don's $2,375,519 in fiscal 2003. Buffalo Don's currently owes
Packaging $805,418, out of which $185,772 was over 90 days old at November 1,
2003.
Packaging sells plastic containers to Waters of America, LLC for its
bottled water business under a five-year product supply agreement dated July 1,
2000. The agreement is a full requirements contract for all of Waters' HDPE and
PET
67
container needs. Sales to Waters are on terms are no less favorable to Packaging
than those with unaffiliated third parties. Waters of America is a Delaware
limited liability company that was organized in 2000. Fifty percent of the
ownership interests of Waters of America is held by the Clean Drink Company, a
Michigan limited liability company, which is in turn 100% owned by members of
William C. Young's immediate family, or by trusts controlled by William C.
Young. Packaging invoiced Waters for plastic containers in the amount of
$2,935,540 in fiscal 2003. There is currently an outstanding balance due of
$1,309,974, out of which $342,821 was over 90 days old at November 1, 2003.
ADMINISTRATIVE SERVICES AND INSURANCE
Plastipak and Packaging provided and continue to provide administrative
services (i.e., marketing, accounting, legal services) to several affiliated
companies. Packaging invoiced Absopure $60,000 for administrative services in
fiscal 2003, pursuant to a service agreement dated September 12, 1994. The
service agreement continues until written notice of cancellation by either
party. There is currently outstanding a balance of $5,000 due to us from
Absopure. Packaging invoiced Buffalo Don's $30,000 for administrative services
in fiscal 2003, pursuant to a service agreement dated September 12, 1994. The
service agreement continues until written notice of cancellation by either
party. There is currently outstanding a balance of $5,000 due to us from Buffalo
Don's.
Plastipak and Packaging provided and continue to provide insurance to
several affiliated companies. Plastipak and/or Packaging invoiced Absopure for
insurance premiums in the amount of $1,753,261 in fiscal 2003. Absopure
currently owes us $181,547 for insurance premiums. Plastipak and/or Packaging
invoiced Buffalo Don's for insurance premiums in the amount of $197,912 in
fiscal 2003. Buffalo Don's currently owes us $24,208 for insurance premiums.
Plastipak and/or Packaging invoiced WPY Co. for insurance premiums in the amount
of $88,624 for fiscal 2003.
FINANCING TRANSACTION
In March 2001, Madras Packaging, L.L.C., a Delaware limited liability
company, redeemed Packaging's 49% membership interest. In connection with the
redemption, Packaging sold certain equipment to Madras. As partial consideration
for this equipment, Madras issued to Packaging a secured promissory note in the
principal amount of $3,000,000 (the "Madras Note"). The Madras Note accrued
interest at a rate of 8% per annum and was payable in monthly installments of
$25,000 with a balloon payment of $2,400,000 due in March 2003. In November
2003, we negotiated a settlement of the principal amount due. As a result, we
received $1.5 million from Madras and offset our reserve for bad debt by
approximately $0.9 million.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees paid to Plastipak's independent auditor, Grant Thornton LLP,
during fiscal years 2002 and 2003 were approximately $748,000 and $696,000,
respectively. The following sets forth the amounts paid for audit,
audit-related, tax and all other fees.
Audit Fees
Plastipak paid fees for professional services rendered for the audit of
annual financial statements and review of financial statements included in Form
10-Q reports as well as services that are normally provided in connection with
statutory and regulatory filings. In fiscal 2002 and 2003, Plastipak paid audit
fees of approximately $344,000 and $343,000, respectively.
Audit-Related Fees
Fees were paid for assurance and related services that are reasonably
related to the performance of the audit or review of financial statements not
included as audit fees. This category includes fees related to the performance
of audits and attest services not required by statute or regulations and
accounting consultations regarding the application of GAAP to proposed
transactions. Audit-related fees of approximately $23,000 and $87,000 were paid
out in fiscal 2002 and 2003, respectively.
