10-Q 1 y48396e10vq.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 December 28, 2007 [ ] 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 of incorporation or organization) Identification Number) 260 North Denton Tap Road Coppell, TX 75019 (972) 304-5077 (Address of principal executive office) (Registrant's telephone number) 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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Smaller reporting company [ ] (Do not check if a smaller reporting company) 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 3 ITEM 1. FINANCIAL STATEMENTS 3 Consolidated Balance Sheets as of December 28, 2007 and June 29, 2007................................................ 3 Consolidated Statements of Operations and Comprehensive Loss for the six months ended December 28, 2007 and December 29, 2006............................................................................................................ 4 Consolidated Statements of Cash Flows for the six months ended December 28, 2007 and December 29, 2006............... 5 Notes to Consolidated Financial Statements........................................................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................... 21 ITEM 4. CONTROLS AND PROCEDURES............................................................................................. 21 PART II. OTHER INFORMATION 23 Item 1. Legal proceedings................................................................................................... 23 Item 1A. Risk factors....................................................................................................... 23 Item 2. Unregistered sales of equity securities and use of proceeds......................................................... 24 Item 3. Defaults upon senior securities..................................................................................... 24 Item 4. Submission of matters to a vote of securities holders............................................................... 25 Item 5. Other information................................................................................................... 25 Item 6. Exhibits............................................................................................................ 25

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

DECEMBER 28, 2007 JUNE 29, (UNAUDITED) 2007 ----------- ------------ ASSETS CURRENT: Cash............................................................................................ $ 23,049 $ 22,345 Accounts receivable, net of allowance for doubtful accounts of $2,899 and $2,928 respectively... 73,171 129,500 Inventories..................................................................................... 149,102 131,884 Prepaid expenses and other current assets....................................................... 8,846 5,129 ----------- ------------ TOTAL CURRENT ASSETS.......................................................................... 254,168 288,858 PROPERTY, PLANT AND EQUIPMENT, NET................................................................ 167,854 164,027 GOODWILL.......................................................................................... 167,284 167,284 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $9,293 AND $8,116 RESPECTIVELY.............. 2,832 4,117 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $19,229 AND $17,653 RESPECTIVELY............. 10,376 11,944 OTHER ASSETS...................................................................................... 3,204 3,063 ----------- ------------ $ 605,718 $ 639,293 =========== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt............................................................... $ 786,966 $ 876 Accounts payable - trade........................................................................ 43,723 51,670 Accrued payroll and benefits.................................................................... 10,887 9,639 Accrued interest................................................................................ 31,070 11,453 Accrued liabilities - other..................................................................... 27,514 25,442 Income taxes payable............................................................................ 6,069 6,259 ----------- ------------ TOTAL CURRENT LIABILITIES..................................................................... 906,229 105,339 LONG-TERM DEBT.................................................................................... -- 786,385 SERIES A REDEEMABLE PREFERRED STOCK............................................................... 93,721 86,033 OTHER LIABILITIES................................................................................. 9,145 9,163 ----------- ------------ TOTAL LIABILITIES............................................................................. 1,009,095 986,920 ----------- ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock.................................................................................... -- -- Additional paid-in capital...................................................................... 188,018 188,018 Accumulated other comprehensive gain............................................................ 4,587 1,031 Accumulated deficit............................................................................. (375,459) (316,153) Less: Treasury stock............................................................................ (220,523) (220,523) ----------- ------------ TOTAL STOCKHOLDERS' DEFICIT................................................................... (403,377) (347,627) ----------- ------------ $ 605,718 $ 639,293 =========== ============

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 SIX MONTHS ENDED ---------------------------- --------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29, 2007 2006 2007 2006 ------------ ------------- ------------ ------------ NET SALES $ 170,167 $ 156,106 $ 341,394 $ 328,111 COST OF GOODS SOLD 155,037 129,943 306,806 275,013 ------------ ------------ ------------ ------------ GROSS PROFIT 15,130 26,163 34,588 53,098 OPERATING EXPENSES: Selling, general and administrative 20,884 14,228 36,583 29,469 Integration expense -- 699 -- 1,357 ------------ ------------ ------------ ------------ OPERATING (LOSS) PROFIT (5,754) 11,236 (1,995) 22,272 OTHER EXPENSES: Interest expense, net 27,543 25,772 54,086 49,931 Realized (gain) loss on derivative contracts (640) (75) (736) 355 Other expenses 763 201 1,404 352 ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAXES (33,420) (14,662) (56,749) (28,366) Provision for income taxes 889 999 2,557 2,167 ------------ ------------ ------------ ------------ NET LOSS $ (34,309) $ (15,661) $ (59,306) $ (30,533) ============ ============ ============ ============

THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- --------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29, 2007 2006 2007 2006 ------------ ------------- ------------ ------------ NET LOSS $ (34,309) $ (15,661) $ (59,306) $ (30,533) OTHER COMPREHENSIVE LOSS, NET OF TAXES Foreign currency translation adjustment 1,128 597 3,555 933 ------------ ------------- ------------ ------------ COMPREHENSIVE LOSS $ (33,181) $ (15,064) $ (55,751) $ (29,600) ============ ============ ============ ============

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

SIX MONTHS ENDED ---------------------------- DECEMBER 28, DECEMBER 29, 2007 2006 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (59,306) $ (30,533) Adjustment to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 16,120 16,432 Realized (gain) loss on derivative contracts (736) 355 Interest accretion on Series A Redeemable Preferred Stock 7,688 4,432 Changes in operating assets and liabilities: Accounts receivable 57,676 63,008 Inventories (16,189) (45,732) Prepaid expenses and other current assets (3,712) (1,236) Income taxes (179) (176) Accounts payable (7,678) (2,615) Accrued interest 19,620 (17) Accrued expenses and other liabilities 4,629 (3,856) ------------ ------------ Net cash provided by operating activities 17,933 62 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (16,430) (11,396) Additions to intangibles 159 (275) Deposits and other assets 658 486 ------------ ------------ Net cash used in investing activities (15,613) (11,185) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under line of credit (13,000) (35,000) Borrowings under line of credit 12,000 42,000 Net repayment from long-term debt (11) (231) Debt financing costs (8) 250 ------------ ------------ Net cash (used in) provided by financing activities (1,019) 7,019 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (597) (122) ------------ ------------ Net increase / (decrease) in cash 704 (4,226) Cash, beginning of period 22,345 20,689 ------------ ------------ Cash, end of period $ 23,049 $ 16,463 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 24,876 $ 43,774 Income taxes 1,810 1,520

