10-Q 1 y27079e10vq.txt FORM 10-Q =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 2006 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 333-28157 TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 North Denton Tap Road (972) 304-5077 Coppell, TX 75019 (Registrant's telephone number) (Address of principal executive office) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] =============================================================================== TEKNI-PLEX, INC.

PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 29, 2006 and June 30, 2006 Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 29, 2006 and September 30, 2005 Consolidated Statements of Cash Flows for the three months ended September 29, 2006 and September 30, 2005 Notes to Consolidated Financial Statements ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 4. CONTROLS AND PROCEDURES PART II. OTHER INFORMATION Item 1. Legal proceedings Item 1A. Risk Factors Item 2. Changes in securities Item 3. Defaults upon senior securities Item 4. Submission of matters to a vote of securities holders Item 5. Other iformation Item 6. Exhibits

2 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)

SEPTEMBER 29, JUNE 30, 2006 2006 (UNAUDITED) AUDITED ----------- ---------- ASSETS CURRENT: Cash $ 23,245 $ 20,689 Accounts receivable, net of allowance for doubtful accounts of $3,009 and $7,070 respectively 89,840 145,699 Inventories 157,448 135,758 Prepaid expenses and other current assets 7,039 5,363 --------- ---------- TOTAL CURRENT ASSETS 277,572 307,509 PROPERTY, PLANT AND EQUIPMENT, NET 166,709 167,787 GOODWILL 167,284 167,284 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $7,327 AND $6,806 RESPECTIVELY 3,909 4,096 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $15,894 AND $15,229 RESPECTIVELY 13,703 14,618 OTHER ASSETS 1,767 2,061 --------- ---------- $ 630,944 $ 663,355 ========= ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 1,083 $ 1,241 Accounts payable - trade 38,932 39,532 Accrued payroll and benefits 16,056 16,057 Accrued interest 24,068 11,427 Accrued liabilities - other 21,266 17,787 Income taxes payable 6,074 6,050 --------- ---------- TOTAL CURRENT LIABILITIES 107,479 92,094 LONG-TERM DEBT 743,204 772,907 SERIES A REDEEMABLE PREFERRED STOCK 75,597 74,495 OTHER LIABILITIES 8,262 12,790 --------- ---------- TOTAL LIABILITIES 934,542 952,286 --------- ---------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 188,018 188,018 Accumulated other comprehensive loss (1,382) (1,587) Retained earnings (269,711) (254,839) Less: Treasury stock (220,523) (220,523) --------- ---------- TOTAL STOCKHOLDERS' DEFICIT (303,598) (288,931) --------- ---------- $ 630,944 $ 663,355 ========= ==========

See accompanying notes to consolidated financial statements. 3 TEKNI-PLEX, INC. AND SUBSIDIARIES (in thousands) (Unaudited) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

THREE MONTHS ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2006 2005 ------------- -------------- NET SALES $ 172,005 $ 162,751 COST OF GOODS SOLD 145,070 144,243 --------- ---------- GROSS PROFIT 26,935 18,508 OPERATING EXPENSES: Selling, general and administrative 15,241 15,014 Integration expense 658 2,057 --------- ---------- OPERATING PROFIT 11,036 1,437 OTHER EXPENSES Interest expense, net 24,159 26,952 Unrealized gain (loss) on derivative contracts 430 (2,275) Other (income) expense 151 (20) --------- ---------- LOSS BEFORE INCOME TAXES (13,704) (23,220) Provision for income tax 1,168 1,079 --------- ---------- NET LOSS $ (14,872) $ (24,299) ========= ==========

THREE MONTHS ENDED ----------------------------- SEPTEMBER 29, SEPTEMBER 30, 2006 2005 ------------- -------------- NET LOSS $ (14,872) $ (24,299) COMPREHENSIVE (LOSS) GAIN, NET OF TAXES Foreign currency translation adjustment 336 (24) --------- ---------- COMPREHENSIVE LOSS $ (14,536) $ (24,323) ========= ==========

See accompanying notes to consolidated financial statements. 4 TEKNI-PLEX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

