<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended: April 30, 1997
-----------------
Commission File Number: 0-26508
--------
PURETEC CORPORATION
-----------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3376449
- ------------------------------- -------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (201)941-6550
-------------
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
--- ---
As of June 11, 1997, there were 29,005,836 shares of common stock
outstanding.
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
C O N T E N T S
Page
----
Part I FINANCIAL INFORMATION:
----------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of 3
April 30, 1997 and July 31, 1996
Consolidated Statements of Operations 4-5
for the three and nine month periods ended
April 30, 1997 and 1996
Consolidated Statements of Cash Flows 6-7
for the nine month periods ended
April 30, 1997 and 1996
Notes to Consolidated Financial 8-11
Statements
Item 2. Management's Discussion and Analysis 12-16
of Financial Condition and Results of
Operations
Part II OTHER INFORMATION:
------------------
Item 1 to Item 6. 17-18
Signatures 19
* * * * * * * * * * * *
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
April 30, July 31,
ASSETS 1997 1996
------ ----------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 3,046 $ 5,995
Accounts receivable, less allowance for doubtful accounts of $724
as of April 30, 1997 and $980 as of July 31, 1996............................................ 61,183 53,675
Inventories..................................................................................... 72,800 41,403
Prepaid expenses and other current assets....................................................... 4,268 3,955
-------- --------
TOTAL CURRENT ASSETS....................................................................... 141,297 105,028
PROPERTY, PLANT AND EQUIPMENT, net..................................................................... 85,901 84,206
EXCESS OF COST OF INVESTMENTS OVER NET ASSETS ACQUIRED
(net of accumulated amortization of $5,788 and $3,168 as of April 30,
1997 and July 31, 1996, respectively)........................................................ 89,980 92,570
OTHER INTANGIBLE ASSETS, net........................................................................... 1,205 1,344
OTHER ASSETS, net...................................................................................... 11,230 12,592
-------- --------
TOTAL ASSETS............................................................................... $329,613 $295,740
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short - term borrowings......................................................................... $ 52,452 $ 20,170
Accounts payable................................................................................ 35,532 28,974
Accrued plant closing and disposal costs........................................................ 1,906 3,554
Accrued expenses................................................................................ 28,947 24,947
Current portion of long term debt............................................................... 1,641 5,114
-------- --------
TOTAL CURRENT LIABILITIES 120,478 82,759
OTHER LONG TERM LIABILITIES............................................................................ 4,957 2,923
PENSION AND POSTRETIREMENT LIABILITIES................................................................. 7,872 7,882
DEFERRED INCOME TAXES.................................................................................. 1,088 1,280
LONG-TERM DEBT......................................................................................... 131,346 130,162
-------- --------
TOTAL LIABILITIES.......................................................................... 265,741 225,006
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST...................................................................................... 373 26
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 50,000,000 authorized; 29,005,836
and 29,334,551 shares issued and outstanding
at April 30, 1997 and July 31, 1996, respectively........................................... 290 293
Treasury Stock.................................................................................... - -
Additional paid - in capital...................................................................... 128,923 129,606
Deficit........................................................................................... (63,511) (58,671)
Minimum pension liability ...................................................................... (137) (137)
Cumulative foreign currency translation adjustment ............................................... (2,066) (383)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................................................. 63,499 70,708
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................. $329,613 $295,740
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------------
1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
NET SALES....................................................................................... $ 93,141 $ 101,101
----------- -----------
COSTS AND EXPENSES:
Cost of goods sold...................................................................... 73,275 77,397
Selling, general and administrative..................................................... 9,273 10,083
Amortization of intangible assets....................................................... 1,006 927
Research and development................................................................ 153 109
----------- -----------
83,707 88,516
----------- -----------
INCOME FROM OPERATIONS......................................................................... 9,434 12,585
OTHER EXPENSES (INCOME):
Interest expense........................................................................ 4,811 4,806
Debt issuance cost and discount amortization............................................ 256 503
Equity in loss (net income) of affiliates............................................... 603 (220)
Other, net ............................................................................. (2) 415
----------- -----------
5,668 5,504
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND INCOME TAXES............................................................... 3,766 7,081
Provision for income taxes.............................................................. 1,135 1,947
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST....................................................................... 2,631 5,134
MINORITY INTEREST ............................................................................. (373) -
----------- -----------
INCOME FROM CONTINUING OPERATIONS ............................................................. 2,258 5,134
DISCONTINUED OPERATIONS:
(Loss) income from injection molding operation.......................................... (580) 57
Loss on disposition from injection molding and non-woven textile operation.............. (548) -
----------- -----------
(1,128) 57
----------- -----------
NET INCOME .................................................................................... $ 1,130 $ 5,191
=========== ===========
INCOME (LOSS) PER COMMON SHARE:
Income from continuing operations.................................................... $ 0.08 $ 0.19
(Loss) income from discontinued operations........................................... (0.04) 0.00
----------- -----------
Net income ............................................................................. $ 0.04 $ 0.19