See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - RECENT DEVELOPMENTS As a result of weaker than anticipated operating results and increased raw material prices, Tekni-Plex has recently been generating less cash flow than it needs to meet its debt service obligations. Accordingly, on December 17, 2007, Tekni-Plex did not make the $20.1 million interest payment due that day on its 12 3/4% Senior Subordinated Notes due 2010 (the "SENIOR SUBORDINATED NOTES"). The failure to make the interest payment on the Senior Subordinated Notes constituted (i) a default under the indenture governing the Senior Subordinated Notes, (ii) upon the expiration of the applicable 30-day grace period, an event of default (together with the default referred to in clause (i) above, the "INTEREST DEFAULT"), under the indenture governing the Senior Subordinated Notes, permitting the holders of at least 25% of the principal amount thereof or the trustee to accelerate the Notes, and (iii) an event of default under the Company's Credit Agreement (the "CREDIT AGREEMENT"), permitting the lenders to terminate their commitments and accelerate all amounts due thereunder. In the event that the Senior Subordinated Notes were accelerated, such acceleration would constitute an event of default under the Credit Agreement, the Company's 10 7/8% Senior Secured Notes due 2012 (the "FIRST LIEN Notes") and the Company's 8.75% Senior Secured Notes due 2013 (the "SECOND LIEN NOTES"). In the event that the Credit Agreement were accelerated, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. In connection with the Interest Default, Tekni Plex engaged in discussions with certain of its lenders and noteholders. On December 17, 2007, the Company announced that it had entered into a waiver (the "WAIVER") to the Company's Credit Agreement, waiving certain defaults that may exist under the Credit Agreement, including certain defaults that may exist due to the Interest Default, for the duration of the Waiver Period (as defined in the Waiver). The Waiver Period ends on February 14, 2008 (or sooner pursuant to the terms of the Waiver). The Company is seeking an amendment to the Credit Agreement prior to the end of the Waiver Period that would increase the Company's availability thereunder, but there is no assurance that the Company will be able to obtain such an amendment. On January 17, 2008, the Company announced that, on January 16, 2008, it entered into a forbearance agreement (the "FORBEARANCE AGREEMENT") with entities (collectively, the "NOTEHOLDERS") that have represented that they hold more than 91% of the Senior Subordinated Notes and more than 67% of the Second Lien Notes. The Forbearance Agreement provides for the Noteholders to forbear, during the Forbearance Period (as defined in the Forbearance Agreement), from exercising rights and remedies that are available under the indenture governing the Senior Subordinated Notes and/or applicable law solely with respect to the Interest Default. The Forbearance Agreement also provides for the Noteholders to forbear, during the Forbearance Period, from exercising rights and remedies that may be available under the indenture governing the Second Lien Notes in the event that the Senior Subordinated Notes are accelerated by the requisite holders of the Senior Subordinated Notes or the indenture trustee under the indenture governing the Senior Subordinated Notes as a result of the Interest Default. The Forbearance Period ends on February 14, 2008 (or sooner pursuant to the terms of the Forbearance Agreement). The Company is seeking an extension of the Forbearance Period with the Noteholders. There can be no assurance that the Company will obtain such an extension on acceptable terms. In the event that holders of at least 25% in aggregate principal amount of the outstanding Senior Subordinated Notes or the trustee accelerate the maturity of the outstanding Senior Subordinated Notes, such acceleration would constitute an event of default under the Credit Agreement, the First Lien Notes and the Second Lien Notes. In order to make the approximately $8.2 million interest payment on February 15, 2008 required by the indenture governing the First Lien Notes, and retain liquidity for other general corporate purposes, the Company is seeking to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such additional financing. The Company is currently engaged in negotiations to obtain such additional financing and consent, but there can be no assurance that the Company will be able to obtain such additional financing and consent. In the event the Company is unable to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such financing, the Company may not be able to make the First Lien Interest Payment. Such non-payment would constitute a default under the First Lien Notes and an event of default under the Credit Agreement, and, upon the expiration of the applicable 30-day grace period, would constitute an event of default under the First Lien Notes. In addition, after the expiration of the 30-day grace period, in the event that holders of at least 25% in aggregate principal amount of the outstanding First Lien Notes or the trustee accelerate the maturity of the outstanding First Lien Notes, such acceleration would constitute an event of default under the Credit Agreement, the Second Lien Notes and the Senior Subordinated Notes. Furthermore, depending on the timing and terms of any additional financing, the Company may need to seek an extension of the Waiver Period under the Waiver. There can be no assurance that if the circumstances arise under which such an extension is needed, that the 6 Company will obtain such an extension on acceptable terms, and in such circumstances the failure to obtain such an extension would result in an event of default under the Credit Agreement. If the Agent or the requisite lenders chose to accelerate the maturity of the loans under the Credit Agreement, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. If the Company is unable to obtain the financing set out above or the consents set out above or otherwise prevent the aforementioned events of default, it would likely need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code. The foregoing events raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not contain any adjustments arising from this uncertainty. NOTE 2 - 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, China, 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 - Aeration hose The results for the second quarter of fiscal 2008 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 December 28, 2007. 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 29, 2007. RECLASSIFICATIONS Certain items in the prior year financial statements have been reclassified to conform to the current presentation. 7 NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 157, FAIR VALUE MEASUREMENTS In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under a number of other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of SFAS No. 157 may have on its statements of operations and financial position. SFAS NO. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 The FASB issued Statement of Financial Accounting Standards ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115" ("SFAS No. 159") in February 2007. SFAS No. 159 permits a company to choose to measure many financial instruments and other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing a company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. A company shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the Company also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The Company is currently evaluating the impact the adoption of SFAS No. 159 may have on its statements of operations and financial position. NOTE 3 - INVENTORIES Inventories as of December 28, 2007 and June 29, 2007 are summarized as follows:

DECEMBER 28, 2007 JUNE 29, 2007 ----------------- -------------- Raw materials $ 61,735 $ 56,561 Work-in-process 11,973 13,318 Finished goods 75,394 62,005 ----------- ----------- $ 149,102 $ 131,884 ----------- ===========

NOTE 4 - DEBT As a result of weaker than anticipated operating results and increased raw material prices, Tekni-Plex has recently been generating less cash flow than it needs to meet its debt service obligations. Accordingly, on December 17, 2007, Tekni-Plex did not make the $20.1 million interest payment due that day on its 12 3/4% Senior Subordinated Notes due 2010 (the "SENIOR SUBORDINATED NOTES"). The failure to make the interest payment on the Senior Subordinated Notes constituted (i) a default under the indenture governing the Senior Subordinated Notes, (ii) upon the expiration of the applicable 30-day grace period, an event of default (together with the default referred to in clause (i) above), the "INTEREST DEFAULT"), under the indenture governing the Senior Subordinated Notes, permitting the holders of at least 25% of the principal amount thereof or the trustee to accelerate the Notes, and (iii) an event of default under the Company's Credit Agreement (the "CREDIT AGREEMENT"), permitting the lenders to terminate their commitments and accelerate all amounts due thereunder. In the event that the Senior Subordinated Notes were accelerated, such acceleration would constitute an event of default under the Credit Agreement, the Company's 10 7/8% Senior Secured Notes due 2012 (the "FIRST LIEN Notes") and the 8.75% Senior Secured Notes due 2013 (the "SECOND LIEN NOTES"). In the event that the Credit Agreement were accelerated, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. See Note 1 - "Recent Developments". As a result, with the exception of our preferred stock, we reclassified our debt from long-term to short-term. 8 Debt consists of the following:

DECEMBER 28, JUNE 29, 2007 2007 ------------ --------- Revolving line of credit.............................................................................. $ 50,000 $ 51,000 Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010 (less unamortized discount of $940 and $1,129)........................................................................ 274,060 273,871 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (less unamortized premium of $173 and $212)...................................................................................... 40,173 40,212 Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $4,537 and $4,853)...................................................................... 270,463 270,080 Senior Secured Notes issued June 10, 2005 at 10.875% due August 15, 2012 (less unamortized discount of $2,230 and $2,433).................................................................................. 147,770 147,530 Series A Redeemable Preferred Stock................................................................... 93,721 86,033 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2008 to 2010................................................................................. 4,500 4,568 ------------ --------- Total Debt 880,687 873,294 Less: Current maturities.............................................................................. 786,966 876 ------------ --------- Total Long-Term Debt $ 93,721 $ 872,418 ============ =========

NOTE 5 - CONTINGENCIES (a) The Company is a party to various legal proceedings arising in the normal conduct of business, including compliance with environmental regulations and foreign tax matters. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position, results of operations or cash flows. (b) 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 $4.5 million at current exchange rates, have been fully accrued for as of December 28, 2007. (c) 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 two 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. In 2004, the National Enforcement Investigation Center (NEIC), on behalf of the United States Environmental Protection Agency (EPA), conducted a multimedia review of our Burlington, NJ site concerning federal environmental requirements. The EPA subsequently issued a request for further information 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 and to negotiate in an attempt to resolve these matters. 9 As of December 28, 2007 we had a $1.5 million 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 $0.5 million 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 to our operations. NOTE 6 - 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 aeration 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, China, Argentina and Canada. Other products not included in either segment are produced in the United States and Europe. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:

TUBING PACKAGING PRODUCT OTHER TOTAL --------- ------- ------- -------- Three Months Ended December 28, 2007 Revenues from external customers $109,454 $22,907 $37,806 $170,167 Interest expense 8,811 12,896 5,836 27,543 Depreciation and amortization 4,242 1,916 1,894 8,052 Segment income (loss) from operations 14,515 (9,379) (2,439) 2,697 Capital Expenditures for segment assets 3,685 917 2,203 6,805 Three Months Ended December 29, 2006 Revenues from external customers $ 97,296 $20,668 $38,142 $156,106 Interest expense 8,240 12,096 5,436 25,772 Depreciation and amortization 3,759 2,177 1,978 7,914 Segment income (loss) from operations 17,610 (3,575) 880 14,915 Capital Expenditures for segment assets 3,760 480 1,239 5,479

TUBING PACKAGING PRODUCT OTHER TOTAL --------- ------- ------- -------- Six months ended December 28, 2007 Revenues from external customers $210,158 $53,212 $78,024 $341,394 Interest expense 17,317 25,317 11,452 54,086 Depreciation and amortization 8,209 3,834 3,750 15,793 Segment income (loss) from operations 27,975 (16,103) (2,031) 9,841 Capital Expenditures for segment assets 9,090 2,784 4,342 16,216 Six months ended December 29, 2006 Revenues from external customers $190,478 $59,250 $78,383 $328,111 Interest expense 15,970 23,423 10,538 49,931 Depreciation and amortization 7,704 4,423 3,962 16,089 Segment income (loss) from operations 33,637 (4,601) 1,177 30,213 Capital Expenditures for segment assets 6,140 2,905 2,080 11,125

10

THREE MONTHS ENDED SIX MONTHS ENDED ----------------------- ------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29, 2007 2006 2007 2006 ---------- ---------- ---------- ----------- PROFIT OR LOSS Total operating profit for reportable segments $ 2,697 $ 14,915 $ 9,841 $ 30,213 Corporate and eliminations (8,451) (3,679) (11,836) (7,941) ---------- ---------- ---------- ---------- Consolidated total $ (5,754) $ 11,236 $ (1,995) $ 22,272 ========== ========== ========== ========== DEPRECIATION AND AMORTIZATION Segment totals $ 8,052 $ 7,914 $ 15,793 $ 16,089 Corporate 164 87 327 343 ---------- ---------- ---------- ---------- Consolidated total $ 8,216 $ 8,001 $ 16,120 $ 16,432 ========== ========== ========== ========== CAPITAL EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 6,805 $ 5,479 $ 16,216 $ 11,125 Other unallocated expenditures (81) 132 214 271 ---------- ---------- ---------- ---------- Consolidated total $ 6,724 $ 5,611 $ 16,430 $ 11,396 ========== ========== ========== ==========

SEGMENT ASSETS

TUBING PACKAGING PRODUCTS OTHER TOTAL ----------- ------------ ------------ ---------- December 28, 2007 $ 279,300 $ 204,023 $ 118,192 $ 601,515 June 29, 2007 $ 275,214 $ 239,110 $ 121,877 $ 636,201

DECEMBER 28, 2007 JUNE 29, 2007 ----------------- ------------- ASSETS Total assets from reportable segments $ 601,515 $ 636,201 Other unallocated amounts 4,203 3,092 ------------- ------------- Consolidated total $ 605,718 $ 639,293 ============= =============

GEOGRAPHIC INFORMATION

THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- -------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 28, DECEMBER 29, 2007 2006 2007 2006 ---------- ---------- ---------- ---------- REVENUES United States $ 135,990 $ 129,143 $ 274,739 $ 273,884 International 34,177 26,963 66,655 54,227 ---------- ---------- ---------- ---------- Total $ 170,167 $ 156,106 $ 341,394 $ 328,111 ========== ========== ========== ==========

DECEMBER 28, 2007 JUNE 29, 2007 ----------------- ------------- LONG-LIVED ASSETS United States $ 299,692 $ 302,687 Canada 8,293 8,483 China & Argentina 5,063 4,028 Europe, primarily Belgium 38,502 35,237 ------------- ------------- Total $ 351,550 $ 350,435 ============= =============

NOTE 7 - 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. 11 Consolidated Statement of Operations For the three months ended December 28, 2007 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net sales $ 170,167 $ 53,452 $ 82,538 $ 34,177 Cost of sales 155,038 41,240 87,945 25,853 ------------- ------------- ------------ ------------ Gross profit (loss) 15,129 12,212 (5,407) 8,324 Operating expenses: Selling, General and administrative 20,883 9,827 7,624 3,432 Integration expense -- -- -- -- ------------- ------------- ------------ ----------- Operating profit (loss) (5,754) 2,385 (13,031) 4,892 Interest expense (income) net 27,543 27,332 108 103 Realized gain on derivative contracts (640) (640) -- -- Other expense (income) 763 (514) (703) 1,980 ------------- ------------- ------------ ------------ Income (loss) before income taxes (33,420) (23,793) (12,436) 2,809 Provision (benefit) for income taxes 889 69 -- 820 ------------- ------------- ------------ ------------ Net income(loss) $ (34,309) $ (23,862) $ (12,436) $ 1,989 ============= ============= ============ ============

Consolidated Statement of Operations For the six months ended December 28, 2007 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net sales $ 341,394 $ 102,958 $ 171,781 $ 66,655 Cost of goods sold 306,806 80,135 176,244 50,427 ------------- ------------- ------------ ------------ Gross profit (loss) 34,588 22,823 (4,463) 16,228 Operating expenses: Selling, General and administrative 36,583 15,845 14,024 6,714 Integration expense -- -- -- -- ------------- ------------- ------------ ----------- Operating profit (loss) (1,995) 6,978 (18,487) 9,514 Interest expense (income), net 54,086 53,761 95 230 Realized loss on derivative contracts (736) (736) -- -- Other expense (income) 1,404 (911) (1,325) 3,640 ------------- ------------- ------------ ------------ Income (loss) before income taxes (56,749) (45,136) (17,257) 5,644 Provision (benefit) for income taxes 2,557 138 -- 2,419 ------------- ------------- ------------ ------------ Net income (loss) $ (59,306) $ (45,274) $ (17,257) $ 3,225 ============= ============= ============ ===========

Consolidated Statement of Operations For the three months ended December 29, 2006 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net sales $ 156,106 $ 49,264 $ 79,879 $ 26,963 Cost of sales 129,943 34,975 74,308 20,660 ------------- ------------- ------------ ------------ Gross profit 26,163 14,289 5,571 6,303 Operating expenses: Selling, General and administrative 14,228 5,602 5,899 2,727 Integration expense 699 264 435 -- ------------- ------------- ------------ ------------ Operating profit (loss) 11,236 8,423 (763) 3,576 Interest expense (income) net 25,772 25,696 (4) 80 Unrealized gain on derivative contracts (75) (75) -- -- Other expense (income) 201 (552) (539) 1,292 ------------- ------------- ------------ ------------ Income (loss) before income taxes (14,662) (16,646) (220) 2,204 Provision (benefit) for income taxes 999 -- 37 962 ------------- ------------- ------------ ------------ Net income(loss) $ (15,661) $ (16,646) $ (257) $ 1,242 ============= ============= ============ ============

