10-Q 1 y09108e10vq.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 April 1, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to Commission file number 333-28157 TEKNI-PLEX, INC. (Exact name of registrant as specified in its charter) Delaware 22-3286312 (State or other jurisdiction (IRS Employer Identification Number) of incorporation or organization) 260 North Denton Tap Road (972) 304-5077 Coppell, TX 75019 (Registrant's telephone number) (Address of principal executive office) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an a accelerated filer (as defined in rule 126-2 of the exchange act) Yes [ ] No [X] TEKNI-PLEX, INC.

PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of April 1, 2005 and July 2, 2004 3 Consolidated Statements of Operations for the nine months and three months ended 4 April 1, 2005 and March 26, 2004 Consolidated Statements of Comprehensive Income (Loss) for the nine months and three 4 months ended April 1, 2005 and March 26, 2004 Consolidated Statements of Cash Flows for the nine months ended April 1, 2005 5 and March 26, 2004 Notes to Consolidated Financial Statements 6-14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17-18 ITEM 4. CONTROLS AND PROCEDURES 18-19 PART II. OTHER INFORMATION 19 Item 1. Legal proceedings 19 Item 2. Changes in securities 19 Item 3. Defaults upon senior securities 19 Item 4. Submission of matters to a vote of securities holders 19 Item 5. Subsequent events 19 Item 6. Exhibits 19

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

APRIL 1, JULY 2, 2005 2004 (UNAUDITED) (AUDITED) ----------- --------- ASSETS CURRENT: Cash $ 12,709 $ 29,735 Accounts receivable, net of allowances of $9,054 and $8,408 respectively 128,056 138,109 Inventories 188,218 153,807 Prepaid expenses and other current assets 9,246 6,355 ----------- --------- TOTAL CURRENT ASSETS 338,229 328,006 PROPERTY, PLANT AND EQUIPMENT, NET 179,042 182,749 GOODWILL 198,532 198,532 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $4,425 AND $2,900 RESPECTIVELY 7,010 8,746 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $10,781 AND $9,122 RESPECTIVELY 9,056 9,652 DEFERRED INCOME TAXES 19,149 18,793 OTHER ASSETS 1,259 1,204 ----------- --------- $ 752,277 $ 747,682 =========== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 1,900 $ 2,121 Accounts payable - trade 52,006 54,312 Accrued payroll and benefits 13,398 10,945 Accrued interest 24,423 6,763 Accrued liabilities - other 22,968 22,136 Income taxes payable 3,105 1,853 ----------- --------- TOTAL CURRENT LIABILITIES 117,800 98,130 LONG-TERM DEBT 751,201 731,886 OTHER LIABILITIES 11,228 18,701 ----------- --------- TOTAL LIABILITIES 880,229 848,717 ----------- --------- Commitments and Contingencies STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 210,518 210,518 Accumulated other comprehensive income (loss) (3,911) (6,000) Retained earnings (deficit) (114,036) (85,030) Treasury stock (220,523) (220,523) ----------- --------- TOTAL STOCKHOLDERS' DEFICIT (127,952) (101,035) ----------- --------- $ 752,277 $ 747,682 =========== =========

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

THREE MONTHS ENDED NINE MONTHS ENDED ------------------------- ------------------------- APRIL 1, MARCH 26, APRIL 1, MARCH 26, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- NET SALES $ 194,215 $ 169,133 $ 475,923 $ 427,903 COST OF SALES 165,994 124,677 392,305 324,589 ----------- ----------- ----------- ----------- GROSS PROFIT 28,221 44,456 83,618 103,314 OPERATING EXPENSES: Selling, general and administrative 15,499 16,399 45,542 46,198 Integration expense 2,008 2,467 6,830 4,731 ----------- ----------- ----------- ----------- OPERATING PROFIT 10,714 25,590 31,246 52,385 OTHER (INCOME) EXPENSES: Interest expense 23,896 20,896 66,053 62,222 Unrealized (gain) loss on derivative contracts (3,078) (788) (7,262) (4,986) Other (income) expenses (3,055) 136 (2,273) 856 ------------ ----------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES (7,049) 5,346 (25,272) (5,707) PROVISION (BENEFIT) FOR INCOME TAXES 2,210 2,120 3,734 (2,280) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (9,259) $ 3,226 $ (29,006) $ (3,427) ============ =========== =========== =========== CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME NET INCOME (LOSS) $ (9,259) $ 3,226 $ (29,006) $ (3,427) COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment (4,280) (4,062) 2,089 1,987 ----------- ----------- ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ (13,539) $ (836) $ (26,917) $ (1,440) =========== =========== =========== ===========

