10-Q 1 y68694e10vq.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 October 1, 2004 [ ] 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 [ ] 1st Quarter 10Q 2005 TEKNI-PLEX, INC.

PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of October 1, 2004 and July 2, 2004... 3 Consolidated Statements of Operations for the three months ended October 1, 2004 and September 26, 2003............................. 4 Consolidated Statements of Comprehensive Net Income (Loss) for the three months ended October 1, 2004 and September 26, 2003.......... 4 Consolidated Statements of Cash Flows for the three months ended October 1, 2004 and September 26, 2003............................. 5 Notes to Consolidated Financial Statements........................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 14 ITEM 4. CONTROLS AND PROCEDURES.............................................. 14 PART II. OTHER INFORMATION Item 1. Legal proceedings.................................................... 15 Item 2. Changes in securities................................................ 15 Item 3. Defaults upon senior securities...................................... 15 Item 4. Submission of matters to a vote of securities holders................ 15 Item 5. Subsequent events.................................................... 15 Item 6. Exhibits............................................................. 15

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

OCTOBER 1, JULY 2, 2004 2004 (UNAUDITED) AUDITED ---------- ---------- ASSETS CURRENT: Cash $ 39,024 $ 29,735 Accounts receivable, net of allowance for doubtful accounts of $8,730 and $8,408 respectively 90,173 138,109 Inventories 175,857 153,807 Prepaid expenses and other current assets 8,007 6,355 ---------- ---------- TOTAL CURRENT ASSETS 313,061 328,006 PROPERTY, PLANT AND EQUIPMENT, NET 183,400 182,749 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $81,040 AND $80,550 RESPECTIVELY INCLUDING GOODWILL OF $198,532 205,720 207,278 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $9,634 AND $9,122 RESPECTIVELY 9,640 9,652 DEFERRED INCOME TAXES 18,951 18,793 OTHER ASSETS 1,166 1,204 ---------- ---------- $ 731,938 $ 747,682 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 1,960 $ 2,121 Accounts payable - trade 33,984 54,312 Accrued payroll and benefits 12,416 10,945 Accrued interest 23,104 6,763 Accrued liabilities - other 18,750 22,136 Income taxes payable 2,982 1,853 ---------- ---------- TOTAL CURRENT LIABILITIES 93,196 98,130 LONG-TERM DEBT 731,819 731,886 OTHER LIABILITIES 15,243 18,701 ---------- ---------- TOTAL LIABILITIES 840,258 848,717 ---------- ---------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 210,518 210,518 Accumulated other comprehensive income (4,361) (6,000) Retained deficit (93,954) (85,030) Less: Treasury stock (220,523) (220,523) ---------- ---------- TOTAL STOCKHOLDERS' DEFICIT (108,320) (101,035) ---------- ---------- $ 731,938 $ 747,682 ========== ==========

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

THREE MONTHS ENDED OCTOBER 1, 2004 SEPTEMBER 26, 2003 ---------------- ------------------ NET SALES $ 143,461 $ 136,058 COST OF GOODS SOLD 114,086 106,230 ---------------- ---------------- GROSS PROFIT 29,375 29,828 OPERATING EXPENSES: Selling, general and administrative 15,843 15,365 Integration expense 2,603 1,174 ---------------- ---------------- OPERATING PROFIT 10,929 13,289 OTHER EXPENSES Interest expense, net 21,803 17,526 Unrealized (gain) loss on derivative contracts (3,176) (2,454) Other expense 362 118 ---------------- ---------------- INCOME (LOSS) BEFORE INCOME TAXES (8,060) (1,901) Provision (benefit)for income tax 864 (760) ---------------- ---------------- NET (LOSS) $ (8,924) $ (1,141) ================ ================

THREE MONTHS ENDED OCTOBER 1, 2004 SEPTEMBER 26, 2003 ---------------- ------------------ CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME (LOSS) $ (8,924) $ (1,141) COMPREHENSIVE (LOSS), NET OF TAXES Foreign currency translation adjustment 1,639 (126) ---------------- ---------------- COMPREHENSIVE (LOSS) $ (7,285) $ (1,267) ================ ================

