HIGH YIELD                                                                                                           RESEA...
sales) due to a concentrated customer base. Adjusted EBITDA for the fiscal year-ended    2005 was $72.4 million, down from...
with the March 1998 acquisition of PureTec Corporation and the June 2000 recapitalization ofthe Company.Figure 2          ...
INDUSTRYThe packaging industry is very diverse, comprised of companies that pursue distinct lines ofbusiness, such as meta...
margin environment resulting from rapidly rising raw material costs. Figure 3 delineates Tekni-Plex’s position along the v...
couplings and packaging. On the whole, resin and plasticizer account for approximately 50% oftotal raw material costs.Prod...
Figure 6                                                                                          TEKNI-PLEX              ...
change in market approach discussed on its fourth quarter fiscal 2005 conference call,Tekni had appeared unwilling to incr...
fiscal quarter, the end of the main selling season, and then build to their peak in the second fiscalquarter in advance of...
MACRO DRIVERSDue to the Company’s inability to pass through pricing in its garden hose line, Tekni-Plex hasbeen greatly af...
Pricing. As can be readily Figure 8deduced, the cost of producing                                             POLYSTYRENE ...
demand cycles with construction trends. The American Plastics Council estimates that rigid pipeand tubing account for half...
Hurricane Rita. According to Chemical Market Resources, over 60% of PVC production isbased in the U.S. Gulf Coast region. ...
CAPITAL STRUCTUREEach of Tekni-Plex’s debt instruments has been borrowed by or issued at the parent, Tekni-Plex,Inc. Tekni...
10.875% 1st Lien Senior Secured NotesTekni-Plex issued $150 million of 1st Lien Notes on June 10, 2005 as part of the refi...
provisions that govern additional indebtedness. The Company may incur indebtedness such thatthe calculated pro forma Fixed...
additional debt.Additional debt beyond the $16.5 million will require additional equity; the Subordinated Notesupplemental...
amount of $40.4 million, total liquidity as of September 30, 2005 was $100.4 million.MANAGEMENT / OWNERSHIP / CONTROLIt ha...
for meat, plastic cutlery, take-out service containers, plastic bags under names such as Hefty,Baggies, and EZ Foil, as we...
2004 to $9.7 million in the fourth quarter of fiscal 2005, accounting for the decrease in adjustedEBITDA from $66.4 millio...
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
Tekni Plex 051205
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Tekni Plex 051205

  1. 1. HIGH YIELD RESEARCH REPORT MILLER TABAK ROBERTS SECURITIES, LLC_________________________________________________________ Tekni-Plex, Inc. (TEKNI) Mdys/ Current BondCoupon Description Maturity CUSIP S&P Amt O/S Yield YTW Price Opinion st10.875% 1 Lien Senior Secured Notes, Reg S/144A 08/15/12 87910PAK6 B3 / CCC- $ 150MM 10.0% 8.8% 109.00 Sell nd 8.750% 2 Lien Senior Secured Notes, Reg S/144A 11/15/13 87910PAG5 Caa2 / C $ 275MM 9.7% 10.6% 90.00 Hold12.750% Senior Subordinated Notes 06/15/10 87910PAF7 Ca / C $ 315MM 21.6% 29.8% 59.00 SellMoodys and S&Ps outlook is negative. December 5, 2005 Ronald A. Rich (212) 692-5185 rrich@mtrdirect.comOPINIONWe initiate coverage of Tekni-Plex with a SELL recommendation on the 10.875% 1st LienNotes and 12.75% Senior Subordinated Notes, and a HOLD recommendation on the 8.75%2nd Lien Notes. Our SELL recommendation is premised on our belief that a purchase at theselevels does not adequately compensate the investor for the commensurate risk. In the near-term, we expect the Subordinated Notes to trade in conjunction with the news related to thesuccess of price increases in the company’s garden hose business, as well as the direction ofresin pricing. Ultimately, though, we expect that Tekni-Plex will be faced with a liquiditycrisis in the second quarter of fiscal 2007 ending December 31, 2006 that will lead to an assetsale or a financial restructuring. Our recommendation is based upon a required rate of returnof 9.0%, 13.0% and 25.0% for the 1st Lien, 2nd Lien and Subordinated Notes, respectively. Asopposed to the 1st Lien Notes and the Subordinated Notes, we have issued a HOLDrecommendation on the 2nd Lien Notes because, at an expected internal rate of return of13.5%, we find them fully valued.SUMMARY• Headquartered in Coppell, TX, Tekni-Plex is a manufacturer and distributor of flexible packaging and tubing products with $715 million in revenue. The company is majority- owned by Weston Presidio and its affiliates.• The company maintains a leading market share across a broad range of products that includes egg cartons, pharmaceutical blister films, closure liners, foam plates and trays, garden hose, medical tubing and specialty resin.• Tekni-Plex is highly leveraged as a result of acquisition and recapitalization financing with an LTM adjusted net leverage ratio of 10.2x and an LTM adjusted net interest coverage ratio of 0.71x for the period ending September 30, 2005.• The company has been adversely affected by rapidly rising raw material costs and has had difficulty passing-through price increases in its garden hose business (25% of fiscal 2005 net 331 MADISON AVENUE NEW YORK, NEW YORK 10017 (212) 867-7959 FAX (212) 867-6492 (800) 452-4528 (888) HI-YIELD www.MTRdirect.com Please refer to the last page of this report for important disclosures
  2. 2. sales) due to a concentrated customer base. Adjusted EBITDA for the fiscal year-ended 2005 was $72.4 million, down from $118.0 million in fiscal 2003.• Liquidity at the end of the first quarter of fiscal 2006 was $100.4 million, comprised of $40.4 million of cash and $60.0 million of revolver availability. We project that Tekni-Plex completes fiscal 2006 with $6.8 million in liquidity. On a projected rebounded adjusted EBITDA base of $91.1 million in fiscal 2007, the company would still be faced with supporting an estimated $90.0 million in cash interest payments and $20.0 million in capital expenditures. We project Tekni-Plex to run out of liquidity in the second quarter of fiscal 2007.• While we anticipate a liquidity crisis, we also foresee a fundamental turnaround in Tekni- Plex’s business given a backdrop of moderate success in pricing pass-throughs in its garden hose business and an abating of raw material costs. Company options to bridge the liquidity gap would include borrowing additional debt, selling assets, as well as structuring some form of financing with Weston Presidio. We have estimated the likelihood of a fiscal 2007 restructuring at 75%.• Given our evaluation of the current risks associated with Tekni-Plex’s turnaround, our recommendations for Tekni-Plex’s debt securities are based upon required returns of 9.0%, 13.0% and 25.0% for the 10.875% Senior Secured Notes, 8.75% Senior Secured Notes and 12.75% Senior Subordinated Notes, respectively.BUSINESS OVERVIEWHeadquartered in Coppell, TX, Tekni-Plex (“Tekni” or the “Company”) is an internationalmanufacturer of packaging, packaging products and plastics materials, primarily for the food,healthcare and consumer markets. With operations in the United States, Europe, Argentina andCanada, Tekni employs approximately 3,200 employees, about a third of which are representedby labor unions. Since its purchase in March 1994 by Dr. F. Patrick Smith and a group ofinvestors, Tekni-Plex has acquired 10 companies and added a number of product lines (seeFigure 2). For the twelve-month period ended September 30, 2005, Tekni-Plex posted anadjusted EBITDA of $67.8 million on a revenue base of $714.8 million.The Company currently reports its results through three Figure 1business segments: Packaging (50% of net sales), Tubing TEKNI-PLEXProducts (30% of net sales) and Other, which reports Tekni’s Market Sharematerials compounding business. The Packaging segment Packaging Positioncurrently includes egg cartons, pharmaceutical blister films, Foam Egg Carton 1 Pharmaceutical Blister Films 1poultry and meat processing trays, closure liners, aerosol and Aerosol & Pump Components 1pump packaging components, and foam plates; Tubing Closure Liners 1 Poultry & Meat Processor Trays 2Products encompasses garden, irrigation, vacuum and pool Tubinghose, as well as medical tubing. Tekni’s Other business Garden and Irrigation Hose 1 Vinyl Medical Tubing 1segment produces recycled polyethylene terepthalate (“PET”), Otherspecialty resins and vinyl compounds for downstream Vinyl Medical Device Materials 1 Source: Company reports.converters. In practically all of its product lines, Teknimaintains a leading share of the market (see Figure 1).Tekni-Plex is currently struggling with a highly leveraged balance sheet, soaring feedstock costs,a limited ability to pass-through pricing in its garden hose business (25% of net sales), and soonto be reduced liquidity. Much of the Company’s current debt load was incurred in connection 2
