10-Q 1 y34827e10vq.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Number of shares of common stock outstanding as of May 14, 2007: 671 shares ================================================================================ TEKNI-PLEX, INC.

PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of March 30, 2007 (unaudited) and June 30, 2006 3 Consolidated Statements of Operations and comprehensive loss for the nine months and three months ended March 30, 2007 and March 31, 2006 4 Consolidated Statements of Cash Flows for the nine months ended March 30, 2007 and March 31, 2006 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 ITEM 4. CONTROLS AND PROCEDURES 19 PART II. OTHER INFORMATION 20 Item 1. Legal Proceedings 20 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Securities Holders 20 Item 5. Other Information 20 Item 6. Exhibits

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

MARCH 30, JUNE 30, 2007 2006 (UNAUDITED) (AUDITED) ----------- --------- ASSETS CURRENT: Cash $ 18,100 $ 20,689 Accounts receivable, net of allowances of $2,884 and $7,070 respectively 131,354 145,699 Inventories 156,464 135,758 Prepaid expenses and other current assets 5,725 5,363 --------- --------- TOTAL CURRENT ASSETS 311,643 307,509 PROPERTY, PLANT AND EQUIPMENT, NET 163,877 167,787 GOODWILL 167,284 167,284 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $8,064 AND $6,806 RESPECTIVELY 2,879 4,096 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $17,061 AND $15,229 RESPECTIVELY 12,536 14,618 OTHER ASSETS 3,015 2,061 --------- --------- $ 661,234 $ 663,355 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 1,094 $ 1,241 Accounts payable - trade 44,428 39,532 Accrued payroll and benefits 15,156 16,057 Accrued interest 24,379 11,427 Accrued liabilities - other 18,894 17,787 Income taxes payable 5,576 6,050 --------- --------- TOTAL CURRENT LIABILITIES 109,527 92,094 LONG-TERM DEBT 791,942 772,907 SERIES A REDEEMABLE PREFERRED STOCK 82,403 74,495 OTHER LIABILITIES 8,140 12,790 --------- --------- TOTAL LIABILITIES 992,012 952,286 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 188,018 188,018 Accumulated other comprehensive loss (743) (1,587) Accumulated deficit (297,530) (254,839) Less: Treasury stock (220,523) (220,523) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (330,778) (288,931) --------- --------- $ 661,234 $ 663,355 ========= =========

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

THREE MONTHS ENDED NINE MONTHS ENDED --------------------- --------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, 2007 2006 2007 2006 --------- --------- --------- --------- NET SALES $211,681 $194,568 $539,792 $509,715 COST OF SALES 177,583 157,654 452,596 431,819 -------- -------- -------- -------- GROSS PROFIT 34,098 36,914 87,196 77,896 OPERATING EXPENSES: Selling, general and administrative 16,575 16,144 46,044 80,280 Integration expense 354 940 1,711 4,336 -------- -------- -------- -------- OPERATING PROFIT (LOSS) 17,169 19,830 39,441 (6,720) OTHER EXPENSES: Interest expense 27,827 26,223 77,758 78,668 Unrealized (gain) loss on derivative contracts (246) (801) 109 (3,326) Other expenses (85) (2,816) 267 (2,698) -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (10,327) (2,776) (38,693) (79,364) PROVISION FOR INCOME TAXES 1,831 1,788 3,998 4,027 -------- -------- -------- -------- NET LOSS $(12,158) $ (4,564) $(42,691) $(83,391) ======== ======== ======== ======== CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS NET LOSS $(12,158) $ (4,564) $(42,691) $(83,391) OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment (89) 946 844 841 -------- -------- -------- -------- COMPREHENSIVE LOSS $(12,247) $ (3,618) $(41,847) $(82,550) ======== ======== ======== ========

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

NINE MONTHS ENDED --------------------- MARCH 30, MARCH 31, 2007 2006 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(42,691) $(83,391) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 24,259 23,872 Goodwill impairment -- 35,131 Unrealized (gain) loss on derivative contracts 109 (3,326) Interest accretion on Series A Redeemable Preferred Stock 7,908 10,756 Deferred income taxes 12 4 Gain on sale of assets -- (2,863) Changes in operating assets and liabilities: Accounts receivable 14,704 23,492 Inventories (20,956) (29,456) Prepaid expenses and other current assets (320) (1,230) Income taxes (472) (3,530) Accounts payable-trade 5,435 (13,098) Accrued interest 12,958 19,724 Accrued expenses and other liabilities (4,912) 8,596 -------- -------- Net cash used in operating activities (3,966) (15,319) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (16,112) (13,081) Additions to intangibles (38) (628) Proceeds from sale of assets -- 4,142 Deposits and other assets (140) 67 -------- -------- Net cash used in investing activities (16,290) (9,500) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowings 18,000 17,490 Repayments of long-term debt (233) -- Proceeds from issuance of Series A Redeemable Preferred Stock -- 5,423 Debt financing costs 250 (240) -------- -------- Net cash provided by financing activities 18,017 22,673 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (350) (64) -------- -------- Net decrease in cash (2,589) (2,210) Cash, beginning of period 20,689 18,584 -------- -------- Cash, end of period $ 18,100 $ 16,374 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 54,411 $ 59,102 Income taxes 3,226 3,109