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

THREE MONTHS ENDED OCTOBER 1, SEPTEMBER 26, 2004 2003 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (8,924) $ (1,141) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,578 7,079 Unrealized (gain) loss on derivative contracts (3,176) (2,454) Deferred income taxes (145) (556) Changes in operating assets and liabilities: Accounts receivable 48,701 43,609 Inventories (21,706) (10,197) Prepaid expenses and other current assets (935) (416) Income taxes 1,129 (6,034) Accounts payable-trade (20,099) (23,729) Accrued interest 16,344 9,926 Accrued expenses and other liabilities (2,174) 3,828 ------------ ------------ Net cash provided by operating activities 16,593 19,915 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,918) (7,841) Acquisition costs (39) -- Additions to intangibles (240) (297) Deposits and other assets 38 (4) ------------ ------------ Net cash (used in) investing activities (6,159) (8,142) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments/borrowings of long-term debt (467) (3,224) Debt financing costs (500) -- ------------ ------------ Net cash (used in) financing activities (967) (3,224) ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (178) (17) ------------ ------------ Net increase in cash 9,289 8,532 Cash, beginning of period 29,735 48,062 ------------ ------------ Cash, end of period $ 39,024 $ 56,594 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 5,040 $ 7,142 Income taxes 19 141

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 first quarter 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 October 1, 2004. 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 --------------------------- OCTOBER 1, SEPTEMBER 26 2004 2003 ------------ ------------ Net (loss) As reported $ (8,924) $ (1,141) Adjustments for Fair value of Stock options, Net of tax (3) (22) ------------ ------------ Pro forma $ (8,927) $ (1,163)

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

OCTOBER 1, 2004 JULY 2, 2004 ---------------- ---------------- Raw materials $ 60,184 $ 58,881 Work-in-process 14,679 12,668 Finished goods 100,994 82,258 ---------------- ---------------- $ 175,857 $ 153,807 ---------------- ----------------

TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following:

OCTOBER 1, 2004 JULY 2, 2004 ---------------- ---------------- Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $2,166 and $2,260) $ 272,834 $ 272,740 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $418 and $437) 40,418 40,437 Senior Debt: Senior Secured Notes issued November 21, 2003 at 8-3/4% due November 15, 2013 (less unamortized discount of $6,932 and (7,121) 268,068 267,879 Revolving line of credit, expiring June, 2006. At October 1, 2004, the interest rates were 5.84% and 5.79% and at July 2, 2004 the interest rates ranged from 4.80% to 6.50% 76,000 76,000 Term notes due June, 2008, with interest rates at October 1, 2004 and July 2, 2004 of 6.08% and 5.60% 71,077 71,263 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2004 to 2010 5,382 5,688 ---------------- ---------------- 733,779 734,007 Less: Current maturities 1,960 2,121 ---------------- ---------------- $ 731,819 $ 731,886 ================ ================

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. 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 October 1, 2004 Revenues from external customers $ 81,762 $ 31,036 $ 30,663 $ 143,461 Interest expense 6,951 10,231 4,621 21,803 Depreciation and amortization 3,657 2,073 1,592 7,322 Segment income from operations 13,602 2,413 364 16,379 Expenditures for segment assets 3,342 1,103 1,244 5,689 Segment assets as of October 1, 2004 $ 287,499 $ 294,443 $ 139,306 $ 721,248 ------------ ------------ ------------ ------------ Three Months Ended September 26, 2003 Revenues from external customers $ 68,659 $ 39,393 $ 28,006 $ 136,058 Interest expense 5,583 8,216 3,727 17,526 Depreciation and amortization 3,388 1,954 1,481 6,823 Segment income from operations 10,029 8,282 68 18,379 Expenditures for segment assets 4,817 333 2,459 7,609 Segment assets as of July 2, 2004 $ 271,432 $ 326,882 $ 138,705 $ 737,019 ------------ ------------ ------------ ------------