THREE MONTHS ENDED -------------------------------------- SEPTEMBER 29, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(14,872) $(24,299) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 8,431 7,865 Unrealized loss (gain) on derivative contracts 430 (2,275) Interest accretion 1,102 3,770 Deferred income taxes -- 7 Changes in operating assets and liabilities: Accounts receivable 56,069 52,549 Inventories (21,637) (7,186) Prepaid expenses and other current assets (1,691) (3,582) Income taxes 24 (4,370) Accounts payable (575) (18,392) Accrued expenses and other liabilities 11,176 28,122 -------- -------- Net cash provided by operating activities 38,457 32,209 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,785) (3,280) Additions to intangibles (84) 151 Deposits and other assets 292 (149) -------- -------- Net cash used in investing activities (5,577) (3,278) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit (30,000) (12,158) Net repayment from long-term debt (229) -- Proceeds from issuance of Series A redeemable preferred stock -- 5,423 Debt financing costs (84) (237) --------- -------- Net cash used in financing activities (30,313) (6,972) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (11) (133) -------- -------- Net increase in cash 2,556 21,826 Cash, beginning of period 20,689 18,584 -------- -------- Cash, end of period $ 23,245 $ 40,410 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 9,367 $ 1,674 Income taxes 322 512 -------- --------

See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL DESCRIPTION OF BUSINESS We are a global, diversified manufacturer of packaging, packaging products and materials as well as tubing products. We primarily serve the food, healthcare and consumer markets. We have built leadership positions in our core markets, and focus on vertically integrated production of highly specialized products. We have operations in the United States, Europe, Argentina, Canada and China. We believe that our end market and product line diversity has the effect of reducing overall risk related to any single product or customer. Our operations are aligned under two business segments: Packaging and Tubing Products. Products that do not fit in either of these two segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. Representative product lines in each of our business segments are listed below: BUSINESS SEGMENTS

PACKAGING TUBING PRODUCTS --------- --------------- - Foam egg cartons - Garden and irrigation hose - Pharmaceutical blister films - Medical tubing - Poultry and meat processor trays - Pool and vacuum hose - Closure Liners - Aerosol and pump packaging components - Foam plates

The results for the first quarter of fiscal 2007 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting primarily of normal recurring accruals, necessary for a fair statement of the results of operations for the periods presented and the consolidated balance sheet at September 29, 2006. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company's latest annual report on Form 10-K for the fiscal year ended June 30, 2006. RECLASSIFICATIONS Certain items in the prior year financial statements have been reclassified to conform to the current presentation. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for years ending on or after November 15, 2006. The Company is currently evaluating the impact that SAB 108 will have on its consolidated financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 ( "SFAS 158"), Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statements of financial condition and to recognize changes in that funded status through comprehensive income. Also, under SFAS 158, defined benefit plan assets and obligations are to be measured as of the date of the employer's fiscal year-end. SFAS 158 is effective as of the end of the fiscal year ending after December 15, 2006. We have not yet determined the effect of the adoption of SFAS 158 on our financial position. The adoption of SFAS 158 will have no effect on our results of operations. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of the adoption of SFAS 157 and its impact on the Company's consolidated financial statements. 6 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 2 - INVENTORIES Inventories as of September 29, 2006 and June 30, 2006 are summarized as follows:

SEPTEMBER 29, 2006 JUNE 30, 2006 ------------------ ------------- Raw materials $ 74,503 $ 60,715 Work-in-process 13,684 12,834 Finished goods 69,261 62,209 --------- --------- $ 157,448 $ 135,758 --------- =========

NOTE 3 - LONG-TERM DEBT Long-term debt consists of the following:

SEPTEMBER 29, 2006 JUNE 30, 2006 ------------------ ------------- Revolving line of credit $ 9,000 $ 39,000 Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $1,412 and $1,506)(B) $ 273,588 $ 273,494 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (less unamortized premium of $268 and $287)(B) 40,268 40,287 Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $5,420 and $5,609)(C) 269,580 269,391 Senior Secured Notes issued June 10, 2005 at 10.875% due August 15, 2012 (less unamortized discount of $2,786 and $2,904)(D) 147,214 147,096 Series A Redeemable Preferred Stock (B) 75,597 74,495 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2005 to 2010 4,637 4,880 ---------- ----------- 819,884 848,643 Less: Current maturities 1,083 1,241 ---------- ----------- $ 818,801 $ 847,402 ========== ===========