  3. 3. with the March 1998 acquisition of PureTec Corporation and the June 2000 recapitalization ofthe Company.Figure 2 TEKNI-PLEX Growth Through Acquisition PRICE DATE BUSINESS LOCATION PRODUCTS ($ millions) ACQUIRED General Felt Products, Laminated closure liners division of Standard Brooklyn, NY for pharmaceutical and NA 1967 Packaging Corporation food industries Hargro Flexible Packaging Corp.; Packaging materials for Flemington, NJ $ 7.5 December 1995 Flemington plant and pharmaceutical industry business. Dolco Packaging Corp. Sherman Oaks, CA Foam egg processor trays $ 39.0 February 1996 Food and electronics PurePlast Inc.; Ontario Cambridge, Ontario, packaging, as well as, $ 2.3 July 1997 facility Canada vinyl sheet for pharmaceutical industry Garden and irrigation hose, precision tubing and gaskets for aerosol packaging industry, vinyl PureTec Corporation Ridgefield, NJ $ 325.0 March 1998 medical tubing, and vinyl compounds for the production of medical devices Tri-Seal International, Extruded and co-extruded Blauvelt, NY $ 20.2 January 1999 Inc.; assets. capliners and seals Disposable medical tubing Natvar; assets. Clayton, NC $ 26.0 April 1999 and electrical sheathingSuper Plastics division of Longueuil, Quebec, Garden hose $ 10.2 October 2000 RCR International Inc. Canada Swan Hose division of Mark IV Industries, Inc.; Bucyrus, OH Garden hose $ 64.2 October 2001 assets. Polystyrene foam plates, Elm Packaging Memphis, TN bowls, and meat and $ 16.4 July 2002 Company, assets bakery trays Genpak; carton Glens Falls, NY Egg cartons $ 5.8 July 2004 business.Source: Company reports. 3
  4. 4. INDUSTRYThe packaging industry is very diverse, comprised of companies that pursue distinct lines ofbusiness, such as metal containers, glass containers, flexible packaging, food service packaging,protective packaging and dispensing closures. Each segment is typically made up of a uniquegroup of competitors that employs specialized machinery, services distinct customers, andutilizes different raw materials. Barriers to entry, innovation cycles, product differentiation,competitive dynamics, and pricing power also vary tremendously among the various packagingsegments.Flexible PackagingThe flexible packaging Figure 3industry has evolved TEKNI-PLEX VALUE CHAINover the past 25 years as Producers and Select Consumersan alternative to rigid PACKAGING TUBING PRODUCTSpackaging. As plasticshave become more Dow Chemicalsophisticated, flexible ExxonMobil Occidental Chemical FEEDSTOCK Chevron Phillips Chemical Georgia Gulfpackaging companies Shell Chemicalshave been able to Nova Chemicalsprovide productmanufacturers withpackaging that hasallowed them to furtherdifferentiate their Dow Chemical Shintech RESIN Total Petrochemicals Occidental Chemicalproducts to the consumer Nova Chemicals Formosathrough package Chevron Phillips Chemical Georgia Gulfgraphics, added shelf lifeand increased packageconvenience. Accordingto the Flexible CONVERTER TEKNI-PLEXPackaging Association,the United States marketfor flexible packagingwas approximately $21.3billion in 2004, and had 3M Pharmaceuticalsgrown at a compounded Pfizer Home Depot Eli Lilly Wal-Martannual growth rate of END-MARKET Boston Scientific Lowes3.9% over the prior ten Kraft Foods Target Cal-Maine Foods Ace Hardwareyears. Rose Acres MoArkA subset of specialtypackaging, flexible Source: Company reports and MTR.packaging is used for avariety of applications, from food wrappers to mattress covers. In industrial markets, stretch andshrink films are often used instead of corrugated boxes and metal strapping to unitize, bundle andprotect items during shipping and storage. The diversity of applications has led to thedevelopment of a fragmented industry, with the top ten companies accounting for less than 50%of sales. With most packaging converters possessing less market power than their substantiallylarger suppliers and customers, consolidation is likely, especially within today’s compressed 4
  5. 5. margin environment resulting from rapidly rising raw material costs. Figure 3 delineates Tekni-Plex’s position along the value chain, placing the company between considerably larger suppliersand customers. Competitors to Tekni-Plex include Pactiv, Bemis and Sealed Air.Discussed later in Macro Drivers, flexible packaging companies use plastic resins in themanufacture of their products. Resins, which utilize crude oil and natural gas in their formation,have experienced substantial price increases along with rising energy prices. With resinaccounting for approximately 50% of flexible packaging cost of goods sold, converters haveworked to pass-through price increases to their customer base with varied success.Foodservice PackagingFoodservice packaging refers to packaging designed and manufactured for customers in the foodindustry that process and prepare food for consumption, also known as food packers andprocessors; it also includes customers in the food distribution business such as wholesalers andsupermarkets. With estimated annual sales exceeding $10 billion in the United States, thefoodservice packaging industry produces products that protect food during distribution, assistretailers in merchandising food, and help customers prepare and serve meals at home.Foodservice packaging includes everyday items such as egg cartons, meat processing trays,clamshell containers and fast-food carryout trays. Historical growth rates of this segment haveexceeded 5%, driven by evolving consumer dietary patterns.PRODUCT LINESWhile Tekni-Plex manufactures a broad line of products (see Figures 5,6), we have chosen tofocus on its garden hose and egg carton lines due to the material nature of their businesses, theirshared challenges, and the varied success that Tekni-Plex has had in dealing with each within thecurrent environment.Garden HoseTekni-Plex established its leadership position in the garden hose market through the acquisitionsof PureTec Corporation ($345 million in sales), the Super Plastics division of RCR International,and the Swan Hose division of Mark IV Industries. For the year ending July 2, 2005, gardenhose net sales of $179.5 million comprised 25.7% of Tekni’s net sales and 86.5% of TubingProducts net sales. We estimate its gross contribution for the same period to be minimal atapproximately $2 million, as compared with an estimated $19 million in fiscal 2004 and $51million in fiscal 2003.Construction. Hose, as compared with tubing, is Figure 4considered a more complex structure, usuallyconsisting of three layers: an inner liner (the tubeitself), a reinforcement layer and an outer jacket (seeFigure 4). The raw materials that make up thesestructural elements include recycled polyvinylchloride (“PVC”) for the inner liner, nylon(feedstock is polypropylene) for the reinforcementlayer and plasticizer (a resin additive is used to Source: Ajay Industrial.create flexibility; feedstock is natural gas) for theouter coating. Additional additives are used to produce color in the hose, as well as resistance toabrasion and sunlight. Other raw materials that comprise the final product are used to make 5
