10-Q 1 y91465e10vq.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 September 26, 2003 [ ] 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 [ ] TEKNI-PLEX, INC.

PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 26, 2003 and June 27, 2003............................................ 3 Consolidated Statements of Operations for the three months ended September 26, 2003 and September 27, 2002....... 4 Consolidated Statements of Comprehensive Loss for the three months ended September 26, 2003 and September 27, 2002........................................... 4 Consolidated Statements of Cash Flows for the three months ended September 26, 2003 and September 27, 2002....... 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 and reports on Form 8-K....................................... 15

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

SEPTEMBER 26, 2003 JUNE 27, (UNAUDITED) 2003 ------------- ------------- ASSETS CURRENT: Cash $ 56,594 $ 48,062 Accounts receivable, net of allowance for doubtful accounts of $9,258 and $8,398 respectively 91,896 135,719 Inventories 171,526 161,333 Deferred income taxes 6,735 6,735 Prepaid expenses and other current assets 8,393 7,939 ------------- ------------- TOTAL CURRENT ASSETS 335,144 359,788 PROPERTY, PLANT AND EQUIPMENT, NET 181,228 179,521 INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $79,579 AND $79,332 RESPECTIVELY 213,202 213,152 DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $7,522 AND $6,899 RESPECTIVELY 11,228 11,851 DEFERRED INCOME TAXES 19,729 19,172 OTHER ASSETS 1,284 1,280 ------------- ------------- $ 761,815 $ 784,764 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current portion of long-term debt $ 22,991 $ 16,709 Accounts payable - trade 28,572 52,371 Accrued payroll and benefits 10,651 9,525 Accrued interest 16,241 6,317 Accrued liabilities - other 21,870 19,143 Income taxes payable 24 6,058 ------------- ------------- TOTAL CURRENT LIABILITIES 100,349 110,123 LONG-TERM DEBT 703,341 712,775 OTHER LIABILITIES 24,203 26,677 ------------- ------------- TOTAL LIABILITIES 827,893 849,575 ------------- ------------- STOCKHOLDERS' DEFICIT: Common stock -- -- Additional paid-in capital 188,018 188,018 Other comprehensive income (1,863) (1,737) Accumulated deficit (31,710) (30,569) Less: Treasury stock (220,523) (220,523) ------------- ------------- TOTAL STOCKHOLDERS' DEFICIT (66,078) (64,811) ------------- ------------- $ 761,815 $ 784,764 ============= =============

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

THREE MONTHS ENDED SEPTEMBER 26, 2003 SEPTEMBER 27, 2002 ------------------ ------------------ NET SALES $ 136,058 $ 140,583 COST OF GOODS SOLD 106,230 110,691 ------------------ ------------------ GROSS PROFIT 29,828 29,892 OPERATING EXPENSES: Selling, general and administrative 15,365 13,911 Integration expense 1,174 -- ------------------ ------------------ OPERATING PROFIT 13,289 15,981 OTHER EXPENSES Interest expense 17,526 17,662 Unrealized (gain) loss on derivative contracts (2,454) 5,344 Other expense 118 303 ------------------ ------------------ INCOME (LOSS) BEFORE INCOME TAXES (1,901) (7,328) Provision (benefit)for income tax (760) (2,560) ------------------ ------------------ NET (LOSS) $ (1,141) $ (4,768) ================== ================== CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME NET (LOSS) $ (1,141) $ (4,768) COMPREHENSIVE (LOSS), NET OF TAXES Foreign currency translation adjustment (126) (438) ------------------ ------------------ COMPREHENSIVE (LOSS) $ (1,267) $ (5,206) ================== ==================