NOTE 4 - CONTINGENCIES The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. We previously reported, in January 1993 and 1994, our Belgian subsidiary received income tax assessments aggregating approximately 74.9 million Belgian Francs for the disallowance of certain foreign tax credits and investment losses claimed for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the subsidiary received an income tax assessment of approximately 32.8 million Belgian francs for the year ended July 31, 1992. By Belgium law, these assessments are capped at the values above, increased by late payment interest for a period of 18 months only (approximately 15.5 million Belgian francs) and do not continue to accrue additional penalties or interest as long as the Tax Director has not rendered a decision in connection with the tax complaints that have been filed against these tax assessments. To date, the Tax Director has not rendered a decision. These liabilities, which total approximately EUR 3,054,000 or $3.8 million at current exchange rates, have been fully accrued for in fiscal 2006. We are subject to environmental laws requiring the investigation and cleanup of environmental contamination. In addition to remediation being undertaken by third parties at a limited number of our locations, we are currently remediating contamination resulting from past industrial activity at three of our New Jersey facilities which we acquired from PureTec in 1998. This remediation is being conducted pursuant to the requirements of New Jersey's Industrial Site Recovery Act which were triggered by the 1998 PureTec transaction. If any other events were to occur in the future that would be deemed to have effected a "change of control" of any of our New Jersey facilities as defined under New Jersey's Industrial Site Recovery Act, we would be required to take additional actions to comply with such statute, including possibly additional investigations and remediation. We also are conducting remediation at a formerly-owned New Jersey facility under a voluntary cleanup agreement with the state. 7 We recently voluntarily self-disclosed to regulators certain non-compliances with the air permit for our Troy, OH facility. While discussions with the Ohio Regional Air Pollution Control Agency are ongoing, we expect that we will be required to install additional pollution controls at this facility in 2006; the capital investment of which we estimate should not exceed $1 million, based on current information. We may also be required to pay a fine, but based on the preliminary stage of discussions, we cannot predict whether such a fine will be imposed, or if so, in what amount. In 2004, the National Enforcement Investigation Center (NEIC), on behalf of the United States Environmental Protection Agency (EPA), conducted an environmental review of our Burlington, NJ site concerning federal Clean Air Act requirements. The EPA subsequently issued a request for further information regarding these air issues under Section 114 of the federal Clean Air Act. In February and March, 2006 the New Jersey Department of Environmental Protection (NJDEP) issued administrative orders alleging violations of certain state air regulations at the Burlington facility. In March, 2006, the United States Department of Justice (DOJ) contacted Colorite on behalf of the EPA. The DOJ indicated that certain violations under several federal environmental statutes had been identified as a result of the EPA's inspection. They discussed the alleged violations and attempted to negotiate a settlement. Since that date, representatives of Colorite have met with representatives of EPA, DOJ and NJDEP on several occasions to discuss the alleged federal and state violations. Tekni-Plex continues to evaluate the alleged violations and its defenses to them, and anticipates negotiating with the government agencies to attempt to resolve these matters. In 2004, we also received a similar request for information from the EPA concerning air emissions at our Wenatchee, Washington plant which we do not expect to result in significant costs or fines or penalties. In fiscal 2006 we established an incremental $900,000 reserve in our financial statements to reflect our best estimate of the aggregate expenses associated with these environmental matters. This reserve is in addition to existing environmental reserves which total $522,500 and the reserves described in Note 7 related to our Elm and Swan acquisitions. Although we believe that, based on historical experience, the costs of achieving and maintaining compliance with environmental laws and regulations are unlikely to have a material adverse effect on our business, we could incur significant fines, penalties, capital costs or other liabilities associated with any confirmed noncompliance or remediation of contamination or natural resource damage liability at or related to any of our current or former facilities, the precise nature of which we cannot now predict. Furthermore, we cannot assure you that future environmental laws or regulations will not require substantial expenditures by us or significant modifications of our operations. 8 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 5 - SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. As a result, Tekni-Plex has aggregated its operating plants into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe, Argentina, Canada and China. Other products not included in either segment are produced in the United States. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:

TUBING PACKAGING PRODUCTS OTHER TOTAL --------- -------- -------- --------- Three Months Ended September 29, 2006 Revenues from external customers $ 93,182 $ 38,582 $ 40,241 $ 172,005 Interest expense, net 7,730 11,327 5,102 24,159 Depreciation and amortization 3,945 2,246 1,984 8,175 Segment income (loss) from operations 16,027 (1,026) 297 15,298 Expenditures for segment assets 2,380 2,425 841 5,646 Segment assets as of September 29, 2006 $ 265,170 $208,147 $147,744 $ 621,061 --------- -------- -------- --------- Three Months Ended September 30, 2005 Revenues from external customers $ 85,057 $ 43,221 $ 34,473 $ 162,751 Interest expense, net 8,611 12,638 5,703 26,952 Depreciation and amortization 3,519 2,244 1,846 7,609 Segment income (loss) from operations 12,771 (7,558) 833 6,046 Expenditures for segment assets 1,727 527 1,020 3,274 Segment assets as of June 30, 2006 $ 263,843 $248,532 $142,606 $ 654,981 --------- -------- -------- ---------

9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands)