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

NINE MONTHS ENDED ------------------------ APRIL 1, MARCH 26, 2005 2004 ------------ --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (29,006) $ (3,427) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 22,975 24,322 Unrealized loss (gain) on derivative contracts (7,262) (4,986) Deferred income taxes (348) (2,133) Loss on sale of assets -- 169 Changes in operating assets and liabilities: Accounts receivable 10,374 10,134 Inventories (33,926) (41,578) Prepaid expenses and other current assets (1,577) 2,269 Income taxes 1,252 (6,056) Accounts payable-trade (2,132) (18,526) Accrued interest 17,669 16,408 Accrued expenses and other liabilities 3,258 2,407 ------------ --------- Net cash used in operating activities (18,723) (20,997) ------------ --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (14,247) (22,718) Acquisition costs (39) -- Additions to intangibles (1,097) (481) Cash proceeds from sale of assets -- 1,354 Deposits and other assets (55) (208) ------------ --------- Net cash used in investing activities (15,438) (22,053) ------------ --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings/(repayments) of long-term debt 18,339 (261,292) Proceeds from senior secured notes -- 267,438 Receipt of additional paid-in capital -- 10,500 Debt financing costs (1,063) (2,745) ------------ --------- Net cash provided by financing activities 17,276 13,901 ------------ --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (141) (491) ------------ --------- Net decrease in cash (17,026) (29,640) Cash, beginning of period 29,735 48,062 ------------ --------- Cash, end of period $ 12,709 $ 18,422 ============ ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 47,030 $ 41,547 Income taxes 3,028 3,042

See accompanying notes to consolidated financial statements. 5 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 1 - GENERAL Nature of Business Tekni-Plex, Inc. and its subsidiaries ("Tekni-Plex" or the "Company") is a global, diversified manufacturer of packaging, packaging products, and materials as well as tubing products. The Company primarily serves the food, healthcare and consumer markets. The Company has built a leadership position in its core markets, and focuses on vertically integrated production of highly specialized products. The Company's operations are aligned under two primary business groups: Packaging and Tubing Products. The results for the third quarter and first nine months of fiscal 2005 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 April 1, 2005. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the SEC rules and regulations. These financial statements should be read in conjunction with the financial statements and notes thereto that were included in the Company's latest annual report on Form 10-K for the fiscal year ended July 2, 2004. NOTE 2 Stock Based Compensation The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure," which allows the Company to apply APB Opinion 25 and related interpretations in accounting for its stock options and present pro forma effects of the fair value of such options. Had compensation cost been determined based on the fair value at the grant dates for these awards consistent with the method of SFAS No. 123, the Company's income (loss) would have been reduced (increased) to the pro forma amounts indicated below. The calculations were based on a risk yield of zero, and expected lives of 8 years.

THREE MONTHS ENDED NINE MONTHS ENDED ------------------- -------------------- APRIL 1 MARCH 26 APRIL 1 MARCH 26 2005 2004 2005 2004 -------- -------- --------- -------- Net income (loss) As reported $ (9,259) $ 3,226 $ (29,006) $ (3,427) Adjustments for Fair value of Stock options, Net of tax (8) (22) (24) (67) -------- -------- --------- -------- Pro forma $ (9,267) $ 3,204 $ (29,030) $ (3,494)

6 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3- INVENTORIES Inventories as of April 1, 2005 and July 2, 2004 are summarized as follows:

APRIL 1, 2005 JULY 2, 2004 ------------- ------------ Raw materials $ 65,436 $ 58,881 Work-in-process 15,820 12,668 Finished goods 106,962 82,258 ------------- ------------ $ 188,218 $ 153,807 ------------- ------------

NOTE 4- LONG-TERM DEBT Long-term debt consists of the following:

APRIL 1, 2005 JULY 2, 2004 ------------- ------------ Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010 (less unamortized discount of $1,977 and $2,260) $ 273,022 $ 272,740 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $381 and $437) 40,381 40,437 Senior Debt: Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $6,554 and $7,121) 268,446 267,879 Revolving line of credit, expiring June, 2006. At April 1, 2005, the interest rates ranged from 6.86% to 8.75% 95,200 76,000 Term notes due June, 2006 and June, 2008, with an interest rate at April 1, 2005 of 7.21% 70,706 71,263 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2005 to 2010 5,346 5,688 ------------- ------------ 753,101 734,007 Less: Current maturities 1,900 2,121 ------------- ------------ $ 751,201 $ 731,886 ============= ============

Significant increases in raw material costs, combined with soft demand in our garden hose business brought about by unfavorable weather conditions, have negatively impacted our recent financial performance. As a result, we were not in compliance with the minimum consolidated EBITDA and minimum fixed charge coverage ratio covenants contained in our credit agreement for the fiscal quarters ended December 31, 2004 and April 1, 2005. The lenders under our credit agreement have waived compliance with these covenants until June 10, 2005, by which time we are required to have raised $30.0 million of equity financing. In addition, our liquidity position has been constrained, causing us to draw down substantially all of our available revolving credit capacity. On April 19, 2005, we received the consents required to amend the covenant in the indenture for our senior subordinated notes which places limitations on indebtedness. The terms of the consents allow us, among other things, to incur incremental debt, not to exceed $90.0 million at any one time outstanding, in ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. The amendment to our senior subordinated note indenture will not become effective until the Company receives $30.0 million in additional equity. In May, 2005, we received commitments for $30.0 million in new equity contributions from existing equity investors, $19.1 million of which has already been obtained by the Company. NOTE 5- 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, results of operations and cash flows. 7 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) 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 pool hose. Products that do not fit in either of these segments, including recycled PET, vinyl compounds and specialty resins have been reflected in Other. The Packaging and Tubing Products segments have operations in the United States, Europe and Canada. Other products not included in either segment are produced in the United States. Financial information concerning the Company's business segments and the geographic areas in which it operates are as follows:

TUBING PACKAGING PRODUCTS OTHER TOTAL ----------- ---------- ---------- ----------- Three Months Ended April 1, 2005 Revenues from external customers $ 92,214 $ 64,214 $ 37,787 $ 194,215 Interest expense 7,624 11,223 5,049 23,896 Depreciation and amortization 3,635 2,155 1,676 7,466 Segment income (loss) from operations 14,488 258 (12) 14,734 Expenditures for segment capital assets 307 341 238 886 ----------- ---------- ---------- ----------- Three Months Ended March 26, 2004 Revenues from external customers $ 78,414 $ 61,320 $ 29,399 $ 169,133 Interest expense 6,655 9,810 4,431 20,896 Depreciation and amortization 3,369 2,013 1,535 6,917 Segment income from operations 13,840 16,333 874 31,047 Expenditures for segment capital assets 3,826 1,816 1,842 7,484 ----------- ---------- ---------- -----------

TUBING PACKAGING PRODUCTS OTHER TOTAL ----------- ---------- ---------- ----------- Nine months ended April 1, 2005 Revenues from external customers $ 257,286 $ 120,572 $ 98,065 $ 475,923 Interest expense 21,051 31,005 13,997 66,053 Depreciation and Amortization 10,911 6,351 4,945 22,207 Segment income (loss) from operations 40,429 4,829 (521) 44,737 Expenditures for segment capital assets 8,460 2,170 3,231 13,861 ----------- ---------- ---------- ----------- Nine months ended March 26, 2004 Revenues from external customers $ 219,075 $ 125,564 $ 83,264 $ 427,903 Interest expense 19,824 29,192 13,206 62,222 Depreciation and Amortization 11,145 7,289 5,120 23,554 Segment income from operations 36,082 30,863 765 67,710 Expenditures for segment capital assets 13,303 2,995 5,864 22,162 ----------- ---------- ---------- -----------

THREE MONTHS ENDED NINE MONTHS ENDED -------------------------- -------------------------- APRIL 1, MARCH 26, APRIL 1 MARCH 26 2005 2004 2005 2004 ---------- ---------- ---------- ---------- PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 14,734 $ 31,047 $ 44,737 $ 67,710 Corporate and eliminations (4,020) (5,457) (13,491) (15,325) ---------- ---------- ---------- ---------- $ 10,714 $ 25,590 $ 31,246 $ 52,385 ========== ========== ========== ========== DEPRECIATION AND AMORTIZATION Segment totals $ 7,466 $ 6,917 $ 22,207 $ 23,554 Corporate 256 256 768 768 ---------- ---------- ---------- ---------- Consolidated total $ 7,722 $ 7,173 $ 22,975 $ 24,322 ========== ========== ========== ========== EXPENDITURES FOR SEGMENT CAPITAL ASSETS Total reportable-segment expenditures $ 886 $ 7,484 $ 13,861 $ 22,162 Other unallocated expenditures 4 147 386 556 ---------- ---------- ---------- ---------- Consolidated total $ 890 $ 7,631 $ 14,247 $ 22,718 ========== ========== ========== ==========

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

TUBING PACKAGING PRODUCTS OTHER TOTAL ------------ ---------- ----------- ---------- April 1, 2005 $ 283,278 $ 324,552 $ 135,937 $ 743,767 ------------ ---------- ----------- ----------- July 2, 2004 271,432 326,882 138,705 737,019 ------------ ---------- ----------- -----------

APRIL 1, 2005 JULY 2, 2004 ------------- ------------ TOTAL ASSETS Total assets from reportable segments $ 743,767 $ 737,019 Other unallocated amounts 8,510 10,663 ------------- ------------ Consolidated total $ 752,277 $ 747,682 ============= ============

GEOGRAPHIC INFORMATION

THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- --------------------------- APRIL 1, MARCH 26, APRIL 1, MARCH 26, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- REVENUES United States $ 164,848 $ 143,917 $ 404,686 $ 367,680 International 29,367 25,216 71,237 60,223 ----------- ----------- ----------- ----------- Total $ 194,215 $ 169,133 $ 475,923 $ 427,903 =========== =========== =========== ===========

APRIL 1, 2005 JULY 2, 2004 ------------- ------------ LONG-LIVED ASSETS United States $ 379,109 $ 385,120 International 34,939 34,556 ------------- ------------ Total $ 414,048 $ 419,676 ============= ============

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

NON- TOTAL ISSUER GUARANTORS GUARANTORS ----------- ----------- ------------ ----------- Net sales $ 194,215 $ 48,613 $ 116,235 $ 29,367 Cost of goods sold 165,994 36,798 107,702 21,494 ----------- ----------- ------------ ----------- Gross profit 28,221 11,815 8,533 7,873 Operating expenses: Selling, General and administrative 15,499 6,405 6,439 2,655 Integration expense 2,008 610 1,398 -- ----------- ----------- ------------ ----------- Operating profit 10,714 4,800 696 5,218 Interest expense (income), net 23,896 23,888 (10) 18 Unrealized gain on derivative contracts (3,078) (3,078) -- -- Other expense (income) (3,055) (3,286) (530) 761 ----------- ----------- ------------ ----------- Income (loss) before income taxes (7,049) (12,724) 1,236 4,439 Provision (benefit) for income taxes 2,210 (400) 400 2,210 ----------- ----------- ------------ ----------- Net income (loss) $ (9,259) $ (12,324) $ 836 $ 2,229 =========== =========== ============ ===========

