<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 1-11600
URETHANE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Nevada 33-0126369
(State of incorporation) (I.R.S. Employer Identification No.)
1202 East Wakeham Avenue, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)
(714) 973-0800
(Registrant's telephone number, including area code)
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
--- ---
Number of shares outstanding of each of the registrant's classes of common
stock, as of August 12, 1996: 10,630,737 shares of common stock, $.01 par value.
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<PAGE> 2
URETHANE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
As of
-------------------------------
June 30 December 31
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 289,458 $ 908,554
Accounts receivable, net of allowance for doubtful accounts 5,849,383 4,170,720
Notes receivable 144,510 147,026
Inventories 4,969,823 3,567,395
Prepaid expenses and other assets 453,225 180,476
----------- -----------
TOTAL CURRENT ASSETS 11,706,399 8,974,171
----------- -----------
PROPERTY AND EQUIPMENT:
Land 162,000 --
Manufacturing equipment and molds 4,020,356 3,102,981
Office equipment 338,246 253,561
Leasehold improvements 795,610 57,609
Equipment held under capital leases 726,997 767,401
----------- -----------
6,043,209 4,181,552
Less accumulated depreciation and amortization (2,047,463) (1,836,927)
----------- -----------
NET PROPERTY AND EQUIPMENT 3,995,746 2,344,625
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization 4,038,082 3,141,101
Notes receivable, net of current portion 930,457 866,673
Patents and other intangible assets, net of accumulated amortization 409,435 301,321
Other assets 516,977 232,906
----------- -----------
TOTAL OTHER ASSETS 5,894,951 4,542,001
----------- -----------
$21,597,096 $15,860,797
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE> 3
URETHANE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(concluded)
<TABLE>
<CAPTION>
As of
--------------------------------
June 30 December 31
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,330,528 $ 3,614,133
Accrued expenses 1,185,259 1,070,475
Long term debt -- current portion 52,000 52,000
Capital lease obligations -- current portion 403,156 396,774
------------ ------------
TOTAL CURRENT LIABILITIES 8,970,943 5,133,382
------------ ------------
LONG-TERM LIABILITIES:
Line of credit 4,552,077 3,291,723
Deferred tax liability 359,680 359,680
Long term debt, net of current portion 2,032,568 386,710
Capital lease obligations, net of current portion 150,539 354,540
------------ ------------
TOTAL LONG-TERM LIABILITIES 7,094,864 4,392,653
------------ ------------
MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE -- 678,956
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 18,000,000 shares authorized:
10,630,737 and 10,395,610 shares issued and outstanding, 106,013 103,956
at June 30, 1996 and December 31, 1995, respectively
Capital in excess of par value 25,852,365 25,252,270
Accumulated deficit (20,427,089) (19,700,420)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,531,289 5,655,806
------------ ------------
$21,597,096 $15,860,797
============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
URETHANE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
---------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 8,456,227 $7,399,763 $14,778,113 $ 12,802,724
COST OF GOODS SOLD 6,844,980 5,880,285 12,179,831 10,057,945
----------- ---------- ----------- ------------
GROSS PROFIT 1,611,247 1,519,478 2,598,282 2,744,779
OPERATING EXPENSES:
Selling, general and administrative 1,342,331 813,498 2,572,321 1,697,881
Research and development 252,780 126,515 457,056 288,976
Depreciation and amortization 330,214 179,748 372,853 291,512
----------- ---------- ----------- ------------
TOTAL OPERATING EXPENSES 1,925,325 1,119,761 3,402,230 2,278,369
----------- ---------- ----------- ------------
OPERATING INCOME (LOSS) (314,078) 399,717 (803,948) 466,410
----------- ---------- ----------- ------------
INTEREST EXPENSE AND OTHER:
Interest expense 207,643 132,177 344,956 227,412
Other expense (income), net 69,385 (16,786) 35,938 (18,737)
----------- ---------- ----------- ------------
TOTAL INTEREST EXPENSE AND OTHER 277,028 115,391 380,894 208,675
----------- ---------- ----------- ------------