Tax Fees
Plastipak paid fees for professional services rendered for tax
compliance, tax advice, and tax planning (domestic and international). In fiscal
2002 and 2003, Plastipak paid tax fees of approximately $252,000 and $233,000,
respectively.
68
All other fees
Plastipak paid for products and services other than those reported as
audit, audit-related and tax fees as well. All other fees of approximately
$129,000 and $33,000 were paid out in fiscal 2002 and 2003, respectively. These
services were primarily related to the filing of the Form S-4 registration
statements for our exchange offers for our 10.75% senior notes, and related
consultations and discussions.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Consolidated Balance Sheets as of November 1, 2003 and
November 2, 2002
Consolidated Statements of Earnings for the years ended
November 1, 2003, November 2, 2002 and November 3, 2001
Consolidated Statements of Stockholders' Equity for the years
ended November 1, 2003, November 2, 2002 and November 3, 2001
Consolidated Statements of Cash Flows for the years ended
November 1, 2003, November 2, 2002 and November 3, 2001
Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules are inapplicable or have been disclosed in the Notes to
the Consolidated Financial Statements and, therefore, have been omitted.
(a)(3) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
3.1(a) Articles of Incorporation of Plastipak Holdings, Inc. (incorporated by
reference to Exhibit 3.1(a) to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
3.1(b) Bylaws of Plastipak Holdings, Inc. (incorporated by reference to
Exhibit 3.1(b) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.2(a) Certificate of Incorporation of Plastipak Packaging, Inc. (incorporated
by reference to Exhibit 3.2(a) to the Registration Statement on Form
S-4 (File No. 333-73552) as filed on February 19, 2002)
3.2(b) Bylaws of Plastipak Packaging, Inc. (incorporated by reference to
Exhibit 3.2(b) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.3(a) Certificate of Incorporation of Whiteline Express, Ltd. (incorporated
by reference to Exhibit 3.3(a) to the Registration Statement on Form
S-4 (File No. 333-73552) as filed on February 19, 2002)
3.3(b) Bylaws of Whiteline Express, Ltd. (incorporated by reference to Exhibit
3.3(b) to the Registration Statement on Form S-4 (File No. 333-73552)
as filed on February 19, 2002)
3.4(a) Articles of Incorporation of Clean Tech, Inc. (incorporated by
reference to Exhibit 3.4(a) to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
3.4(b) Bylaws of Clean Tech, Inc. (incorporated by reference to Exhibit 3.4(b)
to the Registration Statement on Form S-4 (File No. 333-73552) as filed
on February 19, 2002)
3.5(a) Articles of Organization of TABB Realty, LLC (incorporated by reference
to Exhibit 3.5(a) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.5(b) Bylaws of TABB Realty, LLC (incorporated by reference to Exhibit 3.5(b)
to the Registration Statement on Form S-4 (File No. 333-73552) as filed
on February 19, 2002)
69
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
4.1 Indenture dated as of August 20, 2001, by and among Plastipak Holdings,
Inc., Plastipak Packaging, Inc., Whiteline Express, Ltd., TABB Realty,
LLC and Wells Fargo Bank Minnesota, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-4 (File No. 333-73552) as filed on February 19, 2002)
4.2 Form of 10.75% Senior Note due 2011 and annexed guaranty incorporated
by reference to Exhibit 4.2 to the Registration Statement on Form S-4
(File No. 333-101098) as filed on November 8, 2002)
4.3 Exchange and Registration Rights Agreement dated September 25, 2002
among Plastipak Holdings, Inc., Plastipak Packaging, Inc., Whiteline
Express, Ltd., Clean Tech, Inc., TABB Realty, LLC and Goldman, Sachs &
Co. (incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-4 (File No. 333-101098) as filed on November 8,
2002)
10.1 Fourth Amended and Restated Credit Agreement dated as of August 20,
2001 by and among Plastipak Holdings, Inc., Plastipak Packaging, Inc.,
Clean Tech, Inc., Whiteline Express, Ltd., TABB Realty, LLC, various
banks, Comerica Bank (as Lead Arranger and Administrative Agent), Bank
One Michigan (as Syndications Agent), Standard Federal Bank (as
Syndications Agent) and Fleet National Bank (as Documentation Agent)
(incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S-4 (File No. 333-73552) as filed on February 19,
2002)
10.2 First Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of November 16, 2001 (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
10.3 Second Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of September 18, 2002 (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-4 (File No.