  6. 6. couplings and packaging. On the whole, resin and plasticizer account for approximately 50% oftotal raw material costs.Product Differentiation. Manufacturers of garden hose differentiate their hose through acombination of quality and benefits. High quality hose has synthetic rubber mixed with the PVCused for the inner liner, employs a reinforcement layer around the inner tube to prevent bursting,and has fittings made of brass. From a benefits perspective, quality hose is very flexible andseldom kinks. While not every consumer is sophisticated or caring enough to vet theseattributes, most consumers typically focus on price, diameter and length of hose. In speakingwith the retail community, we get the sense that brand is practically irrelevant in theconsumer’s purchase decision.Customer Concentration. According to the 2003 National Gardening Survey, home centers,such as Home Depot and Lowe’s, have become the most important distribution channel in thelawn and garden products industry. Industry participants have estimated that big-box retailerscomprise 68% of Tekni’s garden hose sales, with Home Depot and Wal-Mart accounting for45%. Customer concentration has been an extremely important component of Tekni’s financialproblems. Well aware of the rising cost of petrochemical-based raw materials, large retailershave nevertheless resisted price increase pass-throughs. Their success in doing so is somewhatsurprising given that Tekni-Plex is one of only two major domestic producers of gardenhose in a market that is not currently impacted by imports (see Garden Hose: Imports). Figure 5 TEKNI-PLEX Product Lines EGG CARTONS GARDEN HOSE BLISTER FILMS FOAM PLATES MEDICAL TUBING CLOSURE LINERS Source: Company reports. 6
  7. 7. Figure 6 TEKNI-PLEX Business Description SEGMENT PRODUCT PRODUCT CHARACTERISTICS SALES CHANNEL CUSTOMERS COMPETITION NOTES SALES Somewhat Thermoformed foam polystyrene seasonal with packaging offers a combination of Pactiv weighting on fiscal Most domestic egg Foam Egg Cartons high strength, minimum material Direct sales force manufactures pulp- Q2 and Q3. Higher packagers. content and superior moisture based egg cartons. margins than other barrier performance. packaging product lines. Transparent, high-barrier blister packaging is primarily used to Global network of protect drugs from moisture vapor Two main sales and infiltration and dehydrating. Blister Major pharmaceutical competitors: Pharmaceutical Blister Films marketing packaging is preferred when companies. Pactiv, Klockner personnel on six dispenser handling can affect shelf Pentaplast. continents. like or drug efficacy, or when unit dose packaging is Thermoformed foam polystyrene packaging offers a combination of Pactiv and Formpac Poultry and Meat Processor high strength, minimum material Poultry industry. division of W.R. Trays content and superior moisture Grace barrier performance. PACKAGING $ 352MM Selig. Two principal Packagers of Closure liners perfect the seal competitors in North pharmaceutical, Closure Liners between a container and its Direct sales force America, but also healthcare and food closure, i.e. a bottle and its cap. compete with products. several smaller companies. Dip tubes which transmit contents of the container to the nozzle. Manufacturers of aerosol valves, Rubber-based valve gaskets that Customers moving Aerosol and Pump Packaging dispenser pumps and control the release of product from Direct sales force to internal Components writing instruments the container. production. such as AptarGroup Writing instrument products such and Rexam. as pen barrels, ink tubing and ink reservoirs for felt-tip pens. Thermoformed foam polystyrene Consumer, agricultural disposable plates, bowls, and Pactiv. Foam Plates and foodservice hinged-lid containers, as well as, Numerous. industries. agricultural packaging products. Retailers such as home centers, hardware Highly seasonal High quality lines that utilize Direct sales force cooperatives, food, Teknor Apex with 75% of sales Garden and Irrigation Hose medical-grade plastics and brass and independent auto, drug and mass Ames True Temper occurring in spring couplings. representatives. merchandising chains Flexon and early summer and catalog companies months. TUBING throughout the U.S. $ 225MM and Canada. Kelcourt Plastics. Customers High quality, close tolerance tubing Manufacturers of Medical Tubing Direct sales force upgrading for surgical procedures. medical devices. machinery and increasing capacity. Used for floor coverings, automotive sealants and Direct sales force Teknor Apex. Recycled PET, Vinyl OTHER adhesives, coil coatings, plastisol and independent Large chemical $ 138MM Compounds, Specialty Resins and medical device compounding, representatives. companies. and vinyl packagingSource: Company reports and MTR.Pricing. Wholesale pricing on garden hose has historically been established one time per year inthe summer months, and is scheduled to take effect the following January 1st. According toTekni-Plex, the actual setting of price is not contractual (nor are volumes), but is more of agentleman’s agreement with customers. Price increases have typically ranged between 3% and5%, with some years having no increase. On October 7, 2005, Teknor Apex, Tekni’s primarygarden hose competitor, announced that, effective January 1, 2006, it would institute a 7.5%surcharge on its standard annual price increase, citing rapidly rising raw material, energy andtransportation costs (see Macro Drivers). Teknor Apex’s pricing action and its subsequentacceptance is difficult to confirm, given the secretive nature of retail buyers. Until a recent 7
  8. 8. change in market approach discussed on its fourth quarter fiscal 2005 conference call,Tekni had appeared unwilling to increase prices, fearful of losing market share. Given thedire nature of its liquidity situation, the Company has stated that it is going to market witha double-digit price increase, as well as a potential second increase, ranging between 7.5%and 10.0%, effective January 1, 2006. The announced increases have evidently led to someloss of market share; the amount is unknown to the public. Future price increases mayresult in further market share loss.Competition. It has been estimated by market participants that Tekni-Plex has historically had a55% share of the garden hose market, with Teknor Apex holding a 30% share. Teknor Apex, acompounder of PVC and engineering resins headquartered in Pawtucket, R.I., is estimated tohave generated $500 million of revenue in fiscal 2004, with approximately $95 million derivedfrom the sale of garden hose. Other competitors in the marketplace include Ames True Temperand Flexon, based in New Jersey.Imports. Imports comprise a very small portion of domestic market share, currently estimated atapproximately 3%. Reasons given by market participants for the low level of imports includeinsufficient quality, minimal cost savings due to a non-labor intensive production process, thedifficulty associated with refilling retail inventory channels upon short notice, and the offset ofproduct price savings by transportation costs. On the other hand, we held a conversation withthe garden products buyer of a second-tier retail chain who revealed that imports willcomprise 40% of the chain’s upcoming year’s garden hose line. While the buyer believesthat domestic quality is superior to that of imports and that imports are not an appropriatesubstitute for high-end hose, he believes that overseas-produced mid-range hose is of sufficientquality and price point to warrant importation. He further commented that the quality of productproduced by China is getting increasingly better. Citing hose endings as a category that is nolonger produced domestically, a sweeping change from just five years prior, he believes thatgarden hose will eventually be greatly trade impacted. Recounting a recent trip to China, hespoke of factories the size of football fields and numerous lines of new hose extrusionmachinery.The disparity between domestic and China recycled PVC pricing may widen in the comingyears given