THREE MONTHS ENDED -------------------------------------- SEPTEMBER 29, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ OPERATING PROFIT OR LOSS Segment income from operations $ 15,298 $ 6,046 Corporate and eliminations (4,262) (4,609) --------- --------- Consolidated total $ 11,036 $ 1,437 ========= ========= DEPRECIATION AND AMORTIZATION Segment totals $ 8,175 $ 7,609 Corporate 256 256 --------- --------- Consolidated total $ 8,431 $ 7,865 ========= ========= EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 5,646 $ 3,274 Other unallocated expenditures 139 6 --------- --------- Consolidated total $ 5,785 $ 3,280 ========= =========

SEPTEMBER 29, 2006 JUNE 30, 2006 ------------------ ------------- ASSETS Total assets from reportable segments $ 621,061 $ 654,981 Other unallocated amounts 9,883 8,374 ----------- ----------- Consolidated total $ 630,944 $ 663,355 =========== ===========

GEOGRAPHIC INFORMATION

THREE MONTHS ENDED -------------------------------------- SEPTEMBER 29, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ REVENUES United States $ 144,741 $ 143,042 International 27,264 19,709 ----------- ----------- Total $ 172,005 $ 162,751 =========== ===========

SEPTEMBER 29, 2006 JUNE 30, 2006 ------------------ ------------- LONG-LIVED ASSETS United States $ 318,002 $ 320,630 International 35,370 35,216 ----------- ----------- Total $ 353,372 $ 355,846 =========== ===========

10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and May 2002, 8 3/4% Senior Secured Notes in November 2003 and 10 7/8% Senior Secured Notes in June 2005. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor subsidiaries are 100% owned by the issuer. The guarantees are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). The following condensed consolidation financial statements do not have debt and interest expense allocated to guarantors and non-guarantors. Consolidated Statement of Operations (in thousands) (unaudited) For the three months ended September 29, 2006

NON- TOTAL ISSUER GUARANTORS GUARANTORS --------- --------- ---------- ---------- Net sales $ 172,005 $ 47,980 $ 96,761 $ 27,264 Cost of goods sold 145,070 34,617 89,863 20,590 --------- --------- -------- -------- Gross profit 26,935 13,363 6,898 6,674 Operating expenses: Selling, General and administrative 15,241 6,370 6,648 2,223 Integration expense 658 277 381 -- --------- --------- -------- -------- Operating profit (loss) 11,036 6,716 (131) 4,451 Interest expense, net 24,159 24,100 4 55 Unrealized loss on derivative contracts 430 430 -- -- Other expense 151 (140) (506) 797 --------- --------- -------- -------- Income (loss) before income taxes (13,704) (17,674) 371 3,599 Provision for income taxes 1,168 -- 38 1,130 --------- --------- -------- -------- Net income (loss) $ (14,872) $ (17,674) $ 333 $ 2,469 ========= ========= ======== ========

Consolidated Statement of Operations (in thousands) For the three months ended September 30, 2005

NON- TOTAL ISSUER GUARANTORS GUARANTORS --------- --------- ---------- ---------- Net sales $ 162,751 $ 45,826 $ 97,216 $ 19,709 Cost of goods sold 144,243 33,875 93,403 16,965 --------- --------- --------- -------- Gross profit 18,508 11,951 3,813 2,744 Operating expenses: Selling, General and administrative 15,014 6,485 6,448 2,081 Integration expense 2,057 540 1,517 -- --------- --------- --------- -------- Operating profit (loss) 1,437 4,926 (4,152) 663 Interest expense, net 26,952 26,889 50 13 Unrealized gain on derivative contracts (2,275) (2,275) -- -- Other expense (20) (270) (493) 743 --------- --------- --------- -------- Income (loss) before income taxes (23,220) (19,418) (3,709) (93) Provision for income taxes 1,079 -- -- 1,079 --------- --------- --------- -------- Net (loss) $ (24,299) $ (19,418) $ (3,709) $ (1,172) ========= ========= ========= ========

11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) (unaudited) Condensed Consolidated Balance Sheet - at September 29, 2006