333-101098) as filed on November 8, 2002)
10.4 Third Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of July 25, 2003
10.5* Restricted Stock Bonus Plan of Plastipak Holdings, Inc. (incorporated
by reference to Exhibit 10.2 to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
10.6* Amended and Restated Restricted Stock Bonus Plan of Plastipak Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the quarter ended August 3, 2002 as filed on September
17, 2002)
10.7* First Amendment to Amended and Restated Restricted Stock Bonus Plan of
Plastipak Holdings, Inc. (incorporated by reference to Exhibit 10.6 to
the Annual Report on Form 10-K for the year ended November 2, 2002 as
filed on January 31, 2003)
10.8* 2002 Restricted Stock Bonus Plan of Plastipak Holdings, Inc.
(incorporated by reference to Exhibit 10.7 to the Annual Report on Form
10-K for the year ended November 2, 2002 as filed on January 31, 2003)
10.9* First Amendment to 2002 Restricted Stock Bonus Plan of Plastipak
Holdings, Inc. dated as of December 19, 2003
10.10* Second Amendment to Amended and Restated Restricted Stock Bonus Plan of
Plastipak Holdings, Inc. dated as of December 19, 2003
10.11* Plastipak Packaging, Inc. Amended and Restated Salary Continuation Plan
(incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-4 (File No. 333-73552) as filed on February 19,
2002)
14 Code of Business Conduct
21 List of subsidiaries of the registrants.
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 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
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
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 15(c).
70
(b) Reports on Form 8-K
1. On August 12, 2003, Plastipak Holdings, Inc., filed a Current
Report on Form 8-K pursuant to Item 5. Other Events and
Required FD Disclosure, regarding a press release announcing
the addition of a new facility located in Pineville,
Louisiana. The new facility will supply Procter & Gamble's
Fabric and Home Care Division with containers for their HDL
(Heavy Duty Liquid detergent) business.
71
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.
By: /s/ Michael J. Plotzke
-------------------------------------
Michael J. Plotzke,
Treasurer and Chief Financial Officer
Dated: January 28, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the dates indicated below.
Dated: January 28, 2004 By: /s/ William C. Young
-------------------------------------
William C. Young
President and Chief Executive Officer
and Director
By: /s/ Michael J. Plotzke
-------------------------------------
Treasurer and Chief Financial Officer
By: /s/ Thomas L. Schellenberg
-------------------------------------
Thomas L. Schellenberg,
Director
By: /s/ William J. Schlageter
-------------------------------------
William J. Schlageter,
Director
72
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
3.1(a) Articles of Incorporation of Plastipak Holdings, Inc. (incorporated by
reference to Exhibit 3.1(a) to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
3.1(b) Bylaws of Plastipak Holdings, Inc. (incorporated by reference to
Exhibit 3.1(b) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.2(a) Certificate of Incorporation of Plastipak Packaging, Inc. (incorporated
by reference to Exhibit 3.2(a) to the Registration Statement on Form
S-4 (File No. 333-73552) as filed on February 19, 2002)
3.2(b) Bylaws of Plastipak Packaging, Inc. (incorporated by reference to
Exhibit 3.2(b) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.3(a) Certificate of Incorporation of Whiteline Express, Ltd. (incorporated
by reference to Exhibit 3.3(a) to the Registration Statement on Form
S-4 (File No. 333-73552) as filed on February 19, 2002)
3.3(b) Bylaws of Whiteline Express, Ltd. (incorporated by reference to Exhibit
3.3(b) to the Registration Statement on Form S-4 (File No. 333-73552)
as filed on February 19, 2002)
3.4(a) Articles of Incorporation of Clean Tech, Inc. (incorporated by
reference to Exhibit 3.4(a) to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