our view of China’s changing raw material landscape. Currently, China lacks adeveloped waste management industry, which impedes the supply of recycled PVC, gardenhose’s main raw material. As China continues to bring additional prime PVC capacity online(see Macro Drivers) and builds-out its waste management infrastructure, the difference betweendomestic and foreign raw material pricing may widen to the point where the importation ofgarden hose makes economic sense.While there is no indication that the garden hose supply landscape will change overnight,the macro picture may depress reorganization values in the event of a bankruptcy filing orlimit the interest of potential buyers should an asset sale be pursued. An asset sale of thegarden hose business, though, would be difficult given that it is not discrete, but rathershares physical plant space with Tekni’s materials compounding business.Seasonality. The sale of garden hose is an extremely seasonal business with approximately 70%of sales occurring in the spring and early summer (Tekni’s third and fourth fiscal quarters).Maintaining service levels requires year-round production of garden hose and drives fluctuationsin working capital accounts. Tekni inventory levels typically reach their low point in the fourth 8
  9. 9. fiscal quarter, the end of the main selling season, and then build to their peak in the second fiscalquarter in advance of the beginning of the selling season. Accounts receivable also move inconjunction with these cycles, reaching a peak in the fourth fiscal quarter and a trough in thesecond fiscal quarter.Egg CartonsTekni-Plex’s egg carton business is a fundamentally strong business. Manufactured and sold byTekni’s Dolco Packaging division (merged into Tekni-Plex in August 1997), egg cartonsaccounted for 17% of total net sales and 36% of Packaging net sales in fiscal 2003 (fiscal 2004 isnot representative), with sales of cartons that year reaching $104 million. Prior to the recent run-up in raw material costs, gross margins had typically ranged between 30% and 35%, higher thanother Packaging segment products (~25%). We estimate LTM adjusted EBITDA for the periodending September 30, 2005 at $20.8 million.Product Differentiation. Tekni-Plex manufactures its egg cartons from expandable polystyrene,producing a foam carton, versus other cartons that are pulp or molded-fiber based. Each has itsown distinct characteristics and market following. Foam egg cartons typically run better onautomated packaging equipment resulting in fewer broken eggs, are easier to print on and morevisually appealing, and can be colorized to enhance marketing. Pulp-based egg cartons, afavorite of environmentalists, absorb moisture from the egg (extending freshness) and arethought to deliver fewer broken eggs to the retail store. Estimated at 55%, the foam egg cartonmarket share has gradually increased, taking share from pulp-based egg cartons.Pricing. As with most products in Tekni’s Packaging segment, foam egg cartons are made frompolystyrene. Along with other petrochemical-based raw materials, polystyrene pricing has beenincreasing over the past two years (see Figure 8). Within this environment, Tekni-Plex has beensuccessful in passing through price increases to its customer base. Pricing is typically done atthe time of a customer order and does not involve long-term contracts. The magnitude of thepass-throughs is intended to maintain Tekni’s gross profit dollar, as opposed to its gross margin.The Company’s success in this area, as opposed to its garden hose line, appears to be areflection of 1) a superior product, 2) customer acceptance, 3) competitor practice, and 4)high Tekni production capacity utilization. While probably more diverse than that of theCompany’s garden hose business, Tekni’s egg carton customer base is comprised of large eggfarm/packagers such as Cal-Maine Foods, Rose Acres and MoArk.Competition. Tekni-Plex is currently the leading U.S. producer of foam egg cartons, withapproximately 40% of the egg carton market and more than 80% of the foam egg carton market.Pactiv, a leading flexible packaging company known for brands such as Hefty and Baggies, isthe top producer of pulp-based egg cartons. Together, the two companies represent a duopoly inthe egg carton market. Recently, Hartmann of Denmark has entered the North America marketwith limited initial success.Seasonality. Egg demand, and thus egg carton demand, is somewhat seasonal in nature.Demand typically increases over Thanksgiving, Christmas, New Year’s, the Superbowl andEaster. This seasonality does not translate into a meaningful variance in Tekni’s egg carton salesbecause the Company is currently producing at capacity. 9
  10. 10. MACRO DRIVERSDue to the Company’s inability to pass through pricing in its garden hose line, Tekni-Plex hasbeen greatly affected by the rise in pricing of petrochemicals and their derivative products. Thefollowing section will focus on the two resins which feed the majority of Tekni-Plex’s businessesand the dynamics that drive their pricing mechanism, and in turn, Tekni-Plex’s near-term future.IntroductionPlastics are polymers (poly-styrene, poly-vinyl chloride) that are built up from monomers, whichare derived from crude oil and natural gas (see Figure 7). Polymers that have been dried andshaped into pellets are referred to as plastic resins. These resins are further treated in plasticsprocessing facilities to produce different physical characteristics in the material, such as strength,toughness and flexibility.Resins comprise a very large portion of Tekni-Plex’s cost of goods sold. On a historicalbasis, resins have typically made up 98% of Tekni-Plex’s cost of raw materials, which inturn, have accounted for 64% of Packaging cost of goods sold. Given that resin prices havedramatically increased, this percentage is most likely higher.Figure 7 TEKNI-PLEX Raw Material Value Chain PACKAGING TUBING PRODUCTSFEEDSTOCK CRUDE OIL NATURAL GASCHEMICALS BENZENE ETHYLENE CHLORINE ETHYLENEMONOMER STYRENE VINYL CHLORIDE MONOMERPOLYMER RESIN POLYSTYRENE POLYVINYL CHLORIDE Egg Cartons Garden HoseTEKNI-PLEX PRODUCTS Food Trays Medical Tubing Flexible Packaging Blister PackagingSource: Company reports and MTR.PolystyreneThe majority of Tekni-Plex’s packaging segment revenue is derived from the sale of productsthat use polystyrene as their primary raw material input. These products include foam eggcartons, poultry and meat processor trays, and foam plates. Structurally, polystyrene is amolecular chain of styrene monomer, which is formed through the processing of benzene andethylene. Benzene is a natural constituent of crude oil, but it is usually synthesized from othercompounds present in petroleum. 10
  11. 11. Pricing. As can be readily Figure 8deduced, the cost of producing POLYSTYRENE vs. LIGHT SWEET CRUDE OILpolystyrene is related to the cost PRICINGof crude oil, though its selling 85 70 Lt. Swt. Crude Oil ($/barrel)price is another matter. As with Polystyrene (cents/lb) 80 60most downstream products, the 75 70 50pricing of polystyrene is subject 65 40to supply/demand dynamics 60that can be disconnected from 55 30those affecting its feedstock. 