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

THREE MONTHS ENDED SEPTEMBER 26, SEPTEMBER 27, 2003 2002 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) $ (1,141) $ (4,768) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 7,079 7,475 Unrealized (gain) loss on derivative contracts (2,454) 5,344 Deferred income taxes (556) (3,041) Changes in operating assets and liabilities: Accounts receivable 43,609 36,743 Inventories (10,197) (9,019) Prepaid expenses and other current assets (416) (3,445) Income taxes (6,034) 1,280 Accounts payable-trade (23,729) (11,793) Accrued interest 9,926 11,964 Accrued expenses and other liabilities 3,828 2,511 ------------- ------------- Net cash provided by operating activities 19,915 33,251 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,841) (6,033) Acquisition costs -- (16,806) Additions to intangibles (297) (32) Deposits and other assets (4) 104 ------------- ------------- Net cash (used in) investing activities (8,142) (22,767) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments/borrowings of long-term debt (3,224) (10,658) Receipt of additional paid-in capital -- 392 Debt financing costs -- (189) ------------- ------------- Net cash (used in) financing activities (3,224) (10,455) ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (17) (129) ------------- ------------- Net increase (decrease) in cash 8,532 (100) Cash, beginning of period 48,062 28,199 ------------- ------------- Cash, end of period $ 56,594 $ 28,099 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for: Interest $ 7,142 $ 5,191 Income taxes 141 722

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 and three months of 2003 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 period presented and the consolidated balance sheet at September 26, 2003. 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 June 27, 2003. NOTE 2 New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 does not currently apply to the Company. 6 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) NOTE 3 - INVENTORIES Inventories as of September 26, 2003 and June 27, 2003 are summarized as follows:

SEPTEMBER 26, 2003 JUNE 27, 2003 ------------------ ------------------ Raw materials $ 53,088 $ 51,810 Work-in-process 11,307 10,219 Finished goods 107,131 99,304 ------------------ ------------------ $ 171,526 $ 161,333 ------------------ ------------------

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

SEPTEMBER 26, 2003 JUNE 27, 2003 ------------------ ------------------ Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June 15, 2010. (less unamortized discount of $2,542 and $2,637) $ 272,458 $ 272,363 Senior Subordinated Notes issued May 2002 at 12-3/4% due June 15, 2010 (plus unamortized premium of $493 and $512) 40,493 40,512 Senior Debt: Revolving line of credit, expiring June, 2006. At September 26, 2003, the interest rate was 4.125% 91,000 91,000 Term notes due June, 2006 and June, 2008, with interest rates at September 26, 2003 of 4.125% and 4.625% 316,680 319,790 Other, primarily foreign term loans, with interest rates ranging from 4.44% to 5.44% and maturities from 2003 to 2010 5,701 5,819 ------------------ ------------------ 726,332 729,484 Less: Current maturities 22,991 16,709 ------------------ ------------------ $ 703,341 $ 712,775 ================== ==================

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, beginning in fiscal year 2002, 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. The prior year has been restated to conform to this presentation. 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 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 September 26, 2003 285,480 305,708 $ 143,913 735,101 --------- --------- --------- --------- Three Months Ended September 27, 2002 Revenues from external customers $ 70,703 $ 43,444 $ 26,436 $ 140,583 Interest expense 5,624 8,291 3,747 17,662 Depreciation and amortization 4,208 1,665 1,346 7,219 Segment income from operations 12,312 7,558 139 20,009 Expenditures for segment assets 716 3,887 1,267 5,870 Segment assets as of June 27, 2003 297,303 322,822 141,638 761,763

SEPTEMBER 26, 2003 SEPTEMBER 27, 2002 ------------------ ------------------ OPERATING PROFIT OR LOSS Total operating profit for reportable segments before income taxes $ 18,379 $ 20,009 Corporate and eliminations (5,090) (4,028) ------------------ ------------------ $ 13,289 $ 15,981 ================== ================== DEPRECIATION AND AMORTIZATION Segment totals $ 6,823 $ 7,219 Corporate 256 256 ------------------ ------------------ Consolidated total $ 7,079 $ 7,475 ================== ================== EXPENDITURES FOR SEGMENT ASSETS Total expenditures from reportable segments $ 7,609 $ 5,870 Other unallocated expenditures 232 163 ------------------ ------------------ Consolidated total $ 7,841 $ 6,033 ================== ==================