----------- ------------
INCOME (LOSS) BEFORE TAX PROVISION AND
DISCONTINUED OPERATIONS (591,106) 284,326 (1,184,842) 257,735
TAX PROVISION -- -- -- --
----------- ---------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (591,106) 284,326 (1,184,842) 257,735
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 458,174 (218,313) 458,174 (184,551)
----------- ---------- ----------- ------------
NET INCOME (LOSS) ($ 132,932) $ 66,013 ($ 726,668) $ 73,184
=========== ========== =========== ============
NET INCOME (LOSS) PER COMMON SHARE:
Income (Loss) from continuing operations ($ 0.06) $ 0.03 ($ 0.11) $ 0.03
Income (Loss) from discontinued operations $ 0.04 (0.02) 0.04 (0.02)
----------- ---------- ----------- ------------
NET INCOME (LOSS) PER COMMON SHARE ($ 0.02) $ 0.01 ($ 0.07) $ 0.01
=========== ========== =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,476,815 9,318,592 10,439,087 9,174,815
=========== ========== =========== ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
URETHANE TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 726,668) $ 73,184
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 398,200 294,279
Minority interest in net loss of joint venture (20,815) (22,060)
Provision for bad debts 54,835 --
Increase (decrease) from changes in:
Accounts receivable (929,253) (2,013,661)
Inventories (1,043,071) (234,965)
Deposits and prepaid expenses (294,134) (2,567)
Accounts payable 2,184,778 748,305
Accrued expenses 110,973 (1,390,301)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (265,155) (2,547,786)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable (259,088) (49,667)
Acquisition of property and equipment (308,422) (424,315)
(Acquisition) sale of business (2,148,520) 50,000
Patents and other intangible assets (561,979) (106,208)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,278,009) (530,190)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit line 1,260,354 1,140,457
Payments under capital leases (197,619) (209,337)
Borrowings under long term debt 1,671,858 --
Repayment of long term debt (26,000) (23,592)
Payment of debt issuance costs (125,868) --
Proceeds from issuance of common stock warrant 341,343 --
Proceeds from issuance of common stock -- 2,241,724
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,924,068 3,149,252
----------- -----------
NET (DECREASE) INCREASE IN CASH (619,096) 71,276
CASH, beginning of year 908,554 1,528,380
----------- -----------
CASH, end of six months $ 289,458 $ 1,599,656
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
URETHANE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1996
(1) General Information
The condensed consolidated financial statements include the accounts of
Urethane Technologies, Inc. (the "Parent") and its 100 percent owned
subsidiaries, Polymer Development Laboratories, Inc. ("PDL"), a California
corporation, and BMC Acquisition, Inc. ("BMC"), a North Carolina corporation,
which are consolidated into the accompanying financial statements, collectively
referred to as the "Company." All intercompany transactions and balances are
eliminated in consolidation.
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of the
Company, reflect all adjustments (consisting only of normal recurring
adjustments) and disclosures which are necessary for a fair presentation.
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 such rules and regulations. It is
suggested that these condensed financial statements be read in conjunction with
the audited financial statements and the notes thereto and management's
discussion and analysis of financial condition and results of operations
included in the Company's latest Annual Report on Form 10-K for the year ended
December 31, 1995. The results of operations for the six month period ended June
30, 1996 are not necessarily indicative of the results for the full year.
Certain amounts in the 1995 condensed consolidated statements of
operations have been reclassified to conform to the current year presentation.
(2) Dissolution of Sole Associates Joint Venture
In June 1996, the Company acquired the interest of Candie's Inc.
("Candie's") in Sole Associates, J.V. ("Sole") through the issuance of 175,000
shares of the Company's common stock to Candie's. As part of the agreement, the
Company received cash and machinery held by Sole valued at more than $250,000.