12 Consolidated Statement of Operations For the six months ended December 29, 2006 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net sales $ 328,111 $ 97,244 $ 176,640 $ 54,227 Cost of goods sold 275,013 69,592 164,171 41,250 ------------- ------------- ------------ ------------ Gross profit 53,098 27,652 12,469 12,977 Operating expenses: Selling, General and administrative 29,469 11,972 12,547 4,950 Integration expense 1,357 541 816 -- ------------- ------------- ------------ ----------- Operating profit (loss) 22,272 15,139 (894) 8,027 Interest expense (income), net 49,931 49,796 -- 135 Unrealized loss on derivative contracts 355 355 -- -- Other expense (income) 352 (692) (1,045) 2,089 ------------- ------------- ------------ ------------ Income (loss) before income taxes (28,366) (34,320) 151 5,803 Provision (benefit) for income taxes 2,167 -- 75 2,092 ------------- ------------- ------------ ------------ Net income (loss) $ (30,533) $ (34,320) $ 76 $ 3,711 ============= ============= ============ ============

Condensed Consolidated Balance Sheet - at December 28, 2007 (in thousands) (Unaudited)

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS -------------- --------------- ------------- ------------ ------------ Current assets $ 254,168 $ -- $ 38,958 $ 146,229 $ 68,981 Property, plant and equipment, net 167,854 -- 38,218 98,587 31,049 Intangible assets 170,116 -- 17,327 144,469 8,320 Investment in subsidiaries -- (554,611) 554,611 -- -- Deferred financing costs, net 10,376 -- 10,376 -- -- Other long-term assets 3,204 (905,477) 482,587 415,418 10,676 -------------- --------------- ------------- ------------ ------------ Total assets $ 605,718 $ (1,460,088) $ 1,142,077 $ 804,703 $ 119,026 ============== =============== ============= ============ ============ Current liabilities $ 906,229 $ -- $ 839,195 $ 26,179 $ 40,855 Series A Redeemable Preferred stock 93,721 -- 93,721 -- -- Other long-term liabilities 9,145 (905,477) 618,342 284,815 11,465 -------------- --------------- ------------- ------------ ------------ Total liabilities 1,009,095 (905,477) 1,551,258 310,994 52,320 -------------- --------------- ------------- ------------ ------------ Additional paid-in capital 188,018 (317,015) 188,018 301,880 15,135 Retained earnings (accumulated deficit) (375,459) (237,596) (375,459) 198,289 39,307 Accumulated other comprehensive income (loss) 4,587 -- (1,217) (6,460) 12,264 Treasury stock (220,523) -- (220,523) -- -- -------------- --------------- ------------- ------------ ----------- Total stockholders' equity(deficit) (403,377) (554,611) (409,181) 493,709 66,706 -------------- --------------- ------------- ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 605,718 $ (1,460,088) $ 1,142,077 $ 804,703 $ 119,026 ============== =============== ============= ============ ============

13 Condensed Consolidating Balance Sheet - at June 29, 2007 (in thousands)

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS -------------- --------------- --------------- ------------ ------------ Current assets $ 288,858 $ -- $ 37,002 $ 185,019 $ 66,837 Property, plant and equipment, net 164,027 -- 39,203 97,873 26,951 Intangible assets 171,401 -- 16,995 145,793 8,613 Investment in subsidiaries -- (568,642) 568,642 -- -- Deferred financing costs, net 11,944 -- 11,944 -- -- Other long-term assets 3,063 (860,357) 438,409 411,182 13,829 -------------- --------------- --------------- ------------ ------------ Total assets $ 639,293 $ (1,428,999) $ 1,112,195 $ 839,867 $ 116,230 ============== =============== =============== ============ ============ Current liabilities 105,339 -- 37,916 30,642 36,781 Long-term debt 786,385 -- 782,693 29 3,663 Series A Redeemable Preferred stock 86,033 -- 86,033 -- -- Other long-term liabilities 9,163 (860,357) 555,428 303,346 10,746 -------------- --------------- --------------- ------------ ------------ Total liabilities 986,920 (860,357) 1,462,070 334,017 51,190 -------------- --------------- --------------- ------------ ------------ Additional paid-in capital 188,018 (317,015) 188,018 296,764 20,251 Retained earnings (accumulated deficit) (316,153) (251,627) (316,154) 215,546 36,082 Accumulated other comprehensive income (loss) 1,031 -- (1,216) (6,460) 8,707 Treasury stock (220,523) -- (220,523) -- -- -------------- --------------- --------------- ------------ ------------ Total stockholders' equity (deficit) (347,627) (568,642) (349,875) 505,850 65,040 -------------- --------------- --------------- ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 639,293 $ (1,428,999) $ 1,112,195 $ 839,867 $ 116,230 ============== =============== =============== ============ ============

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows For the six months ended December 28, 2007 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net cash provided by (used in) operating activities $ 17,933 $ (17,187) $ 23,317 $ 11,803 ------------- ------------- ------------ ------------ Cash flows from investing activities: Capital expenditures (16,430) (1,726) (8,447) (6,257) Additions to intangibles 159 (787) 1,324 (378) Deposits and other assets 658 (8) 171 495 ------------- -------------- ------------ ------------ Net cash used in investing activities (15,613) (2,521) (6,952) (6,140) ------------- ------------- ------------ ------------ Cash flows from financing activities: Repayments under line of credit (13,000) (13,000) -- -- Borrowings under line of credit 12,000 12,000 -- -- Repayments of long-term debt (11) -- -- (11) Debt financing costs (8) (8) -- -- Change in intercompany accounts -- 19,183 (17,851) (1,332) ------------- ------------- ------------ ------------ Net cash flows provided by (used in) financing activities (1,019) 18,175 (17,851) (1,343) Effect of exchange rate changes on cash (597) -- -- (597) ------------- ------------- ------------ ------------ Net increase (decrease) in cash 704 (1,533) (1,486) 3,723 Cash, beginning of period 22,345 5,449 6,203 10,693 ------------- ------------- ------------ ------------ Cash, end of period $ 23,049 $ 3,916 $ 4,717 $ 14,416 ============= ============= ============ ============

14 For the six months ended December 29, 2006 (in thousands) (Unaudited)

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------- ------------- ------------ ------------ Net cash provided by (used in) operating activities $ 62 $ (31,914) $ 25,558 $ 6,418 ------------- ------------- ------------ ------------ Cash flows from investing activities: Capital expenditures (11,396) (2,177) (7,144) (2,075) Additions to intangibles (275) (100) 255 (430) Deposits and other assets 486 -- 1,101 (615) ------------- ------------- ------------ ------------ Net cash used in investing activities (11,185) (2,277) (5,788) (3,120) ------------- ------------- ------------ ------------ Cash flows from financing activities: Repayments under line of credit (35,000) (35,000) -- -- Borrowings under line of credit 42,000 42,000 -- -- Repayments of long-term debt (231) -- -- (231) Debt financing costs 250 250 -- -- Change in intercompany accounts -- 26,560 (24,519) (2,041) ------------- ------------- ------------ ------------ Net cash flows provided by (used in) financing activities 7,019 33,810 (24,519) (2,272) Effect of exchange rate changes on cash (122) -- -- (122) ------------- ------------- ------------ ------------ Net increase (decrease) in cash (4,226) (381) (4,749) 904 Cash, beginning of period 20,689 4,429 4,895 11,365 ------------- ------------- ------------ ------------ Cash, end of period $ 16,463 $ 4,048 $ 146 $ 12,269 ============= ============= ============ ============

NOTE 8 - 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 December 28, 2007 are as follows:

BALANCE COSTS CHARGED BALANCE JUNE 29, 2007 TO RESERVE DECEMBER 28, 2007 ------------- ------------- ----------------- Legal, environmental and other $ 1,116 $ 0 $ 1,116 ------------- ------------- ----------------- $ 1,116 $ 0 $ 1,116 ============= ============= =================