50 20Polystyrene pricing has been on 03 03 03 03 04 04 04 04 05 05 05 05 06 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Qan uptrend over the past three Polystyrene Lt. Sweet Crude Oilyears, rising from 57 cents perpound in the first quarter of * X-axis reflects Companys fiscal calendar. Source: Plastics News (Crystal Injection GP) and NYMEX.fiscal 2003 to an estimatedaverage price of 88 cents per pound in the second quarter of fiscal 2006 (see Figure 8). Recentannouncements of price increases include 5 cents, 6 cents and 5 cents commencing October 1,2005, November 1, 2005 and November 15, 2005, respectively.With a correlation of 0.95 (statistical measure by which 1.00 is Figure 9perfect correlation), the pricing movement of polystyrene parallels FEEDSTOCKthat of crude oil (see Figure 9). We have chosen not to use this CORRELATION Fiscal Lt.Swt.Crude PS *correlation for polystyrene forecasting purposes due to our belief Period ($/barrel) (cts/lb)that the NYMEX Light Sweet Crude Oil futures contracts pricing 1Q03 28.3 56.0 2Q03 28.3 57.0is not indicative of future crude oil pricing. Instead, our view to 3Q03 34.0 60.0future pricing has been shaped through conversations with 4Q03 29.0 56.0 1Q04 30.2 56.0polystyrene producers. In general, producers have been selling 2Q04 31.2 62.0polystyrene at low profitability levels, which does not bode well 3Q04 35.3 68.0 4Q04 38.3 74.0for price decreases should input costs decrease. Polystyrene 1Q05 43.9 82.0pricing is being driven by styrene, which is made up of benzene 2Q05 48.3 81.5 3Q05 49.9 79.0and ethylene (see Figure 7). While the price of benzene has been 4Q05 53.1 83.0coming down, due to high inventory levels in Europe and Asia, Correlation: 0.95 * Polystyrene pricing reflects the forward period.ethylene pricing has been moving up, a result of low inventory Source: MTR analysis.levels caused by production outages due to the hurricanes. Given our feedback, ourprojections for polystyrene incorporate flat pricing going forward at 94 cents per poundthrough fiscal 2007. Contrary to this view, CMAI projects that polystyrene pricing willdecrease due to oversupply in Asia.Hurricane Rita. Hurricane Rita caused significant supply channel and production disruptions tochemical facilities located on the U.S. Gulf Coast, which produce styrene. In many cases,producers such as Dow Chemical, BASF and Nova Chemical were forced to declare forcemajeure, a contractual provision that allows producers to depart from the terms of a contract dueto events that are neither foreseeable nor controllable. Styrene monomer production, inparticular, was sharply reduced due to the lack of ethylene feedstock.Polyvinyl ChloridePolyvinyl chloride, or “PVC” as it is more commonly known, is a widely used plastic found inproducts ranging from clothing to piping and plumbing fixtures to garden hose. Its presence isso pervasive in the building industry through its use in pipe, conduit, frames and siding, that its 11
  12. 12. demand cycles with construction trends. The American Plastics Council estimates that rigid pipeand tubing account for half of all domestic PVC sales in the United States and Canada, whileother construction-related uses account for almost 22%. Tekni-Plex makes use of PVC in itsmedical packaging business and throughout its Tubing Products and Other (compounding)reported segments. PVC is produced from its monomer, vinyl chloride, which is dependent uponnatural gas, chlorine and ethylene (see Figure 7). During the manufacturing process (as withgarden hose), PVC is often mixed with plasticizers, stabilizers and pigments to produce a varietyof physical qualities.Pricing. While Tekni-Plex uses recycled PVC in the production of Figure 10garden hose, our analysis utilizes the market pricing of prime PVC FEEDSTOCK(also known as virgin PVC) as a proxy for recycled PVC, due to CORRELATION Fiscal Lt.Swt.Crude PVC *the difficulty associated with sourcing pricing information on the Period ($/barrel) (cts/lb)recycled derivative (prime and recycled PVC are highly 1Q03 28.3 36.0 2Q03 28.3 38.0correlated). Pricing on prime PVC has increased 61.5% since the 3Q03 34.0 43.0first quarter of fiscal 2003, moving from 39 cents per pound to 63 4Q03 29.0 39.7 1Q04 30.2 41.0cents per pound in the first quarter of fiscal 2006. The extremely 2Q04 31.2 43.0high correlation between prime PVC and light sweet crude oil is 3Q04 35.3 47.7 4Q04 38.3 49.0delineated in Figure 10 and graphed in Figure 11. 1Q05 43.9 51.5 2Q05 48.3 55.5 3Q05 49.9 57.5As with polystyrene, PVC pricing is not only dependent on 4Q05 53.1 63.0petrochemical pricing but also on the supply and demand dynamic Correlation: 0.98of its chemical and monomer feeds. Dow Chemical will soon be * PVC pricing reflects the forward period. Source: MTR analysis.taking vinyl chloride monomer capacity out of the marketplace,accounting for a 10% reduction in domestic production capacity. It has been speculated thatPVC pricing has risen so high that current pricing may spur the use of substitutes such asconcrete and ductile iron for rigid pipe in the construction industry. While there appears to be anumber of opposing forces on pricing, we have based our projections on our conversations withPVC producers which predict some pricing relief over the coming year.Forecasted PVC pricing is an Figure 11extremely important driver inour model for Tekni-Plex’s PRIME PVC vs. LIGHT SWEET CRUDE OIL PRICINGTubing Products segment 75 70profitability. Tekni’s near- Lt. Swt. Crude Oil ($/barrel) 70 65 60 PVC (cents/lb)term future is highly dependent 65 55 60on its success in recovering raw 55 50 45material price increases. This 50 40 45will, of course, be made all the 40 35 30more unlikely should PVC 35 25pricing continue to rise. We 03 03 03 03 04 04 04 04 05 05 05 05 2Q 6 3Q E 4Q E 1Q E 2Q E E 0 06 06 06 07 07 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Qhave forecast PVC pricing toincrease to 72 cents per pound Prime PVC Lt. Sweet Crude Oilin the second quarter of fiscal * X-axis reflects Companys fiscal calendar.2006, remain flat into the Source: Plastics News and NYMEX.third quarter of fiscal 2006, and thereafter decline by 4 cents per pound each quarter to 61cents per pound in the second quarter of fiscal 2007. 12
  13. 13. Hurricane Rita. According to Chemical Market Resources, over 60% of PVC production isbased in the U.S. Gulf Coast region. PVC (as well as polystyrene) is produced with rawmaterials that are transported by barges to the ports of New Orleans, LA and Gulfport, MS.According to CMAI, as of September 29, 2005, North American PVC capacity had been reducedby 20% due to Hurricane Rita, but as of the writing of this report, normal production levels hadbeen resumed.The problems that will be encountered with PVC pricing in the near-term have more to do withthe damage Rita caused to natural gas and ethylene production facilities, rather than to PVCplants. With limited supply of natural gas and ethylene, PVC producers were unable tomanufacture PVC. This resulted in inventory being driven to low levels across the supply chainand through to the end-user markets. While inventories are usually built up during the calendarfirst quarter, we believe they will, at best, be maintained in the first quarter of fiscal 2006. Thisdynamic may serve to support PVC pricing at current levels.China. China will be a key determinant in the future worldwide supply and demand equation forPVC. Fueled by infrastructure projects, as well as the export of fabricated goods, Chinese annualPVC demand is expected to exceed that of the United States in 2005 at 16.5 billion pounds. By2010, China PVC demand is projected to grow to more than 22 billion pounds. With an outlookto self-sufficiency, China is aggressively adding PVC production capacity. In 2005, CMAIforecasted an increase of 9.6% for Chinese demand for PVC, with capacity projected to increaseover 35% during the same period and 17% in 2006. Capacity increases in China are expected toreduce worldwide PVC price levels. CMAI forecasts that by 2010, China PVC imports willdecline to 1.0 million metric tons, down 47% from 2000. Increased China PVC production willultimately lead to greater recycled PVC supply.CORPORATE STRUCTURE Figure 12 TEKNI-PLEX MANAGEMENT LLC Controlled by Dr. F. Patrick Smith Sole Managing Member of Tekni-Plex Partners and MST/TP Partners TEKNI-PLEX PARTNERS LLC MST/TP PARTNERS LLC Owns 94% of Tekni-Plex Common Stock Owns 6% of Tekni-Plex Common Stock (91.7% fully diluted) (5.8% fully diluted) TEKNI-PLEX, INC. Revolving Credit Facility 10.875% Senior Secured Notes 8.75% Senior Secured Notes 12.75% Senior Sub. Notes DOMESTIC SUBSIDIARIES FOREIGN SUBSIDIARIES Guarantors of: Revolving Credit Facility PurePlast Acquisition Limited (Nova Scotia) 10.875% Senior Secured Notes PurePlast Inc. (Ontario) 8.75% Senior Secured Notes Tekni-Plex Europe, N.V. (Belgium) 12.75% Senior Sub. Notes Action Technology Italia S.p.A (Italy) Colorite Europe, Ltd. (Northern Ireland) PureTec Corporation Colorite Plastics Canada Ltd. (Ontario) Plastic Specialties and Technologies, Inc. Tekni-Plex Holdings (Canada) Ltd. (Nova Scotia) Plastic Specialties and Technologies Investments, Inc. Tekni-Plex Argentina, S.A. (Argentina) Burlington Resins, Inc. Tekni-Plex, Inc. (Singapore) Natvar Holdings, Inc. Tri-Seal Holdings, Inc. TP-Elm Acquisition Subsidiary, Inc. TPI Acquisition Subsidiary, Inc. Source: Company reports. 13