SEPTEMBER 26, 2003 JUNE 27, 2003 ------------------ ------------------ ASSETS Total assets from reportable segments $ 735,101 $ 761,763 Other unallocated amounts 26,714 23,001 ------------------ ------------------ Consolidated total $ 761,815 $ 784,764 ================== ==================

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

SEPTEMBER 26, 2003 SEPTEMBER 27, 2002 ------------------ ------------------ REVENUES United States $ 118,174 $ 124,539 International 17,884 16,044 ------------------ ------------------ Total $ 136,058 $ 140,583 ================== ==================

SEPTEMBER 26, 2003 JUNE 27, 2003 ------------------ ------------------ LONG-LIVED ASSETS United States $ 379,377 $ 377,406 International 47,294 47,570 ------------------ ------------------ Total $ 426,671 $ 424,976 ================== ==================

NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Consolidated Statement of Operations (in thousands) (Unaudited) 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 goods sold 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 gain on derivative contracts (2,454) (2,454) -- -- Other expense 118 (194) (315) 627 ------------ ------------ ------------ ------------ Income (loss) before 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 ============ ============ ============ ============

Consolidated Statement of Operations (in thousands) For the three months ended September 27, 2002

NON- TOTAL ISSUER GUARANTORS GUARANTORS ------------ ------------ ------------ ------------ Net sales $ 140,583 $ 39,197 $ 85,342 $ 16,044 Cost of sales 110,691 27,435 71,723 11,533 ------------ ------------ ------------ ------------ Gross profit 29,892 11,762 13,619 4,511 Operating expenses: Selling, General and administrative 13,911 6,094 6,377 1,440 ------------ ------------ ------------ ------------ Operating profit 15,981 5,668 7,242 3,071 Interest expense, net 17,662 17,665 (23) 20 Unrealized loss on derivative contracts 5,344 5,344 -- -- Other expense (income) 303 69 (279) 513 ------------ ------------ ------------ ------------ Income (loss) before provision (benefit) for income taxes (7,328) (17,410) 7,544 2,538 Provision (benefit) for income taxes (2,560) (6,090) 2,640 890 ------------ ------------ ------------ ------------ Net income(loss) $ (4,768) $ (11,320) $ 4,904 $ 1,648 ============ ============ ============ ============

9 TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) Condensed Consolidated Balance Sheet - at September 26, 2003

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ------------ ------------ ------------ ------------ ------------ Current assets $ 335,144 $ -- $ 69,139 $ 204,771 $ 61,234 Property, plant and equipment, net 181,228 -- 44,474 111,617 25,137 Intangible assets 213,202 -- 9,925 191,048 12,229 Investment in subsidiaries -- (543,830) 543,830 -- -- Deferred income taxes 19,729 -- 27,637 (5,610) (2,298) Deferred financing costs 11,228 -- 11,112 116 -- Other assets 1,284 (351,426) 49,689 290,795 12,226 ------------ ------------ ------------ ------------ ------------ Total assets $ 761,815 $ (895,256) $ 755,806 $ 792,737 $ 108,528 ============ ============ ============ ============ ============ Current liabilities $ 100,349 $ -- $ 53,541 $ 28,920 $ 17,888 Long-term debt 703,341 -- 698,832 -- 4,509 Other long-term liabilities 24,203 (351,426) 68,543 269,015 38,071 ------------ ------------ ------------ ------------ ------------ Total liabilities 827,893 (351,426) 820,916 297,935 60,468 ------------ ------------ ------------ ------------ ------------ Additional paid-in capital 188,018 (313,420) 187,998 296,784 16,656 Retained earnings (deficit) (31,710) (230,410) (31,710) 201,589 28,821 Cumulative currency translation (1,863) -- (875) (3,571) 2,583 adjustment Less: Treasury stock (220,523) -- (220,523) -- -- ------------ ------------ ------------ ------------ ------------ Total equity (66,078) (543,830) (65,110) 494,802 48,060 ------------ ------------ ------------ ------------ ------------ Total liabilities and deficit $ 761,815 $ (895,256) $ 755,806 $ 792,737 $ 108,528 ============ ============ ============ ============ ============