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 December 28, 2007 are as follows:

BALANCE COSTS CHARGED BALANCE JUNE 29, 2007 TO RESERVE DECEMBER 28, 2007 ------------- ------------- ----------------- Legal and environmental $ 610 $ 90 $ 520 ------------- ------------- ----------------- $ 610 $ 90 $ 520 ============= ============= =================

The remaining legal and environmental costs are expected to extend over the next four years. NOTE 9 - INCOME TAX Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to tax benefit carryforwards and to differences between the financial statement amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on management's review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax asset will not be realized. Given our limited history of profitability, management continues to conclude a 15 valuation allowance is required for the full amount of the deferred tax asset. If in the future, we determine based on our future profitability, that these deferred tax assets are more likely than not to be realized, a release of all, or part, of the related valuation allowance could result in an immediate material income tax benefit in the period of decrease and material income tax provisions in future periods. We adopted the FASB Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48 in July 2007. The implementation of FIN 48 did not have a material impact on our consolidated financial statements or results of operations. We are currently in the process of conducting a review of our Canadian tax positions. This review may result in an adjustment to the 2.9 million Canadian dollar reserve that we recorded in fiscal year 2003. However, until the review is completed and any adjustment is known, no amounts are being presented as an uncertain tax position under FIN 48. We believe that our unrecognized tax benefits position will not change significantly within the next twelve months. The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and foreign jurisdictions. The tax years of 2004-2006 remain open to examination in the U.S. jurisdiction and the Company's U.S. net operating loss carryforwards are subject to examination for the years in which they were generated. There is a range of open tax years in foreign jurisdictions with the earliest open year being 1990. 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 $4.5 million at current exchange rates, have been fully accrued for as of December 28, 2007. The Company's policy is to include interest and penalties related to unrecognized tax positions within the provision for income taxes. With the adoption of FIN 48, the Company did not make any incremental accruals for the payment of interest and penalties relating to unrecognized tax positions. TEKNI-PLEX, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a result of weaker than anticipated operating results and increased raw material prices, Tekni-Plex has recently been generating less cash flow than it needs to meet its debt service obligations. Accordingly, on December 17, 2007, Tekni-Plex did not make the $20.5 million interest payment due that day on its 12 3/4% Senior Subordinated Notes due 2010. See the Liquidity portion of this Management's Discussion and Analysis for information about the steps taken by the Company in light of this interest default and actions the Company is taking in an effort to provide liquidity for upcoming interest payments and for other general corporate purposes. As reported in November 2007, the Company has engaged Rothschild, Inc. as its financial advisor in connection with consideration of various strategic alternatives, including debt restructurings. In December 2007, the Company appointed James A. Mesterharm, a turnaround expert from AlixPartners, as its Chief Restructuring Officer. Mr. Mesterharm is working with the Company's senior management team to implement a series of initiatives aimed at maintaining the Company's near-term liquidity and strengthening its financial performance. QUARTER ENDED DECEMBER 28, 2007 COMPARED TO THE QUARTER ENDED DECEMBER 29, 2006 Net sales increased to $170.2 million in the second quarter of fiscal 2008 from $156.1 million the same period last year, representing a 9.0% increase. Net sales in our Packaging Segment grew 12.5% to $109.5 million in the most recent quarter from $97.3 million in the comparable period of fiscal 2007 primarily due to higher prices for our packaging products. Sales volumes, measured in pounds, for our Packaging Segment were down 6.2% in the second quarter of fiscal 2008 compared to the comparable period of fiscal 2007 while our average selling prices, measured as net sales per pound, were up 19.9%. Net sales in our Tubing Products Segment increased 10.8% to $22.9 million in fiscal 2008 from $20.7 million in fiscal 2007, due to a 20.0% increase in the average prices, measured as net sales per pound, for our Tubing products primarily driven by product mix improvements. Overall volumes, measured in pounds, were down 7.6% in our Tubing Segment in fiscal 2008 compared to fiscal 2007 reflecting generally soft market demand for garden hose products. Other net sales slightly decreased by 0.9% to $37.8 million in 16 fiscal 2008 compared to $38.1 million in the previous year due to a 5.2% decline in volume. Average prices for our Other Products were up 4.6%. Our accruals for rebates, discounts and sales allowances decreased to $8.6 million or 5.1% of net sales in the second quarter of fiscal 2008 compared to $9.3 million or 5.9% of net sales in the comparable period of fiscal 2007 reflecting lower garden hose sales which typically account for the majority of our rebates, discounts and sales allowances. In general, fluctuations in our accrual for rebates, discounts and sales allowances are due to changes in our underlying sales programs, primarily at our garden hose operations, as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold increased to $155.0 million in the second quarter of fiscal 2008 compared to $129.9 million in the same period of fiscal 2007. Expressed as a percentage of net sales, cost of goods sold increased to 91.1% in the current period compared to 83.2% in the prior period, primarily due to the increase in the raw material costs as well as low production rates driven by lower market demand and low overhead absorption rates, particularly at our garden hose facilities during the second quarter of fiscal 2008. 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. Typically, the increase in raw material costs at our garden hose operations during a 12-month time period reduces our profitability. Between December 2006 and December 2007, the two primary raw materials for our garden hose business, PVC and plasticizers, increased an average of 4.3% and 33.3%, respectively. To mitigate the potential impact of expected increases in the cost of our raw materials, starting from the fiscal year 2007 and in contrast to previous years, we have not guaranteed garden hose pricing for our customers. The price of polystyrene, the primary raw material for our food packaging operations, increased an average of 6.3% between December 2006 and December 2007. Gross profit, as a result of the above, decreased to $15.1 million in the current period compared to $26.2 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 8.9% in the second quarter of fiscal 2008 from 16.8% in comparable period of last year. Our Packaging Segment gross profit decreased 14.2% to $20.9 million in fiscal 2008 from $24.4 million for fiscal 2007, primarily due to increased raw material costs. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 19.1% in the current period from 25.1% in the previous period. Our Tubing Products Segment reported a gross loss of ($5.6) million in fiscal 2008 compared to a gross loss of ($0.9) million in fiscal 2007, primarily due to higher raw material costs and low overhead absorption rates at our garden hose operations. Expressed as a percentage of net sales, our Tubing Products Segment gross loss increased to (24.6%) in the current period from (4.4%) in the previous period. Our Other segment had a gross loss of ($0.2) million in fiscal 2008 compared with a gross profit of $2.6 million in fiscal 2007. Expressed as a percentage of net sales, other gross profit declined to negative (0.4%) in fiscal 2008 from 6.8% a year earlier. Selling, general and administrative expenses increased to $20.9 million or 12.3% of net sales in the most recent fiscal year from $14.2 million or 9.1% of net sales last year. This increase is primarily due to restructuring advisors expenses, increasing legal, audit and Sarbanes-Oxley compliance expenses. No integration expenses were incurred in the second quarter of fiscal 2008; we incurred $0.7 million or 0.4% of net sales of integration expenses in the comparable period of fiscal 2007 relating to 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:

2008 2007 ----- ---- Elm Packaging Material 0.0 0.4 Labor 0.0 0.1 Overhead 0.0 0.2 --- --- Total 0.0 0.7 --- ---