The Company and Candie's established Sole in 1991 to develop footwear soles and
certain other items utilizing the Company's proprietary polyurethane systems.
Following the acquisition of Candie's interest in Sole, the Company dissolved
Sole, which had been dormant for over one year prior to that dissolution.
(3) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist primarily of raw materials used in the blending of chemicals
and production of polyurethane products. Inventories at June 30, 1996 and
December 31, 1995 are summarized as follows:
6
<PAGE> 7
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
Raw materials $2,849,012 $1,938,612
Finished goods 2,120,811 1,628,783
---------- ----------
Total $4,969,823 $3,567,395
========== ==========
</TABLE>
(4) Notes Payable -- Credit Line
PDL utilizes a $5,000,000 secured credit line from a finance company to
finance its working capital requirements. As the credit line includes a term
loan with a balance of approximately $186,000 at June 30, 1996, the maximum
amount that the Company could possibly borrow on the credit line on the date was
approximately $4,814,000. As of June 30, 1996, the outstanding balance on the
credit line was $4,552,077 and the amount available to the Company on the line
was approximately $261,000. The outstanding balance on both the credit line and
the term loan bears interest at 2.5% over a floating base rate. Interest is paid
monthly. The credit line requires PDL to maintain certain financial covenants
including a total debt to net worth ratio, a minimum level of net worth, a
minimum current ratio and a minimum cash flow coverage ratio. Under the terms of
the credit line, the Company may allocate up to $100,000 per month to PDL for
general and administrative services. The credit line restricts dividends from
PDL to the Parent to no more than 25% of PDL's earnings for the previous year.
The Parent has guarantied the line of credit, which expires in November 1997.
(5) Raw Material Purchase Agreements
The Company has reached purchase agreements with several of its raw
material suppliers. Under those agreements, the Company is required to purchase
certain quantities of raw materials from those suppliers over a two to three
year period in exchange for certain credits related to purchases prior to June
30, 1996. The current portion of those credits is included in prepaid expenses
and other current assets and the long-term portion is included in other long
term assets.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Sales in the second quarter of 1996 were $8,456,227, a $1,056,464 or 14
percent increase over sales of $7,399,763 in the second quarter of 1995. Sales
in the first six months of 1996 were $14,778,113, a $1,975,389 or 15 percent
increase over sales of $12,802,724 in the first six months of 1995. The increase
in sales in each case was due to increased quantities of product sold, which in
turn was primarily a result of the Company's March 1996 acquisition of the
business of Brin-Mont Corporation. That business consists of a polyol production
and polyurethane systems blending facility in Greensboro, North Carolina. The
Company conducts its business through two wholly-owned subsidiaries, Polymer
Development Laboratories, Inc. ("PDL"), and the operator of the Greensboro plant
("BMC").
Cost of goods sold for the second quarter of 1996 was $6,844,980, as
compared to $5,880,285 in the second quarter of 1995, reflecting the higher
volume of overall sales noted above. The Company's gross margin was 20.5 percent
in the second quarter of 1995 and 19.1 percent in the second quarter of 1996.
The gross margin decrease was the result of raw material price increases from
the Company's vendors and competitive pressures in the Company's selling
markets, which forced the Company to cut prices while suffering an increase in
raw materials costs. A change in the mix of products that the Company sells
included a greater proportion of low-margin products, which exacerbated the
effect of competitive pressures. The Company has announced a general price
increase effective August 15, 1996, but it is too early to tell to what extent
that increase in posted prices will result in increased gross margin, as it is
possible that competition may force the Company to rescind or suspend that
increase as to certain customers, or that certain customers may refuse to
continue purchasing from the Company at the increased price level.
Cost of goods sold for the first six months of 1996 was $12,179,831, as
compared to $10,057,945 in the first six months of 1995, reflecting the higher
volume of overall sales noted above. The Company's gross margin was 21.4 percent
in the first six months of 1995, compared to a gross margin of 17.6 percent in
the first six months of 1996. The gross margin decrease was the result of the
change in mix, competitive pressures and raw material price increases discussed
above.
