10-Q 1 y18485e10vq.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 March 31, 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 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 March 31, 2006 (unaudited) and July 1, 2005 3 Consolidated Statements of Operations for the nine months and three months ended March 31, 2006 and April 1, 2005 4 Consolidated Statements of Comprehensive Income (Loss) for the nine months and three months ended March 31, 2006 and April 1, 2005 4 Consolidated Statements of Cash Flows for the nine months ended March 31, 2006 and April 1, 2005 5 Notes to Consolidated Financial Statements 6-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 ITEM 4. CONTROLS AND PROCEDURES 19-21 PART II. OTHER INFORMATION 21 Item 1. Legal proceedings 21 Item 2. Changes in securities 21 Item 3. Defaults upon senior securities 21 Item 4. Submission of matters to a vote of securities holders 21 Item 5. Subsequent events 21 Item 6. Exhibits 21

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

MARCH 31, JULY 1, 2006 2005 (UNAUDITED) (AUDITED) ----------- --------- ASSETS CURRENT: Cash $ 16,374 $ 18,584 Accounts receivable, net of allowances of $6,470 and $9,144 respectively 115,398 138,383 Inventories 159,066 129,617 Prepaid expenses and other current assets 7,067 5,845 --------- --------- TOTAL CURRENT ASSETS 297,905 292,429 PROPERTY, PLANT AND EQUIPMENT, NET 168,456 176,182 GOODWILL 163,401 198,532 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $6,310 AND $4,943 RESPECTIVELY 5,370 6,110 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $14,646 AND $12,817 RESPECTIVELY 15,088 16,677 OTHER ASSETS 1,698 1,765 --------- --------- $ 651,918 $ 691,695 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 892 $ 1,082 Accounts payable - trade 34,882 48,060 Accrued payroll and benefits 14,171 12,185 Accrued interest 26,108 6,385 Accrued liabilities - other 24,720 17,508 Income taxes payable 2,861 6,391 --------- --------- TOTAL CURRENT LIABILITIES 103,634 91,611 LONG-TERM DEBT 763,380 744,613 SERIES A REDEEMABLE PREFERRED STOCK 71,001 54,822 OTHER LIABILITIES 9,779 13,976 --------- --------- TOTAL LIABILITIES 947,794 905,022 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 188,018 188,018 Accumulated other comprehensive loss (9,453) (10,294) Retained earnings (253,918) (170,528) Less: Treasury stock (220,523) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (295,876) (213,327) --------- --------- $ 651,918 $ 691,695 ========= =========

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

THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ MARCH 31, 2006 APRIL 1, 2005 MARCH 31, 2006 APRIL 1, 2005 -------------- ------------- -------------- ------------- NET SALES $194,568 $194,215 $509,715 $475,923 COST OF SALES 157,654 166,958 431,819 395,128 -------- -------- -------- -------- GROSS PROFIT 36,914 27,257 77,896 80,795 OPERATING EXPENSES: Selling, general and administrative 16,144 15,499 80,280 45,542 Integration expense 940 2,008 4,336 6,830 -------- -------- -------- -------- OPERATING PROFIT (LOSS) 19,830 9,750 (6,720) 28,423 OTHER EXPENSES: Interest expense 26,223 23,896 78,668 66,053 Unrealized gain on derivative contracts (801) (3,078) (3,326) (7,262) Other expenses (2,816) (3,055) (2,698) (2,273) --------- --------- --------- --------- LOSS BEFORE INCOME TAXES (2,776) (8,013) (79,364) (28,095) PROVISION FOR INCOME TAXES 1,788 2,210 4,027 3,734 -------- -------- -------- -------- NET LOSS $ (4,564) $(10,223) $(83,391) $(31,829) ======== ======== ======== ======== CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS NET LOSS $ (4,564) $(10,223) $(83,391) $(31,829) OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment 946 (4,280) 841 2,089 -------- --------- -------- -------- COMPREHENSIVE LOSS $ (3,618) $(14,503) $(82,550) $(29,740) ======== ======== ======== ========

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

NINE MONTHS ENDED ------------------------------ MARCH 31, 2006 APRIL 1, 2005 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(83,391) $(31,829) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 23,872 22,975 Goodwill impairment 35,131 -- Unrealized (gain) on derivative contracts (3,326) (7,262) Gain on asset sales (2,863) -- Interest accretion on Series A Redeemable Preferred Stock 10,756 -- Deferred income taxes 4 (348) Changes in operating assets and liabilities: Accounts receivable 23,492 10,374 Inventories (29,456) (31,103) Prepaid expenses and other current assets (1,230) (1,577) Income taxes (3,530) 1,252 Accounts payable-trade (13,098) (2,132) Accrued interest 19,724 17,669 Accrued expenses and other liabilities 8,596 3,258 -------- -------- Net cash used in operating activities (15,319) (18,723) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,081) (14,247) Proceeds from asset sales 4,142 -- Acquisition costs -- (39) Additions to intangibles (628) (1,097) Deposits and other assets 67 (55) -------- -------- Net cash used in investing activities (9,500) (15,438) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Repayments) borrowings of long-term debt 17,490 18,339 Proceeds from issuance of Series A Redeemable Preferred Stock 5,423 -- Debt financing costs (240) (1,063) -------- --------- Net cash provided by financing activities 22,673 17,276 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (64) (141) --------- -------- Net decrease in cash (2,210) (17,026) Cash, beginning of period 18,584 29,735 -------- -------- Cash, end of period $ 16,374 $ 12,709 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 59,102 $ 47,030 Income taxes 3,109 3,028