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

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

The results for the third quarter of fiscal 2007 are not necessarily indicative of the results to be expected for the full fiscal year and have not been audited. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting primarily of normal recurring accruals, necessary for a fair statement of the results of operations for the periods presented and the consolidated balance sheet at March 30, 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 30, 2006. RECLASSIFICATIONS Certain items in the prior year financial statements have been reclassified to conform to the current presentation. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN 48"). This interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 will require companies to determine whether it is more-likely-than-not that a tax position taken or expected to be taken in a tax return will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If a tax position meets the more-likely-than-not recognition threshold, it is measured to determine the amount of benefit to recognize in the financial statements based on guidance in the interpretation. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has not determined the effect, if any, that the adoption of FIN 48 will have on the Company's consolidated financial position or results of operations. The FASB issued 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 6 date. SFAS No. 159 will be effective for fiscal years that begin after November 15, 2007. The Company is currently assessing the impact SFAS No. 159 will have on the consolidated financial statements. NOTE 2 - INVENTORIES Inventories as of March 30, 2007 and June 30, 2006 are summarized as follows:

MARCH 30, JUNE 30, 2007 2006 --------- -------- Raw materials $ 60,100 $ 60,715 Work-in-process 14,115 12,834 Finished goods 82,249 62,209 -------- -------- $156,464 $135,758 -------- --------

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

MARCH 30, JUNE 30, 2007 2006 --------- -------- Revolving line of credit $ 57,000 $ 39,000 Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010 (less unamortized discount of $1,223 and $1506) 273,777 $273,494 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $231 and $287) 40,231 40,287 Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $5,042 and $5,609) 269,958 269,391 Senior Secured Notes issued June 10, 2005 at 10.87% due August 15, 2012 (less unamortized discount of $2,551 and $2,904) 147,449 147,096 Series A Redeemable Preferred Stock 82,403 74,495 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2007 to 2010 4,621 4,880 -------- -------- 875,439 848,643 Less: Current maturities 1,094 1,241 -------- -------- $874,345 $847,402 ======== ========

NOTE 4 - CONTINGENCIES The Company is a party to various legal proceedings arising in the normal conduct of business. Management believes that the final outcome of these proceedings will not have a material adverse effect on the Company's financial position. We previously reported, in January 1993 and 1994, our Belgian subsidiary received income tax assessments aggregating approximately 74.9 million Belgian Francs for the disallowance of certain foreign tax credits and investment losses claimed for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the subsidiary received an income tax assessment of approximately 32.8 million Belgian francs for the year ended July 31, 1992. By Belgium law, these assessments are capped at the values above, increased by late payment interest for a period of 18 months only (approximately 15.5 million Belgian francs) and do not continue to accrue additional penalties or interest as long as the Tax Director has not rendered a decision in connection with the tax complaints that have been filed against these tax assessments. To date, the Tax Director has not rendered a decision. These liabilities, which total approximately EUR 3,054,000 or $4.1 million at current exchange rates, have been fully accrued for in fiscal 2006. We are subject to environmental laws requiring the investigation and cleanup of environmental contamination. In addition to remediation being undertaken by third parties at a limited number of our locations, we are currently remediating contamination resulting from past industrial activity at three of our New Jersey facilities which we acquired from PureTec in 1998. This remediation is being conducted pursuant to the requirements of New Jersey's Industrial Site Recovery Act which were triggered by the 1998 PureTec transaction. If any other events were to occur in the future that would be deemed to have effected a "change of control" of any of our New Jersey facilities as defined under New Jersey's Industrial Site Recovery Act, we would be required to take additional actions to comply with that statute, including possibly additional investigations and remediation. We also are conducting remediation at a formerly-owned New Jersey facility under a voluntary cleanup agreement with the state. 7 We have voluntarily self-disclosed to regulators certain non-compliances with the air permit for our Troy, Ohio facility. We have installed additional pollution controls at this facility and we are now in compliance with the air permit. We may be required to pay a fine in connection with this violation, but we cannot predict whether such a fine will be imposed, or if so, in what amount. In 2004, the National Enforcement Investigation Center (NEIC), on behalf of the United States Environmental Protection Agency (EPA), conducted an environmental review of our Burlington, NJ site concerning federal Clean Air Act requirements. The EPA subsequently issued a request for further information regarding these air issues under Section 114 of the federal Clean Air Act. In February and March, 2006 the New Jersey Department of Environmental Protection (NJDEP) issued administrative orders alleging violations of certain state air regulations at the Burlington facility. In March, 2006, the United States Department of Justice (DOJ) contacted Colorite on behalf of the EPA. The DOJ indicated that certain violations under several federal environmental statutes had been identified as a result of the EPA's inspection. They discussed the alleged violations and attempted to negotiate a settlement. Since that date, representatives of Colorite have met with representatives of EPA, DOJ and NJDEP on several occasions to discuss the alleged federal and state violations. Tekni-Plex continues to evaluate the alleged violations and its defenses to them, and anticipates negotiating with the government agencies to attempt to resolve these matters. In 2004, we also received a similar request for information from the EPA concerning air emissions at our Wenatchee, Washington plant which we do not expect to result in significant costs or fines or penalties. In the third quarter of fiscal 2007 we increased the environmental reserves in our financial statements by $300,000 for a total of $1.7 million to reflect our best estimate of the aggregate expenses associated with the environmental matters noted above. These reserves are in addition to the reserves described in Note 7 related to our Elm and Swan acquisitions. Although we believe that, based on historical experience, the costs of achieving and maintaining compliance with environmental laws and regulations are unlikely to have a material adverse effect on our business, we could incur significant fines, penalties, capital costs or other liabilities associated with any confirmed noncompliance or remediation of contamination or natural resource damage liability at or related to any of our current or former facilities, the precise nature of which we cannot now predict. Furthermore, we cannot assure you that future environmental laws or regulations will not require substantial expenditures by us or significant modifications of our operations. NOTE 5 - SEGMENT INFORMATION Tekni-Plex management reviews its operating plants to evaluate performance and allocate resources. As a result, Tekni-Plex has aggregated its operating plants into two industry segments: Packaging and Tubing Products. The Packaging segment principally produces foam egg cartons, pharmaceutical blister films, poultry and meat processor trays, closure liners, aerosol and pump packaging components and foam plates. The Tubing Products segment principally produces garden and irrigation hose, medical tubing and pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe, 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 PRODUCTS OTHER TOTAL --------- -------- ------- -------- Three Months Ended March 30, 2007 Revenues from external customers $108,385 $61,184 $42,112 $211,681 Interest expense 8,877 13,033 5,917 27,827 Depreciation and amortization 3,933 1,927 1,967 7,827 Segment income from operations 16,698 4,663 409 21,770 Capital expenditures for segment assets 3,352 704 1,122 5,178 Three Months Ended March 31, 2006 Revenues from external customers $ 96,009 $58,005 $40,554 $194,568 Interest expense 8,408 12,281 5,534 26,223 Depreciation and amortization 3,653 2,289 1,889 7,831 Segment income from operations 17,752 6,521 359 24,632 Capital expenditures for segment assets 3,177 560 1,626 5,363