Selling, general and administrative ("SG&A") expenses in the second
quarter of 1996 were $1,342,331, or 15.9 percent of sales, compared to $813,498,
or 11.0 percent of sales, in the second quarter of 1995. Approximately $145,000
of the overall $528,833 increase in SG&A expenses represents such expenses
incurred at the Greensboro plant, which was acquired in March 1996 and thus not
included in the prior year's expenses. Approximately $215,000 of the remainder
of the increase in SG&A expenses represents increases in selling expenses,
primarily as a result of adding personnel to generate the increase in sales.
SG&A expenses in the first six months of 1996 were $2,572,321, or 17.4
percent of sales, compared to $1,697,881, or 13.3 percent of sales, in the first
six months of 1995. The Greensboro plant contributed approximately $163,000 of
the increase. The remainder of the increase is primarily increased selling
expenses. As the Greensboro plant was acquired in mid-March 1996, the six month
periods are not directly comparable.
Research and development ("R&D") expenses in the second quarter of 1996
were $252,780, or 3.0 percent of sales, compared to $126,515, or 1.7 percent of
sales, in the second quarter of 1995. R&D expenses in the first six months of
1996 were $457,056, or 3.1 percent of sales, compared to $288,976, or 2.3
percent of sales in the first six months of 1995. The primary reason for the
increased expenses was an increase in product testing, implemented for the
purpose of improving
8
<PAGE> 9
quality control. Both the Company's internal quality control staff and
expenditures for outside testing increased. Inclusion of some of the R&D
expenses at the Greensboro plant also increased the total. The Company expects
that R&D expenses as a percentage of sales should decline in future periods, to
a level of approximately 2.5%.
The Company incurred depreciation and amortization expense of $330,214
during the second quarter of 1996, compared to $179,748 during the second
quarter of 1995. The Company incurred depreciation and amortization expense of
$372,853 during the six months ended June 30, 1996, compared to $291,512 during
the corresponding period during 1995. These are non-cash charges against
earnings. Amortization expense includes amortization of goodwill over a 20-year
period, relating to both the 1994 acquisition of PDL and the 1996 acquisition of
the Greensboro plant. The goodwill being amortized represents the excess of the
cost of acquiring PDL and the assets of Brin-Mont Corporation over the fair
value of the PDL and Brin-Mont Corporation net assets at their respective dates
of acquisition. The Company incurred goodwill amortization expense of $99,894
during the first six months of 1996, compared to $84,990 in the first six months
of 1995. The goodwill amortization expense reflected BMC goodwill only for the
period after March 15, 1996. Depreciation expense includes, for periods after
March 15, 1996, depreciation of the assets of BMC, which accounts for most of
the increase in that expense category.
Interest expense in the second quarter of 1996 was $207,643, as
compared with $132,177 in the second quarter of 1995. Interest expense in the
first six months of 1996 was $344,956, as compared with $227,412 in the first
six months of 1995. The increase in interest expense was due in part to
increased sales, resulting in increased borrowings under the Company's line of
credit, but the primary reason for the increase was interest incurred in
connection with borrowing $2,000,000 to finance the acquisition of the assets of
Brin-Mont Corporation.
Overall, the Company recorded a loss from continuing operations of
$591,106, or $.06 per share, for the second quarter of 1996, compared to income
from continuing operations of $284,326, or $.03 per share, in the second quarter
of 1995.
Upon the dissolution of its Sole Associates joint venture in the second
quarter of 1996, the Company realized a gain from discontinued operations of
$458,174, representing the co-venturer's share of the book value of that
venture, reduced by the fair market value of the Company's common stock issued
in exchange. In the second quarter of 1995, the Company suffered a loss on
discontinued operations of $218,313, representing losses incurred by the
Company's detectable warning mat operations in that period. The Company's income
from discontinued operations for the six months ended June 30, 1996 was
identical to such income for the second quarter, as compared to a loss from
discontinued operations in the first six months of 1995 of $184,551.