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ---------- ---------- ---------- Current assets $ 277,572 $ -- $ 42,135 $ 167,940 $ 67,497 Property, plant and equipment, net 166,709 -- 39,935 100,700 26,074 Intangible assets 171,193 -- 15,145 146,910 9,138 Investment in subsidiaries -- (550,580) 550,580 -- -- Deferred income taxes -- -- 8,502 (8,502) -- Deferred financing costs 13,703 -- 13,587 116 -- Other assets 1,767 (700,716) 447,785 254,540 158 --------- ----------- ---------- --------- -------- Total assets $ 630,944 $(1,251,296) $1,117,669 $ 661,704 $102,867 ========= =========== ========== ========= ======== Current liabilities $ 107,479 $ -- $ 47,784 $ 28,449 $ 31,246 Long-term debt 743,204 -- 739,650 -- 3,554 Series A Redeemable Preferred stock 75,597 -- 75,597 -- -- Other long-term liabilities 8,262 (700,716) 558,181 134,743 16,054 --------- ----------- ---------- --------- -------- Total liabilities 934,542 (700,716) 1,421,212 163,192 50,854 --------- ----------- ---------- --------- -------- Additional paid-in capital 188,018 (313,529) 188,011 294,585 18,951 Retained earnings (deficit) (269,711) (237,051) (269,712) 210,507 26,545 Accumulated other comprehensive income (loss) (1,382) -- (1,319) (6,580) 6,517 Less: Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- --------- -------- Total stockholders' equity (deficit) (303,598) (550,580) (303,543) 498,512 52,013 --------- ----------- ---------- --------- -------- Total liabilities and equity (deficit) $ 630,944 $(1,251,296) $1,117,669 $ 661,704 $102,867 ========= =========== ========== ========= ========

Condensed Consolidating Balance Sheet - at June 30, 2006

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ---------- ------------ ---------- ---------- ----------- Current assets $ 307,509 $ -- $ 36,233 $ 203,580 $ 67,696 Property, plant and equipment, net 167,787 -- 40,641 101,724 25,422 Intangible assets 171,380 -- 14,929 147,109 9,342 Investment in subsidiaries 0 (547,778) 547,778 -- -- Deferred taxes 0 -- 8,502 (8,502) -- Deferred financing costs, net 14,618 -- 14,502 116 -- Other long-term assets 2,061 (700,716) 418,403 283,922 452 ---------- ----------- ---------- --------- --------- Total assets $ 663,355 $(1,248,494) $1,080,988 $ 727,949 $ 102,912 ========== =========== ========== ========= ========= Current liabilities 92,094 -- 33,085 28,800 30,209 Long-term debt 772,907 -- 769,268 -- 3,639 Series A Redeemable Preferred stock 74,495 -- 74,495 -- -- Other long-term liabilities 12,790 (700,716) 492,811 205,765 14,930 ---------- ----------- ---------- --------- --------- Total liabilities 952,286 (700,716) 1,369,659 234,565 48,778 ---------- ----------- ---------- --------- --------- Additional paid-in capital 188,018 (313,529) 188,011 294,585 18,951 Retained earnings (accumulated deficit) (254,839) (234,249) (254,840) 205,381 28,869 Accumulated other comprehensive income (loss) (1,587) -- (1,319) (6,582) 6,314 Treasury stock (220,523) -- (220,523) -- -- ---------- ----------- ---------- --------- --------- Total stockholders' equity (deficit) (288,931) (547,778) (288,671) 493,384 54,134 ---------- ----------- ---------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 663,355 $(1,248,494) $1,080,988 $ 727,949 $ 102,912 ========== =========== ========== ========= =========

12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the three months ended September 29, 2006

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ 38,457 $ (4,612) $ 38,204 $ 4,865 -------- -------- -------- ------- Cash flows from Investing activities: Capital expenditures (5,785) (910) (3,345) (1,530) Additions to intangibles (84) (25) (34) (25) Deposits and other assets 292 -- (2) 294 -------- -------- --------- ------- Net cash used in investing activities (5,577) (935) (3,381) (1,261) -------- -------- -------- -------- Cash flows from financing activities Repayment / borrowings of line of credit (30,000) (30,000) -- -- Repayment of long-term debt (229) -- -- (229) Debt Financing costs (84) -- -- (84) Change in intercompany accounts -- 35,557 (34,400) (1,157) -------- -------- -------- ------- Net cash flows provided by (used in) financing activities (30,313) 5,557 (34,400) (1,470) Effect of exchange rate changes on cash (11) -- -- (11) -------- -------- -------- ------- Net increase in cash 2,556 10 423 2,123 Cash, beginning of period 20,689 4,429 4,895 11,365 -------- -------- -------- ------- Cash, end of period $ 23,245 $ 4,439 $ 5,318 $13,488 ======== ======== ======== =======