8

TUBING PACKAGING PRODUCTS OTHER TOTAL --------- -------- -------- -------- Nine months ended March 30, 2007 Revenues from external customers $298,863 $120,434 $120,495 $539,792 Interest expense 24,847 36,456 16,455 77,758 Depreciation and amortization 11,637 6,350 5,929 23,916 Income from operations 50,335 62 1,586 51,983 Capital expenditures for segment assets 9,492 3,609 3,202 16,303 Nine months ended March 31, 2006 Revenues from external customers $273,971 $124,734 $111,010 $509,715 Interest expense 25,155 36,878 16,635 78,668 Depreciation and amortization 10,607 6,883 5,614 23,104 Segment income (loss) from operations 45,410 (40,315) 1,206 6,301 Capital expenditures for segment assets 7,536 1,719 3,223 12,478

9

THREE MONTHS ENDED NINE MONTHS ENDED --------------------- --------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, 2007 2006 2007 2006 --------- --------- --------- --------- PROFIT OR LOSS Total operating profit for reportable segments $21,770 $24,632 $ 51,983 $ 6,301 Corporate and eliminations (4,601) (4,802) (12,542) (13,021) ------- ------- -------- -------- Consolidated total $17,169 $19,830 $ 39,441 $ (6,720) ======= ======= ======== ======== DEPRECIATION AND AMORTIZATION Segment totals $ 7,827 $ 7,831 $ 23,916 $ 23,104 Corporate 0 256 343 768 ------- ------- -------- -------- Consolidated total $ 7,827 $ 8,087 $ 24,259 $ 23,872 ======= ======= ======== ======== CAPITAL EXPENDITURES FOR SEGMENT ASSETS Total reportable-segment expenditures $ 5,178 $ 5,363 $ 16,303 $ 12,478 Other unallocated expenditures (462) 252 (191) 603 ------- ------- -------- -------- Consolidated total $ 4,716 $ 5,615 $ 16,112 $ 13,081 ======= ======= ======== ========

SEGMENT ASSETS

TUBING PACKAGING PRODUCTS OTHER TOTAL --------- -------- -------- -------- March 30, 2007 $289,260 $243,866 $124,813 $657,939 June 30, 2006 $263,843 $248,532 $142,606 $654,981

MARCH 30, 2007 JUNE 30, 2006 -------------- ------------- TOTAL ASSETS Total assets from reportable segments $657,939 $654,981 Other unallocated amounts 3,295 8,374 -------- -------- Consolidated total $661,234 $663,355 ======== ========

GEOGRAPHIC INFORMATION

THREE MONTHS ENDED NINE MONTHS ENDED --------------------- --------------------- MARCH 30, MARCH 31, MARCH 30, MARCH 31, 2007 2006 2007 2006 --------- --------- --------- --------- REVENUES United States $174,524 $166,904 $448,408 $441,103 International 37,157 27,664 91,384 68,612 -------- -------- -------- -------- Total $211,681 $194,568 $539,792 $509,715 ======== ======== ======== ========

MARCH 30, 2007 JUNE 30, 2006 -------------- ------------- LONG-LIVED ASSETS United States $312,467 $320,630 International 37,124 35,216 -------- -------- Total $349,591 $355,846 ======== ========