  14. 14. CAPITAL STRUCTUREEach of Tekni-Plex’s debt instruments has been borrowed by or issued at the parent, Tekni-Plex,Inc. Tekni-Plex, Inc. is operational, comprising five plant locations, a result of the 1997 mergerwith Dolco Packaging Corp. (26.0% of consolidated net sales). Additionally, Tekni-Plex, Inc.’sdebt is guaranteed by all domestic subsidiaries.Revolving Credit FacilityOn June 10, 2005, Tekni-Plex entered into a new four-year $65 million asset-based credit facilitywith Citicorp USA. The new facility was part of a refinancing of the Company’s old $100million revolver and $70 million term loan. As of September 30, 2005, there were nooutstanding borrowings under the facility. Net of $5 million of LC’s, revolver availability was$60 million. Tekni-Plex, Inc. is the borrower of the revolving credit facility, and each of itsdomestic subsidiaries is a guarantor of the facility. The credit facility is secured on a firstpriority basis by the accounts receivable, inventory, general intangibles and certain other assetsof the borrower and the guarantors (“ABL Facility Priority Collateral”) (see Figure 13).Additionally, it contains a letter of credit sub-limit of $25 million and a swing loan sub-limit of$15 million.Outstanding borrowings are Figure 13charged an interest rate equal TEKNI-PLEX Debt Collateralto the sum of a Base Rate,which is approximately 0.5% ABL FACILITY PRIORITY COLLATERAL NOTE PRIORITY COLLATERALplus the Federal Funds Rate, Accounts Receivable Inventory Instruments, Accounts PP&Eand an applicable margin General Intangibles Certain Real Property Certain Other Assets Equityranging from 1.25% to 1.75%, (Domestic subs, 65% Foreign subs.)depending upon the MonthlyAvailable Credit. Thefacility’s Borrowing Base is REVOLVING CREDIT FACILITYcalculated as the sum of 1) Amount: $ 65 million85% of Eligible Receivables;2) the lesser of (a) 85% of theorderly liquidation value of 10.875% SENIOR SECURED NOTESEligible Finished Goods and Amount: $ 150 million(b) 75% of Eligible FinishedGoods; and 3) the lesser of (a)85% of the orderly liquidation 8.75% SENIOR SECURED NOTES Amount: $ 275 millionvalue of Eligible RawMaterials, and (b) 75% of Source: Company reports.Eligible Raw Materials, less anEligibility Reserve.Asset sales are governed under a negative covenant provision in the credit agreement. To theextent that an asset sale includes credit facility collateral, the sale must include substantially allof the assets constituting the unit of operation, and 1) net cash proceeds shall neither exceed $25million in any fiscal year nor $50 million during the term of the Agreement, 2) considerationmust be at least 75% cash and 3) net cash proceeds must be applied to repay borrowings underthe facility. The credit agreement also limits capital expenditures to $55 million, $40 million,$35 million and $35 million for the fiscal years 2006 through 2009, respectively; the covenantdoes incorporate a spending rollover provision. 14
  15. 15. 10.875% 1st Lien Senior Secured NotesTekni-Plex issued $150 million of 1st Lien Notes on June 10, 2005 as part of the refinancing ofits old senior secured credit facility. The Notes bear interest at an annual rate of 10.875%,payable semiannually on February 15 and August 15, and are scheduled to mature on August 15,2012. The Company will make its first coupon payment on February 15, 2006.The 1st Lien Notes are issued by Tekni-Plex, Inc. and are guaranteed by all domestic subsidiaries.The obligations are secured on a first priority basis by all instruments and accounts, PP&E andreal property of both Tekni-Plex, Inc. and the guarantors, as well as the equity of all the domesticsubsidiaries and 65% of the capital stock of all the foreign subsidiaries (“Note PriorityCollateral”) (see Figure 13). The Notes are also secured on a second priority basis by the ABLFacility Priority Collateral and are thus effectively subordinated to the Credit Facility.The 1st Lien Notes indenture allows the Company to incur indebtedness such that, prior to June10, 2006, the calculated pro forma Fixed Charge Coverage Ratio for the most recent four fullfiscal quarters is not greater than 2.0x; after June 10, 2006, ratio compliance is achieved at 2.25x.The Note indenture defines the Fixed Charge Coverage Ratio as the ratio of the ConsolidatedCash Flow to Fixed Charges for the prior four-quarter period. Consolidated Cash Flow isdefined as Consolidated Net Income plus, to the extent deducted, extraordinary losses, taxes,Fixed Charges, depreciation and amortization, non-cash items that do not relate to accruals orreserves. Fixed Charges are defined as consolidated interest expense plus preferred stockdividends adjusted for taxes. Indebtedness under the credit facility is limited to $125 million lessthe aggregate amount of asset sale net proceeds applied by the Company to permanently repayterm debt or revolving debt which leads to a corresponding commitment reduction. Permitteddebt also includes a basket for the incurrence of additional unsecured indebtedness in an amount,at any time outstanding, of $40 million, which has already been used.As specified in the 1st Lien Note indenture, net proceeds from an asset sale may be applied,within 365 days, to the following: 1) to the extent the asset sale involves ABL Facility PriorityCapital, to reduce commitments under the revolving credit facility, 2) to acquire the assets orcapital stock of a Permitted Business, 3) to make capital expenditures, and 4) to acquire usefulassets. Any proceeds in excess of $15 million not applied to the aforementioned will be used topurchase the 1st Lien Notes and other indebtedness that is secured equally and ratably with theNotes.The Notes are callable on or after August 15, 2009 at $105.438, August 15, 2010 at $102.719,and August 15, 2011 and thereafter at $100. The Notes carry a change of control put at 101%.8.75% 2nd Lien Senior Secured NotesThe Company issued $275 million of 2nd Lien Senior Secured Notes on November 21, 2003, theproceeds of which were used to pay down the term loan of a previous credit facility. The Notesbear interest at an annual rate of 8.75%, payable semiannually on May 15 and November 15, andare scheduled to mature on November 15, 2013.The 2nd Lien Notes were issued by Tekni-Plex, Inc. and are guaranteed by all domesticsubsidiaries. The Notes are secured by liens junior to that of the 1st Lien Notes on the ABLFacility Priority Collateral and the Note Priority Collateral and are effectively subordinated tothe 1st Lien Notes (see Figure 13). The 2nd Lien Notes’ indenture contains a number of 15