17 As a result of the above, we incurred an operating loss of ($5.8) million in fiscal 2008 compared with an operating profit of $11.2 million in fiscal 2007. Expressed as a percentage of net sales, operating profit declined to negative (3.4%) in the most recent period compared with 7.2% in the comparable period of last year. Our Packaging Segment operating profit decreased 17.6% to $14.5 million (13.3% of net sales) in the current period compared to $17.6 million (18.1% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($9.4) million in fiscal 2008 compared to an operating loss of ($3.6) million in fiscal 2007. Measured as a percent of net sales, our Tubing Segment operating loss increased to (40.9%) of net sales in the current period compared to (17.3%) of net sales in the previous year. Our Other segment reported an operating loss of ($2.4) million in the second quarter of fiscal 2008 compared to an operating profit of $0.9 million in the comparable period of 2007. Interest expense increased to $27.5 million (16.2% of net sales) in fiscal 2008 from $25.8 million (16.5% of net sales) in fiscal 2007, primarily due to higher average debt levels. Realized gain on derivative transactions was $0.6 million or 0.4% of net sales in fiscal 2008 compared to $0.1 million or 0.0% of net sales in the previous year. In the second quarter of fiscal 2008, we terminated our derivative transactions. Loss before income taxes, as a result, was ($33.4) million or (19.6%) of net sales for fiscal 2008 compared to ($14.7) million or (9.4%) of net sales for fiscal 2007. Income tax expense was $0.9 million for fiscal 2008 compared to $1.0 million for fiscal 2007 primarily reflecting our foreign and state taxes as we continued to fully reserve against our deferred tax asset. As a result, we incurred a net loss of ($34.3) million for fiscal 2008 or (20.2%) of net sales compared with a net loss of ($15.7) million for fiscal 2007 or (10.0%) of net sales. FIRST HALF OF FISCAL 2008 COMPARED TO THE FIRST HALF OF FISCAL 2007 Net sales increased to $341.4 million in the first half of fiscal 2008 from $328.1 million the same period last year, representing a 4.0% increase. Net sales in our Packaging Segment grew 10.3% to $210.2 million in the most recent period from $190.5 million in the comparable period of fiscal 2007 primarily due to higher demand for our packaging products. Sales volumes, measured in pounds, increased approximately 2.8% in fiscal 2008 compared to fiscal 2007 while our average selling price increased 7.3%. Net sales in our Tubing Products Segment decreased 10.2% to $53.2 million in fiscal 2008 from $59.3 million in fiscal 2007 due to generally weaker demand for garden hose products. Sales volumes, measured in pounds decreased 18.3% in the first six months of fiscal 2008 compared to the same period in fiscal 2007 while the average selling price, measured as net sales per pound, increased 9.9%. The increase in average selling price was primarily driven by product mix improvements. Other net sales decreased slightly to $78.0 million in the first six months of fiscal 2008 compared to $78.4 million in the same period of the previous year primarily due to weaker sales volumes which decreased 4.5% while the average selling price, measured as net sales per pound, increased 4.2%. Our accruals for rebates, discounts and sales allowances decreased to $17.7 million or 5.2% of net sales in fiscal 2008 compared to $18.9 million or 5.8% of net sales in fiscal 2007 reflecting lower garden hose sales which account for the majority of our rebates, discounts and sales allowances. In general, fluctuations in our accrual for rebates, discounts and sales allowances are due to changes in our underlying sales programs, primarily at our garden hose operations, as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold increased to $306.8 million in fiscal 2008 from $275.0 million in fiscal 2007. Expressed as a percentage of net sales, cost of goods sold increased to 89.9% in the current period compared to 83.8% 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. 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 18 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. Consequently, in recent fiscal years, the increase in raw material costs at our garden hose operations during a 12-month time period has reduced our profitability. To mitigate the impact of expected increases in the cost of our raw materials and in contrast to previous years, we have not guaranteed garden hose pricing for the 2008 season. Gross profit, as a result of the above, decreased to $34.6 million in the current period compared to $53.1 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 10.1% in the first half of fiscal 2008 from 16.2% in comparable period of last year. Our Packaging Segment gross profit decreased 13.0% to $41.4 million in fiscal 2008 from $47.6 million in fiscal 2007, Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 19.7% in 2008 compared to 25.0% in 2007, primarily due to higher raw material costs. Our Tubing Products Segment had a gross loss of ($9.2) million in the first half of fiscal 2008 compared with a gross profit of $1.2 million in the first half of fiscal 2007, due to the higher raw material costs and low overhead absorption rates at our garden hose operations. Expressed as a percentage of net sales, our Tubing Products Segment gross profit declined to negative (17.3%) in the current period from 2.0% in the previous period. Other gross profit decreased to $2.4 million in fiscal 2008 from $4.3 million in fiscal 2007 primarily due to higher raw material costs. Expressed as a percentage of net sales, Other gross profit declined to 3.0% in fiscal 2008 from 5.5% in fiscal 2007. Selling, general and administrative expenses increased to $36.6 million in the most recent fiscal year from $29.5 million last year. Measured as a percentage of net sales, selling, general and administrative expenses increased to 10.7% in the current period from 9.0% in the previous period. This increase is primarily due to restructuring advisors expenses, increasing legal, audit and Sarbanes-Oxley compliance expenses. No integration expenses were incurred in the first half of fiscal 2008; we incurred $1.4 million or 0.4% of net sales of integration expenses in the first half of fiscal 2007 relating to 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:

2008 2007 ---- ---- Elm Packaging Material......... 0.0 0.9 Labor............ 0.0 0.2 Overhead......... 0.0 0.3 --- --- Total............ 0.0 1.4 --- ---