NOTE 6 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and May 2002 and 8 3/4% Senior Secured Notes in November 2003. These notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor subsidiaries are 100% owned by the issuer. The guarantees are full and unconditional and joint and several. There are no restrictions on the transfer of funds from guarantor subsidiaries to the issuer. The following condensed consolidating financial statements present separate information for Tekni-Plex (the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign subsidiaries (the "Non-Guarantors"). The following condensed consolidation financial statements do not have debt and interest expense allocated to guarantors and non-guarantors. 10 Consolidated Statement of Operations For the three months ended March 30, 2007 (Unaudited, in thousands)

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $211,681 $ 52,520 $122,004 $37,157 Cost of sales 177,583 40,499 111,076 26,008 -------- -------- -------- ------- Gross profit 34,098 12,021 10,928 11,149 Operating expenses: Selling, General and administrative 16,575 6,686 6,886 3,003 Integration expense 354 171 183 -- -------- -------- -------- ------- Operating profit 17,169 5,164 3,859 8,146 Interest expense, net 27,827 27,771 128 (72) Unrealized gain on derivative contracts (246) (246) -- -- Other expense (income) (85) (816) (733) 1,464 -------- -------- -------- ------- Income (loss) before income taxes (10,327) (21,545) 4,464 6,754 Provision (benefit) for income taxes 1,831 113 (75) 1,793 -------- -------- -------- ------- Net income(loss) $(12,158) $(21,658) $ 4,539 $ 4,961 ======== ======== ======== =======

Consolidated Statement of Operations For the nine months ended March 30, 2007 (Unaudited, in thousands)

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net sales $539,792 $149,764 $298,644 $91,384 Cost of goods sold 452,596 110,091 275,247 67,258 -------- -------- -------- ------- Gross profit 87,196 39,673 23,397 24,126 Operating expenses: Selling, General and administrative 46,044 18,658 19,433 7,953 Integration expense 1,711 712 999 -- -------- -------- -------- ------- Operating profit 39,441 20,303 2,965 16,173 Interest expense, net 77,758 77,567 128 63 Unrealized loss on derivative contracts 109 109 -- -- Other expense (income) 267 (1,508) (1,778) 3,553 -------- -------- -------- ------- Income (loss) before income taxes (38,693) (55,865) 4,615 12,557 Provision (benefit) for income taxes 3,998 113 -- 3,885 -------- -------- -------- ------- Net income (loss) $(42,691) $(55,978) $ 4,615 $ 8,672 ======== ======== ======== =======

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

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

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

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

Condensed Consolidated Balance Sheet - at March 30, 2007 (Unaudited, in thousands)

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS --------- ------------ ---------- ---------- ---------- Current assets $ 311,643 $ -- $ 36,776 $195,919 $ 78,948 Property, plant and equipment, net 163,877 -- 39,502 98,656 25,719 Intangible assets, net 170,163 -- 14,382 145,804 9,977 Investment in subsidiaries -- (564,551) 564,551 -- -- Deferred charges, net 12,536 -- 12,420 116 -- Other assets 3,015 (745,323) 472,349 274,561 1,428 --------- ----------- ---------- -------- -------- Total assets $ 661,234 $(1,309,874) $1,139,980 $715,056 $116,072 ========= =========== ========== ======== ======== Current liabilities $ 109,527 $ -- $ 47,567 $ 27,041 $ 34,919 Long-term debt 791,942 -- 788,414 -- 3,528 Preferred Stock 82,403 -- 82,403 -- -- Other long-term liabilities 8,140 (745,323) 552,958 183,954 16,551 --------- ----------- ---------- -------- -------- Total liabilities 992,012 (745,323) 1,471,342 210,995 54,998 --------- ----------- ---------- -------- -------- Additional paid-in capital 188,018 (317,015) 188,011 296,771 20,251 Retained earnings (deficit) (297,530) (247,536) (297,531) 214,789 32,748 Other comprehensive income (loss) (743) -- (1,319) (7,499) 8,075 Less: Treasury stock (220,523) -- (220,523) -- -- --------- ----------- ---------- -------- -------- Total stockholders' equity(deficit) (330,778) (564,551) (331,362) 504,061 61,074 --------- ----------- ---------- -------- -------- Total liabilities and stockholders' deficit $ 661,234 $(1,309,874) $1,139,980 $715,056 $116,072 ========= =========== ========== ======== ========

12 Condensed Consolidating Balance Sheet - at June 30, 2006 (in thousands)

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

Condensed Consolidated Cash Flows For the nine months ended March 30, 2007 (Unaudited, in thousands)

NON- TOTAL ISSUER GUARANTORS GUARANTORS -------- -------- ---------- ---------- Net cash provided by (used in) operating activities $ (3,966) $(30,014) $ 16,077 $ 9,971 -------- -------- -------- ------- Cash flows from Investing activities: Capital expenditures (16,112) (2,891) (10,222) (2,999) Additions to intangibles (38) 348 1,106 (1,492) Deposits and other assets (140) -- 836 (976) -------- -------- -------- ------- Net cash used in investing activities (16,290) (2,543) (8,280) (5,467) -------- -------- -------- ------- Cash flows from financing activities: Line of credit borrowings 18,000 18,000 -- -- Proceeds from long-term debt (233) -- -- (233) Debt financing costs 250 250 -- -- Change in intercompany accounts -- 12,769 (11,218) (1,551) -------- -------- -------- ------- Net cash flows provided by (used in) financing activities 18,017 31,019 (11,218) (1,784) Effect of exchange rate changes on cash (350) -- -- (350) -------- -------- -------- ------- Net increase (decrease) in cash (2,589) (1,538) (3,421) 2,370 Cash, beginning of period 20,689 4,429 4,895 11,365 -------- -------- -------- ------- Cash, end of period $ 18,100 $ 2,891 $ 1,474 $13,735 ======== ======== ======== =======