3.4(b) Bylaws of Clean Tech, Inc. (incorporated by reference to Exhibit 3.4(b)
to the Registration Statement on Form S-4 (File No. 333-73552) as filed
on February 19, 2002)
3.5(a) Articles of Organization of TABB Realty, LLC (incorporated by reference
to Exhibit 3.5(a) to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
3.5(b) Bylaws of TABB Realty, LLC (incorporated by reference to Exhibit 3.5(b)
to the Registration Statement on Form S-4 (File No. 333-73552) as filed
on February 19, 2002)
4.1 Indenture dated as of August 20, 2001, by and among Plastipak Holdings,
Inc., Plastipak Packaging, Inc., Whiteline Express, Ltd., TABB Realty,
LLC and Wells Fargo Bank Minnesota, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-4 (File No. 333-73552) as filed on February 19, 2002)
4.2 Form of 10.75% Senior Note due 2011 and annexed guaranty incorporated
by reference to Exhibit 4.2 to the Registration Statement on Form S-4
(File No. 333-101098) as filed on November 8, 2002)
4.3 Exchange and Registration Rights Agreement dated September 25, 2002
among Plastipak Holdings, Inc., Plastipak Packaging, Inc., Whiteline
Express, Ltd., Clean Tech, Inc., TABB Realty, LLC and Goldman, Sachs &
Co. (incorporated by reference to Exhibit 4.3 to the Registration
Statement on Form S-4 (File No. 333-101098) as filed on November 8,
2002)
10.1 Fourth Amended and Restated Credit Agreement dated as of August 20,
2001 by and among Plastipak Holdings, Inc., Plastipak Packaging, Inc.,
Clean Tech, Inc., Whiteline Express, Ltd., TABB Realty, LLC, various
banks, Comerica Bank (as Lead Arranger and Administrative Agent), Bank
One Michigan (as Syndications Agent), Standard Federal Bank (as
Syndications Agent) and Fleet National Bank (as Documentation Agent)
(incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S-4 (File No. 333-73552) as filed on February 19,
2002)
10.2 First Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of November 16, 2001 (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-4 (File No.
333-73552) as filed on February 19, 2002)
10.3 Second Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of September 18, 2002 (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-4 (File No.
333-101098) as filed on November 8, 2002)
10.4 Third Amendment to Fourth Amended and Restated Revolving Credit
Agreement dated as of July 25, 2003
10.5* Restricted Stock Bonus Plan of Plastipak Holdings, Inc. (incorporated
by reference to Exhibit 10.2 to the Registration Statement on Form S-4
(File No. 333-73552) as filed on February 19, 2002)
10.6* Amended and Restated Restricted Stock Bonus Plan of Plastipak Holdings,
Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report
on Form 10-Q for the quarter ended August 3, 2002 as filed on September
17, 2002)
10.7* First Amendment to Amended and Restated Restricted Stock Bonus Plan of
Plastipak Holdings, Inc. (incorporated
73
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the
year ended November 2, 2002 as filed on January 31, 2003)
10.8* 2002 Restricted Stock Bonus Plan of Plastipak Holdings, Inc.
(incorporated by reference to Exhibit 10.7 to the Annual Report on Form
10-K for the year ended November 2, 2002 as filed on January 31, 2003)
10.9* First Amendment to 2002 Restricted Stock Bonus Plan of Plastipak
Holdings, Inc. dated as of December 19, 2003
10.10* Second Amendment to Amended and Restated Restricted Stock Bonus Plan of
Plastipak Holdings, Inc. dated as of December 19, 2003
10.11* Plastipak Packaging, Inc. Amended and Restated Salary Continuation Plan
(incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form S-4 (File No. 333-73552) as filed on February 19,
2002)
14 Code of Business Conduct
21 List of subsidiaries of the registrants
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 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
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
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Form 10-K pursuant to Item 15(c).
74