As a result of the above, we incurred an operating loss of ($2.0) million in fiscal 2008 compared with an operating profit of $22.3 million in fiscal 2007. Expressed as a percentage of net sales, operating profit declined to negative (0.6%) in the most recent period from 6.8% in the comparable period of last year. Our Packaging Segment operating profit decreased to $28.0 million (13.3% of net sales) in the current period compared to $33.6 million (17.7% of net sales) in the previous period. Our Tubing Products Segment reported an operating loss of ($16.1) million or (30.3%) of net sales in the current period compared to a loss of ($4.6) million or (7.8%) of net sales in the previous year. Other operating profit declined to a loss of ($2.0) million or (2.6%) of net sales in the current period compared to a profit of $1.2 million or 1.5% of net sales in the previous period. Interest expense increased to $54.1 million (15.8% of net sales) in fiscal 2008 from $49.9 million (15.2% of net sales) in fiscal 2007, primarily due to average higher debt balances. Realized gain (loss) on derivative transactions was a gain of $0.7 million or 0.2% of net sales in fiscal 2008 compared to a loss of ($0.4) million or (0.1%) of net sales in fiscal 2007. In the second quarter of fiscal 2008, we terminated our derivative transactions. As a result, we incurred a loss before income taxes of ($56.7) million or (16.6%) of net sales for fiscal 2008 compared with a loss before income taxes of ($28.4) million or (8.6%) of net sales for fiscal 2007. 19 Income tax expense was $2.6 million in fiscal 2008 compared to $2.2 million in fiscal 2007 primarily reflecting foreign and state taxes as we continued to fully reserve against our deferred tax asset. Net loss, as a result, was ($59.3) million for fiscal 2008 or (17.4%) of net sales compared with a net loss of ($30.5) million for fiscal 2007 or (9.3%) of net sales. LIQUIDITY AND CAPITAL RESOURCES As a result of weaker than anticipated operating results and increased raw material prices, Tekni-Plex has recently been generating less cash flow than it needs to meet its debt service obligations. Accordingly, on December 17, 2007, Tekni-Plex did not make the $20.1 million interest payment due that day on its 12 3/4% Senior Subordinated Notes due 2010 (the "SENIOR SUBORDINATED NOTES"). The failure to make the interest payment on the Senior Subordinated Notes constituted (i) a default under the indenture governing the Senior Subordinated Notes, (ii) upon the expiration of the applicable 30-day grace period, an event of default (together with the default referred to in clause (i) above, the "INTEREST DEFAULT"), under the indenture governing the Senior Subordinated Notes, permitting the holders of at least 25% of the principal amount thereof or the trustee to accelerate the Notes, and (iii) an event of default under the Company's Credit Agreement (the "CREDIT AGREEMENT"), permitting the lenders to terminate their commitments and accelerate all amounts due thereunder. In the event that the Senior Subordinated Notes were accelerated, such acceleration would constitute an event of default under the Credit Agreement, the Company's 10 7/8% Senior Secured Notes due 2012 (the "FIRST LIEN Notes") and the Company's 8.75% Senior Secured Notes due 2013 (the "SECOND LIEN NOTES"). In the event that the Credit Agreement were accelerated, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. In connection with the Interest Default, Tekni Plex engaged in discussions with certain of its lenders and noteholders. On December 17, 2007, the Company announced that it had entered into a waiver (the "WAIVER") to the Company's Credit Agreement, waiving certain defaults that may exist under the Credit Agreement, including certain defaults that may exist due to the Interest Default, for the duration of the Waiver Period (as defined in the Waiver). The Waiver Period ends on February 14, 2008 (or sooner pursuant to the terms of the Waiver). The Company is seeking an amendment to the Credit Agreement prior to the end of the Waiver Period that would increase the Company's availability thereunder, but there is no assurance that the Company will be able to obtain such an amendment. On January 17, 2008, the Company announced that, on January 16, 2008, it entered into a forbearance agreement (the "FORBEARANCE AGREEMENT") with entities (collectively, the "NOTEHOLDERS") that have represented that they hold more than 91% of the Senior Subordinated Notes and more than 67% of the Second Lien Notes. The Forbearance Agreement provides for the Noteholders to forbear, during the Forbearance Period (as defined in the Forbearance Agreement), from exercising rights and remedies that are available under the indenture governing the Senior Subordinated Notes and/or applicable law solely with respect to the Interest Default. The Forbearance Agreement also provides for the Noteholders to forbear, during the Forbearance Period, from exercising rights and remedies that may be available under the indenture governing the Second Lien Notes in the event that the Senior Subordinated Notes are accelerated by the requisite holders of the Senior Subordinated Notes or the indenture trustee under the indenture governing the Senior Subordinated Notes as a result of the Interest Default. The Forbearance Period ends on February 14, 2008 (or sooner pursuant to the terms of the Forbearance Agreement). The Company is seeking an extension of the Forbearance Period with the Noteholders. There can be no assurance that the Company will obtain such an extension on acceptable terms. In the event that holders of at least 25% in aggregate principal amount of the outstanding Senior Subordinated Notes or the trustee accelerate the maturity of the outstanding Senior Subordinated Notes, such acceleration would constitute an event of default under the Credit Agreement, the First Lien Notes and the Second Lien Notes. In order to make the approximately $8.2 million interest payment on February 15, 2008 required by the indenture governing the First Lien Notes, and retain liquidity for other general corporate purposes, the Company is seeking to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such additional financing. The Company is currently engaged in negotiations to obtain such additional financing and consent, but there can be no assurance that the Company will be able to obtain such additional financing and consent. In the event the Company is unable to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such financing, the Company may not be able to make the First Lien Interest Payment. Such non-payment would constitute a default under the First Lien Notes and an event of default under the Credit Agreement, and, upon the expiration of the applicable 30-day grace period, would constitute an event of default under the First Lien Notes. In addition, after the expiration of the 30-day grace period, in the event that holders of at least 25% in aggregate principal amount of the outstanding First Lien Notes or the trustee accelerate the maturity of the outstanding First Lien Notes, such acceleration would 20 constitute an event of default under the Credit Agreement, the Second Lien Notes and the Senior Subordinated Notes. Furthermore, depending on the timing and terms of any additional financing, the Company may need to seek an extension of the Waiver Period under the Waiver. There can be no assurance that if the circumstances arise under which such an extension is needed, that the Company will obtain such an extension on acceptable terms, and in such circumstances the failure to obtain such an extension would result in an event of default under the Credit Agreement. If the Agent or the requisite lenders chose to accelerate the maturity of the loans under the Credit Agreement, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. If the Company is unable to obtain the financing set out above or the consents set out above or otherwise prevent the aforementioned events of default, it would likely need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code. This raises substantial doubt about the Company's ability to continue as a going concern. For the six months ended December 28, 2007, net cash provided from operating activities was $17.9 million compared to $0.1 million of cash used in operating activities in the first half of the prior year. The $17.8 million improvement was primarily due to a $29.5 million reduction in inventory and a $20.1 million increase in accrued interest reflecting the non-payment of interest expense that was due on December 17, 2007 on our 12 3/4% subordinated notes. These sources of cash were partially offset by a $28.8 million decline in earnings before non-cash charges. Other various year-over-year changes in operating assets and liabilities are generally due to offsetting timing differences. As of February 6, 2008 we had an outstanding balance of $50.0 million under our $75.0 million asset backed credit facility. Availability under this facility is reduced by $10.8 million of letters of credit related to our workmen's compensation insurance programs. Working capital at December 28, 2007 was $133.8 million compared to $183.5 million at June 29, 2007. The $49.7 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 six months ended December 28, 2007 and December 29, 2006 were $16.4 million and $11.4 million, respectively. Cash generated from operations plus funds available under our asset backed facility are our principal sources of liquidity to help us to meet our debt service needs, operating needs, capital expenditures and other investments which we believe are prudent. Our ability to generate sufficient cash to cover our needs will be dependent upon our ability to significantly improve our financial results and cash flows compared to our results in the first half of fiscal 2008, which will be dependent in large part on our ability to increase prices to offset raw material cost increases that have continued to occur and to achieve a restructuring of our debt as set out in more detail below. We cannot assure you that increasing prices will improve our financials results. We also cannot assure you that our debt restructuring will succeed or that sufficient funds will be available from operations or from additional 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. On December 17, 2008 we unwound the interest rate swap and recorded a $0.7 million realized gain. 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 21 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 29, 2007, 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) adding additional staff to the accounting and finance functional group; (2) centralizing the reporting of financial managers to 4 group controllers who will provide increased oversight and improved training; (3) 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; (4) 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; (5) instituting a policy of performing routine credit and background checks on all financial staff and key managers; and (6) centralized 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 December 28, 2007. 