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

NON- TOTAL ISSUER GUARANTORS GUARANTORS ----------- ----------- ------------ ---------- Net sales $ 475,923 $ 135,574 $ 269,112 $ 71,237 Cost of sales 392,305 101,365 236,357 54,583 ----------- ----------- ------------ ---------- Gross profit 83,618 34,209 32,755 16,654 Operating expenses: Selling, General and administrative 45,542 20,086 18,497 6,959 Integration expense 6,830 1,776 5,054 -- ----------- ----------- ------------ ---------- Operating profit 31,246 12,347 9,204 9,695 Interest expense, net 66,053 66,011 (43) 85 Unrealized loss on derivative contracts (7,262) (7,262) -- -- Other expense (income) (2,273) (3,745) (1,399) 2,871 ----------- ----------- ------------ ---------- Income (loss) before income taxes (25,272) (42,657) 10,646 6,739 Provision (benefit) for income taxes 3,734 (3,700) 3,700 3,734 ----------- ----------- ------------ ---------- Net income(loss) $ (29,006) $ (38,957) $ 6,946 $ 3,005 =========== =========== ============ ==========

10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Consolidated Statement of Earnings (in thousands) (Unaudited) For the three months ended March 26, 2004

NON- TOTAL ISSUER GUARANTORS GUARANTORS ----------- ----------- ----------- ---------- Net sales $ 169,133 $ 38,211 $ 105,706 $ 25,216 Cost of sales 124,677 27,247 79,159 18,271 ----------- ----------- ----------- ---------- Gross profit 44,456 10,964 26,547 6,945 Operating expenses: Selling, General and administrative 16,399 6,850 7,244 2,305 Integration expense 2,467 1,190 1,277 -- ----------- ----------- ----------- ---------- Operating profit 25,590 2,924 18,026 4,640 Interest expense 20,896 20,874 (6) 28 Unrealized gain on derivative contracts (788) (788) -- -- Other expense (income) 136 308 (829) 657 ----------- ----------- ----------- ---------- Income (loss) before income taxes 5,346 (17,470) 18,861 3,955 Provision (benefit) for income taxes 2,120 (6,820) 7,735 1,205 ----------- ----------- ----------- ---------- Net income (loss) $ 3,226 $ (10,650) $ 11,126 $ 2,750 =========== =========== =========== ==========

For the nine months ended March 26, 2004

NON- TOTAL ISSUER GUARANTORS GUARANTORS ----------- ----------- ----------- ---------- Net sales $ 427,903 $ 108,084 $ 259,596 $ 60,223 Cost of sales 324,589 79,904 199,502 45,183 ----------- ----------- ----------- ---------- Gross profit 103,314 28,180 60,094 15,040 Operating expenses: Selling, General and administrative 46,198 20,581 19,552 6,065 Integration expense 4,731 1,190 3,541 -- ----------- ----------- ----------- ---------- Operating profit 52,385 6,409 37,001 8,975 Interest expense 62,222 62,138 (30) 114 Unrealized loss on derivative contracts (4,986) (4,986) -- -- Other expense (income) 856 (438) (1,122) 2,416 ----------- ----------- ----------- ---------- Income (loss) before income taxes (5,707) (50,305) 38,153 6,445 Provision (benefit) for income taxes (2,280) (20,100) 15,435 2,385 ----------- ----------- ----------- ---------- Net income (loss) $ (3,427) $ (30,205) $ 22,718 $ 4,060 =========== =========== =========== ==========

11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at April 1, 2005

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ---------- ------------ ----------- ---------- ---------- Current assets $ 338,229 $ -- $ 42,156 $ 234,230 $ 61,843 Property, plant and equipment, net 179,042 -- 42,818 110,522 25,702 Intangible assets, net 205,542 -- 15,255 179,406 10,881 Investment in subsidiaries -- (570,589) 570,589 -- -- Deferred income taxes 19,149 -- 30,032 (9,033) (1,850) Deferred charges, net 9,056 -- 8,940 116 -- Other assets 1,259 (592,288) 327,723 265,618 206 ---------- ----------- ----------- ---------- ---------- Total assets $ 752,277 $ (1,162,877) $ 1,037,513 $ 780,859 $ 96,782 ========== ============ =========== ========== ========== Current liabilities $ 117,800 $ -- $ 46,997 $ 43,676 $ 27,127 Long-term debt 751,201 -- 747,013 -- 4,188 Other long-term liabilities 11,228 (592,288) 368,930 230,157 4,429 ---------- ------------ ----------- ---------- ---------- Total liabilities 880,229 (592,288) 1,162,940 273,833 35,744 ---------- ------------ ----------- ---------- ---------- Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765 Retained earnings (deficit) (114,036) (257,060) (114,036) 218,515 38,545 Other comprehensive income (loss) (3,911) -- (1,367) (8,272) 5,728 Less: Treasury stock (220,523) -- (220,523) -- -- ---------- ------------ ----------- ---------- ---------- Total stockholders' equity (deficit) (127,952) (570,589) (125,427) 507,026 61,038 ---------- ------------ ----------- ---------- ---------- Total liabilities and deficit $ 752,277 $ (1,162,877) $ 1,037,513 $ 780,859 $ 96,782 ========== ============ =========== ========== ==========