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 components, 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 and Canada. 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 - Foam egg cartons - Pharmaceutical blister films - Poultry and meat processor trays - Closure Liners - Aerosol and pump packaging components - Foam plates TUBING PRODUCTS - Garden and irrigation hose - Medical tubing - Pool and vacuum hose The results for the third quarter of fiscal 2006 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 March 31, 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 July 1, 2005. RESTATEMENT As previously disclosed on Form 8-K filed September 21, 2005, and the Company's latest annual report on Form 10-K for the fiscal year ended July 1, 2005, Tekni-Plex has identified certain inventory overstatements at its American Gasket & Rubber Division which resulted in a $6.8 million overstatement of inventory. With the assistance of outside legal counsel as well as an independent registered public accounting firm other than BDO Seidman, LLP, the Audit Committee of the Board of Directors of Tekni-Plex has concluded an internal investigation into this matter. These inventory overstatements at American Gasket and Rubber Division have required a non-cash charge to results of operations for fiscal 2005 as follows: 1st Quarter $(1.0) million 2nd Quarter $(0.9) million 3rd Quarter $(1.0) million 4th Quarter $(0.0) million Total Fiscal 2005 $(2.8) million Results of operations for the nine months and third quarter of fiscal 2005 have been restated herein. Management has concluded that the impact of these errors on interim reporting periods filed under Form 10-Q during fiscal 2005 are not material. Consequently investors can continue to rely on all financial reports filed during fiscal 2005 on Form 10-Q. 6 The following table sets forth selected line items from the Company's historical consolidated statements of operations that are affected by the restatement on a restated basis and as previously reported.

THREE MONTHS ENDED NINE MONTHS ENDED APRIL 1, 2005 APRIL 1, 2005 ------------------------- ------------------------- AS RESTATED AS REPORTED AS RESTATED AS REPORTED ----------- ----------- ----------- ----------- Cost of Sales $166,958 $165,994 $395,128 $392,305 Net (Loss) $(10,223) $ (9,259) $(31,829) $(29,006)

NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123R, Share Based Payment. SFAS No. 123R requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date value of the award. The cost will be recognized over the period during which the employee is required to provide services in exchange for the award. This standard eliminates the alternative to use the intrinsic value method of accounting for share based payments as previously provided in APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company will adopt SFAS 123R in its next fiscal year beginning July 1, 2006. The Company is determining its impact on the consolidated financial statements. NOTE 2 - INVENTORIES Inventories as of March 31, 2006 and July 1, 2005 are summarized as follows:

MARCH 31, 2006 JULY 1, 2005 -------------- ------------ Raw materials $ 61,293 $ 53,450 Work-in-process 12,000 12,466 Finished goods 85,773 63,701 -------- -------- $159,066 $129,617 -------- --------

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

MARCH 31, 2006 JULY 1, 2005 -------------- ------------ Revolving line of credit $ 30,000 $ 12,000 Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010 (less unamortized discount of $1,600 and $1,883) 273,400 273,117 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $306 and $362) 40,306 40,362 Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $5,798 and $6,365) 269,202 268,635 Senior Secured Notes issued June 10, 2005 at 10.87% due August 15, 2012 (less unamortized discount of $3,022 and $3,375) 146,977 146,625 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2006 to 2010 4,387 4,956 -------- -------- 764,272 745,695 Less: Current maturities 892 1,082 -------- -------- $763,380 $744,613 ======== ========

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. As 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 Beligan 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. These liabilities total approximately EUR 3,054,000 or $3.8 million at current exchange rates. Some weeks ago, the Belgium tax authorities submitted to us a file outlining their arguments supporting their assessments. We are currently reviewing the merits of the Belgium tax authorities' position. 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. 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 8 (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. The DOJ offered to meet with Colorite to attempt to negotiate a settlement. On March 31, 2006, representatives of Colorite met with representatives of EPA, DOJ and NJDEP to discuss the alleged federal and state violations. Colorite is evaluating 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 and responded to a request for information from the EPA under Section 114 of the federal Clean Air Act concerning air emissions at our Wenatchee, Washington plant which we do not expect to result in significant costs or fines or penalties. Based on a recent review of the environmental matters noted above, in the third quarter of fiscal 2006 we have established an incremental $900,000 accounting reserve on our balance sheet 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 facilities. 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. 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 and Canada. 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 March 31, 2006 Revenues from external customers $96,009 $58,005 $40,554 $194,568 Interest expense 8,408 12,281 5,534 26,223 Depreciation and amortization 3,653 2,289 1,889 7,831 Segment income (loss) from operations 17,752 6,521 359 24,632 Capital expenditures for segment assets 3,177 560 1,626 5,363 ------- ------- ------- -------- Three months ended April 1, 2005 Revenues from external customers $92,214 $64,214 $37,787 $194,215 Interest expense 7,624 11,223 5,049 23,896 Depreciation and amortization 3,635 2,155 1,676 7,466 Segment income (loss) from operations 13,524 258 (12) 13,770 Capital expenditures for segment assets 307 341 238 886 ------- ------- ------- --------