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

THREE MONTHS ENDED OCTOBER 1, 2004 SEPTEMBER 26, 2003 ---------------- ------------------ OPERATING PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 16,379 $ 18,379 Corporate and eliminations (5,450) (5,090) ---------------- ---------------- $ 10,929 $ 13,289 ================ ================ DEPRECIATION AND AMORTIZATION Segment totals $ 7,322 $ 6,823 Corporate 256 256 ---------------- ---------------- Consolidated total $ 7,578 $ 7,079 ================ ================ EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 5,689 $ 7,609 Other unallocated expenditures 229 232 ---------------- ---------------- Consolidated total $ 5,918 $ 7,841 ================ ================

OCTOBER 1, 2004 JULY 2, 2004 ---------------- ---------------- ASSETS Total assets from reportable segments $ 721,248 $ 737,019 Other unallocated amounts 10,690 10,663 ---------------- ---------------- Consolidated total $ 731,938 $ 747,682 ================ ================

GEOGRAPHIC INFORMATION

THREE MONTHS ENDED OCTOBER 1, 2004 SEPTEMBER 26, 2003 ---------------- ------------------ REVENUES United States $ 122,110 $ 118,174 International 21,351 17,884 ---------------- ---------------- Total $ 143,461 $ 136,058 ================ ================

OCTOBER 1, 2004 JULY 2, 2004 ---------------- ---------------- LONG-LIVED ASSETS United States $ 384,214 $ 385,120 International 34,663 34,556 ---------------- ---------------- Total $ 418,877 $ 419,676 ================ ================

9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) 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. Consolidated Statement of Operations (in thousands) (Unaudited) For the three months ended October 1, 2004

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------ ------------ ------------ ------------ Net sales $ 143,461 $ 42,235 $ 79,875 $ 21,351 Cost of goods sold 114,086 30,908 67,165 16,013 ------------ ------------ ------------ ------------ Gross profit 29,375 11,327 12,710 5,338 Operating expenses: Selling, General and administrative 15,843 7,563 6,228 2,052 Integration expense 2,603 555 2,048 -- ------------ ------------ ------------ ------------ Operating profit 10,929 3,209 4,434 3,286 Interest expense, net 21,803 21,783 (16) 36 Unrealized gain on derivative contracts (3,176) (3,176) -- -- Other expense 362 (235) (203) 800 ------------ ------------ ------------ Income (loss) before income taxes Provision (benefit) for income taxes (8,060) (15,163) 4,653 2,450 Net income (loss) 864 (1,600) 1,600 864 ------------ ------------ ------------ ------------ $ (8,924) $ (13,563) $ 3,053 $ 1,586 ============ ============ ============ ============

Consolidated Statement of Operations (in thousands) For the three months ended September 26, 2003

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------ ------------ ------------ ------------ Net sales $ 136,058 $ 33,648 $ 84,526 $ 17,884 Cost of sales 106,230 26,110 66,071 14,049 ------------ ------------ ------------ ------------ Gross profit 29,828 7,538 18,455 3,835 Operating expenses: Selling, General and administrative 15,365 6,692 6,905 1,768 Integration Expense 1,174 -- 1,174 -- ------------ ------------ ------------ ------------ Operating profit 13,289 846 10,376 2,067 Interest expense, net 17,526 17,498 (16) 44 Unrealized loss on derivative contracts (2,454) (2,454) -- -- Other expense (income) 118 (194) (315) 627 ------------ ------------ ------------ ------------ Income (loss) before provision (benefit) for income taxes (1,901) (14,004) 10,707 1,396 Provision (benefit) for income taxes (760) (5,600) 4,289 551 ------------ ------------ ------------ ------------ Net income(loss) $ (1,141) $ (8,404) $ 6,418 $ 845 ============ ============ ============ ============