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING...................................................................... 29,005,836 27,346,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
----------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
NET SALES...................................................................................... $ 216,571 $ 234,304
----------- -----------
COSTS AND EXPENSES:
Cost of goods sold...................................................................... 170,938 185,629
Selling, general and administrative..................................................... 26,153 25,030
Amortization of intangible assets....................................................... 2,753 2,782
Research and development................................................................ 480 507
----------- -----------
200,324 213,948
----------- -----------
INCOME FROM OPERATIONS........................................................................ 16,247 20,356
OTHER EXPENSES (INCOME):
Interest expense........................................................................ 14,092 14,297
Debt issuance cost and discount amortization............................................ 1,444 1,515
Equity in loss of affiliates............................................................ 868 346
Other, net ............................................................................. (95) 253
----------- -----------
16,309 16,411
----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND INCOME TAXES (62) 3,945
Provision for income taxes............................................................. 2,086 2,100
----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST ...................................................................... (2,148) 1,845
MINORITY INTEREST ............................................................................. (373) -
----------- -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS ...................................................... (2,521) 1,845
DISCONTINUED OPERATIONS:
Loss from non-woven textiles and injection molding operations........................... (1,226) (1,585)
Loss on disposition from non-woven textiles and injection molding operations............ (1,093) (1,445)
----------- -----------
(2,319) (3,030)
NET LOSS....................................................................................... $ (4,840) $ (1,185)
=========== ===========
(LOSS) INCOME PER COMMON SHARE:
(Loss) income from continuing operations.............................................. $ (0.09) $ 0.05
Loss from discontinued operations.................................................... (0.08) (0.11)
----------- -----------
Net loss................................................................................ $ (0.17) $ (0.06)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING...................................................................... 29,226,757 27,114,000
=========== ===========
</TABLE>
See notes to consolidated financial statement
5
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ................................................................... $ (4,840) $ (1,185)
Adjustments to reconcile net loss to net cash
used in operating activities from continuing operations:
Depreciation and amortization .................................... 10,470 13,009
Gain on disposal of property and equipment ....................... (18) (321)
Bad debt allowance ............................................... (202) 111
Deferred income tax benefit ...................................... (480) (86)
Changes in operating assets and liabilities net of effects from
acquisition:
(Increase) decrease in assets:
Accounts receivable ............................................ (9,410) (26,909)
Inventories .................................................... (32,650) (3,093)
Prepaid expenses and other current assets ...................... (289) 3,630
Other assets ................................................... (1,143) (854)
Increase (decrease) in liabilities:
Accounts payable ............................................... 6,830 2,709
Accrued plant closing and disposal costs ....................... (1,648) (499)
Accrued expenses ............................................... 4,181 8,859
Other Liablities ............................................... 1,774 132
NET CASH USED IN OPERATING ACTIVITIES -------- --------
FROM CONTINUING OPERATIONS ....................................... (27,425) (4,497)
-------- --------
Adjustment for loss on sale of non-woven textile operations and to
adjust for cash held by previously consolidated subsidiary ..... - 1,205
Reserve for losses on discontinued injection molding operations... 500 -
Depreciation of discontinued injection molding operation ......... 754 -
Change in net operating assets of injection molding operation .... (222) -
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES FROM
DISCONTINUED OPERATIONS .......................................... 1,032 1,205
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ...................................... (26,393) (3,292)
-------- --------
</TABLE>
(Continued)
See notes to consolidated financial statements
6
<PAGE>
PureTec Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ......................... (5,902) (9,801)
Additions to intangibles ........................................... - -
Purchase of net assets ............................................. - (26,820)
Proceeds from the sale of property, plant, & equipment ............. 28 915
Investment used for Burlington purchase ............................ - 13,500
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................................. (5,874) (22,206)
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving credit
facility and short-term borrowing, net ........................ 32,372 12,463
Proceeds from long-term debt ....................................... 471 16,229
Repayments of long-term debt ....................................... (6,617) (8,139)
Proceeds from warrant/option exercise .............................. 1 -
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............................. 26,227 20,553
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 3,091 1,019
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .............................. (2,949) (3,926)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of the period ..................... 5,995 7,097
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 3,046 $ 3,171
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .......................................................... $ 10,138 $ 10,149
Income taxes ...................................................... 770 1,875
Non-cash transactions:
Debenture conversion .............................................. - 1,000
Issuance of note payable to seller - Burlington Resins ............ - 4,000
Capitalized Lease Colorite Europe Limited premises ................ 3,784 -
Retirement of treasury stock ...................................... 687 -
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. ORGANIZATION
PureTec's ("The Company") principal businesses are the manufacturing of
garden hose, specialty plastic compounds and fabricated precision plastic
components for consumer and industrial markets, the manufacturing of dispersion
(plastisol) and specialty suspension (copolymer and blending) polyvinyl
chloride ("PVC") resins and the recycling of plastics and injection molding of
custom parts using both recycled and virgin plastic materials. The Company
services its markets through its network of 22 manufacturing facilities,
located in key points throughout the United States, with three locations in
Europe and one in Canada.