Including discontinued operations, the Company recorded a net loss for
the second quarter of 1996 of $132,932, or $0.02 per share, compared to net
income of $66,013 or $0.01 per share, in the second quarter of 1995. The average
number of outstanding shares in the second quarter of 1996 was 10,476,815,
compared to 9,318,592 in the second quarter of 1995.
Net loss for the first six months of 1996 was $726,668, or $0.07 per
share, compared to net income of $73,184, or $0.01 per share, in the first six
months of 1995. The average number of outstanding shares in the first six months
of 1996 was 10,439,087, compared to 9,174,815 in the first six months of 1995.
Liquidity and Capital Resources
During the second quarter, the Company acquired substantially all the
assets (and specified liabilities) of Brin-Mont Corporation, a manufacturer of
polyols, for consideration consisting of
9
<PAGE> 10
$2,000,000 in cash and 30,769 shares of common stock. Those assets comprise a
polyurethane manufacturing facility in Greensboro, North Carolina, the accounts
receivable and accounts payable of Brin-Mont Corporation, inventory, and certain
contractual rights and obligations.
In addition to investment in improved production facilities, the
Company may require capital for the purpose of making one or more acquisitions
of businesses related to the Company's existing business. The Company has begun
discussions with candidates for acquisition, and expects that it would be most
likely to raise any necessary capital by issuance of equity securities directly
to the seller, or by other seller financing. The Company does not have any
agreement to make any particular acquisition, and there can be no assurance that
the Company will agree to acquire any business.
At June 30, 1996, the Company had working capital of $2,735,456, as
compared to working capital of $3,840,789 at December 31, 1995. Included in
working capital at December 31, 1995 was $203,304 of cash attributable to Sole,
which was not generally available to the Company for working capital or any
other purposes. In June 1996, the Company acquired its joint venture partner's
interest in Sole, and then dissolved Sole, making Sole's assets available to the
Company for all purposes. The Company's operating activities used cash in the
first six months of 1996, as has been the case in the past. The Company has
financed its working capital requirements through the issuance of shares of
common stock and warrants and through borrowings.
Operating activities used cash of $265,155 in the first six months of
1996, or $461,513 less than the Company's net loss by $726,668. The primary
reason for the difference was an increase in accounts payable of $2,184,778,
which exceeded the combined increase in accounts receivable and inventory by
$212,454. The other significant factor was depreciation and amortization expense
of $398,200, which is a noncash charge. In the prior year's corresponding
period, the primary reason for the substantial difference between the net loss
and use of cash in operating activities was the growth in accounts receivable,
which in turn was due primarily to the Company's sales growth. The other major
factor in the difference between the net profit and the use of cash in operating
activities in the prior year's period was the utilization of an accrued shutdown
cost reserve relating to the discontinued molding operation. That reserve was
included in the other payables and accrued expenses account.
The Company used $3,278,009 of cash in its investing activities in the
first six months of 1996, compared to a use of $530,190 in the first six months
of 1995. The primary component in the investing activities figure for the first
six months of 1996 was the Company's acquisition of the assets of Brin-Mont
Corporation. The next most significant component was also related to the
Brin-Mont acquisition: goodwill acquired in that transaction accounted for most
of the $561,979 increase in patents and other intangible assets. The principal
component in the investing activities figure in the first six months of 1995 was
a $424,315 increase in equipment and improvements. That figure included
equipment that the Company purchased for its discontinued operations. The
Company plans to invest approximately $1 million to $1.5 million in 1996 in
fixed assets and leasehold improvements at its production facilities, but such
investments will be made only as capital resources become available. The Company
has not to date identified a source for such capital.