Condensed Consolidated Balance Sheet - at July 2, 2004

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ---------- ------------ ----------- ---------- ---------- Current assets $ 328,006 $ -- $ 38,357 $ 218,542 $ 71,107 Property, plant and equipment, net 182,749 -- 43,178 113,335 26,236 Intangible assets, net 207,278 -- 16,471 179,997 10,810 Investment in subsidiaries -- (560,638) 560,638 -- -- Deferred income taxes 9,652 -- 9,536 116 -- Deferred charges, net 18,793 -- 30,032 (9,205) (2,034) Other assets 1,204 (594,961) 339,165 257,456 (456) ---------- ------------ ----------- ---------- ---------- Total assets $ 747,682 $ (1,155,599) $ 1,037,377 $ 760,241 $ 105,663 ========== ============ =========== ========== ========== Current liabilities 98,130 -- 26,277 47,577 24,276 Long-term debt 731,886 -- 727,577 -- 4,309 Other long-term liabilities 18,701 (594,961) 379,944 211,540 22,178 ---------- ------------ ----------- ---------- ---------- Total liabilities 848,717 (594,961) 1,133,798 259,117 50,763 ---------- ------------ ----------- ---------- ---------- Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765 Retained earnings (deficit) (85,030) (247,109) (85,030) 211,569 35,540 Other comprehensive income (loss) (6,000) -- (1,367) (7,228) 2,595 Less: Treasury stock (220,523) -- (220,523) -- -- ---------- ------------ ----------- ---------- ---------- Total Stockholders' equity (deficit) (101,035) (560,638) (96,421) 501,124 54,900 ---------- ------------ ----------- ---------- ---------- Total liabilities and deficit $ 747,682 $ (1,155,599) $ 1,037,377 $ 760,241 $ 105,663 ========== ============ =========== ========== ==========

12 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the nine months ended April 1, 2005

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

For the nine months ended March 26, 2004

NON- TOTAL ISSUER GUARANTORS GUARANTORS ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities $ (20,997) $ (37,824) $ 3,692 $ 13,135 ---------- ---------- ---------- ---------- Cash flows from Investing activities: Capital expenditures (22,718) (7,981) (10,897) (3,840) Cash proceeds from sale of assets 1,354 -- 1,230 124 Additions to intangibles (481) (164) 161 (478) Deposits and other assets (208) 12 (22) (198) ---------- ---------- ---------- ---------- Net cash used in investing activities $ (22,053) $ (8,133) $ (9,528) $ (4,392) ---------- ---------- ---------- ---------- Cash flows from financing activities (Repayment) borrowing of long term debt (261,292) (261,155) -- (137) Proceeds from Senior secured notes 267,438 267,438 -- -- Receipt of additional paid-in capital 10,500 10,500 -- -- Debt financing costs (2,745) (2,745) -- -- Change in intercompany accounts -- 13,055 (11,792) (1,263) ---------- ---------- ---------- ---------- Net cash flows provided by (used in) financing activities 13,901 27,093 (11,792) (1,400) ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash (491) -- -- (491) ---------- ---------- ---------- ---------- Net increase (decrease) in cash (29,640) (18,864) (17,628) 6,852 Cash, beginning of period 48,062 20,900 19,650 7,512 ---------- ---------- ---------- ---------- Cash, end of period $ 18,422 $ 2,036 $ 2,022 $ 14,364 ========== ========== ========== ==========

13 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) 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 from July 2, 2004 through April 1, 2005 are as follows:

BALANCE COSTS CHARGED BALANCE JULY 2004 TO RESERVE APRIL 1, 2005 --------- ------------- ------------- Legal, environmental and other 1,161 16 1,145 --------- --------- ---------- $ 1,161 $ 16 $ 1,145 ========= ========= ==========

The remaining legal, environmental and other costs are expected to be paid over the next two 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. In connection with the acquisition, a reserve of $10,000 was established for the costs to integrate Swan operations with the Company. The components of the integration reserve and activity from July 2, 2004 through April 1, 2005 are as follows:

BALANCE COSTS CHARGED BALANCE JULY 2004 TO RESERVE APRIL 1, 2005 --------- ------------- ------------- Legal and environmental 1,281 262 1,019 --------- ---------- ----------- $ 1,281 $ 262 $ 1,019 ========= ========== ===========