For the three months ended September 30, 2005

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ 32,209 $ (633) $ 25,994 $ 6,848 -------- -------- -------- -------- Cash flows from Investing activities: Capital expenditures (3,280) (1,023) (2,080) (177) Additions to intangibles 151 148 -- 3 Deposits and other assets (149) (152) 2 1 -------- -------- -------- -------- Net cash used in investing activities (3,278) (1,027) (2,078) (173) -------- -------- -------- -------- Cash flows from financing activities Repayment / borrowings of line of credit (12,158) (12,015) -- (143) Proceeds from issuance of Series A redeemable of preferred stock 5,423 5,423 -- -- Debt Financing costs (237) (237) -- -- Change in intercompany accounts -- 27,698 (27,391) (307) -------- -------- -------- -------- Net cash flows provided by (used in) financing activities (6,972) 20,869 (27,391) (450) Effect of exchange rate changes on cash (133) -- -- (133) -------- -------- -------- -------- Net increase (decrease) in cash 21,826 19,209 (3,475) 6,092 Cash, beginning of period 18,584 7,150 7,732 3,702 -------- -------- -------- -------- Cash, end of period $ 40,410 $ 26,359 $ 4,257 $ 9,794 ======== ======== ======== ========

13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 7 - ACQUISITIONS In July 2002, the Company purchased certain assets and assumed certain liabilities of ELM Packaging "ELM" for approximately $16,806. The acquisition was recorded under the purchase method, whereby Elm's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. In connection with the acquisition, a reserve of $4,500 has been established for the costs to integrate ELM's operations with the company. The reserve is included in accrued expenses. The components of the integration reserve and activity through September 29, 2006.

BALANCE COSTS CHARGED TO BALANCE JUNE 2006 RESERVE SEPTEMBER 29, 2006 --------- ---------------- ------------------- Legal, environmental and other $ 1,118 $ 0 1,118 -------- ----- -------- $ 1,118 $ 0 $ 1,118 ======== ===== ========

The remaining legal and environmental costs are expected to be paid over the next four years. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through September 29, 2006 is as follows:

BALANCE COSTS CHARGED TO BALANCE JUNE 2006 RESERVE SEPTEMBER 29, 2006 --------- ---------------- ------------------ Legal and environmental $ 749 $ 43 $ 706 ------- ----- ------ $ 749 $ 43 $ 706 ======= ===== ======

The remaining legal and environmental costs are expected to extend over the next three years. 14 TEKNI-PLEX, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 29, 2006 COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 2005 Net sales increased to $172.0 million in the first quarter fiscal 2007 from $162.8 million in the same period last year, representing a 5.7% gain. Net sales in our Packaging Segment grew 9.6% to $93.2 million in the most recent period from $85.1 million in the comparable period of fiscal 2006 due to higher selling prices which have increased approximately 10.0% on average. Net sales in our Tubing Products Segment decreased 10.7% to $38.6 million in fiscal 2007 from $43.2 million in fiscal 2006 primarily due to weaker demand for our garden hose products. Our Tubing Segment volumes, measured in pounds, were down 26.4% in fiscal 2007 compared to fiscal 2006 due, in part, to the market share losses we sustained at the beginning of calendar 2006 as well as significantly lower overall demand for garden hose products in the first quarter of fiscal 2007 compared to the comparable period of fiscal 2006. Prices for our Tubing products increased an average of 16.9% in our first quarter compared to the prior year. Other net sales grew 16.7% to $40.2 million in fiscal 2007 compared to $34.5 million in the previous year due to both higher selling prices which were up 6.6% on average and sales volumes which were up 10.0% on average. Our accruals for rebates, discounts and sales allowances decreased to $9.6 million or 5.6% of net sales in fiscal 2007 compared to $13.0 million or 8.0% of net sales in fiscal 2006. Most of our customer rebates, discounts and allowances are generated by our garden hose operations. The decrease in our accrual was primarily due to lower garden hose sales in the first quarter of fiscal 2007 compared to 2006. In addition, changes in our sales programs and changes in the volumes purchased by each of our customers during the relevant quarters have a significant impact on our accrual for rebates, discounts and allowances. Tekni-Plex's primary raw materials are Polyvinyl Chloride (PVC), Polystyrene, Vinyl Chloride Monomer (VCM) and various plasticizers, all of which are petrochemical based. Generally higher oil and natural gas prices, coupled with strong global demand for commodity chemicals and tight supplies, have resulted in generally higher costs for all of our key raw materials. We expect this trend to continue for the foreseeable future. According to public indices, between September 2005 and September 2006, the cost of PVC rose 13.7%, the cost of Polystyrene rose 14.7%, the cost of VCM rose 12.5%, and the cost of our highest volume plasticizer rose 23.8%. Cost of goods sold increased slightly to $145.1 million in fiscal 2007 from $144.2 million in fiscal 2006. Expressed as a percentage of net sales, cost of goods sold decreased to 84.3% in the current period compared to 88.6% in the prior period as we were able to pass through higher raw material costs to our customers. Gross profit, as a result of the above, increased to $26.9 million in the current period compared to $18.5 million in the prior period. Expressed as a percentage of net sales, gross profit improved to 15.7% in the first quarter of fiscal 2007 from 11.4% in comparable period of last year. Our Packaging Segment gross profit increased 11.9% to $23.2 million in fiscal 2007 from $20.7 million for fiscal 2006 as we were able to pass through higher raw material costs to our customers. Expressed as a percentage of net sales, Packaging Segment gross profit increased to 24.9% in the current period from 24.4% in the previous period. Our Tubing Products Segment gross profit improved to $2.1 million in fiscal 2007 from a loss of ($4.6) million in fiscal 2006 as significantly higher selling prices more than offset both higher raw material costs and reduced volumes. Expressed as a percentage of net sales, our Tubing Products Segment gross profit increased to 5.4% in the current period from (10.5%) in the previous period. Other gross profit decreased $1.7 million in fiscal 2007 from $2.3 million in fiscal 2006. Expressed as a percentage of net sales, Other gross profit declined to 4.1% in fiscal 2007 from 6.8% a year earlier. Selling, general and administrative expenses increased slightly to $15.2 million in the most recent fiscal quarter from $15.0 million last year. Measured as a percentage of net sales, selling, general and administrative expenses decreased to 8.9% in the current period from 9.2% in the previous period. Integration expenses decreased to $0.7 million or 0.4% of net sales in fiscal 2007 from $2.1 million or 1.3% of net sales in fiscal 2006 as the integration of our Elm facilities is nearing completion. Our integration expenses are typically cash expenses and relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards as well as the costs associated with consolidating facilities. These costs are comprised of the following: 15