9

TUBING PACKAGING PRODUCTS OTHER TOTAL --------- --------- -------- -------- Nine months ended March 31, 2006 Revenues from external customers $273,971 $124,734 $111,010 $509,715 Interest expense 25,155 36,878 16,635 78,668 Depreciation and amortization 10,607 6,883 5,614 23,104 Segment income (loss) from operations 45,410 (40,315) 1,206 6,301 Capital expenditures for segment Assets 7,536 1,719 3,223 12,478 -------- -------- -------- -------- Nine months ended April 1, 2005 Revenues from external customers $257,286 $120,572 $ 98,065 $475,923 Interest expense 21,051 31,005 13,997 66,053 Depreciation and amortization 10,911 6,351 4,945 22,207 Segment income (loss) from operations 37,606 4,829 (521) 41,914 Capital expenditures for segment assets 8,460 2,170 3,231 13,861 -------- -------- -------- --------

THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ MARCH 31, 2006 APRIL 1, 2005 MARCH 31, 2006 APRIL 1, 2005 -------------- ------------- -------------- ------------- PROFIT OR LOSS Total operating profit for reportable segments $24,632 $13,770 $ 6,301 $ 41,914 Corporate and eliminations (4,802) (4,020) (13,021) (13,491) ------- ------- -------- -------- Consolidated total $19,830 $ 9,750 $ (6,720) $ 28,423 ======= ======= ======== ======== DEPRECIATION AND AMORTIZATION Segment totals $ 7,831 $ 7,466 $ 23,104 $ 22,207 Corporate 256 256 768 768 ------- ------- -------- -------- Consolidated total $ 8,087 $ 7,722 $ 12,478 $ 22,975 ======= ======= ======== ======== CAPITAL EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 5,363 $ 886 $ 11,199 $ 13,861 Other unallocated expenditures 252 4 603 386 ------- ------- -------- -------- Consolidated total $ 5,615 $ 890 $ 13,081 $ 14,247 ======= ======= ======== ========

SEGMENT ASSETS

TUBING PACKAGING PRODUCTS OTHER TOTAL --------- -------- -------- -------- March 31, 2006 $262,096 $239,534 $139,998 $641,628 -------- -------- -------- -------- July 1, 2005 255,827 295,176 132,166 683,169 -------- -------- -------- --------

MARCH 31, 2006 JULY 1, 2005 -------------- ------------ TOTAL ASSETS Total assets from reportable segments $641,628 $683,169 Other unallocated amounts 10,290 8,526 -------- -------- Consolidated total $651,918 $691,695 ======== ========

10 GEOGRAPHIC INFORMATION

THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ MARCH 31, 2006 APRIL 1, 2005 MARCH 31, 2006 APRIL 1, 2005 -------------- ------------- -------------- ------------- REVENUES United States $166,904 $164,848 $441,103 $404,686 International 27,664 29,367 68,612 71,237 -------- -------- -------- -------- Total $194,568 $194,215 $509,715 $475,923 ======== ======== ======== ========

MARCH 31, 2006 JULY 1, 2005 -------------- ------------ LONG-LIVED ASSETS United States $321,956 $364,864 International 32,057 34,402 -------- -------- Total $354,013 $399,266 ======== ========

NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and May 2002 and 8 3/4% Senior Secured Notes in November 2003. 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 March 31, 2006

TOTAL ISSUER GUARANTORS NON-GUARANTORS -------- -------- ---------- -------------- Net sales $194,568 $ 50,900 $116,004 $27,664 Cost of sales 157,654 37,312 101,504 18,838 -------- -------- -------- ------- Gross profit 36,914 13,588 14,500 8,826 Operating expenses: Selling, General and administrative 16,144 6,298 7,326 2,520 Integration expense 940 258 682 -- -------- -------- -------- ------- Operating profit 19,830 7,032 6,492 6,306 Interest expense net 26,223 26,128 -- 95 Unrealized gain on derivative contracts (801) (801) -- -- Other expense (income) (2,816) (294) (3,213) 691 -------- -------- -------- ------- Income (loss) before income taxes (2,776) (18,001) 9,705 5,520 Provision (benefit) for income taxes 1,788 4 271 1,513 -------- -------- -------- ------- Net income(loss) $ (4,564) $(18,005) $ 9,434 $ 4,007 ======== ======== ======== =======

11 Consolidated Statement of Operations (in thousands) For the nine months ended March 31, 2006

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $509,715 $148,117 $292,986 $68,612 Cost of goods sold 431,819 108,092 271,197 52,530 -------- -------- -------- ------- Gross profit 77,896 40,025 21,789 16,082 Operating expenses: Selling, General and administrative 80,280 19,599 53,875 6,806 Integration expense 4,336 1,188 3,148 -- -------- -------- -------- ------- Operating profit (loss) (6,720) 19,238 (35,234) 9,276 Interest expense, net 78,668 78,463 -- 205 Unrealized loss on derivative contracts (3,326) (3,326) -- -- Other expense (income) (2,698) (830) (4,121) 2,253 -------- -------- -------- ------- Income (loss) before income taxes (79,364) (55,069) (31,113) 6,818 Provision (benefit) for income taxes 4,027 11 813 3,203 -------- -------- -------- ------- Net income (loss) $(83,391) $(55,080) $(31,926) $ 3,615 ======== ======== ======== =======

Consolidated Statement of Operations (in thousands) (Unaudited) For the three months ended April 1, 2005

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $194,215 $ 48,613 $116,235 $29,367 Cost of goods sold 166,958 36,798 108,666 21,494 -------- -------- -------- ------- Gross profit 27,257 11,815 7,569 7,873 Operating expenses: Selling, General and administrative 15,499 6,405 6,439 2,655 Integration expense 2,008 610 1,398 -- -------- -------- -------- ------- Operating profit 9,750 4,800 (268) 5,218 Interest expense (income), net 23,896 23,888 (10) 18 Unrealized gain on derivative contracts (3,078) (3,078) -- -- Other expense (income) (3,055) (3,286) (530) 761 -------- -------- -------- ------- Income (loss) before income taxes (8,013) (12,724) 272 4,439 Provision (benefit) for income taxes 2,210 (400) 400 2,210 -------- -------- -------- ------- Net income (loss) $(10,223) $(12,324) $ (128) $ 2,229 ======== ======== ======== =======