In September 1996, the recycling operations of PureTec were sold to
Plastic Specialties & Technologies, Inc., ("PST") an 83% owned subsidiary of
the Company. This sale transaction included the sale of certain fixed assets,
raw material inventory and other assets for $4,400 in cash and a $1,769
contribution to capital. This transaction had no material effect on
consolidated financial statements of the Company as PST is a consolidated
subsidiary, except to the extent that the operating results of the recycling
operations are attributable to the minority interests in PST. Such transaction
had no material effect on the current operating results herein.
2. INTERIM FINANCIAL INFORMATION
The consolidated balance sheet of the Company as of April 30, 1997, the
consolidated statements of operations for the three and nine month periods
ended April 30, 1997 and 1996 and the consolidated statements of cash flows for
the nine months ended April 30, 1997 and 1996 are unaudited and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments (which
include only normal recurring accruals) necessary to present fairly the
financial position, results of operations and cash flows have been included.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The July 31, 1996 balance sheet data
is derived from the audited consolidated financial statements. The attached
financial statements should be read in connection with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K/A-1 for the year ended July 31, 1996.
3. COMMITMENTS AND CONTINGENCIES
The Company and certain of its directors are currently defendants in two
proceedings brought by shareholders and former employees who seek, among other
things, injunctive relief, damages, and royalties. The Company has agreed to
indemnify the directors for any final judgments against them in these
proceedings. The Company currently has accrued $150 in connection with settling
this matter.
On February 18, 1993, Ware Chemical Co. ("Ware Chemical"), a former PST
subsidiary (now dormant) was served with a third party complaint in the matter
of United States v. Davis. In Davis, the United States has alleged that certain
private entitites are liable, pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), for cleanup costs that have
been incurred, and will be incurred in the future, with remediation of the Davis
Landfill site in Rhode Island. Ware Chemical was owned by Dart Industries (now
Kraft, Inc.) during the time in question (1975-1977), and Kraft has agreed to
assume all responsibility.
Ozite Corporation ("Ozite"), a wholly owned subsidiary, is also engaged
in litigation in which it seeks damages from the former owner of Dalen
("Dalen"), a discontinued segment of Ozite. In December 1987, Ozite commenced
legal proceedings against the seller of Dalen, seeking monetary damages and
other equitable relief from Dalen for various misrepresentations made in its
financial statements and other miscellaneous information presented on which
Ozite elected to proceed with the purchase of Dalen. The former owner of Dalen
has counterclaimed for the enforcement of his rights in the subject matter and
for recovery of the balance of the purchase price in an amount
8
<PAGE>
approximately equal to $3,000 plus accrued interest, amounts claimed to be due
under a consulting agreement, and punitive damages. The total amount demanded
by the seller is approximately $11,000. The ultimate outcome of either of these
actions is presently undeterminable. However, the Company believes the ultimate
outcome will not have any material adverse effect on its financial position or
results of operations.
4. INVENTORIES:
Inventories consist of the following:
April 30, July 31,
1997 1996
----------- ----------
(Unaudited)
Raw materials & supplies $ 23,770 $ 16,028
Recycled material 825 1,944
Work-in-process 1,367 2,074
Finished goods 46,838 21,357
---------- ----------
$ 72,800 $ 41,403
========== ==========
5. SHORT TERM BORROWINGS AND LONG TERM DEBT
On August 23, 1996, Colorite Europe Limited ("CEL"), an indirect
wholly owned subsidiary of PST, entered into an agreement with a UK Commercial
Bank to provide the following credit facilities:
a. Working Capital Facility of $243 ((pound)150) with interest charged at
the sum of 2.0% plus the London Interbank Offered Rate ("LIBOR").
b. Short Term Demand Loan of $1,458 ((pound)900), for bridging of capital
grants to be received from government related authorities in Northern Ireland.
Interest will be charged at the sum of 2.0% plus LIBOR.
c. Overdraft Facility of $729 ((pound)450), with interest charged at the
UK base rate, currently at 5.75%, plus 1.75%, payable quarterly.
At April 30, 1997, there were no amounts outstanding on these short
term credit facilities. These short term credit facilities are subject to
certain restrictions, collateral and covenants, and expire in July 31, 1997.
The Company intends to extend these, or similar facilities, with the UK
Commercial Bank.
In addition to the short term credit facilities for CEL described
above, the credit agreement with the UK Commercial Bank also provided for a
Term Loan of $2,107 ((pound)1,300), payable in 13 equal semi-annual
installments of $151 ((pound)93) commencing June 20, 1998 with a final payment
of $158 ((pound)98) on December 31, 2004. Interest will be charged at the sum
of 1.75% plus LIBOR. At April 30, 1997, the entire balance was outstanding. The
Term Loan is subject to certain restrictions, collateral and covenants.