2007 2006 ----- ------ Elm Packaging Material 0.4 1.1 Labor 0.1 0.4 Overhead 0.1 0.6 ---- ---- Total 0.7 2.1 ---- ----

We expect the reconfiguring and realignment of our Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, increased to $11.0 million in fiscal 2007 from $1.4 million in fiscal 2006. Expressed as a percentage of net sales, operating profit increased to 6.4% in the most recent period from 0.9% in the comparable period of last year. Our Packaging Segment operating profit increased to $16.0 million (17.2% of net sales) in the current period compared to $12.8 million (15.0% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($1.0) million or (2.7%) of net sales in the current period compared to loss of ($7.6) million or (17.5%) of net sales in the previous year. Other operating profit decreased to $0.3 million (0.7% of net sales) in the current period compared to $0.9 million or (2.4% of net sales) in the previous period. Interest expense decreased to $24.2 million (14.0% of net sales) in fiscal 2007 from $27.0 million (16.6% of net sales) in fiscal 2006. In the first quarter of fiscal 2007 we changed the method we are using to accrete our Series A Redeemable preferred stock to its mandatory redemption amount from the straight-line method to the interest method. This change in estimate reduced the current period's interest expense by $2.4 million. Unrealized loss on derivative transactions was $0.4 million or 0.2% of net sales in fiscal 2007 compared to a gain of $2.3 million or 1.4% of net sales in the previous year due to the various movements of the interest rates embedded in our derivative contracts. See the Liquidity and Capital Resources discussion below for a detailed description of our derivative transactions. Loss before income taxes, as a result, was a loss of ($13.7) million or (8.0%) of net sales for fiscal 2007 compared to a loss of ($23.2) million or (14.3%) of net sales for fiscal 2006. Income tax expense was $1.2 million for fiscal 2007 compared to $1.1 million for fiscal 2005 primarily reflecting foreign and state taxes as we continued to fully reserve against our deferred tax asset. Net loss, as a result, was a loss of ($14.9) million for fiscal 2007 or (8.6%) of net sales compared with a loss of ($24.3) million for fiscal 2006 or (14.9%) of net sales. LIQUIDITY AND CAPITAL RESOURCES For the quarter ended September 29, 2006, net cash generated in operating activities was $38.5 million compared to $32.2 million of cash generated in operating activities in the first quarter of the prior year. The $6.3 million increase was due primarily to improved earnings. In addition, normal seasonal reductions in accounts receivable at our garden hose operations coupled with reductions in accrued expenses more than offset our increase in inventories. Other various year-over-year changes in operating assets, accrued expenses (including interest expense) and liabilities, are generally due to offsetting timing differences. As of November 13, 2006 we had an outstanding balance of $12.0 million under our $75.0 million asset backed credit facility. Also as of November 13, 2006 availability under this facility was reduced by $7.0 million of letters of credit related to our workmen's compensation insurance programs. Working capital at September 29, 2006 was $170.1 million compared to $215.4 million at June 30, 2006. The $45.3 million decrease was primarily due to operating losses as well as a reduction of long term debt. Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the quarters ended September 29, 2006 and September 30, 2005 were $5.8 million and $3.3 million, respectively. We believe that we will be able to pass along expected higher raw material costs to our garden hose customers during fiscal 2007 and consequently, cash generated from operations plus funds available under our asset backed facility will be sufficient to meet our needs and to provide us with the flexibility to make capital expenditures and other investments which we believe are prudent. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet all of our future cash needs. 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS In June 2000, we entered into a series of interest rate derivative transactions designed to protect us from rising interest rates on our senior term debt facilities while enabling us to partially benefit from falling interest rates. At that time, Tekni-Plex had $344.0 million of term loans outstanding with variable rates of interest tied to US$ LIBOR. These loans, which originally had maturity dates ranging from June 2006 through June 2008, have been repaid. Concurrent with incurring this debt, Tekni-Plex entered into a series of interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on 3 month dollar LIBOR on an aggregate of $344.0 million amount of indebtedness. The