13 For the nine months ended March 31, 2006 (Unaudited, in thousands)

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

NOTE 7 - ACQUISITIONS In July 2002, the Company purchased certain assets and assumed certain liabilities of ELM Packaging "Elm" for approximately $16,806. The acquisition was recorded under the purchase method, whereby Elm's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. In connection with the acquisition, a reserve of $4,500 has been established for the costs to integrate ELM's operations with the company. The reserve is included in accrued expenses. The components of the integration reserve and activity through March 30, 2007 are as follows:

BALANCE COSTS CHARGED BALANCE JUNE 2006 TO RESERVE MARCH 30, 2007 --------- ------------- -------------- Legal, environmental and other $1,118 $0 $1,118 ------ --- ------ $1,118 $0 $1,118 ====== === ======

The remaining legal, environmental and other costs are expected to be paid over the next four years. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through March 30, 2007 are as follows:

BALANCE COSTS CHARGED BALANCE JUNE 2006 TO RESERVE MARCH 30, 2007 --------- ------------- -------------- Legal and environmental $749 $111 $638 ---- ---- ---- $749 $111 $638 ==== ==== ====

The remaining legal and environmental costs are expected to extend over the next four years. TEKNI-PLEX, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUARTER ENDED MARCH 30, 2007 COMPARED TO THE QUARTER ENDED MARCH 31, 2006 14 Our loss before income taxes, and our net loss, both increased in the third quarter of fiscal year 2007 as compared to the third quarter of fiscal year 2006. As described in more detail below, this was primarily due to decreased operating profit (which in turn was primarily due to higher raw material costs, some of which we were unable to pass along to our customers), a one-time $2.8 million gain on the sale of a facility in the fiscal 2006 period, an increase in our interest expense during the fiscal 2007 period, and higher unrealized gains on derivative transactions during the fiscal 2006 period compared with the fiscal 2007 period. Throughout this "First Three Months" discussion, references to "fiscal 2007," "the fiscal 2007 period," the "current period" and the like refer to the third quarter of fiscal year 2007, while references to "fiscal 2006," "the fiscal 2006 period," the "prior period" and like refer to the third quarter of fiscal year 2006. Net sales increased to $211.7 million in the third quarter of fiscal 2007 from $194.6 million the same period last year, representing an 8.8% increase. Net sales in our Packaging Segment grew 12.9% to $108.4 million in the most recent period from $96.0 million in the comparable period of fiscal 2006 primarily due to higher selling prices which were up 14.5% on average. Volumes, measured in pounds, at our Packaging Segment declined 2.3% in the most recent quarter compared to the comparable period of last year. Net sales in our Tubing Products Segment increased 5.5% to $61.2 million in fiscal 2007 from $58.0 million in fiscal 2006 as volumes, measured in pounds, rose 7.4% and average prices remained flat compared to the previous year. Other net sales grew 3.7% to $42.1 million in fiscal 2007 compared to $40.6 million in the previous year due to higher sales volumes which increased 5.7% on average. Average prices for our Other Segment declined 2.4% in the most recent quarter compared to the previous year. Our accruals for rebates, discounts and sales allowances decreased to $12.1 million or 5.7% of net sales in fiscal 2007 compared to $14.3 million or 7.3% of net sales in fiscal 2006. 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 operation which typically accounts for the majority of our rebates, discounts and sales allowances; as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold increased to $177.6 million in fiscal 2007 from $157.7 million in fiscal 2006 primarily reflecting generally higher raw material costs, particularly at our Packaging Segment. Expressed as a percentage of net sales, cost of goods sold increased to 83.9% in the current period compared to 81.0% in the prior period. Tekni-Plex's primary raw materials are Polyvinyl Chloride (PVC), Polystyrene, Vinyl Chloride Monomer (VCM) and various plasticizers, all of which are petrochemical based. Generally higher oil and natural gas prices, coupled with strong global demand for commodity chemicals and tight supplies, have resulted in generally higher costs for all of our key raw materials. 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. 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 2007 selling season. Gross profit, as a result of the above, decreased to $34.1 million in the current period compared to $36.9 million in the prior period. Expressed as a percentage of net sales, gross profit decreased to 16.1% in the third quarter of fiscal 2007 from 19.0% in comparable period of last year. Our Packaging Segment gross profit decreased 5.1% to $24.0 million in fiscal 2007 from $25.3 million in fiscal 2006, primarily due to higher raw material costs, particularly at our food packaging operations which incurred a 6.8% increase in the average cost of their primary raw material, polystyrene, in the third quarter of fiscal 2007 compared to the comparable period of last year. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 22.1% in the current period from 26.3% in the previous period. Our Tubing Products Segment gross profit decreased $1.4 million to $8.2 million in fiscal 2007 from $9.6 million in fiscal 2006, largely due to start-up costs associated with our Chinese garden hose operations. Expressed as a percentage of net sales, our Tubing Products Segment gross profit decreased to 13.4% in the current period from 16.5% in the previous period. Other gross profit was flat at $2.0 million in both fiscal 2007 and 2006. Expressed as a percentage of net sales, other gross profit decreased to 4.7% in fiscal 2007 from 5.1% a year earlier. Selling, general and administrative expenses increased slightly to $16.6 million in the most recent fiscal year from $16.1 million last year as we have added staff in our Legal, Finance and Internal Audit departments. Measured as a percent of net sales, selling, general and administrative expenses declined to 7.8% in the third quarter of fiscal 2007 from 8.3% in fiscal 2006. Integration expenses decreased to $0.4 million or 0.2% of net sales in fiscal 2007 from $0.9 million or 0.5% of net sales in fiscal 2006. The decrease was related to both the elimination of charges associated with the closing of our Rockaway, New Jersey facility and consolidating its operations at our Clinton, Illinois and Clayton, North Carolina facilities, as well as lower costs associated with the integration of our Elm facilities. Our integration expenses are typically cash expenses and relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards as well as the costs associated with consolidating facilities. These costs are comprised of the following measured in millions:

2007 2006 ---- ---- Elm Packaging Material $0.2 $0.5

15 Labor 0.1 0.1 Overhead 0.1 0.1 Rockaway closing Material 0.0 0.0 Labor 0.0 0.0 Overhead 0.0 0.0 SG&A 0.0 0.2 ---- ---- Total $0.4 $0.9 ==== ==== We expect the reconfiguring and realignment of our Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, decreased to $17.2 million in fiscal 2007 from $19.8 million in fiscal 2006. Expressed as a percentage of net sales, operating profit decreased to 8.1% in the most recent period from 10.2% in the comparable period of last year. Our Packaging Segment operating profit decreased to $16.7 million (15.4% of net sales) in the current period compared to $17.8 million (18.5% of net sales) in the previous period. Our Tubing Products Segment reported operating profit of $4.7 million in fiscal 2007 compared to $6.5 million in fiscal 2006. Measured as a percent of net sales, our Tubing Segment operating profit decreased to 7.7% of net sales in the current period compared to 11.2% of net sales in the previous year. Our Other segment reported operating profit of $0.4 million or 1.0% of net sales in the third quarter of fiscal 2007 compared to $0.4 million or 0.9% of net sales in the comparable period of 2006. Other income declined to $0.1 million in fiscal 2007 from $2.8 million in fiscal 2006. Other income in fiscal 2006 included a one-time $2.8 million gain on the sale of our Rockaway, NJ facility. Interest expense increased to $27.8 million (13.1% of net sales) in fiscal 2007 from $26.2 million (13.5% of net sales) in fiscal 2006 due to higher average interest rates. Unrealized loss on derivative transactions was $0.2 million or 0.1% of net sales in fiscal 2007 compared to $0.8 or 0.4% of net sales in the previous year due to the various movements of the interest rates embedded in our derivative contracts. See the Liquidity and Capital Resources discussion below for a detailed description of our derivative transactions. Loss before income taxes, as a result, was a loss of $10.3 million or 4.9% of net sales for fiscal 2007 compared to a loss of $2.8 million or 1.4% of net sales for fiscal 2006. Income tax expense was $1.8 million for both fiscal 2007 and fiscal 2006, primarily reflecting foreign taxes as we continued to fully reserve against our deferred tax asset. Net loss, as a result, was a loss of $12.2 million for fiscal 2007 or 5.7% of net sales compared with a loss of $4.6 million for fiscal 2006 or 2.3% of net sales. FIRST NINE MONTHS OF FISCAL 2007 COMPARED TO THE FIRST NINE MONTHS OF FISCAL 2006 Our loss before income taxes, and our net loss, both decreased in the first nine months of fiscal year 2007 as compared to the first nine months of fiscal year 2006. As described in more detail below, this was primarily due to increased operating profit (which in turn was primarily due to generally higher prices on our products), and a $46.0 million decrease in Selling, General and Administrative expenses (which in turn was primarily due to $35.1 million non-cash charge in the second quarter of our fiscal 2006 to write off goodwill associated with our garden hose operations). Throughout this "First Nine Months" discussion, references to "fiscal 2007," "the fiscal 2007 period," the "current period" and the like refer to the first nine months of fiscal year 2007, while references to "fiscal 2006," "the fiscal 2006 period," the "prior period" and like refer to the first nine months of fiscal year 2006. Net sales increased to $539.8 million in the first nine months of fiscal 2007 from $509.7 million in the same period last year, representing a 5.9% increase. Net sales in our Packaging Segment grew 9.1% to $298.9 million in the most recent period from $274.0 million in the comparable period of fiscal 2006 due to higher selling prices which were up 10.5% on average. Volumes, measured in pounds, at our Packaging Segment were down 1.3%. Net sales in our Tubing Products Segment decreased 3.4% to $120.4 million in fiscal 2007 from $124.7 million in fiscal 2006 due to lower volumes, measured in pounds, which were off 12.1%. Average prices for our Tubing Segment's products were up 9.9% in the first nine months of fiscal 2007 compared to the same period of last year. Other net sales grew 8.5% to $120.5 million in fiscal 2007 compared to $111.0 million in the previous year due to higher selling prices which were up 29.7% on average. Volumes, measured in pounds, at our Other Segment were down 36.9% in fiscal 2007 compared to fiscal 2006. Our accruals for rebates, discounts and sales allowances decreased to $31.0 million or 5.7% of net sales in fiscal 2007 compared to $39.5 million or 7.7% of net sales in fiscal 2006. 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 which typically accounts for the majority of 16 our rebates, discounts and sales allowances; as well as changes in the volumes purchased by each of our customers during the relevant quarters. Cost of goods sold increased to $452.6 million in fiscal 2007 from $431.8 million in fiscal 2006. Expressed as a percentage of net sales, cost of goods sold decreased to 83.8% in the current period compared to 84.7% in the prior period, primarily due to generally higher price on our products. 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 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 2007 selling season. Gross profit, as a result of the above, increased to $87.2 million in the current period compared to $77.9 million in the prior period. Expressed as a percentage of net sales, gross profit increased to 16.2% in the first nine months of fiscal 2007 from 15.3% in comparable period of last year. Our Packaging Segment gross profit increased 4.7% to $71.6 million in fiscal 2007 from $68.4 million in fiscal 2006. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 23.9% in the current period from 25.0% in the prior period. Our Tubing Products Segment gross profit increased to $9.4 million in fiscal 2007 from $3.4 million in fiscal 2006. Expressed as a percentage of net sales, our Tubing Products Segment gross profit increased to 7.8% in the current period from 2.7% in the previous period. Other gross profit increased to $6.3 million in fiscal 2007 from $6.1 million in fiscal 2006. Expressed as a percentage of net sales, Other gross profit decreased to 5.2% in fiscal 2007 from 5.5% in fiscal 2006. Selling, general and administrative expenses decreased to $46.0 million in the most recent fiscal year from $80.3 million last year, due to the inclusion of a $35.1 million non-cash charge in our second quarter of fiscal 2006 to write off goodwill associated with our garden hose operations. Measured as a percentage of net sales, selling, general and administrative expenses decreased to 8.5% in the current period from 15.7% in the previous period. Integration expenses decreased to $1.7 million or 0.3% of net sales in fiscal 2007 from $4.3 million or 0.9% of net sales in fiscal 2006. The decrease was related to both the elimination of charges associated with the closing of our Rockaway, New Jersey facility and consolidating its operations at our Clinton, Illinois and Clayton, North Carolina facilities, as well as lower costs associated with the integration of our Elm facilities. Our integration expenses are typically cash expenses and relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards as well as the costs associated with consolidating facilities. These costs are comprised of the following measured in millions:

2007 2006 ---- ---- Elm Packaging Material $1.1 $2.4 Labor 0.3 0.8 Overhead 0.3 0.9 Rockaway closing Material 0.0 0.0 Labor 0.0 0.0 Overhead 0.0 0.0 SG&A 0.0 0.2 ---- ---- Total $1.7 $4.3 ==== ====

We expect the reconfiguring and realignment of our Elm facilities to result in significant cost reductions as well as enable us to produce higher value added products; however, we cannot currently quantify these benefits. Operating profit, as a result of the above, increased to $39.4 million in fiscal 2007 from a loss of ($6.7) million in fiscal 2006. Expressed as a percentage of net sales, operating profit improved to 7.3% in the most recent period from (1.3%) in the comparable period of last year. 17 Our Packaging Segment operating profit increased 10.8% to $50.3 million (16.8% of net sales) in the current period compared to $45.4 million (16.6% of net sales) in the previous period. Our Tubing Products Segment reported an operating profit of $0.1 million or (0.1%) of net sales in the current period compared to a loss of $40.3 million or (32.3%) of net sales in the previous year. Fiscal 2006 included an operating loss of $35.1 million for a non-cash charge to write-off goodwill associated with our garden hose operations. Other operating profit improved to $1.6 million or 1.3% of net sales in the current period compared to $1.2 million or 1.1% of net sales in the previous period. Interest expense decreased to $77.8 million or 14.4% of net sales in fiscal 2007 from $78.7 million or 15.4% of net sales in fiscal 2006. Unrealized loss on derivative transactions was $0.1 million or 0.0% of net sales in fiscal 2007 compared to a gain of $3.3 or 0.7% of net sales in the previous year due to the various movements of the interest rates embedded in our derivative contracts. See the Liquidity and Capital Resources discussion below for a detailed description of our derivative transactions. Loss before income taxes, as a result, was a loss of $38.7 million or 7.2% of net sales for fiscal 2007 compared to a loss of $79.4 million or 15.6% of net sales for fiscal 2006. Income tax expense was $4.0 million for both fiscal 2007 and 2006, primarily reflecting foreign taxes as we continued to fully reserve against our deferred tax asset. Net loss, as a result, was a loss of $42.7 million for fiscal 2007 or 7.9% of net sales compared with a loss of $83.4 million for fiscal 2006 or 16.4% of net sales. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended March 30, 2007, net cash used in operating activities was $4.0 million compared to $15.3 million in the first nine months of the prior year. The $11.3 million improvement was primarily due to reduction in operating losses. Other various year-over-year changes in operating assets, accrued expenses (including interest expense) and liabilities are generally due to offsetting timing differences. As of May 11, 2007, we had $57.0 million of drawn borrowings under our $75 million asset backed credit facility. In addition, we had $9.3 million of outstanding letters of credit to support our workmen's compensation insurance program. In May 2007, we monetized our Belgium accounts receivable for net proceeds of approximately $8.0 million through a factoring agreement. We anticipate replicating this transaction with our other European accounts receivable and expect to generate an incremental $6.0 million of cash. Working capital at March 30, 2007 was $202.1 million compared to $215.4 million at June 30, 2006. The $13.3 million decrease was primarily due to operating losses. Our principal uses of cash will be debt service, capital expenditures and working capital requirements. Our capital expenditures for the nine months ended March 30, 2007 and March 31, 2006 were $16.1 million and $13.1 million, respectively. We believe our current cash balances, cash generated from operations plus funds available under our asset backed facility will be sufficient to meet our needs and to provide us with the flexibility to make some capital expenditures and other investments which we believe are prudent. However, we cannot assure you that sufficient funds will be available from operations or borrowings under our credit facility to meet all of our future cash needs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS In June 2000, we entered into a series of interest rate derivative transactions designed to protect us from rising interest rates on our senior term debt facilities while enabling us to partially benefit from falling interest rates. At that time, Tekni-Plex had $344.0 million of term loans outstanding with variable rates of interest tied to US$ LIBOR. These loans, which originally had maturity dates ranging from June 2006 through June 2008, have been repaid. Concurrent with incurring this debt, Tekni-Plex entered into a series of interest swap contracts to pay variable rates of interest based on a basket of LIBOR benchmarks and receive variable rates of interest based on 3 month dollar LIBOR on an aggregate of $344.0 million amount of indebtedness. The swaps amortize on the same schedule as the original term loans. As of March 30, 2007, the notional amount of the swaps is approximately $172.0 million. 