Additionally, CEL has entered into a 20 year lease for the facilities that it
has now occupied in Northern Ireland. This lease is accounted for as a capital
lease, and the balance on the lease as of April 30, 1997 is $3,784
((pound)2,335).
6. INCOME TAXES
The Company's tax provision for the periods ended April 30,
1997 and 1996 are primarily due to the Company's foreign operations. The tax
provisions do not reflect the expected 34% benefit based on existing Federal
tax rates due to the sizable operating losses experienced in its domestic
operations. The Company has not anticipated the tax benefits of such losses as
it is more likely than not that such deferred tax asset would not be realizable
at this time. Information with respect to net operating losses is as reported
in Note 12 of the Company's 10K/A-1 for the year ended July 31, 1996.
9
<PAGE>
7. ACCOUNTING FOR STOCK BASED COMPENSATION
In October of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123"). SFAS 123 established a fair valuebased method
of accounting for compensation cost related to stock options and other
stock-based compensation awards. SFAS 123 is effective for fiscal years
beginning after December 15, 1995 (the Company's 1997 fiscal year) for employee
compensation awards and effective for all transactions entered into after
December 15, 1995 for transactions to acquire goods or services from other than
employees. However, SFAS 123 allows an entity to continue to measure employee
compensation costs using the principles of Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25") if certain
proforma disclosures are made. The Company will continue to account for its
employee stock compensation arrangements under the provisions of APB No. 25,
and stock transactions to acquire goods or services from other employees under
the provisions of SFAS 123.
8. EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). This new standard, which supercedes APB Opinion No. 15, requires
dual presentation of basic and diluted earnings per share (EPS) on the face of
the income statement and a reconciliation of the income available to common
stockholders and weighted-average shares of the basic EPS computation to the
income available to common stockholders and weighted average shares plus
dilutive potential common shares of the diluted EPS computation. The objective
of the statement is to make the computation more comparable with international
accounting standards. SFAS 128 is effective for periods ending after December
15, 1997 (the Company's 1998 fiscal year). Earlier application of SFAS 128 is
not permitted. The Company's current EPS calculation conforms to basic EPS.
Diluted EPS will not be materially different from basic EPS since potential
common shares in the form of stock options are not materially dilutive.
Earnings per share calculation for continuing operations for the three
and nine months ended April 30, 1996 is calculated after accounting for the
increase in value of redeemable preferred stock ($126 and $378, respectively).
9. STYREX DISCONTINUED OPERATIONS
Styrex Industries, Inc. ("Styrex") is a wholly owned subsidiary of the
Company engaged in thermoplastic and injection molding operations. Negotiations
are currently underway with several parties concerning the sale or other
disposition of Styrex. Accordingly, operating results for Styrex have been
shown as a discontinued operation within the consolidated statement of
operations for the three and nine months ended April 30, 1997. Included within
these results are estimated operating losses for Styrex for the fourth quarter
as the Company expects any transactions (for example, a sale to a prospective
buyer) will close towards the end of the fourth quarter of fiscal 1997.
Management is unable to determine whether the Company will recognize a gain or
loss on the Styrex disposition. The following summarizes the assets and
liabilities for Styrex as of April 30, 1997:
April 30,
1997
-----------
(Unaudited)
Accounts receivable, net $ 1,536
Inventories 1,216
Property, plant and equipment, net 2,512
Other assets 324
--------
$ 5,588
--------
Current liabilities $ 3,044
Other long term liabilities 1,962
--------
$ 5,006
--------
10
<PAGE>
The net assets for Styrex of $582 have been included in other current
assets on the consolidated balance sheet at April 30, 1997. The measurement date
for this discontinued operation is April 30, 1997. Sales for the three months
ended April 30, 1997 and 1996 were $3,112 and $4,886, respectively. Sales for
the nine months ended April 30, 1997 and 1996 were $12,073 and $12,384,
respectively.