Consolidated Statement of Operations (in thousands) For the nine months ended April 1, 2005

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $475,923 $135,574 $269,112 $71,237 Cost of sales 395,128 101,365 239,180 54,583 -------- -------- -------- ------- Gross profit 80,795 34,209 29,932 16,654 Operating expenses: Selling, General and administrative 45,542 20,086 18,497 6,959 Integration expense 6,830 1,776 5,054 -- -------- -------- -------- ------- Operating profit 28,423 12,347 6,381 9,695 Interest expense, net 66,053 66,011 (43) 85 Unrealized loss on derivative contracts (7,262) (7,262) -- -- Other expense (income) (2,273) (3,745) (1,399) 2,871 -------- -------- -------- ------- Income (loss) before income taxes (28,095) (42,657) 7,823 6,739 Provision (benefit) for income taxes 3,734 (3,700) 3,700 3,734 -------- -------- -------- ------- Net income(loss) $(31,829) $(38,957) $ 4,123 $ 3,005 ======== ======== ======== =======

12 Condensed Consolidated Balance Sheet - at March 31, 2006

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ---------- ---------- ---------- Current assets $ 297,905 $ -- $ 42,227 $193,342 $62,336 Property, plant and equipment, net 168,456 -- 41,505 104,484 22467 Intangible assets, net 168,771 -- 15,865 143,486 9,420 Investment in subsidiaries -- (534,063) 534,063 -- -- Deferred income taxes -- -- 8,502 (8,502) -- Deferred charges, net 15,088 -- 14,972 116 -- Other assets 1,698 (699,093) 429,214 271,407 170 --------- ----------- ---------- -------- ------- Total assets $ 651,918 $(1,233,156) $1,086,348 $704,333 $94,393 ========= =========== ========== ======== ======= Current liabilities $ 103,634 $ -- $ 47,095 $ 34,020 $22,519 Long-term debt 763,380 -- 795,885 -- 3,495 Series A Redeemable Preferred stock 71,001 -- 71,001 -- -- Other long-term liabilities 9,779 (699,093) 497,015 193,402 18,455 --------- ----------- ---------- -------- ------- Total liabilities 947,794 (699,093) 1,374,996 227,422 44,469 --------- ----------- ---------- -------- ------- Additional paid-in capital 188,018 (313,529) 188,011 296,771 16,765 Retained earnings (deficit) (253,918) (220,534) (253,920) 190,812 29,724 Other comprehensive income (loss) (9,453) -- (2,216) (10,672) 3,435 Less: Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- -------- ------- Total stockholders' equity(deficit) (295,876) (534,063) (288,648) 476,911 49,924 --------- ----------- ---------- -------- ------- $ 651,918 $(1,233,156) $1,086,348 $704,333 $94,393 ========= =========== ========== ======== =======

Condensed Consolidating Balance Sheet - at July 1, 2005

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ---------- ---------- ---------- Current assets $ 292,429 $ -- $ 38,998 $192,614 $60,817 Property, plant and equipment, net 176,182 -- 42,397 109,750 24,035 Intangible assets 204,642 -- 15,268 179,210 10,164 Investment in subsidiaries -- (562,374) 562,374 -- -- Deferred financing costs, net 16,677 -- 16,561 116 -- Other long-term assets 1,765 (592,288) 379,589 214,261 203 --------- ----------- ---------- -------- ------- Total assets $ 691,695 $(1,154,662) $1,055,187 $695,951 $95,219 ========= =========== ========== ======== ======= Current liabilities 91,611 -- 27,709 39,040 24,862 Long-term debt 744,613 -- 740,739 -- 3,874 Series A Redeemable Preferred stock 54,822 -- 54,822 -- -- Other long-term liabilities 13,976 (592,288) 437,185 148,101 20,978 --------- ----------- ---------- -------- ------- Total liabilities 905,022 (592,288) 1,260,455 187,141 49,714 --------- ----------- ---------- -------- ------- Additional paid-in capital 188,018 (313,529) 187,999 296,783 16,765 Retained earnings (accumulated deficit) (170,528) (248,845) (170,528) 222,736 26,109 Accumulated other comprehensive (income) loss (10,294) -- (2,216) (11,005) 2,927 Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- -------- ------- Total stockholders' deficit (213,327) (562,374) (205,268) 508,514 45,801 --------- ----------- ---------- -------- ------- Total liabilities and stockholders' deficit $ 691,695 $(1,154,662) $1,055,187 $695,655 $95,515 ========= =========== ========== ======== =======

13 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the nine months ended March 31, 2006