  16. 16. provisions that govern additional indebtedness. The Company may incur indebtedness such thatthe calculated pro forma Fixed Charge Coverage Ratio for the most recent four full fiscalquarters is not greater than 2.25x. The Note indenture defines the Fixed Charge Coverage Ratiousing similar language to that found in the 1st Lien Note indenture. Indebtedness under the creditfacility is limited to $275 million (as compared with $125 million under the 1st Lien Noteindenture) less the aggregate amount of asset sale net proceeds applied by the Company topermanently repay term debt or revolving debt which leads to a corresponding commitmentreduction. Permitted debt also includes a basket for the incurrence of additional unsecuredindebtedness in an amount, at any time outstanding, of $40 million, which has already been used.The language governing the net proceeds from an asset sale is similar to that in the 1st Lien Noteindenture. Any proceeds in excess of $15 million not applied to the aforementioned will be usedto purchase the 2nd Lien Notes and other indebtedness that is secured equally and ratably with theNotes.The Notes are callable on or after November 15, 2008 at $104.375, November 15, 2009 at$102.917, November 15, 2010 at $101.458, and November 15, 2011 and thereafter at $100. TheNotes carry a change of control put at 101%.12.75% Senior Subordinated NotesIn June 2000 and May 2002, the Company issued $275 million and $40 million of 12.75%Senior Subordinated Notes, respectively. The proceeds from the initial issuance were part of arecapitalization of Tekni-Plex, Inc. and that of the second issue were used to repay borrowingsunder the old revolving credit facility. The Notes bear interest at an annual rate of 12.75%,payable semiannually on June 15 and December 15, and are scheduled to mature on June 15,2010. The Subordinated Notes are issued by Tekni-Plex, Inc. and are guaranteed by all domesticsubsidiaries on a subordinated basis to the guarantees of the Senior Debt. The Notes arecontractually subordinated to all Senior Debt and thus rank junior in right of payment to theCredit Facility, 1st Lien Notes and 2nd Lien Notes. They are also structurally subordinated toindebtedness and other liabilities of all the non-guarantor foreign subsidiaries.The Subordinated Notes are callable on or after June 15, 2005 at $106.375, June 15, 2006 at$104.25, June 15, 2007 at $102.125, and June 15, 2008 and thereafter at $100. The Notes carry achange of control put at 101%.Additional Indebtedness. Effective June 10, 2005, an Figure 14amendment to the Subordinated Note indenture, which had TEKNI-PLEXbeen approved through a consent solicitation, allowed Tekni- Additional IndebtednessPlex to borrow up to an incremental $90 million at any one Equity Received Post-4/15/05 $ 37.2time outstanding, in a ratio of 1.5:1.0 for every dollar of equity Available Additional Debt (1.5x) 55.8 New Debt Issued:received after April 1, 2005. Having received an equity Credit Facility 65.0infusion in the amount of $37.2 million in the form of Series A st 1 Lien Notes 150.0 Subtotal 215.0Preferred Stock (see following page), Tekni-Plex was able to Less: Old Debt Refinanced:issue an additional $55.8 million of debt (see Figure 14). At Revolver 100.0 Term Loan 70.7current equity infusion levels, we estimate that the Subtotal 170.7Company has provided for an additional $11.5 million of Additional Debt Used 44.3 Calculated Additional Debt, net $ 11.5debt. Along with a basket provision in the Note indentures LC Basket Provision 5.0to which the Company can allocate its letters of credit, we Total Available Additional Debt $ 16.5calculate that Tekni can issue a total of $16.5 million of Source: Company reports and MTR analysis. 16
  17. 17. additional debt.Additional debt beyond the $16.5 million will require additional equity; the Subordinated Notesupplemental indenture provides for additional debt of $34.2 million (totaling $90 million),which would require an additional equity investment of $22.8 million. This is morerestrictive than the language in the Senior Secured Notes’ indentures, which will allow anadditional $60 million of Credit Facility debt. Thirty million of the post-4/15/05 $37.2 millionSeries A Preferred investment was made by Weston Presidio. It is unclear who will investadditional equity in future financing rounds, given Weston’s unrequited desire to reduce itsSeries A exposure from $30 million to $15 million and its co-investors’ disinterest inparticipating in the prior investment round.Series A Preferred StockAs part of the Subordinated Note consent solicitation requiring the investment of additionalequity, Tekni authorized 82,500 shares of Series A Preferred Stock through an Amended andRestated Certificate of Incorporation dated May 13, 2005. To-date, a total of $37.2 million ofSeries A Preferred Stock has been purchased, comprised of $30 million of equity contributed byWeston Presidio, $1.8 million by Dr. F. Patrick Smith, $5 million from Forrest Binkley & BrownCapital Partners, $230,527 by Michael Cronin, managing partner of Weston Presidio, and$192,249 by other existing investors. Missing in the investor roster is a number of largeinstitutional investors that had previously co-invested alongside Weston Presidio in priorinvestment rounds. Accreting at an estimated 16% per annum, there was $64.0 million Series APreferred outstanding as of September 30, 2005.The Series A Preferred Stock is to be redeemed at three times the purchase price upon theoccurrence of a sale of the Company or its subsidiaries, whether by merger, asset sale, change inequity control, or liquidation; in addition, the Preferred Stock is to be redeemed at three times thepurchase price upon the earlier of i) of February 15, 2014 and ii) to the extent such redemption ispermitted under the Company’s new asset-based credit facility, the payment in full of theCompany’s Senior Subordinated Notes and existing Senior Secured Notes. Upon a TriggeringEvent, the Preferred Stock will be entitled to receive cumulative dividends at a rate of 12% perannum, compounded quarterly. A Triggering Event is defined, in part, as the failure of theCompany to redeem Series A Preferred shares, the failure to comply with covenants in the SeriesA Stock Purchase Agreement, the failure to service Company debt, a Chapter 11 filing, and thedate April 30, 2007. Upon a Triggering Event, theSeries A Preferred Stockholders assume control of Figure 15 TEKNI-PLEXthe Company’s board of directors. Leverage As of September 30, 2005Leverage / Liquidity Amount LeverageAs of the first quarter of fiscal 2006 ended September ($ millions) Thru Revolving Credit Facility $ - 0.0x30, 2005, Tekni had $693.4 million of net debt. 10.875% Senior Secured Notes 146.7 2.2xUsing an LTM adjusted EBITDA of $67.8 million, 8.75% Senior Secured Notes 268.8 6.1xthe Company’s net interest coverage and net leverage 12.75% Senior Sub. Notes 313.5 10.8x Foreign Term Loan 4.8 10.8xratios were 0.71x and 10.2x, respectively, for theperiod (see Figure 15). At the end of the quarter, Total Debt $ 733.8 10.8xthere were no borrowings under the $65 million Series A Preferred Stock 64.0 11.8xrevolving credit facility. Net of approximately $5.0 Total Obligations $ 797.8 11.8xmillion of letters of credit, facility availability was LTM Adjusted EBITDA $ 67.8$60 million. Together with cash on hand in the Source: Company reports and MTR analysis. 17
  18. 18. amount of $40.4 million, total liquidity as of September 30, 2005 was $100.4 million.MANAGEMENT / OWNERSHIP / CONTROLIt has been estimated that, prior to the issuance of the Series A Preferred Stock, Weston Presidioand its co-investors had approximately $300 million invested in Tekni-Plex, translating intoapproximately a 60% ownership stake in Tekni-Plex’s equity; Dr. F. Patrick Smith is estimatedto own more than 20% of the Company’s equity. Since the issuance of the Series A PreferredStock and the amendment of the Certificate of Incorporation, day-to-day control has effectivelyshifted to Weston Presidio. As long as shares of the Preferred Stock are issued and outstanding,the Company is not permitted, without the approval of the Series A Preferred stockholders, toengage in the following: 1) consummate the sale of the Company or any significant subsidiary; 2)issue any securities other than 45.752 shares of common stock and certain refinancing securities;3) liquidate or dissolve the Company or any subsidiary; 4) declare or pay any dividend, or redeemany securities other than Series A Preferred Stock; 5) change the number of Company directors;6) incur any indebtedness that would prohibit the redemption of the Preferred Stock; and 7) hire,terminate or modify the compensation of the CEO, CFO and COO. As stated previously, upon aTriggering Event, the Series A Preferred Stockholders assume control of the Company’s board ofdirectors.RELATIVE VALUEWhile Tekni-Plex faces competition across each of its product categories, the fragmented natureof the flexible packaging industry allows a relatively small company such as Tekni to identifyand