10. BURLINGTON RESINS, INC. FINANCING
As discussed in the footnotes to the Company's financial statements
included in its July 31, 1997 Form 10K, Burlington Resins, Inc. ("Burlington"),
an indirect wholly owned subsidiary, entered into a Credit Agreement with a
Commercial Bank to finance Burlington's acquisition of certain assets from
Occidental Chemical in August of 1995. As of April 30, 1997, Burlington was not
in compliance with certain financial statement ratio covenants included in the
Credit Agreement with the Commercial Bank. Burlington has requested a waiver of
these financial statement ratio covenants with effect from April 30, 1997, and
is currently negotiating the details of this waiver and related agreements from
the Commercial Bank. Burlington and the Commercial Bank have agreed in principal
that the waiver will also include a guarantee of some or all of Burlington's
indebtedness by Ozite Corporation ("Ozite", a wholly owned subsidiary of the
Company, and the company that owns Burlington), and certain other undertakings
by Ozite. Management expects that the waiver of these financial statement ratio
covenants, and related agreements, will be concluded with the Commercial Bank
shortly. The balances that Burlington has outstanding as of April 30, 1997 under
the Credit Agreement are as follows:
Revolving Credit Loans $3,193
Term Loan 3,144
------
$6,337
======
11
<PAGE>
PART I
FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
Item 1. FINANCIAL STATEMENTS
See pages 3 through 10.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth the percentages of net sales of the
Company represented by the components of income and expense for the three and
nine month periods ended April 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
April 30, April 30,
--------- ---------
1997 1996 1997 1996
------ ------ ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of goods sold (78.7) (76.6) (78.9) (79.2)
------ ------ ------ ------
Gross profit 21.3 23.4 21.1 20.8
Selling, general and administrative (10.0) (10.0) (12.1) (10.7)
Amortization of intangible assets (1.1) (0.9) (1.3) (1.2)
Research and development (0.1) (0.1) (0.2) (0.2)
----- ----- ------ -----
Income from operations 10.1 12.4 7.5 8.7
Interest expense (5.2) (4.7) (6.5) (6.1)
Debt issuance costs and discount amortization (0.3) (0.5) (0.7) (0.7)
Equity in (loss) income of affiliate (0.6) 0.2 (0.4) (0.1)
Other income (expense), net --- (0.4) 0.1 (0.1)
----- ----- --- -----
Income (loss) from continuing operations before 4.0 7.0 --- 1.7
minority interest and income taxes
Income tax provision 1.2 1.9 1.0 0.9
--- --- --- ---
Earnings (loss) from continuing operations 2.8 5.1 (1.0) 0.8
Before minority interest
Minority interest (0.4) --- (0.2) ---
----- ----- ----- ---
Earnings (loss) from continuing operations 2.4 5.1 (1.2) 0.8
Discontinued operations (1.2) --- (1.0) (1.3)
----- --- ----- -----
Net income 1.2% 5.1% (2.2)% (0.5)%
===== ===== ======= =======
</TABLE>
12
<PAGE>
Three months ended April 30, 1997 vs. three months ended April 30, 1996:
Net sales from continuing operations in the three month period ended
April 30, 1997 were $93,141 compared to $101,101 in the three month period
ended April 30, 1996. The decrease is mainly attributable to decreases in sales
volume for garden hose and specialty resins and to price decreases for PET. The
decrease was partially offset by increased sales volume in dip tubing, gaskets,
medical tubing, and PVC compound. The comparative decline in hose sales volume
is directly attributable to a late hose selling season, primarily as a result
of unfavorable weather conditions.
Gross profit for the three months ended April 30, 1997 was $19,866, a
decrease of $3,838, (16.2%) compared to a gross profit of $23,704 for the
three months ended April 30, 1996. Gross profit as a percentage of sales
decreased to 21.3% from 23.4% for the same period. Gross profit was adversely
affected primarily as a result of the decline in garden hose sales and to some
extent on the continuing effect of PET pricing.
Selling, general and administrative expenses for the three months
ended April 30, 1997 were $9,273, a $810 (8.0%) decrease compared to the three
months ended April 30, 1996. As a percentage of net sales, these expenses
remained constant at 10.0% of sales for both periods.
Operating income for the three months ended April 30, 1997 and 1996
was $9,434 and $12,585, respectively. The $3,151 decrease in operating income
is primarily attributable to lower sales volumes in garden hose and specialty
resins and declines in PET prices, partly offset by a lower cost of goods sold.
Interest expense, net of amortization of deferred financing costs for
the three month periods ended April 30, 1997 and 1996 remained constant at
$4,811 and $4,806, respectively.
The income tax provision for the three months ended April 30, 1997 and
1996 is comprised of foreign tax provisions of $1,135 and $1,431, respectively.
Additionally, the tax provision for the three months ended April 30, 1996 is
comprised of a state provision of $168 and a reduction in the federal tax
benefit of $348.
The Company had earnings from continuing operations for the three
month period ended April 30, 1997 and 1996 of $2,258 and $5,134, respectively.
As mentioned previously, weather conditions have continued to cause sales
declines within the garden hose business.
As mentioned in Note 9, the Company is presently negotiating with
several parties concerning the sale of its Styrex injection molding operation.
Accordingly, the Company has included a (loss) income of $(1,080) and $57
relating to this operation for the three months ended April 30, 1997 and 1996,
respectively, within discontinued operations.
Nine months ended April 30, 1997 vs. Nine months ended April 30, 1996:
Net sales from continuing operations in the nine month period ended
April 30, 1997 were $216,571 compared to $234,304 in the nine month period
ended April 30, 1996. The decrease is mainly attributable to decreased sales
volume for garden hose and specialty resins as well as price decreases for PET.