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $(15,319) $(27,207) $ 7,039 $ 4,849 -------- -------- ------- ------- Cash flows from Investing activities: Capital expenditures (13,081) (2,798) (9,187) (1,096) Additions to intangibles (628) (192) (592) 156 Proceeds from asset sales 4,142 -- 4,142 -- Deposits and other assets 67 (3) 103 (33) -------- -------- ------- ------- Net cash used in investing activities $ (9,500) $ (2,993) $(5,534) $ (973) -------- -------- ------- ------- Cash flows from financing activities: Repayment/Borrowings of line of credit 17,490 18,059 -- (569) Proceeds from Issuance of Series A Redeemable Preferred Stock 5,423 5,423 -- -- Debt financing (240) (240) -- -- Change in intercompany accounts -- 5,458 (7,693) 2,235 -------- -------- ------- ------- Net cash flows provided by (used in) financing activities 22,673 28,700 (7,693) 1,666 -------- -------- ------- ------- Effect of exchange rate changes on cash (64) -- -- (64) -------- -------- ------- ------- Net increase (decrease) in cash (2,210) (1,500) (6,188) 5,478 Cash, beginning of period 18,584 7,150 7,732 3,702 -------- -------- ------- ------- Cash, end of period $ 16,374 $ 5,650 $ 1,544 $ 9,180 ======== ======== ======= =======

For the nine months ended April 1, 2005

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $(18,723) $(33,663) $ 6,634 $ 8,306 -------- -------- -------- ------- Cash flows from Investing activities: Capital expenditures (14,247) (1,533) (10,527) (2,187) Acquisitions (39) (39) -- -- Additions to intangibles (1,097) (244) (44) (809) Deposits and other assets (55) (55) -- -- -------- -------- -------- ------- Net cash used in investing activities $(15,438) $ (1,871) $(10,571) $(2,996) -------- -------- -------- ------- Cash flows from financing activities (Repayments) borrowings of long term debt 18,339 18,643 -- (304) Debt financing costs (1,063) (1,063) -- -- Change in intercompany accounts -- 11,442 (2,479) (8,963) -------- -------- -------- ------- Net cash flows provided by (used in) financing activities 17,276 29,022 (2,479) (9,267) -------- -------- -------- ------- Effect of exchange rate changes on cash (141) -- -- (141) -------- -------- -------- ------- Net increase (decrease) in cash (17,026) (6,512) (6,416) (4,098) Cash, beginning of period 29,735 11,890 8,923 8,922 -------- -------- -------- ------- Cash, end of period $ 12,709 $ 5,378 $ 2,507 $ 4,824 ======== ======== ======== =======

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 March 31, 2006 are as follows: 14

BALANCE COSTS CHARGED BALANCE JULY 1, 2005 TO RESERVE MARCH 31, 2006 ------------ -------------- -------------- Legal, environmental and other $1,144 $16 $1,128 ------ --- ------ $1,144 $16 $1,128 ====== === ======

The remaining legal, environmental and other 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 March 31, 2006 are as follows:

BALANCE COSTS CHARGED BALANCE JULY 1, 2005 TO RESERVE MARCH 31, 2006 ------------ ------------- -------------- Legal and environmental $965 $149 $816 ---- ---- ---- $965 $149 $816 ==== ==== ====

The remaining legal and environmental costs are expected to extend over the next four years. 15 TEKNI-PLEX, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2006 COMPARED TO THE QUARTER ENDED APRIL 1, 2005 Net sales increased to $194.6 million in the third quarter of fiscal 2006 from $194.2 million the same period last year, representing a modest 0.2% gain. Net sales in our Packaging Segment grew 4.1% to $96.0 million in the most recent period from $92.2 million in the comparable period of fiscal 2005 primarily due to higher selling prices. Net sales in our Tubing Products Segment decreased 9.7% to $58.0 million in fiscal 2006 from $64.2 million in fiscal 2005 reflecting lower sales volumes at our garden hose operations. These lower sales volumes were caused by lost market share as well as inventory reductions and a shift to setting stores later in the season by some of our key garden hose customers. Other net sales grew 7.3% to $40.6 million in fiscal 2006 compared to $37.8 million in the previous year primarily due to higher selling prices. Our accruals for rebates, discounts and sales allowances increased to $14.3 million or 7.3% of net sales in fiscal 2006 compared to $13.0 million or 6.7% of net sales in fiscal 2005. The increase was due to changes in our sales programs as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold decreased to $157.7 million in fiscal 2006 from $167.0 million in fiscal 2005 primarily reflecting lower material costs at our Tubing Segment operations resulting from lower garden hose shipments. Expressed as a percentage of net sales, cost of goods sold decreased to 81.0% in the current period compared to 86.0% in the prior period. 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. In most of our businesses we have been able to pass on higher material costs to our customers in a relatively short time period. However, like most seasonal retail products, we traditionally have sold garden hose under annual agreements, where prices are generally set in the fall and generally remain in effect for the calendar year. In general, the increase in raw material costs at our garden hose operations during a 12-month time period reduces our profitability. Between March, 2005 and March, 2006, the two primary raw materials for our garden hose business, PVC and plasticizers, rose an average of 10.4% and 1.5% respectively. Price increases on our garden hose products that generally went into effect in January 2006 coupled with cost reduction initiatives and product mix improvements more than offset this increase in raw material prices in our third fiscal quarter. To further mitigate the potential impact of continued increases in the cost of our raw materials and in contrast to previous years, we have not guaranteed garden hose pricing for the 2006 selling season. As previously discussed, our cost of goods sold includes a $1.0 million inventory write-down (0.5% of net sales) in fiscal 2005 to reflect inventory restatements at our American Gasket and Rubber Division. Gross profit, as a result of the above, increased to $36.9 million in the current period compared to $27.3 million in the prior period. Expressed as a percentage of net sales, gross profit increased to 19.0% in the third quarter of fiscal 2006 from 14.0% in comparable period of last year. Our Packaging Segment gross profit increased 15.1% to $25.3 million in fiscal 2006 from $22.0 million in fiscal 2005, primarily due to higher selling prices. Expressed as a percentage of net sales, Packaging Segment gross profit increased to 26.3% in the current period from 23.9% in the previous period. Our Tubing Products Segment gross profit increased 157.0% to $9.6 million in fiscal 2006 from $3.7 million in fiscal 2005 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 16.5% in the current period from 5.8% in the previous period. Other gross profit increased to $2.0 million in fiscal 2006 from $1.6 million in fiscal 2005 primarily due to higher pricing. Expressed as a percentage of net sales, other gross profit improved to 5.1% in fiscal 2006 from 4.3% a year earlier. 16 Selling, general and administrative expenses increased to $16.1 million in the most recent fiscal year from $15.5 million last year as a $0.9 million environmental liability reserve and increased costs associated with maintaining our asset backed revolving credit agreement more than offset a decline in executive compensation. Integration expenses decreased to $0.9 million or 0.5% of net sales in fiscal 2006 from $2.0 million or 1.0% of net sales in fiscal 2005. The decrease was largely related to lower costs associated with the integration of our Elm facilities. 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 measured in millions:

2006 2005 ---- ---- Elm Packaging Material $0.5 $0.9 Labor 0.1 0.3 Overhead 0.1 0.5 Rockaway closing Material 0.0 0.0 Labor 0.0 0.0 Overhead 0.0 0.2 SG&A 0.2 0.1 ---- ---- Total $0.9 $2.0 ==== ====

We expect the closing of our Rockaway facility to result in approximately $1.0 million of annual cost savings. We also 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 $19.8 million in fiscal 2006 from $9.8 million in fiscal 2005. Expressed as a percentage of net sales, operating profit increased to 10.2% in the most recent period from 5.0% in the comparable period of last year. Our Packaging Segment operating profit increased 30.9% to $17.8 million (18.5% of net sales) in the current period compared to $13.6 million (14.7% of net sales) in the previous period. Our Tubing Products Segment reported operating income of $6.5 million in fiscal 2006 compared to a profit of $0.3 million in fiscal 2005. Measured as a percent of net sales, our Tubing Segment operating profit increased to 11.2% of net sales in the current period compared to 0.4% of net sales in the previous year. Our Other segment reported a $0.4 million profit in the third quarter of fiscal 2006 compared to a loss of ($12,000) in the comparable period of 2005. Other (income) expense included a $2.8 million gain on the sale of our Rockaway, NJ facility in fiscal 2006, and $3.0 million life insurance proceeds in fiscal 2005. Interest expense increased to $26.2 million (13.5% of net sales) in fiscal 2006 from $23.9 million (12.3% of net sales) in fiscal 2005 due to the inclusion of a $3.5 million, non-cash charge reflecting the accretion of our Series A Redeemable preferred stock to its mandatory redemption amount, as well as higher average debt levels and interest rates. Unrealized gain on derivative transactions was $0.8 million or 0.4% of net sales in fiscal 2006 compared to $3.1 or 1.6% 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 ($2.8) million or (1.4%) of net sales for fiscal 2006 compared to a loss of ($8.0) million or (4.1%) of net sales for fiscal 2005. Income tax expense was $1.8 million for fiscal 2006 compared to $2.2 million for fiscal 2005 primarily reflecting foreign taxes as we continued to fully reserve against our deferred tax asset. Net loss, as a result, was a loss of ($4.6) million for fiscal 2006 or (2.3%) of net sales compared with a loss of ($10.2) million for fiscal 2005 or (5.3%) of net sales. 17 FIRST NINE MONTHS OF FISCAL 2006 COMPARED TO THE FIRST NINE MONTHS OF FISCAL 2005 Net sales increased to $509.7 million in the first nine months of fiscal 2006 from $475.9 million in the same period last year, representing a 7.1% gain. Net sales in our Packaging Segment grew 6.5% to $274.0 million in the most recent period from $257.3 million in the comparable period of fiscal 2005 due to both higher selling prices and volumes. Net sales in our Tubing Products Segment increased 3.5% to $124.7 million in fiscal 2006 from $120.6 million in fiscal 2005 primarily due to strong, weather-related demand for garden hose in the first quarter of fiscal 2006, offset by lower garden hose sales volumes in the third quarter of fiscal 2006. Other net sales grew 13.1% to $111.0 million in fiscal 2006 compared to $98.1 million in the previous year primarily due to higher selling prices. Our accruals for rebates, discounts and sales allowances increased to $39.5 million or 7.7% of net sales in fiscal 2006 compared to $27.6 million or 5.8% of net sales in fiscal 2005. The increase was due to changes in our sales programs as well as changes in the volumes purchased by each of our customers during the relevant periods. Cost of goods sold increased to $431.8 million in fiscal 2006 from $395.1 million in fiscal 2005. Expressed as a percentage of net sales, cost of goods sold increased to 84.7% in the current period compared to 83.0% in the prior period, primarily due to higher raw material costs. 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. In most of our businesses we have been able to pass on higher material costs to our customers in a relatively short time period. However, like most seasonal retail products, we traditionally have sold garden hose under annual agreements, where prices are generally set in the fall and generally remain in effect for the calendar year. In general, the increase in raw material costs at our garden hose operations during a 12-month time period reduces our profitability. Between March, 2005 and March, 2006, the two primary raw materials for our garden hose business, PVC and plasticizers, rose an average of 10.4% and 1.5% respectively. Price increases on our garden hose products that generally went into effect in January 2006 coupled with cost reduction initiatives and product mix improvements more than offset this increase in raw material prices in our third fiscal quarter. To further mitigate the potential impact of continued increases in the cost of our raw materials and in contrast to previous years, we have not guaranteed garden hose pricing for the 2006 selling season. As previously discussed, in the first nine months of fiscal 2005 our cost of goods sold includes a $2.9 million inventory write-down (0.6% of net sales) to reflect inventory restatements at our American Gasket and Rubber Division. Gross profit, as a result of the above, decreased to $77.9 million in the current period compared to $80.8 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 15.3% in the first nine months of fiscal 2006 from 17.0% in comparable period of last year. Our Packaging Segment gross profit increased 10.1% to $68.4 million in fiscal 2006 from $62.1 million in fiscal 2005 due to both higher selling prices and higher sales volumes. Expressed as a percentage of net sales, Packaging Segment gross profit decreased slightly to 25.0% from 24.1%. Our Tubing Products Segment gross profit decreased to $3.4 million in fiscal 2006 from $14.5 million in fiscal 2005 as significantly higher raw material costs during the first half of fiscal 2006, particularly for plasticizers, more than offset the 3% to 6% price increases that went into effect in January 2005 at our garden hose unit. This trend reversed itself in the third quarter of fiscal 2006 as new garden hose prices went into effect. Expressed as a percentage of net sales, our Tubing Products Segment gross profit decreased to 2.7% in the current period from 12.0% in the previous period. Other gross profit increased to $6.1 million in fiscal 2006 from $4.2 million in fiscal 2005 primarily due to higher pricing. Expressed as a percentage of net sales, Other gross profit improved to 5.5% in fiscal 2006 from 4.3% in fiscal 2005. 18 Selling, general and administrative expenses increased to $80.3 million in the most recent fiscal year from $45.5 million last year, due to the inclusion of a $35.1 million non-cash charge in our second fiscal quarter to write off goodwill associated with our garden hose operations. In recent years our garden hose operations have not been profitable. While the price increases we secured for the 2006 selling season has returned these operations to profitability, we have lost some market share for the 2006 selling season. In the near term, we expect to reduce our production capacity to reflect our reduced market share and accordingly we have deemed it appropriate to write-off goodwill associated with these operations. Measured as a percentage of net sales, selling, general and administrative expenses increased to 15.7% in the current period from 9.6% in the previous period. Integration expenses decreased to $4.3 million or 0.9% of net sales in fiscal 2006 from $6.8 million or 1.4% of net sales in fiscal 2005. The decrease was related to both the reduction of charges associated with the closing of our Rockaway, New Jersey facility and consolidating its operations at our Clinton, Illinois and Clayton, North Carolina facilities, as well as lower costs associated with the integration of our Elm facilities. 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 measured in millions:

2006 2005 ---- ---- Elm Packaging Material $2.4 $2.8 Labor 0.8 1.1 Overhead 0.9 1.6 Rockaway closing Material 0.0 0.2 Labor 0.0 0.1 Overhead 0.0 0.9 SG&A 0.2 0.2 ---- ---- Total $4.3 $6.8 ==== ====

We expect the closing of our Rockaway facility to result in approximately $1.0 million of annual cost savings. We also 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, decreased to a loss of ($6.7) million in fiscal 2006 from $28.4 million in fiscal 2005. Expressed as a percentage of net sales, operating profit decreased to (1.3%) in the most recent period from 6.0% in the comparable period of last year. Our Packaging Segment operating profit increased 20.7% to $45.4 million (16.6% of net sales) in the current period compared to $37.6 million (14.6% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($40.3) million or (32.3%) of net sales in the current period compared to profit of $4.8 million or 4.0% of net sales in the previous year. The 2006 period included a $35.1 million non-cash charge to write-off goodwill associated with our garden hose operations. Other operating profit improved to $1.2 million or 1.1% of net sales in the current period compared to a loss of ($0.5) million or (0.5%) of net sales in the previous period. Interest expense increased to $78.7 million or 15.4% of net sales in fiscal 2006 from $66.1 million or 13.9% of net sales in fiscal 2005 primarily due to the inclusion of a $10.8 million, non-cash charge reflecting the accretion of our series A redeemable preferred stock to its mandatory redemption amount. Unrealized gain on derivative transactions was $3.3 million or 0.7% of net sales in fiscal 2006 compared to $7.3 or 1.5% 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 ($79.4) million or (15.6%) of net sales for fiscal 2006 compared to a loss of ($28.1) million or (5.9%) of net sales for fiscal 2005. Income tax expense was $4.0 million for fiscal 2006 compared to $3.7 million for fiscal 2005 primarily reflecting foreign taxes as we continued to fully reserve against our deferred tax asset. 19 Net loss, as a result, was a loss of ($83.4) million for fiscal 2006 or (16.4%) of net sales compared with a loss of ($31.8) million for fiscal 2005 or (6.7%) of net sales. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended March 31, 2006, net cash used in operating activities was $15.3 million compared to $18.7 million of cash used in operating activities in the first nine months of the prior year. The $3.4 million improvement was due primarily to higher inventory turn over and lower accounts receivable. A $51.6 million increase in net loss in fiscal year to date 2006 compared to the comparable period in fiscal 2005 was largely the result of a $35.1 million non-cash charge related to the write-off of goodwill associated with our garden hose operations, as well as $10.8 million non-cash charge for accretion associated with our Series A Redeemable Preferred Stock both of which occurred only in the first nine months of fiscal 2006. Other various year-over-year changes in operating assets, accrued expenses (including interest expense) and liabilities are generally due to offsetting timing differences. In June, 2005 we arranged a new $65 million asset backed credit facility. On May 11, 2006 we increased our asset backed credit facility to $75 million. As of May 12, 2006 we had $39.0 million of borrowings under this facility. Working capital at March 31, 2006 was $194.3 million compared to $200.8 million at July 1, 2005. The $6.5 million decrease was primarily due to operating losses. Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the nine months ended March 31, 2006 and April 1, 2005 were $13.1 million and $14.2 million, respectively. We believe that we will be able to pass along expected higher raw material costs to our garden hose customers during fiscal 2006 and consequently, cash generated from operations plus funds available under our new 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. 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 March 31, 2006, the notional amount of the swaps is approximately $269.2 million. Portfolio theory and empirical evidence suggested the change in value of a basket of LIBOR benchmarks will 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 gain from derivative transactions of $0.8 million and $3.1 million in the third quarters of fiscal 2006 and 2005, respectively. We recorded a total of unrealized gains from derivative transactions of $3.3 million and a $7.3 million in each of the nine months ending March 31, 2006 and April 1, 2005. 20 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 new 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 new 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. As previously disclosed on Form 8-K, in fiscal 2005, management identified certain overstated inventory valuations at its American Gasket & Rubber Division ("AGR"), totaling approximately $6.8 million, resulting in a $2.8 million reduction in fiscal 2005 operating profit, a $2.7 million reduction in fiscal 2004 operating profit and a restatement of Tekni-Plex's financial statements for those periods. Management promptly reported the inventory overstatement at AGR to the Board, the Audit Committee and BDO Seidman, LLP, our independent registered public accounting firm. The Audit Committee subsequently engaged counsel to supervise an internal investigation of the