The remaining legal and environmental costs are expected to extend over the next two years. 14 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER OF FISCAL 2005 COMPARED WITH THE THIRD QUARTER OF FISCAL 2004 Net sales increased to $194.2 million for the three months ended April 1, 2005 from $169.1 million for the three months ended March 26, 2004, representing a 14.8% gain. Net sales in our Packaging Segment grew 17.6% to $92.2 million in the most recent period from $78.4 million in the comparable period of 2004 primarily due to higher selling prices. Net sales in our Tubing Products Segment increased 4.7% to $64.2 million in the third quarter of fiscal 2005 from $61.3 million in the comparable quarter of fiscal 2004 primarily due to an increase in garden hose prices that generally went into effect in January 2005. Other net sales grew 28.5% to $37.8 million in fiscal 2005 compared to $29.4 million in the previous year due to both higher selling prices and higher volumes. Cost of Sales increased to $166.0 million for the three months ended April 1, 2005 from $124.7 million for the three months ended March 26, 2004. Expressed as a percentage of net sales, cost of sales increased to 85.5% in the current period compared to 73.7% in the prior period, primarily due to higher raw material costs. Gross Profit, as a result of the above, decreased to $28.2 million in the current period compared to $44.5 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 14.5% for the three months ended April 1, 2005 from 26.3% in the comparable period of last year. Our Packaging Segment gross profit increased to $22.9 million for the three months ended April 1, 2005 from $21.8 million for the three months ended March 26, 2004 as we were largely able to pass on higher raw material costs to our customers. However, expressed as a percentage of net sales, Packaging Segment gross profit decreased to 24.8% in the current period from 27.8% in the previous period. Our Tubing Products Segment gross profit decreased to $3.7 million for the three months ended April 1, 2005 from $20.2 million for the three months ended March 26, 2004. Expressed as a percentage of net sales, Tubing Products Segment gross profit decreased to 5.8% in the current period from 32.9% in the previous period as significantly higher raw material cost more than offset the price increases that went into effect in January at our garden hose unit. Other gross profit decreased to $1.6 million for the three months ended April 1, 2005 from $2.5 million for the three months ended March 26, 2004. Selling, General and Administrative expense decreased to $15.5 million in the most recent quarter from $16.4 million in the comparable period of the previous year, primarily due to lower executive compensation. Measured as a percentage of net sales, selling, general and administrative expense decreased to 8.0% in the current period from 9.7% in the previous period. Integration expense declined to $2.0 million or 1.0% of net sales for the three months ended April 1, 2005 from $2.5 million or 1.5% of net sales for the comparable period of fiscal 2004. These costs relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards Operating Profit, as a result of the above, decreased to $10.7 million for the three months ended April 1, 2005 from $25.6 million for the three months ended March 26, 2004. Expressed as a percentage of net sales, operating profit decreased to 5.5% in the most recent period from 15.1% in the comparable period of last year. Our Packaging Segment operating profit increased to $14.5 million (15.7% of net sales) in the current period compared to $13.8 million (17.6% of net sales) in the previous period. Our Tubing Products Segment operating profit decreased to $0.3 million or 0.4% of net sales in the current period compared to $16.3 million or 26.6% of net sales in the previous year. Other operating profit decreased to a $0.01 million loss in the current period compared to a $0.9 million gain in the previous period. Interest expense increased to $23.9 million (12.3% of net sales) in the three months ended April 1, 2005 from $20.9 million (12.4% of net sales) for the three months ended March 26, 2004 due to both higher average interest rates and higher average debt levels. Unrealized gain on derivative transactions was $3.1 million or 1.6% of net sales for the three months ending April 1, 2005 compared to $0.8 or 0.5% of net sales in the previous year. The increase in other income was largely attributable to the receipt of $3.0 million from an insurance claim. Income (loss) before income taxes, as a result, was a loss of ($7.0) million or (3.6%) of net sales for the three months ended April 1, 2005 compared to income of $5.3 million or 3.2% of net sales for the three months ended March 26, 2004. 15 Income tax was $2.2 million for the three months ended April 1, 2005 compared to $2.1 million for the three months ended March 26, 2004. The Company's effective tax rate was 36.5% for the three months ended April 1, 2005 compared to 39.7% for the three months ending March 26, 2004. Income taxes in the current period reflect fully reserving losses generated during the quarter. Net income (loss), as a result, was a loss of ($9.3) million for the three months ended April 1, 2005 or (4.8%) of net sales compared to income of $3.2 million for the three months ended March 26, 2004 or 1.9% of net sales. FIRST NINE MONTHS OF FISCAL 2005 COMPARED WITH THE FIRST NINE MONTHS OF FISCAL 2004 Net sales increased by $48.0 million or 11.2% to $475.9 million for the nine months ended April 1, 2005 from $427.9 million for the nine months ended March 26, 2004. Net sales in our Packaging Segment grew 17.4% to $257.3 million in the current period compared to $219.1 million in the comparable period of the previous year primarily due to higher selling values. Net sales in our Tubing Products Segment declined 4.0% to $120.6 million in the first nine months of fiscal 2005 from $125.6 million in the same period of fiscal 2004 primarily due to lower volumes. Other net sales increased 17.8% to $98.1 million in first nine months fiscal 2005 compared to $83.3 million to the first nine months of fiscal 2004 due to both higher volumes and pricing. Cost of Sales increased to $392.3 million for the nine months ended April 1, 2005 from $324.6 million for the nine months ended March 26, 2004. Expressed as a percentage of net sales, cost of sales increased to 82.4% in the current period compared to 75.9% in the prior period primarily due to higher raw material costs. Gross Profit, as a result of the above, decreased to $83.6 million in the current period compared to $103.3 million in the prior