Condensed Consolidated Balance Sheet - at June 27, 2003

NON- TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS ------------ ------------ ------------ ------------ ------------ Current assets $ 359,788 $ -- $ 56,727 $ 241,910 $ 61,151 Property, plant and equipment, net 179,521 -- 42,411 111,880 25,230 Intangible assets 213,152 -- 8,713 192,049 12,390 Investment in subsidiaries -- (535,567) 535,567 -- -- Deferred income taxes 19,172 -- 21,204 64 (2,096) Deferred financing costs, net 11,851 -- 11,735 116 -- Other assets 1,280 (358,967) 81,667 266,534 12,046 ------------ ------------ ------------ ------------ ------------ Total assets $ 784,764 $ (894,534) $ 758,024 $ 812,553 $ 108,721 ============ ============ ============ ============ ============ Current liabilities $ 110,123 $ -- $ 46,758 $ 43,487 $ 19,878 Long-term debt 712,775 -- 708,115 -- 4,660 Other long-term liabilities 26,677 (358,967) 67,887 279,805 37,952 ------------ ------------ ------------ ------------ ------------ Total liabilities 849,575 (358,967) 822,760 323,292 62,490 ------------ ------------ ------------ ------------ ------------ Additional paid-in capital 188,018 (312,420) 187,998 296,784 15,656 Retained earnings (deficit) (30,569) (223,147) (30,569) 195,171 27,976 Other comprehensive loss (1,737) -- (1,642) (2,694) 2,599 Less: Treasury stock (220,523) -- (220,523) -- -- ------------ ------------ ------------ ------------ ------------ Total Stockholders' deficit (64,811) (535,567) (64,736) 489,261 46,231 ------------ ------------ ------------ ------------ ------------ Total liabilities and deficit $ 784,764 $ (894,534) $ 758,024 $ 812,553 $ 108,721 ============ ============ ============ ============ ============

10 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 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) Change in intercompany accounts -- 33,086 (30,687) (2,399) ---------- ---------- ---------- ---------- Net cash flows provided by (used in) financing activities (3,224) 30,052 (30,687) (2,589) ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash (17) -- -- (17) ---------- ---------- ---------- ---------- Net increase (decrease) in cash 8,532 12,473 (11,643) 7,702 Cash, beginning of period 48,062 20,900 19,650 7,512 ---------- ---------- ---------- ---------- Cash, end of period $ 56,594 $ 33,373 $ 8,007 $ 15,214 ========== ========== ========== ==========

For the three months ended September 27, 2002

NON- TOTAL ISSUER GUARANTORS GUARANTORS ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities $ 33,251 $ (3,838) $ 30,122 $ 6,967 ---------- ---------- ---------- ---------- Cash flows from Investing activities: Capital expenditures (6,033) 242 (5,122) (1,153) Additions to intangibles (16,806) -- (16,806) -- Deposits and other assets (32) (32) -- -- Net cash provided by (used in) provided by investing activities 104 71 1 32 ---------- ---------- ---------- ---------- Cash flows from financing activities (22,767) 281 (21,927) (1,121) ---------- ---------- ---------- ---------- Repayment of long term debt Payment for treasury stock (10,658) (10,924) -- 266 Change in intercompany accounts 392 392 -- -- Net cash flows provided by (used in) (189) -- -- (189) financing activities -- 17,879 (18,038) 159 ---------- ---------- ---------- ---------- Effect of exchange rate changes on cash Net increase (decrease) in cash (10,455) 7,347 (18,038) 236 ---------- ---------- ---------- ---------- Cash, beginning of period (129) -- -- (129) ---------- ---------- ---------- ---------- Cash, end of period (100) 3,790 (9,843) 5,953 28,199 9,035 10,660 8,504 ---------- ---------- ---------- ---------- $ 28,099 $ 12,825 $ 817 $ 14,457 ========== ========== ========== ==========

11 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 September 26, 2003.