The decrease was partially offset by increased sales volume in dip tubing,
gaskets, medical tubing, and PVC compound. The comparative decline in hose
sales volume is directly attributable to a late hose selling season, primarily
as a result of poor weather conditions adversely affecting the garden hose
business.
Gross profit for the nine months ended April 30, 1997 was $45,633, a
decrease of $3,042, (6.2 %) compared to a gross profit of $48,675 for the nine
months ended April 30, 1996. Gross profit was adversely affected by the decline
in garden hose sales as well as the decline in PET prices.
Selling, general and administrative expenses for the nine months ended
April 30, 1997 were $26,153, a
13
<PAGE>
$1,123 (4.5%) increase compared to the nine months ended April 30, 1996. As a
percentage of net sales, these expenses increased to 12.1% from 10.7% for the
same period. The increase is due to the start-up of Colorite Europe Limited in
Ireland and a reversal of accruals that impacted fiscal 1996 expenses.
Operating income for the nine months ended April 30, 1997 and 1996 was
$16,247 and $20,356, respectively. The $4,109 decrease in operating income is
primarily attributable to the decline in garden hose and specialty resin sales
and PET prices as well as higher selling, general and administrative costs.
Interest expense, net of amortization of deferred financing costs for
the nine month periods ended April 30, 1997 and 1996 were $14,092 and $14,297,
respectively. This $205 or 1.4% decrease is primarily attributable to lower
average short term borrowings.
The income tax provision for the nine months ended April 30, 1997 and
1996 is comprised of foreign tax provisions of $2,086 and $1,932,
respectively.
The Company had (loss) income from continuing operations for the nine
month period ended April 30, 1997 and 1996 of $(2,521) and $1,845, respectively.
The Company sold its Ozite manufacturing division in March of 1996.
The $593 and $2,424 loss recorded by this operation for the nine months ended
April 30, 1997 and 1996 is reflected within discontinued operations for the
period. As mentioned in Note 9, negotiations are currently underway with
several parties concerning the sale of its Styrex injection molding operation.
Accordingly, the Company has included a $1,726 and $606 loss relating to this
operation for the nine months ending April 30, 1997 and 1996, respectively,
within discontinued operations.
Liquidity and Capital Resources
- -------------------------------
In the past, the Company has expanded its operations through the
expansion of existing activities, acquisitions of new facilities and various
business combinations. Historically, the Company's sources of liquidity and
capital resources have been net cash provided by operations, bank financing,
private placements of the Company's securities and other private and public
financial sources.
While the management of the Company believes that the Company will be
able to operate on a positive cash flow basis with respect to continuing
operations during the fiscal year ending July 31, 1997, the ability of the
Company to continue to expand its operations may require additional funding.
Cash and cash equivalents decreased $2,949 for the nine months ended
April 30, 1997 compared to a $3,926 decrease for the nine months ended April
30, 1996. The changes for these periods were attributable to the factors
discussed below.
For the nine months ended April 30, 1997, net cash used in operating
activities was $26,393. The Company funded operating activities (which included
$32,650 of inventory), repaid $3,473 of its outstanding debt, and disbursed
$5,902 on capital improvements by increasing short term borrowings by $32,372
and decreasing its cash by $2,949.
For the nine months ended April 30, 1996, net cash used in operating
activities was $3,292. The Company funded its operating activities, repaid
$8,139 of its outstanding debt, disbursed $9,801 on capital improvements and
purchased the net assets of a resin manufacturing facility for $26,820. The
Company increased short term borrowings by $12,463 and reduced cash by $3,926.
The Company had working capital of approximately $20,819 at April 30,
1997 which is a $1,450 decrease from $22,269 at July 31, 1996. Changes in the
components of working capital are attributable to an $7,508 increase in
accounts receivable, a $32,282 increase in short term borrowing, and a
corresponding $31,397 increase in inventory offset by increases in accounts
payable ($6,558) and accrued expenses ($4,000).
The Company's businesses are relatively stable and mature and do not
generally require significant ongoing additions to plant and equipment. Capital
expenditures for the nine month period ended April 30, 1997 and
14
<PAGE>
1996 were $5,902 and $9,801, respectively.
Borrowings, Debt Offerings and Redemptions
On December 30, 1992 PST entered into a $50,000 Senior Loan Agreement
(the "Agreement") with a commercial lending company ("CLC"). Proceeds were used
to repay the borrowings outstanding under a prior loan and security agreement
with a bank. The Agreement contains covenants, the most restrictive of which
are maintenance of certain financial ratios, prohibition of the occurrence of
additional indebtedness, the payment of dividends, certain related party
transactions and limitations on capital expenditures. Borrowings under the
Agreement are secured by substantially all the domestic current assets of PST.
Additionally, the CLC has a security interest in PST's intangible assets, and
this security interest ranks pari passu with the security interest of the
Senior Secured Notes (see below) in PST's intangible assets. Revolving credit
advances under the Agreement are based on eligible receivables and inventory.