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 18 months, specifically focused on: 1. adding additional staff in critical accounting functions, including internal audit and Sarbanes-Oxley compliance 2. centralizing the Accounts Payable, Payroll and Accounts Receivable functions 22 3. evaluating the costs and benefits of upgrading our enterprise software system in order to both improve our controls and provide better information to management 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. We missed an interest payment due on December 17, 2007 under the indenture governing the Senior Subordinated Notes, and if we cannot achieve a debt restructuring we will likely need to file for Chapter 11 under the U.S. Bankruptcy Code. As a result of weaker than anticipated operating results and increased raw material prices, Tekni-Plex has recently been generating less cash flow than it needs to meet its debt service obligations. Accordingly, on December 17, 2007, Tekni-Plex did not make the $20.1 million interest payment due that day on the Senior Subordinated Notes. The failure to make the interest payment on the Senior Subordinated Notes constituted (i) a default under the indenture governing the Senior Subordinated Notes, (ii) upon the expiration of the applicable 30-day grace period, an event of default (together with the default referred to in clause (i) above, the "INTEREST DEFAULT"), under the indenture governing the Senior Subordinated Notes, permitting the holders of at least 25% of the principal amount thereof or the trustee to accelerate the Notes, and (iii) an event of default under the Credit Agreement, permitting the lenders to terminate their commitments and accelerate all amounts due thereunder. In the event that the Senior Subordinated Notes were accelerated, such acceleration would constitute an event of default under the Credit Agreement, the First Lien Notes and the Second Lien Notes. In the event that the Credit Agreement were accelerated, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. In connection with the Interest Default, Tekni Plex engaged in discussions with certain of its lenders and noteholders. On December 17, 2007, the Company announced that it had entered into the Waiver to the Company's Credit Agreement, waiving certain defaults that may exist under the Credit Agreement, including certain defaults that may exist due to the Interest Default, for the duration of the Waiver Period (as defined in the Waiver). The Waiver Period ends on February 14, 2008 (or sooner pursuant to the terms of the Waiver). The Company is seeking an amendment to the Credit Agreement prior to the end of the Waiver Period that would increase the Company's availability thereunder, but there is no assurance that the Company will be able to obtain such an amendment. On January 17, 2008, the Company announced that, on January 16, 2008, it entered into the Forbearance Agreement with the Noteholders, which have represented that they hold more than 91% of the Senior Subordinated Notes and more than 67% of the Second Lien Notes. The Forbearance Agreement provides for the Noteholders to forbear, during the Forbearance Period (as defined in the Forbearance Agreement), from exercising rights and remedies that are available under the indenture governing the Senior Subordinated Notes and/or applicable law solely with respect to the Interest Default. The Forbearance Agreement also provides for the Noteholders to forbear, during the Forbearance Period, from exercising rights and remedies that may be available under the indenture governing the Second Lien Notes in the event that the Senior Subordinated Notes are accelerated by the requisite holders of the Senior Subordinated Notes or the indenture trustee under the indenture governing the Senior Subordinated Notes as a result of the Interest Default. The Forbearance Period ends on February 14, 2008 (or sooner pursuant to the terms of the Forbearance Agreement). The Company is seeking an extension of the Forbearance Period with the Noteholders. There can be no assurance that the Company will obtain such an extension on acceptable terms. In the event that holders of at least 25% in aggregate principal amount of the outstanding Senior Subordinated Notes or the trustee accelerate the maturity of the outstanding Senior Subordinated Notes, such acceleration would constitute an event of default under the Credit Agreement, the First Lien Notes and the Second Lien Notes. In order to make the approximately $8.2 million interest payment on February 15, 2008 required by the indenture governing the First Lien Notes, and retain liquidity for other general corporate purposes, the Company will need to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such additional financing. In the event the Company is unable to raise additional financing and enter into a supplemental indenture under the indenture governing the Senior Subordinated Notes (and secure the requisite consent under the Forbearance Agreement) to permit such financing, the Company may not be able to make the First Lien Interest Payment. Such non-payment would constitute a default under the First Lien Notes and an event of default under the Credit Agreement, and, 23 upon the expiration of the applicable 30-day grace period, would constitute an event of default under the First Lien Notes. In addition, after the expiration of the 30-day grace period, in the event that holders of at least 25% in aggregate principal amount of the outstanding First Lien Notes or the trustee accelerate the maturity of the outstanding First Lien Notes, such acceleration would constitute an event of default under the Credit Agreement, the Second Lien Notes and the Senior Subordinated Notes. Furthermore, depending on the timing and terms of any additional financing, the Company may need to seek an extension of the Waiver Period under the Waiver. There can be no assurance that if the circumstances arise under which such an extension is needed, that the Company will obtain such an extension on acceptable terms, and in such circumstances the failure to obtain such an extension would result in an event of default under the Credit Agreement. If the Agent or the requisite lenders chose to accelerate the maturity of the loans under the Credit Agreement, such acceleration would constitute an event of default under the First Lien Notes, the Second Lien Notes and the Senior Subordinated Notes. If the Company is unable to obtain the financing set out above or the consents set out above or otherwise prevent the aforementioned events of default, it would likely need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code. This raises substantial doubt about the Company's ability to continue as a going concern. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. See Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations; Liquidity and Capital Resources". 24 Item 4. Submission of Matters to a Vote of Securities holders. Not applicable Item 5. Other Information. The Company recently formalized its key executive severance plan in which James E. Condon, Senior Vice President and Chief Financial Officer, and Edward Goldberg, Senior Vice President, are participants. This severance plan calls for Messrs. Condon and Goldberg to receive a severance payment of the lesser of twenty six weeks' base salary or $175,000 if terminated in 2008, other than for cause. Receipt of severance is subject to several conditions, including the execution by the participant of a release of claims and a non-competition agreement. The plan also has a mitigation feature. In addition, the Company has agreed to pay to Messrs. Condon and Goldberg 2008 cash bonuses of $40,000, payable in quarterly installments of $10,000, subject to their continued employment. Item 6. Exhibits (a) Exhibits 3.1 Amended and Restated Certificate of Incorporation of Tekni-Plex, Inc.(3) 3.2 Amended and Restated By-laws of Tekni-Plex, Inc.(1) 3.3 Certificate of Incorporation of PureTec Corporation.(1) 3.4 By-laws of PureTec Corporation.(1) 3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.(1) 3.6 By-laws of Tri-Seal Holding, Inc.(1) 3.7 Certificate of Incorporation of Natvar Holdings,Inc.(1) 3.8 By-laws of Natvar Holdings, Inc.(1) 3.9 Certificate of Incorporation of Plastic Specialties and Technologies, Inc.(1) 3.10 By-laws of Plastic Specialties and Technologies, Inc.(1) 3.11 Certificate of Incorporation of Plastic Specialties and Technologies Investments, Inc.(1) 3.12 By-laws of Plastic Specialties and Technologies Investments, Inc.(1) 25 3.13 Certificate of Incorporation of Burlington Resins, Inc.(1) 3.14 By-laws of Burlington Resins, Inc.(1) 3.15 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.(2) 3.16 By-laws of TPI Acquisition Subsidiary, Inc.(2) 3.17 Certificate of Incorporation of Distributors Recycling, Inc.(1) 3.18 By-laws of Distributors Recycling, Inc.(1) 3.19 Certificate of Incorporation of Tekni-Plex-Elm Acquisition Subsidiary, Inc.(2) 3.20 By-laws of TP-Elm Acquisition Subsidiary, Inc.(2) 4.1 Waiver No. 4, dated as of December 17, 2007, to the Credit Agreement, dated as June 10, 2005 (as amended), among Tekni-Plex, Inc., Citicorp USA, Inc. as Administrative Agent, General Electric Capital Corporation as Syndication Agent, and the Lenders and Issuers party thereto. (4) 4.2 Forbearance Agreement, dated as of January 16, 2008, among Tekni-Plex, Inc., each of its subsidiaries identified on the signature pages thereof, and various other parties. (5) 10.1 Extension of Employment Agreement dated September 30, 2007. (6) 10.2 Extension and Amendment of Employment Agreement dated October 15, 2007. (7) 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 99.1 2008 Senior Executive Severance Plan 99.2 Form of retention letter from the Company to James E. Condon, Senior Vice President and Chief Financial Officer and Edward Goldberg, Senior Vice President. ------------ (1) Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-43800) filed on August 15, 2000. (2) Filed previously as an Exhibit to our Registration Statement on Form S-4 (File No. 333-98561) filed on August 22, 2002. (3) Filed previously as an Exhibit to our Registration Statement on Form S-4/A (File No. 333-111778) filed on July 13, 2005. (4) Filed previously as an Exhibit to our Current Report on Form 8-K (File No. 333-28157) filed on December 17, 2007. (5) Filed previously as an Exhibit to our Current Report on Form 8-K (File No. 333-28157) filed on January 16, 2008. (6) Filed previously as an exhibit to our Current Report on Form 8-K (File No. 333-28157) filed on October 2, 2007. (7) Filed previously as an exhibit to our Current Report on Form 8-K (File No. 333-28157) filed on October 19, 2007. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. February 11, 2008 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 27