BALANCE COSTS CHARGED TO BALANCE JULY 2002 RESERVE SEPTEMBER 26, 2003 --------- ------- ------------------ Reduction in personnel and related costs $ 1,000 $ 1,000 $ -- Legal, environmental and other 3,500 1,453 2,047 ------------- -------------- -------------- $ 4,500 $ 2,453 $ 2,047 ============= ============== ==============

The remaining legal and environmental costs are expected to be paid over the next two years. The proforma results of operations for the quarter ended September 27, 2002, assuming ELM was acquired on June 30, 2001, would not be materially different from the historical presentation. 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 September 26, 2003 is as follows:

BALANCE BALANCE COSTS CHARGED ADJUSTMENTS SEPTEMBER 26, OCTOBER 2001 TO RESERVE TO RESERVE 2003 ------------ ------------- ----------- ------------- Cost to close duplicate facilities $ 3,500 $ 1,441 $ (2,059) $ -- Reduction in personnel and related costs 2,100 718 (1,382) -- Legal and environmental 1,275 1,847 2,625 2,053 Manufacturing reconfiguration 1,455 175 (1,280) -- Other 1,670 1,766 96 -- ------------ ------------- ----------- ------------- $ 10,000 $ 5,947 $ (2,000)* $ 2,053 ============ ============= =========== =============