Effective January 31, 1997, PST amended this Agreement with the CLC
("Amended Agreement"), representing the fourth amendment to the Agreement. The
Amended Agreement provides, among other things, for revolving credit advances
of up to $50,000 through July 31, 2000 and letters of credit of up to $1,000.
The Amended Agreement provides for certain pricing performance adjustments
based on defined Performance Ratios. The Company will pay interest at a defined
Index Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to
0.25%) or, at the election of PST, the LIBOR Rate plus the Applicable LIBOR
Margin (ranging from 2.50% to 3.00%). The Amended Agreement also provides that
outstanding revolving credit advances shall not exceed $20,000 for 30
consecutive days during the period from July 1 to September 30 for each year.
Furthermore, the Amended Agreement provides that domestic capital expenditures
are limited to $8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and
1999 (and each fiscal year thereafter), respectively. The Company also has the
right to cancel the Agreement on 30 days' written notice and pay the CLC an
early termination fee of $175 if such cancellation occurs prior to January 31,
1998, and $100 if cancellation occurs on or after January 31, 1998 and prior to
September 30, 1998.
In addition, on January 31, 1997 PST signed a Receivables Agreement
with the CLC that provides PST with the ability to sell a 100% ownership
interest, without recourse, in certain Eligible Receivables generated by PST.
The CLC's commitment to purchase said receivables from PST are restricted to
the period beginning each February 1 and ending on each May 31.
On November 8, 1993, PST issued $125,000 principal amount of 11-1/4%
Senior Secured Notes due in 2003. The Senior Secured Notes are senior secured
obligations of PST, ranking pari passu in right of payment with all existing
and future senior indebtedness of PST and senior to all subordinated
indebtedness of PST, if any. The Senior Secured Notes are secured by
substantially all real property, machinery, equipment, general intangibles and
other intellectual property now owned or hereafter acquired by PST and by a
pledge of all outstanding capital stock of Plastic Specialties and Technologies
Investments, Inc., a wholly-owned subsidiary of PST. The indenture for the
Senior Secured Notes contains covenants which restrict, among other matters,
the ability of PST and its subsidiaries to incur additional indebtedness, pay
dividends, (except as defined in the indenture) redeem capital stock, prepay
subordinated indebtedness, create liens, dispose of certain assets, engage in
sale and merger transactions, make contributions, loans or advances and enter
into transactions with affiliates.
On August 16, 1995, in connection with its acquisition of the
Burlington, New Jersey facility, the Company's Burlington Resins, Inc.
subsidiary has entered into a revolving credit facility with a Commercial Bank
for up to $5,500 based on levels of inventory and accounts receivable. Interest
on this facility is the prime rate plus 1.25%. The prime rate as of April 30,
1997 was 8.25%. At April 30, 1997, there was $3,193 outstanding on this loan.
The Company has also received a term loan from the Commercial Bank in the
principal amount of $5,500. This term loan is payable in 28 quarterly
installments of approximately $196 plus interest accrued at the prime rate plus
1.25%. At April 30, 1997 there was $3,144 outstanding on this term loan. The
Commercial Bank agreement contains covenants, the most restrictive of which are
the maintenance of certain financial ratios, prohibition of the incurrence of
additional indebtedness, the payment of dividends, certain related party
transactions and limitations on
15
<PAGE>
capital expenditures. The loans are secured by the property, plant and
equipment, accounts receivable and inventory of Burlington Resins, Inc. The
Company also has a term loan in the amount of $4,000 provided by Occidental
Chemical Corporation. This loan is subordinated to the Commercial Bank debt,
and is payable on a quarterly basis beginning after year two of the loan,
interest only, and after year four, interest and principal. At April 30, 1997
there was $4,000 outstanding on this loan.
In February 1996, Styrex and PureTech Plastics, Inc. and subsidiaries
("PTP") entered into a Loan and Security Agreement with a bank ("Styrex/PTP
Loan") providing an aggregate revolving credit line of $7,500 and an aggregate
term loan of $5,000. The proceeds of the loan were used to pay off existing
debt. In September 1996 the Company repaid the amount outstanding at that time
relating to PTP. Styrex subsequently paid off its loans to the bank on November
11, 1996 when it signed a new Loan and Security Agreement (the "Styrex Loan
Agreement") with a Finance Company for a period of three years. The Styrex Loan
Agreement provides for a term loan and revolving loans up to a maximum of
$6,000 and letters of credit of up to $1,000 and is secured by all of the
assets of Styrex. Advances under the agreement bear interest at the rate of
prime plus 1 1/2%. The initial term loan of $1,360 has scheduled repayments of
$23 per month beginning December 1, 1996. As of April 30, 1997 the revolving
loan and the term loan balances were $1,379 and $1,224, respectively.
Capital Expenditure Commitments
As discussed above, the Company's businesses are relatively mature and
as a result do not require significant ongoing additions to plant and
equipment. The Company generally finances its ongoing capital expenditure
requirements from its cash flow provided from operations and borrowings under
its Revolving Credit Facility.