10 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at October 1, 2004

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ---------------- ---------------- ---------------- ---------------- ---------------- Current assets $ 313,061 $ -- $ 45,268 $ 196,073 $ 71,720 Property, plant and equipment, net 183,400 -- 43,818 113,831 25,751 Intangible assets 205,720 -- 15,190 179,799 10,731 Investment in subsidiaries -- (565,277) 565,277 -- -- Deferred income taxes 18,951 -- 30,032 (9,030) (2,051) Deferred financing costs 9,640 -- 9,524 116 -- Other assets 1,166 (608,583) 331,724 277,793 232 ---------------- ---------------- ---------------- ---------------- ---------------- Total assets $ 731,938 $ (1,173,860) $ 1,040,833 $ 758,582 $ 106,383 ================ ================ ================ ================ ================ Current liabilities $ 93,196 $ -- $ 43,407 $ 28,059 $ 21,730 Long-term debt 731,819 -- 727,655 -- 4,164 Other long-term liabilities 15,243 (608,583) 375,116 226,361 22,349 ---------------- ---------------- ---------------- ---------------- ---------------- Total liabilities 840,258 (608,583) 1,146,178 254,420 48,243 ---------------- ---------------- ---------------- ---------------- ---------------- Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765 Retained earnings (deficit) (93,954) (251,748) (93,954) 214,622 37,126 Cumulative currency translation adjustment (4,361) -- (1,367) (7,243) 4,249 Less: Treasury stock (220,523) -- (220,523) -- -- ---------------- ---------------- ---------------- ---------------- ---------------- Total equity (108,320) (565,277) (105,345) 504,162 58,140 ---------------- ---------------- ---------------- ---------------- ---------------- Total liabilities and deficit $ 731,938 $ (1,173,860) $ 1,040,833 $ 758,582 $ 106,383 ================ ================ ================ ================ ================

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 207,278 -- 16,471 179,997 10,810 Investment in subsidiaries -- (560,638) 560,638 -- -- Deferred financing costs, net 9,652 -- 9,536 116 -- Deferred taxes 18,793 -- 30,032 (9,205) (2,034) Other long-term 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 loss (6,000) -- (1,367) (7,228) 2,595 Less: Treasury stock (220,523) -- (220,523) -- -- ---------------- ---------------- ---------------- ---------------- ---------------- Total Stockholders' 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 ================ ================ ================ ================ ================

11 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Condensed Consolidated Cash Flows (Unaudited) For the three months ended October 1, 2004

NON- TOTAL ISSUER GUARANTOR GUARANTORS ---------------- ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities $ 16,593 $ (7,130) $ 17,038 $ 6,685 ---------------- ---------------- ---------------- ---------------- Cash flows from Investing activities: Capital expenditures (5,918) (1,112) (4,552) (254) Additions to intangibles (240) (92) -- (148) Deposits and other assets 38 38 -- -- Acquisition costs (39) (39) -- -- ---------------- ---------------- ---------------- ---------------- Net cash used in investing activities (6,159) (1,205) (4,552) (402) ---------------- ---------------- ---------------- ---------------- Cash flows from financing activities Borrowing / (Repayment) of long term debt (467) 78 -- (545) Debt Financing costs (500) (500) -- -- Change in intercompany accounts -- 7,444 (17,278) 9,834 ---------------- ---------------- ---------------- ---------------- Net cash flows provided by (used in) financing activities (967) 7,022 (17,278) 9,289 Effect of exchange rate changes on cash (178) -- -- (178) ---------------- ---------------- ---------------- ---------------- Net increase (decrease) in cash 9,289 (1,313) (4,792) 15,394 Cash, beginning of period 29,735 11,890 8,923 8,922 ---------------- ---------------- ---------------- ---------------- Cash, end of period $ 39,024 $ 10,577 $ 4,131 $ 24,316 ================ ================ ================ ================

For the three months ended September 26, 2003

NON- TOTAL ISSUER GUARANTORS GUARANTORS ---------------- ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities $ 19,915 $ (13,771) $ 22,604 $ 11,082 ---------------- ---------------- ---------------- ---------------- Cash flows from Investing activities: Capital expenditures (7,841) (3,754) (3,367) (720) Additions to intangibles (297) (50) (193) (54) Deposits and other assets (4) (4) -- -- ---------------- ---------------- ---------------- ---------------- Net cash provided by (used in) provided by investing activities (8,142) (3,808) (3,560) (774) ---------------- ---------------- ---------------- ---------------- Cash flows from financing activities Repayment of long term debt (3,224) (3,034) -- (190) Payment for treasury stock -- 33,086 (30,687) (2,399) ---------------- ---------------- ---------------- ---------------- Change in intercompany accounts Net cash flows provided by (used in) (3,224) 30,052 (30,687) (2,589) ---------------- ---------------- ---------------- ---------------- financing activities (17) -- -- (17) ---------------- ---------------- ---------------- ---------------- Effect of exchange rate changes on cash 8,532 12,473 (11,643) 7,702 Net increase (decrease) in cash 48,062 20,900 19,650 7,512 ---------------- ---------------- ---------------- ---------------- Cash, beginning of period $ 56,594 $ 33,373 $ 8,007 $ 15,214 ================ ================ ================ ================ Cash, end of period

12 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 through October 1, 2004.