swaps amortize on the same schedule as the original term loans. As of September 29, 2006 the notional amount of the swaps is approximately $229.4 million. Portfolio theory and empirical evidence suggested that the change in value of a basket of LIBOR benchmarks would be less volatile than the change in value of a single benchmark. Since 2000, this has generally been our experience. In conjunction with our swap contracts we also purchased an interest rate cap. We believe the reduced volatility created by the interest rate swaps made the interest rate cap less expensive. We recorded an unrealized loss from derivative transactions of $0.4 million and an unrealized gain of $2.3 million in the first quarters of fiscal 2007 and 2006, respectively. Our senior debt and our senior subordinated notes include various covenants, the most restrictive of which limit our incremental debt and capital expenditures. The availability of borrowings under our asset based facility is subject to a borrowing base limitation equal to the lesser of the borrowing base as defined in the asset backed agreement and the then effective commitments under the asset based facility minus such availability reserves as the administrative agent, in its sole discretion, deems appropriate. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In connection with the completion of its audit of and the issuance of an unqualified report on the Company's consolidated financial statements for the fiscal year ended June 30, 2006, the Company's independent registered public accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that the following matters involving the Company's internal controls and operations were considered to be "significant deficiencies", as defined under standards established by the Public Company Accounting Oversight Board: - Lack of quantity of staff in order to ensure timeliness and completeness of financial reporting. Management agrees with this assessment. Significant deficiencies are matters coming to the attention of the independent auditors that in their judgment, relate to material weaknesses in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider this matter, which is listed above, to be a "material weakness" that, by itself, may increase the possibility that a material misstatement in our financial statements might not be prevented or detected by our employees in the normal course of performing their assigned functions. Over the last 12 months we have made a number of significant changes to our internal controls. They include: (1) creating of an internal audit department; 17 (2) adding additional staff to the accounting and finance functional group; (3) centralizing the reporting of financial managers to 4 group controllers who will provide increased oversight and improved training; (4) during annual performance reviews of accounting and bookkeeping personnel requiring all reviewing personnel to inquire whether the reviewed employee has had or observed any problems in the use of approved accounting systems or in the accounting function generally; (5) improving its internal financial reporting systems and related controls across all of its divisions to, among other things, increase both the frequency by which inventory and rebates discounts and allowances are monitored as well as increasing the number of managers responsible for monitoring these functions; (6) instituting a policy of performing routine credit and background checks on all financial staff and key managers; and (7) beginning the process of centralizing our cash management function and significantly improving our controls over cash disbursements. As required by SEC Rule 13a-15(b), the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures and internal controls over financial reporting as of September 29, 2006. Given the material weakness noted above, the Company's Chief Executive Officer and Chief Financial Officer determined that its controls are not effective as of that date. However, the Chief Executive Officer and Chief Financial Officer noted that significant improvement in its controls have been made and they expect its controls can be improved further. Consequently, the Company will continue to improve and refine its internal controls over the next 12 months. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 1A. Risk Factors. None Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Securities holders. Not applicable Item 5. Other Information. None Item 6. Exhibits (a) Exhibits 31.1 Certification of Chairman and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. November 13, 2006 By: /s/ F. Patrick Smith ---------------------------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ James E. Condon ----------------------------------------- James E. Condon Vice President and Chief Financial Officer 19