period. Expressed as a percentage of net sales, gross profit declined to 17.6% for the nine months ended April 1, 2005 from 24.1% in the comparable period of last year primarily due to higher raw material costs. Our Packaging Segment gross profit increased to $64.9 million for the nine months ended April 1, 2005 from $57.1 million for the nine months ended March 26, 2004 as we were able to raise prices inline with increased raw material costs and we benefited from an improved sales mix at our food packaging operations in the first six months of fiscal 2005. Expressed as a percentage of net sales, Packaging Segment gross profit decreased to 25.2% in the current period from 26.1% in the previous period. Our Tubing Products Segment gross profit decreased to $14.5 million for the nine months ended April 1, 2005 from $40.8 million for the nine months ended March 26, 2004 as we were unable to pass along higher raw material costs to our garden hose customers. Expressed as a percentage of net sales, Tubing Products Segment gross profit decreased to 12.0% in the current period from 32.5% in the previous period. Other gross profit fell to $4.2 million or 4.3% of net sales for the nine months ended April 1, 2005 from $5.4 million or 6.5% of net sales for the nine months ended March 26, 2004 primarily due to higher raw material costs. Selling, General and Administrative expense decreased to $45.5 million in the most recent period from $46.2 million in the comparable period of the previous year, primarily due to lower executive compensation. Measured as a percentage of net sales, selling, general and administrative expense decreased to 9.6% in the current period from 10.8% in the previous period. Integration expense increased in the first nine months of fiscal 2005 to $6.8 million or 1.4% of net sales compared to $4.7 million or 1.1% of net sales for the comparable period of fiscal 2004. These costs relate to reconfiguring and realignment of acquired facilities to conform to the Company's current production and product standards. Operating Profit, as a result of the above, decreased to $31.2 million for the nine months ended April 1, 2005 from $52.4 million for the nine months ended March 26, 2004. Expressed as a percentage of net sales, operating profit decreased to 6.6% in the most recent period from 12.2% in the comparable period of last year. Packaging Segment operating profit increased to $40.4 million (15.7% of net sales) in the current period compared to $36.1 million (16.5% of net sales) in the previous period. Tubing Products Segment operating profit decreased to $4.8 million or 4.0% of net sales in the current period compared to $30.9 million or 24.6% of net sales in the previous period. Other operating profit declined to a ($0.5) million loss in the current period from a $0.8 million profit in the previous period. Interest expense increased to $66.1 million in the nine months ended April 1, 2005 from $62.2 million in the nine months ended March 26, 2004 due to both higher average interest rates and debt levels. Expressed as a percentage of net sales, interest expense 16 decreased to 13.9% in the current period compared to 14.5% in the comparable period of last year. Unrealized (gain) loss on derivative transactions was a ($7.3) million gain or 1.5% of net sales for the nine months ending April 1, 2005 compared to a ($5.0) million gain or 1.2% of net sales for the nine months ending March 26, 2004. The changes were due to changes in the market interest rates underlying our derivatives. The increase in other income was largely attributable to the receipt of $3.0 million from an insurance claim. Income (loss) before income taxes, as a result, was a ($25.3) million loss or (5.3%) of net sales for the nine months ended April 1, 2005 compared to a loss of ($5.7) million or (1.3%) of net sales for the nine months ended March 26, 2004. Income tax expense (benefit) was $3.7 million for the nine months ended April 1, 2005, compared to a benefit of ($2.3) million for the nine months ended March 26, 2004 as operating losses were fully reserved in fiscal 2005. The Company's effective tax rate was 15.4% for the nine months ended April 1, 2005 compared to 40.0% for the nine months ending March 26, 2004. Net loss, as a result, was ($29.0) million or (6.1%) of net sales for the nine months ended April 1, 2005 compared with a loss of ($3.4) million or (0.8%) of net sales for the nine months ended March 26, 2004. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations for the nine months ended April 1, 2005 was $18.7 million compared with $21.0 million in the same period of the prior year. The decrease of $2.3 million was primarily due to a $7.7 million reduction in our normal seasonal inventory build, partially offset by lower profitability and less of a reduction in accounts payable in the current fiscal year compared to the previous fiscal year. Working capital on April 1, 2005 was $220.4 million compared to $229.9 million on July 2, 2004. The $9.5 million decrease was due primarily to a $17.0 million reduction in cash due primarily to the losses incurred in the current year, a $10.1 million reduction in accounts receivable, and a $17.7 million increase in accrued interest, partially offset by a normal $34.4 million seasonal increase in inventory. As of April 1, 2005, the Company had an outstanding balance of $95.2 million under the $100.0 million revolving credit line. This represents an increase of $19.2 million from the $76.0 million outstanding balance as of July 2, 2004. Our Senior debt and our Senior Subordinated Notes include various covenants, the most restrictive of which require a minimum consolidated EBITDA, minimum fixed charge coverage ratio and minimum leverage ratio as defined in the debt agreement. Significant increases in raw material costs, combined with soft demand in our garden hose business brought about by unfavorable weather conditions, have negatively impacted our recent financial performance. As a result, we were not in compliance with the minimum consolidated EBITDA and minimum fixed charge coverage ratio covenants contained in our credit agreement for the fiscal quarters ended December 31, 2004 and April 1, 2005. The lenders under our credit agreement have waived compliance with these covenants until June 10, 2005, by which time we are required to have raised $30 million of equity financing. In addition, our liquidity position has been constrained, causing us to draw down substantially all of our available revolving credit capacity. On April 19, 2005, we received the consents required to amend the covenant in the indenture for our senior subordinated notes which places limitations on indebtedness. The terms of the consents allow us, among other things, to incur incremental debt, not to exceed $90.0 million at any one time outstanding, in ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. The amendment to our senior subordinated note indenture will not become effective until the Company receives $30 million in additional equity. In May, 2005, we received commitments for $30.0 million in new equity contributions from existing equity investors, $19.1 million of which has already been obtained by the Company. The Company expects that its principal uses of cash for the next several years will be debt service, capital expenditures and working capital requirements. Management believes that cash generated from operations plus funds available in the Company's credit facility and the anticipated $30.0 million equity financing will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and other investments which management believes will provide attractive returns. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At April 1, 2005, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $165.9 million. A hypothetical 10% adverse change in interest rates would have an annualized unfavorable impact of approximately $0.7 million on the Company's after-tax earnings and cash flows, assuming the 17 Company's current effective tax rate and assuming no change in the principal amount. Conversely, a reduction in interest rates would favorably impact the Company's after-tax earnings and cash flows in a similar proportion. To mitigate these risks, in June 2000, the Company entered into interest rate Swap and Cap Agreements for a notional amount of $344.0 million. In the normal course of business, Tekni-Plex is exposed to changes in interest rates. The objective in managing its exposure to interest rates is to decrease the volatility that changes in interest rates might have on operations and cash flows. To achieve this objective, Tekni-Plex uses interest rate swaps and caps to hedge a portion of total long-term debt that is subject to variable interest rates. These derivative contracts are considered to be a hedge against changes in the amount of future cash flows associated with the interest payments on variable-rate debt obligations, however, they do not qualify for hedge accounting under FASB 133. Accordingly, the interest rate swaps are reflected at fair value in the Consolidated Balance Sheet and the related gains or losses on these contracts are recorded as an unrealized gain or loss from derivative instruments in the Consolidated Statements of Operations. These are the only derivative instruments held by Tekni-Plex as of April 1, 2005. The fair value of derivative contracts are determined based on quoted market values obtained from a third party. Tekni-Plex has interest rate 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 initial aggregate of $344.0 million of indebtedness with maturity dates ranging from June 2006 through June 2008. In conjunction with these interest rate swap contracts, Tekni-Plex also purchased an interest rate cap. The approximate aggregate fair market value of these interest rate swap contracts was $5.8 million and $13.0 million on April 1, 2005 and July 2, 2004, respectively, and is included in other liabilities on the Consolidated Balance Sheet. For the nine months ending April 1, 2005 Tekni-Plex incurred an unrealized gain of $7.3 million on these contracts which is included in the Consolidated Statement of Operations. Similarly, Tekni-Plex incurred an unrealized gain of $5.0 million for the comparable period of fiscal 2004. 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 July 2, 2004, the Company's independent auditors, 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 "reportable conditions", as defined under standards established by the American Institute of Certified Public Accountants or AICPA: - Lack of quantity of staff which led to issues related to timeliness of financial reporting and year end closing process. - Lack of quantity of staff which led to issues related to process related to estimating chargeback reserves and inventory lower of cost or market analysis, including preparation and review of analysis. Reportable conditions are matters coming to the attention of the independent auditors that in their judgment, relate to significant deficiencies in the design or operation of internal controls and could adversely affect the Company's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. In addition, BDO has advised the Company that they consider these matters, which are listed above, to be "material weaknesses" that, by themselves or in a combination, may increase the possibility that a material misstatement in our financial statements might not be prevented or detected by our employees in the normal course of performing their assigned functions. 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 as of April 1, 2005. Because of the foregoing material weakness identified by BDO in conjunction with our annual audit for fiscal year ending July 2, 2004, the Company's Chief Executive Officer and Chief Financial Officer determined that the Company's disclosure controls and procedures are not effective. However, the Chief Executive Officer and Chief Financial Officer noted that the Company is actively seeking to remedy the deficiencies identified herein including hiring additional staff to assure timeliness of financial reporting as well as reviewing our estimates of chargeback reserves and inventory on a 18 more frequent basis. The Company's Chief Executive Officer and Chief Financial Officer did not note any other material weakness or significant deficiencies in the Company's disclosure controls and procedures during their evaluation. The Company continues to improve and refine its internal controls. This process is ongoing. In the third quarter of fiscal 2005, there were no significant changes in the Company's internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to certain litigation in the ordinary course of business, none of which the Company believes is likely to have a material adverse effect on its consolidated financial position or results of operations. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Securities holders Not applicable Item 5. Subsequent Events Item 6. Exhibits (a) Exhibits 31.1 Certification of Chairman and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chairman and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 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 16, 2005 By: /s/ Dr. F. Patrick Smith ----------------------------------------- Dr. 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 20