18 Portfolio theory and empirical evidence suggested the change in value of a basket of LIBOR benchmarks will be less volatile than the change in value of a single benchmark. Since 2000, this has generally been our experience. In conjunction with our swap contracts we also purchased an interest rate cap. We believe the reduced volatility created by the interest rate swaps made the interest rate cap less expensive. We recorded an unrealized gain from derivative transactions of $0.2 million and $0.8 million in the third quarters of fiscal 2007 and 2006, respectively. We recorded a total of unrealized losses from derivative transactions of $0.1 million in the first nine months of fiscal 2007 and a gain of $3.3 million in the nine months of fiscal 2006. Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which limit our incremental debt and capital expenditures. The availability of borrowings under our new asset based facility is subject to a borrowing base limitation equal to the lesser of the borrowing base as defined in the asset backed agreement and the then effective commitments under the new asset based facility minus such availability reserves as the administrative agent, in its sole discretion, deems appropriate. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In connection with the completion of its audit of and the issuance of an unqualified report on the Company's consolidated financial statements for the fiscal year ended June 30, 2006, the Company's independent registered public accounting firm, BDO Seidman, LLP ("BDO"), communicated to the Company's Audit Committee that the following matters involving the Company's internal controls and operations were considered to be "significant deficiencies", as defined under standards established by the Public Company Accounting Oversight Board: - Lack of quantity of staff in order to ensure timeliness and completeness of financial reporting. Management agrees with this assessment. Significant deficiencies are matters coming to the attention of the independent auditors that in their judgment, relate to material weaknesses in the design or operation of internal controls that could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider this matter, which is listed above, to be a "material weakness" that, by itself, may increase the possibility that a material misstatement in our financial statements might not be prevented or detected by our employees in the normal course of performing their assigned functions. 19 Over the last 12 months we have made a number of significant changes to our internal controls. They include: (1) creating an internal audit department; (2) adding additional staff to the accounting and finance functional group; (3) centralizing the reporting of financial managers to 5 group controllers who will provide increased oversight and improved training; (4) during annual performance reviews of accounting and bookkeeping personnel requiring all supervising personnel to inquire whether the employee has had or observed any problems in the use of approved accounting systems or in the accounting function generally; (5) improving our internal financial reporting systems and related controls across all of our divisions to, among other things, increase both the frequency by which inventory and rebates discounts and allowances are monitored as well as increasing the number of managers responsible for monitoring these functions; (6) instituting a policy of performing routine credit and background checks on all financial staff and key managers; and (7) beginning the process of centralizing our cash management function and significantly improving our controls over cash disbursements. As required by Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of the Company's disclosure controls and procedures and internal controls over financial reporting as of March 30, 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 plans to continue to improve and refine its internal controls over the next 12 months. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 1A. Risk Factors. None Item 2. Unregistered Sale of Equity Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Securities Holders. Not applicable Item 5. Other Information. EMPLOYMENT AGREEMENTS Dr. F. Patrick Smith, the Company's Chairman and Chief Executive Officer, is employed pursuant to a Second Amended and Restated Employment Agreement (the "Agreement") dated May 13, 2005 by and between him and the Company, which was included as Exhibit 10.1 to our Form 8-K filed on May 19, 2005. Under the Agreement, Dr. Smith's employment term was to end on May 13, 2007. On May 10, 2007, the employment term was extended through July 13, 2007. As of the date of this filing, Dr. Smith and the Chair of the Compensation Committee of the Board of Directors are engaged in negotiations regarding Dr. Smith's employment. Item 6. Exhibits 10.2.1 Extension of Employment Agreement for Dr. F. Patrick Smith dated May 10, 2007. 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 20 32.1 Certification of Chairman and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. May 14, 2007 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 22