The Company's financing activities provided $2,924,068 of cash in the
first six months of 1996, compared to $3,149,252 in the first six months of
1995. The cash provided by financing activities consisted primarily of the
proceeds from a venture capital loan received in March 1996, the proceeds of
which were used to pay the majority of the purchase price of the Company's BMC
subsidiary. Substantially all of the remainder represents a net increase in
amounts borrowed under the Company's line of credit. The primary financing
source in the first half of 1995 was a private offering of common stock, which
raised $2,241,724.
10
<PAGE> 11
As a result of the foregoing, the Company had a net decrease in cash
during the first six months of 1996 of $619,096, compared to a net cash increase
of $71,276 during the first six months of 1995. At June 30, 1996, the Company
had $2,735,456 in working capital. This represented a decrease of $1,105,333
from the working capital position of $3,840,789 at December 31, 1995.
Despite the working capital balance of $2,735,456 at June 30, 1996, the
Company's financial condition is constrained since that figure includes only
$289,458 of cash. That cash position has tightened further subsequent to the end
of the quarter.
The Company and its PDL subsidiary are dependent on PDL's $5,000,000
line of credit, which UTI has guarantied. The line of credit is secured by PDL's
receivables and inventory and matures in November 1997. Borrowings on the line
of credit bear interest at the lender's base rate (historically equal to the
prime rate) plus 2.5%, which presently results in interest accruing at the rate
of 10.75% per annum. Under the line of credit, PDL is permitted to borrow up to
80% of eligible receivables, and 20% to 30% of eligible inventory. As of June
30, 1996, PDL had drawn approximately $4,552,000 on the credit line and had
approximately $261,000 available under the borrowing base formula on that date.
There can be no assurance that such a borrowing base formula will enable PDL to
continue to finance its working capital requirements through borrowings under
the credit line. There can also be no assurance that the $5,000,000 maximum
advance on the line will be sufficient to finance PDL's working capital
requirements, if PDL's sales were to grow substantially.
The credit line includes covenants which require that PDL maintain
certain financial restrictions, including a ratio of current assets to current
labilities of at least one-to-one, and other tests. All of the financial
covenants are tested on a monthly basis. Certain of those tests were not met as
of April 30 and May 30, 1996. As part of a June 1996 agreement to expand the
credit line from a maximum of $4,200,000 to a maximum of $5,000,000, those
requirements were relaxed, prior noncompliance was waived, and the Company paid
an accommodation fee of $15,000. However, there can be no assurance that the
Company will be able to continue to operate within such existing financial
restrictions. A failure to fulfill such covenants would be a default under the
credit line, in which event the Company could be required to seek alternate
financing under severely adverse conditions should the existing lender refuse to
waive any breach of covenants or relax their terms.
Due to the decrease in gross margin during the second quarter and
expected continued downward pressure on margins for the next year, the Company
concluded that its operating expense structure had to be reduced in order to
meet its financial covenant tests, improve profitability, and improve cash flow.
Accordingly, the Company reduced its workforce by ten employees, or 11%, on
August 9, 1996. That workforce reduction should yield approximately $150,000 in
quarterly savings. The Company has also increased its existing program to reduce
operating costs, such as travel and telephone expenses. That expense reduction
program is expected to yield a similar $150,000 in quarterly savings. As various
building and equipment leases end over the next twelve months, the Company
expects that its operating costs will decline by a further $120,000 per quarter.
Should the above expense cuts fail to improve earnings enough to allow
the Company to meet its financial covenants, the Company may be required to
further reduce its operating expenses and to approach its lender for either a
waiver of any covenant breaches or a modification to its covenants.