* $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 two years. 12 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER OF FISCAL 2004 COMPARED WITH THE FIRST QUARTER OF FISCAL 2003 Net sales declined by $4.5 million or 3.2% to $136.1 million for the three months ended September 26, 2003 from $140.6 million for the three months ended September 27, 2002. The decrease in net sales was largely attributable to lower garden hose sales due to unusually rainy weather throughout much of North America in July and August. Net sales for our Tubing Segment decreased $4.1 million to $39.4 million in the current period from $43.4 million in the prior period. Net sales for our Packaging Segment decreased $2.0 million or 2.8% to $68.7 million in the current period from $70.7 million in the prior period due to lower egg carton sales in the quarter. Other net sales increased 5.9% to $28.0 million in the current period compared to $26.4 million last year. Cost of sales decreased to $106.2 million for the three months ended September 26, 2003 from $110.7 million for the three months ended September 27, 2002. Expressed as a percentage of net sales, cost of sales decreased to 78.1% for the three months ended September 26, 2003 from 78.7% for the three months ended September 27, 2002 primarily due to improved profitability at our garden hose unit. Gross profit, as a result, remained essentially flat at $29.8 million for the three months ended September 26, 2003 from $29.9 million for the three months ending September 27, 2002. Expressed as a percentage of net sales, gross profit improved to 21.9% in the current period from 21.3% in the previous year. Our Tubing Segment gross profit increased to $11.6 million or 29.6% of net sales in the first quarter of fiscal 2004 compared to $10.8 million or 24.9% in the first quarter of the previous year due to improved profitability at our garden hose unit stemming from our continuous cost reduction program. Gross profit at our Packaging Segment declined to $16.6 million in the most recent period from $17.3 million in the comparable period of last year due to lower sales volume. Measured as a percentage of net sales, gross profit declined to 24.1% in fiscal 2004 from 24.5% in fiscal 2003. Other gross profit decreased slightly to $1.6 million in the current period from $1.7 million in the comparable period of the previous year. Measured as a percentage of net sales, other gross profit decreased to 5.8% in the first quarter of fiscal 2004 compared to 6.5% in the same period of the previous year. Selling, general and administrative expense increased to $15.4 million in the three months ended September 26, 2003 compared to $13.9 million in the three months ended September 27, 2002 due to higher selling expense associated with our expanding picnic plate business as well as higher legal, and insurance related expenses due to timing differences. The ratio of selling, general and administrative expense to net sales increased to 11.3% for the three months ending September 26, 2003 from 9.9% in the comparable period of last year. Integration expense of $1.2 million represents costs to reconfigure and realign the Elm production facilities to conform to our current production and product standards. Operating profit, as a result of the foregoing, decreased to $13.3 million or 9.8% of net sales for the three months ended September 26, 2003 from $16.0 million or 11.4% of net sales for the three months ended September 27, 2002. Operating profit for our Tubing Segment increased to $8.3 million in the current period from $7.6 million in the prior period. Measured as a percentage of net sales, operating profit increased to 21.0% in the current period from 17.4% in the prior period. Operating Profit for our Packaging Segment decreased to $10.0 million in the current period from $12.3 million in the prior period due to lower egg carton sales volume and higher selling expense associated with our picnic plate business. Measured as a percent of net sales, operating profit for our Packaging Segment decreased to 14.6% in the current period from 17.4% in the prior period. Other operating profit was flat at 0.1 million in the current period compared to the previous year. Measured as a percentage of net sales, other operating profit decreased slightly to 0.2% in the first quarter of fiscal 2004 compared to 0.5% in the same period of the previous year. Interest expense decreased to $17.5 million in the three months ended September 26, 2003 from $17.7 million in the three months ended September 27, 2002. Measured as a percentage of net sales, interest expense increased to 12.9% in the current period compared to 12.6% in the previous period due to lower sales. The unrealized (gain) loss in derivative contracts increased to a gain of $2.4 million in the current period as compared to a loss of $5.3 million for the three months ended September 27, 2002. Loss before income taxes, as a result, was a loss of ($1.9) million for the three months ended September 26, 2003 compared to a loss of ($7.3) million for the three months ended September 27, 2002. Benefit for income taxes was a credit of ($0.8) million for the three months ended September 26, 2003, compared to a credit of ($2.6) million for the three months ended September 27, 2002. The Company's effective tax rate was 40.0% for the three months ended September 26, 2003 compared to 34.9% for the three months ending September 27, 2002. Net loss, as a result, was a loss of ($1.1) million for the three months ended September 26, 2003 compared with a loss of ($4.8) million for the three months ended September 27, 2002. 13 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations for the three months ended September 26, 2003 was $19.9 million compared with $33.3 million in the same period of the prior year. The $13.4 million decrease was due primarily to a reduction in accounts payable. Working capital on September 26, 2003 was $234.8 million compared to $249.7 million on June 27, 2003. During the quarter, a normal seasonal reduction in accounts receivable was partially offset by a normal seasonal increase in inventories. As of September 26, 2003, the Company had an outstanding balance of $91 million under the $100.0 million revolving credit line. The Company's capital expenditures for the three months ended September 26, 2003 and September 27, 2002 were $7.8 million and $6.0 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 September 26, 2003, the principal amount of the Company's aggregate outstanding variable rate indebtedness was $407.7 million. A hypothetical 1% adverse change in interest rates would have an annualized unfavorable impact of approximately $1.1 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. ITEM 4. Controls and Procedures The management of the Company, including the Company's principal executive officer and principal financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of Exchange Act) as of September 26, 2003. Based on such evaluation, the Company's principal executive officer and principal financial officer have concluded that as of September 26, 2003, such disclosure controls and procedures are effective for the purpose of ensuring that material information required to be in this Annual Report is made known to them by others on a timely basis. There have not been any changes in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) of the Exchange Act) during the quarter ended September 26, 2003 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting. 14 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 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 15 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 07, 2003 By: /s/ F. Patrick Smith -------------------- F. Patrick Smith Chairman of the Board and Chief Executive Officer By: /s/ Kenneth W.R. Baker ---------------------- Kenneth W. R. Baker President and Chief Operating Officer By: /s/ James E.Condon ------------------ James E.Condon Vice President and Chief Financial Officer 16