dominate niches within its markets. While Tekni’s direct competitors are few in number,this section will briefly address direct and indirect public competitors that share similar industrydynamics.As shown in Figure 16, the range of EV/EBITDA multiples, from 7.3x to 8.3x, is narrow.Within a historical context, these multiples compare favorably to a twenty-year industry averageof 7.5x. There is a significant valuation premium attributed to size in the packaging industry andas such when applied, the multiples delineated need to be adjusted downward to account forTekni’s relatively lower product line volume and revenue base.Figure 16 Specialty Packaging - Public Comparables Financials as of September 30, 2005 Stock Price as of November 18, 2005 (In Millions of Dollars) LTM LTM EBITDA Enterprise EV / EV / Net Debt /Company Ticker Specialty Sales EBITDA Margin Net Debt Value EBITDA Sales EBITDATekni-Plex TEKNI Flexible packaging $ 714.8 $ 67.8 9.5% $ 693.3 NA NA NA 10.2xPactiv PTR Flexible packaging 3,516.0 544.0 15.5% 1,112.0 3,955.0 7.3x 1.12x 2.0xAptarGroup ATR Dispensing pumps 1,384.5 255.4 18.4% 65.3 1,939.0 7.6x 1.40x 0.3xBemis BMS Flexible packaging 3,307.5 433.5 13.1% 688.5 3,518.0 8.1x 1.06x 1.6xSealed Air SEE Protective packaging 4,026.5 708.5 17.6% 1,626.0 5,850.0 8.3x 1.45x 2.3xSonoco Products SON Packaging 3,458.7 455.9 13.2% 756.9 3,552.0 7.8x 1.03x 1.7xSource: Company Reports and MTR analysis.Pactiv (PTV). Pactiv is a global supplier of specialty packaging and consumer products.Operating through three segments, Consumer Products, Foodservice/Food Packaging, andProtective and Flexible Packaging, the company produces molded-fiber egg cartons, foam trays 18
  19. 19. for meat, plastic cutlery, take-out service containers, plastic bags under names such as Hefty,Baggies, and EZ Foil, as well as padded mailers and medical packaging. LTM sales for theperiod ending September 30, 2005 were $3.5 billion with LTM EBITDA of $544 million, or15.5% of sales. The company’s net leverage ratio was 2.04x.AptarGroup (ATR). AptarGroup is a leading global supplier of dispensing pumps for thepersonal care, pharmaceutical, household and food/beverage markets. The company’ssubsidiaries, which include Emsar, Pfeiffer, SeaquistPerfect Dispensers, and Valois, producepumps, closures and aerosol valves. LTM sales for the period ending September 30, 2005 were$1.4 billion with LTM EBITDA of $255 million, or 18.4% of sales. Its net leverage ratio was0.26x.Bemis (BMS). Bemis operates through two segments: the Flexible Packaging segment and thePressure Sensitive Materials segment. Accounting for 79% of fiscal 2004 sales, the FlexiblePackaging segment manufactures a broad range of consumer and industrial packaging, includingflexible film structures and laminates, sealing tapes and paper bags. These products are sold tothe food and beverage industry, agribusiness, minerals, and medical device packaging. ThePressure Sensitive Materials segment manufactures pressure sensitive materials that are sold intolabel, graphic and technical markets. For the period ending September 30, 2005, LTM saleswere $3.3 billion, and LTM EBITDA was $434 million, or 13.1% of sales. The net leverageratio is calculated at 1.59x.Sealed Air (SEE). Sealed Air’s Food Packaging segment primarily produces bags, films andlaminates which customers use to package a broad range of perishable foods. In conjunctionwith its materials offerings, Sealed Air also sells food-packaging equipment. Its Protective andSpecialty Packaging segment produces Bubble Wrap, Instapak foam, Jiffy envelopes and RapidFill inflatable packaging systems. LTM sales for the period ending September 30, 2005 were$4.0 billion, while LTM EBITDA was $709 million, or 17.6% of sales. The company’s netleverage ratio was 2.29x.Sonoco Products (SON). Sonoco Products is one of the world’s largest manufacturers ofindustrial and consumer packaging products. Through its Engineered Carriers and Papersegment, the company makes tubes, cores and recycled paperboard for the construction, textile,beverage and paper manufacturing industries. Its Consumer Packaging segment makes ends andclosures for containers, rigid packaging for the food and non-food markets, as well as printedflexible packaging. For the period ending September 25, 2005, LTM sales were $3.5 billion withEBITDA of $456 million, or 13.2% of sales. Its net leverage ratio was 1.66x.RECENT FINANCIAL RESULTSPackagingOver the past two years, Tekni’s Packaging segment has come under margin pressure due to therising cost of polystyrene (see Figure 8). Polystyrene has increased 12% during the last fourfiscal quarters and 64% over the past eight quarters to an estimated 92 cents per pound in thesecond fiscal quarter of 2006. In response, Tekni has successfully passed through the dollarincrease in rising raw material costs, resulting in lower gross margin. Gross profit for fiscal 2004and 2005 was $80.1 million and $83.1 million, respectively, while gross margin declined from26.2% to 23.8% over the same period (see Figure 17). Quarterly adjusted SG&A expense rosesubstantially over the two-year period, increasing from $6.6 million in the first quarter of fiscal 19
  20. 20. 2004 to $9.7 million in the fourth quarter of fiscal 2005, accounting for the decrease in adjustedEBITDA from $66.4 million in fiscal 2004 to $64.2 million in fiscal 2005.Packaging segment net sales grew 4.0% year-over-year to $85.1 million in the first quarter offiscal 2006, primarily due to the pass-through of higher selling prices. Gross profit was basicallyflat at $20.7 million, as compared with the prior year’s quarter, reflecting the dollar-for-dollarpass-throughs. SG&A expense decreased $1.8 million from the prior quarter ended July 1, 2005,primarily due to lower executive compensation. Adjusted EBITDA for the first quarter of fiscal2006 was flat at $16.3 million, compared with $16.4 million in the first quarter of fiscal 2005.Tubing ProductsTekni’s Tubing Products segment has been adversely affected by the performance of the gardenhose business (86.5% of Tubing Products net sales). Rising PVC prices, combined withmanagement’s previous unwillingness to pass-through price increases, has greatly hurt financialresults. Since September 2003, Prime PVC has increased from 39 cents per pound to 72 centsper pound, or 84.6%, while Tekni’s pricing of garden hose has increased an estimated 8.2% (seeFigure 11). This has resulted in a gross profit decline from $23.3 million in fiscal 2004 to $10.0million in fiscal 2005 (see Figure 17). Adjusted EBITDA has decreased in concert with grossprofit, declining from $18.6 million in fiscal 2004 to $5.7 million in fiscal 2005.Tubing Product segment net sales increased 39.3% to $43.2 million in the first quarter of 2006from $31.0 million in the first quarter of 2005. The increase was driven by a weather-relatedshift in timing, moving volumes from the fourth quarter of fiscal 2005 to the first quarter of fiscal2006. Gross profit declined to negative $0.5 million in the quarter from $6.7 million in the prioryear’s quarter as a result of Tekni’s unwillingness to raise prices sufficiently to compensate forsignificantly higher raw material costs. Adjusted EBITDA for the quarter ended September 30,2005 was negative $1.3 million, down $6.8 million from the prior year’s quarter.OtherTekni’s Other segment, which comprises the Company’s materials compounding businesses, hasimproved slightly over the past two years. With gross profit increasing from $4.5 million infiscal 2004 to $5.2 million in fiscal 2005, it is likely that Tekni has grown unit volume. AdjustedEBITDA increased 16% over the prior year to $5.8 million in fiscal 2005.Other segment net sales grew 12.4% year-over-year to $34.5 million in the quarter. Grossmargins increased 50bps to 6.7%, as higher sales volumes provided greater absorption of theoperation’s fixed costs. Adjusted EBITDA improved to $2.8 million, or 8.0% of net sales, forthe quarter ended September 30, 2005, up from $2.0 million, or 6.4% of net sales, in the prioryear’s quarter. 20