BALANCE COSTS CHARGED TO BALANCE JULY 2004 RESERVE OCTOBER 1, 2004 ------------ ---------------- --------------- Legal, environmental and other $ 1,161 $ 13 1,148 ------------ ------------ --------------- $ 1,161 $ 13 $ 1,148 ============ ============ ===============

The remaining legal and environmental costs are expected to be paid over the next four years. In October 2001, the Company purchased certain assets and assumed certain liabilities of Swan Hose for approximately $63,600. The acquisition was recorded under the purchase method, whereby Swan's net assets were recorded at estimated fair value and its operations have been reflected in the statement of operations since that date. The components of the Integration reserve and activity through October 1, 2004 is as follows:

BALANCE BALANCE COSTS CHARGED OCTOBER 1, JULY 2004 TO RESERVE 2004 ------------ ------------- --------------- Legal and environmental $ 1,281 $ 90 1,191 ------------ ------------- --------------- $ 1,281 $ 90 $ 1,191 ============ ============= ===============

* $2,000 adjustment was recorded to beginning balance Integration reserve as an adjustment to the original estimates prepared by the Company. Goodwill was adjusted for the aforementioned amount. These adjustments were recorded during the fiscal year ended June 27, 2003. The remaining legal and environmental costs are expected to extend over the next four years. 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2005 COMPARED WITH THE FIRST QUARTER OF FISCAL 2004 Net sales increased by $7.4 million or 5.4% to $143.5 million for the three months ended October 1, 2004 from $136.1 million for the three months ended September 26, 2003. The increase in net sales was largely attributable to higher selling prices and higher volumes for our packaging products, partially offset by weaker volumes at our garden hose unit. Net sales for our Tubing Segment decreased 21.2% to $31.0 million in the current period from $39.4 million in the prior period due to weather related weak demand for garden hose in July and August. Net sales for our Packaging Segment increased 19.1% to $81.8 million in the current period from $68.7 million in the prior period due higher prices and higher volumes. Other net sales increased 9.5% to $30.7 million in the current period compared to $28.0 million last year, primarily due to higher volumes. Cost of sales increased to $114.1 million for the three months ended October 1, 2004 from $106.2 million for the three months ended September 26, 2003. Expressed as a percentage of net sales, cost of sales increased to 79.5% for the three months ended October 1, 2004 from 78.1% for the three months ended September 26, 2003 primarily due to our inability to pass through higher material costs to our garden hose customers. Gross profit, as a result, remained essentially flat at $29.4 million for the three months ended October 1, 2004 from $29.8 million for the three months ending September 26, 2003. Expressed as a percentage of net sales, gross profit declined to 20.5% in the current period from 21.9% in the previous year. Our Tubing Segment gross profit decreased to $5.7 million or 18.4% of net sales in the first quarter of fiscal 2005 compared to $11.6 million or 29.6% in the first quarter of the previous year largely due to our inability to pass through higher raw material cost to our garden hose customers. Gross profit at our Packaging Segment increased to $21.7 million in the most recent period from $16.6 million in the comparable period of last year as we were successful in passing through rising raw material costs to our packaging customers. In addition, our Packaging Segment benefited from an improved product mix at our food packaging operations. Measured as a percentage of net sales, Packaging gross profit improved to 26.6% in fiscal 2005 from 24.1% in fiscal 2004. Other gross profit increased to $1.9 million in the current period from $1.6 million in the comparable period of the previous year as we realized improvements at our recycling operations. Measured as a percentage of net sales, Other gross profit increased to 6.3% in the first quarter of fiscal 2005 compared to 5.7% in the same period of the previous year. Selling, general and administrative expense increased slightly to $15.8 million in the three months ended October 1, 2004 compared to $15.4 million in the three months ended September 26, 2003. The ratio of selling, general and administrative expense to net sales decreased to 11.0% for the three months ending October 1, 2004 from 11.3% in the comparable period of last year. Integration expense increased to $2.6 million in the current period from $1.2 million last year due to the inclusion of expenses associated with the closing of our Rockaway, New Jersey facility and consolidating Rockaway's operations into our Clayton, North Carolina and our Clinton, Illinois facilities as well as the integration expenses associated with our recent acquisition of Genpak's egg carton business. Operating profit, as a result of the foregoing, decreased to $10.9 million or 7.6% of net sales for the three months ended