circumstances leading to the inventory overstatement. Counsel to the Audit Committee, in turn, engaged a forensic accounting firm to assist it in the investigation. The investigation determined that prior accounting management at AGR, from at least 2001 through fourth-quarter 2005, made unsupported adjustments to cost of goods sold that had the effect both of improving the appearance within Tekni-Plex of the financial performance of AGR and increasing the value of AGR's ending inventory. Tekni-Plex has terminated the employment of the accounting manager who made these adjustments. As part of the internal investigation, the investigative team made certain remedial recommendations to the Audit Committee, including that (1) a divisional controller or a manager delegated by a divisional controller be assigned responsibility, on a regular basis, to conduct a substantive review of AGR's financial statements, and that a similar structure of review be instituted with respect to other decentralized businesses of Tekni-Plex; (2) reporting by AGR accounting management be direct to Tekni-Plex corporate accounting; (3) notification be distributed to all Tekni-Plex accounting employees on a periodic basis instructing them that any difficulties in accounting or the use of the company's accounting systems be reported timely to Tekni-Plex corporate accounting; (4) in annual performance reviews of accounting and bookkeeping personnel, all reviewing personnel be required 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) Tekni-Plex apply additional resources to ensure that all of its site controllers and staff are trained properly in the use of company accounting systems, (6) in addition to establishing a hotline through which employees may report problems, Tekni-Plex publish to its employees a statement of ethics and periodically circulate written reminders to all employees that the company expects its employees (a) to perform all functions consistent with established accounting and legal standards and high ethics, and (b) to report any accounting difficulties to Tekni-Plex's corporate office. Lastly, the investigative team recommended that full consideration be given to establishing, or out-sourcing, an adequately staffed internal audit function. In fiscal 2006, the Audit Committee adopted these recommendations. In response to the findings above, Tekni-Plex has: (1) terminated the employment of an individual directly responsible for the inventory restatements, (2) improved training for the accounting staff of AGR, (3) improved its internal financial reporting systems and related controls across all of its divisions to, among other things, increase both the frequency by which inventory is monitored as well as increasing the number of managers responsible for monitoring inventory; and (4) increased the frequency and depth by which the inventory and other financial transactions of each of divisions are reviewed by our independent registered public accountants during the course of our annual audit. 21 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 July 1, 2005, 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 which led to issues related to timeliness of financial reporting. - Lack of quantity of staff which led to issues related to the timely review of the financial statements of AGR and the calculation of inventory. As a result, accounting errors existed in the financial statements of this subsidiary resulted in a restatement of inventory and cost of sales for certain accounting periods as described within this filing. 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 these matters, which are listed above, to be "material weaknesses" that, by themselves or in a combination, 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. Prior to the identification of the accounting overstatement at AGR, and in response to material weaknesses identified by BDO last year, Tekni-Plex has committed to increase and reorganize its finance staff with a strong emphasis on internal audit. This process is ongoing. 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 March 31, 2006. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer determined that deficiencies in our internal control over financial reporting have caused the Company's disclosure controls and procedures to not be effective today. However, the Chief Executive Officer and Chief Financial Officer noted that the Company is actively seeking to remedy the deficiencies identified herein including hiring additional staff to assure the accuracy and timeliness of financial reporting. The Company's Chief Executive Officer and Chief Financial Officer did not note any other material weakness or significant deficiencies in the Company's disclosure controls and procedures during their evaluation. The Company continues to improve and refine its internal controls. This process is ongoing. In the third quarter of fiscal 2006, there were no significant changes in the Company's internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities: None Item 3. Defaults Upon Senior Securities: None Item 4. Submission of Matters to a Vote of Securities holders: Not applicable Item 5. Subsequent Events: None Item 6. Exhibits and Reports on Form 8-K (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 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. May 15, 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 24