In any event, the Company must renegotiate or replace its existing line
of credit for two reasons: first, in November 1996 the maturity date of the line
will be less than one year in the future, and amounts borrowed under the line
will therefore be classified as short-term debt, rather than long-term debt. The
Company expects that such a reclassification would result in a ratio of current
assets to current liabilities of less than one-to-one, which would be a breach
of covenants under the existing line of credit. Second, the Company's loan from
a venture lender in March 1996 (the proceeds of which were used to acquire the
assets of Brin-Mont Corporation) requires that the Company cause its
11
<PAGE> 12
BMC subsidiary to merge with its PDL subsidiary no later than January 1, 1997.
Such a merger would require the consent of the lender under the existing line of
credit, but that lender has to date refused to give such consent. The Company
therefore plans, within the current fiscal quarter, to discuss with its lender a
further modification of this credit line, to extend its maturity date, and to
allow a merger of the Company's subsidiaries. There can be no assurance that
such discussions will result in an agreement with the current lender on
acceptable terms, or at all. If no such agreement is reached, then the Company
may seek alternative credit facilities from other potential lenders. If the
Company does terminate its existing credit line, as it would do upon obtaining
an alternative credit line with more favorable terms, the Company would incur a
prepayment penalty of approximately $100,000. The Company has not identified any
specific alternate lenders, and there can be no assurance that the Company will
be successful in negotiating more favorable terms for such a credit facility, if
any.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that its current working capital,
together with projected revenues from operations, will satisfy the Company's
contemplated cash requirements for at least 12 months following the date of this
report. In the event that the Company's plans change, its assumptions prove to
be inaccurate, or if projected cash flow proves to be insufficient to fund
operations, the Company could be required to seek additional or other financing,
which may be unavailable or available only on unfavorable terms. In view of the
Company's limited resources, its anticipated expenses, and the competitive
environment in which the Company operates, any failure to make or implement
necessary reductions in expenditures, further deterioration in the Company's
gross margins on sales, or decline in net sales, could have a material adverse
effect on the Company, including possibly requiring the Company to curtail its
operations significantly.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed:
11. Statement re Computation of Per Share Earnings
27. Financial Data Schedule
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: August 15, 1996 URETHANE TECHNOLOGIES, INC.
By: /s/ JAMES B. FRAKES
------------------------------------------
James B. Frakes
Vice President and Chief Financial Officer
12
<PAGE> 1
EXHIBIT 11
URETHANE TECHNOLOGIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The computation of net loss per share for the quarter and six month period ended
June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30,1996 June 30,1996
------------- ----------------
<S> <C> <C>
PRIMARY:
Net Loss ($ 132,932) ($ 726,668)
============ ============
Weighted average number of common shares outstanding 10,476,815 10,439,087
Dilutive common stock equivalents outstanding -- --
------------ ------------
Average number of common shares outstanding
on a primary basis ($ 0.01) ($ 0.07)
============ ============
FULLY DILUTED:
Net loss ($ 132,932) ($ 726,668)
============ ============
Weighted average number of common
shares outstanding 10,476,815 10,439,087
Dilutive common stock equivalents outstanding -- --
------------ ------------
Average number of common shares outstanding 10,476,815 10,439,087
============ ============
on a fully diluted basis
Net loss per share on a fully diluted basis ($ 0.01) ($ 0.07)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 289458
<SECURITIES> 0
<RECEIVABLES> 6201909
<ALLOWANCES> 208016
<INVENTORY> 4969823
<CURRENT-ASSETS> 11706399
<PP&E> 6043209
<DEPRECIATION> 2047463
<TOTAL-ASSETS> 21597096
<CURRENT-LIABILITIES> 8970943
<BONDS> 0
0
0
<COMMON> 106013
<OTHER-SE> 5425276
<TOTAL-LIABILITY-AND-EQUITY> 21597096
<SALES> 8456227
<TOTAL-REVENUES> 8456227
<CGS> 6844980
<TOTAL-COSTS> 8770305
<OTHER-EXPENSES> 69385
<LOSS-PROVISION> 54835
<INTEREST-EXPENSE> 207643
<INCOME-PRETAX> (591106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (591106)
<DISCONTINUED> 458174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132932)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