October 1, 2004 from $13.3 million or 9.8% of net sales for the three months ended September 26, 2003. Operating profit for our Tubing Segment decreased to $2.4 million in the current period from $8.3 million in the prior period. Measured as a percentage of net sales, Tubing operating profit decreased to 7.8% in the current period from 21.0% in the prior period due to weak garden hose sales and higher raw material costs that we were unable to pass through to our garden hose customers. Despite a rapid run-up in material costs, our operating Profit for our Packaging Segment increased to $13.6 million in the current period from $10.0 million in the prior period due higher volumes and higher selling prices as well as improved sales mix. Measured as a percent of net sales, operating profit for our Packaging Segment increased to 16.6% in the current period from 14.6% in the prior period. Other operating profit increased slightly to $0.4 million in the current period compared to $0.1 million in the previous year. Measured as a percentage of net sales, Other Operating profit increased to 1.2% in the first quarter of fiscal 2005 compared to 0.2% in the same period of the previous year. Interest expense increased to $21.8 million for the three months ended October 1, 2004 from $17.5 million in the three months ended September 26, 2003, primarily due to higher interest rates. Measured as a percentage of net sales, interest expense increased to 15.2% in the current period compared to 12.9% in the previous period. The unrealized gain on derivative contracts increased to $3.2 million in the current period as compared to $2.5 million for the three months ended September 26, 2003. Loss before income taxes, as a result, was a loss of $8.1 million for the three months ended October 1, 2004 compared to a loss of $1.9 million for the three months ended September 26, 2003. Provision for income taxes was $0.9 million for the three months ended October 1, 2004, compared to a benefit of $0.8 million for the 14 three months ended September 26, 2003, primarily attributable to reserving losses generated in the three months ended October 1, 2004. Net loss, as a result, was a loss of $8.9 million for the three months ended October 1, 2004 compared with a loss of $1.1 million for the three months ended September 26, 2003. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the three months ended October 1, 2004 was $16.6 million compared with $19.9 million in the same period of the prior year. The $3.3 million decrease was due primarily to lower earnings as well as a larger increase in inventories in fiscal 2005 compared to fiscal 2004, particularly at our garden hose operations where we built seasonal inventories early in the year in anticipation of rising raw material costs later in the year. Working capital on October 1, 2004 was $219.9 million compared to $229.9 million on June 27, 2003. The $10.0 million decrease in working capital is largely attributable to a normal seasonal decline in accounts receivable partially offset by a normal seasonal increase in inventories as well as a decline in accounts payable. This seasonal fluctuation also resulted in a $9.4 million increase in cash. As of October 1, 2004, the Company had an outstanding balance of $76.0 million under the $100.0 million revolving credit line. The Company's capital expenditures for the three months ended October 1, 2004 and September 26, 2003 were $5.9 million and $7.8 million respectively. The Company continues to expect 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 will be sufficient to meet its needs and to provide it with the flexibility to make capital expenditures and acquisitions which management believes will provide an attractive return on investment. However, the probability exists that the Company may need additional financing to take advantage of all the acquisition opportunities that might arise. There can be no assurance that such financing will be available in the amounts and terms acceptable to the Company. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk inherent in certain debt instruments. At October 1, 2004, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $147.1 million. A hypothetical 1% adverse change in interest rates would have an annualized unfavorable impact of approximately $0.9 million on the Company's after-tax earnings and cash flows, assuming the 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. 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. 15 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 October 1, 2004. 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 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 first 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 None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of Chairman and Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chairman and Chief Executive Officer 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 (b) Reports on Form 8-K None 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEKNI-PLEX, INC. November 15, 2004 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 17