Construction is nearing completion on a new plant in Northern Ireland
for the Company's Unichem division. For purposes of this new business venture,
a new subsidiary has been formed, Colorite Europe Limited (a United Kingdom
company). The anticipated total capital costs for the Company in connection
with this new Unichem plant are approximately $6 million. The Company has
received commitments for certain grants, subsidies and other inducements from
government authorities in Northern Ireland. The Company plans to finance a
large part of its capital costs of this new plant by using cash reserves (and
possibly some additional borrowing from a commercial bank) at Action Belgium
N.V.
Inflation
Generally, the Company's operations have benefited from relatively
stable or declining prices for raw materials. In fiscal 1997 the Company
benefited domestically from declining raw material costs (except for the
significant decline in PET prices). Foreign operations saw raw material costs
continue to rise until they stabilized during the second quarter. Raw material
costs have generally stabilized at this time. In the event significant
inflationary trends were to resume, management believes that the Company will
generally be able to offset the effects thereof through continuing improvements
in operating efficiencies and increasing prices, to the extent permitted by
competitive factors. However, there can be no assurance that all such cost
increases can be passed through to customers.
16
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is party to certain litigation and environmental proceedings in
the ordinary course of business, none of which the Company believes are likely
to have a material adverse effect on its consolidated financial position or
results of operations.
Ozite is engaged in litigation in which it seeks damages from the former
owner of Dalen ("Dalen"), a discontinued segment of Ozite. In December 1987,
Ozite commenced legal proceedings against the seller of Dalen, seeking monetary
damages and other equitable relief from Dalen for various misrepresentations
made in its financial statements and other miscellaneous information, based on
which Ozite elected to proceed with the purchase of Dalen. The former owner has
counterclaimed for the enforcement of his rights in the subject matter and for
recovery of the balance of the purchase price in an amount approximately equal
to $4,000 plus accrued interest and punitive damages. The ultimate outcome of
either of these actions is presently undeterminable. However, the Company
believes the ultimate outcome will not have a material adverse effect on its
financial position or results of operations.
PureTech Plastics ("PTIP"), certain of its directors, three former directors
and its President were defendants in a lawsuit brought in 1989 in New Jersey
Superior Court and are currently defendants in a lawsuit brought in 1989 in New
Jersey Superior Court by Frank Tammera, Sr., a stockholder and former officer
and director of PTIP and Frank Tammera, Jr., a former officer of PTIP. Trial of
the Frank Tammera, Sr. lawsuit commenced in April 1991 and concluded in 1995.
In March 1996, the New Jersey Superior Court decided that PTIP did not have to
reinstate Mr. Tammera, Sr., that his termination had been for cause, and in
March 1996 a NJ Superior Court decided for PTIP on all matters except that PTIP
was obligated to pay him only approximately $30 of indebtedness, which PTIP had
acknowledged, and $14 in royalties. Final judgement in the Frank Tammera, Sr.
suit was entered on June 6, 1996. In August 1996, Mr. Tammera, Sr. appealed the
court's decision. The Frank Tammera, Jr. lawsuit has been stayed pending the
resolution of the Frank Tammera, Sr. lawsuit.
In May 1992, PST and all of its directors (as of 1988), as well as K and B
Liquidating Corp. (a former subsidiary of PST which is being liquidated) were
named in two lawsuits filed in the Minnesota state courts. The plaintiffs are
Douglass Hutchinson (since deceased) and James Czaja, both of whom were former
employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp.
("Circuit Chemistry"). The suits allege several causes of action, all of which
center upon a claim that PST and/or other defendants did not adequately
disclose sufficient information to the plaintiffs in connection with the
acquisition from the plaintiffs by PST of their 20% equity interest in Circuit
Chemistry, and the termination of their employment agreements. Each complaint
seeks various items of damage totaling approximately $7,000. Counsel has been
retained by PST in Minnesota, and the cases have been removed to the Federal
Court in Minnesota. Only PST, Mr. Fred Broling, Chairman and Chief Executive
Officer of PST, and a former director remain in the suits, as the case against
the other defendants has been dismissed. The matter is being vigorously
defended and management believes the suits have no merit.
Under the 1984 Agreement of Purchase and Sale between Dart & Kraft and PST
(the "1984 Agreement"), Dart & Kraft retained responsibility for liabilities
resulting from any violation of applicable environmental law or laws and
regulations of the Occupational Safety and Health Administration ("OSHA") prior
to the date of the 1984 Agreement. Dart & Kraft further agreed to indemnify
PST, as of the effective date of the 1984 Agreement, for existing, pending,
threatened, or unasserted action suits, or other claims or proceedings (whether
contingent or otherwise), with respect to certain matters (including
environmental matters). Pursuant to the split-up of Dart & Kraft in 1987,
Kraft, Inc. retained all liability under the 1984 Agreement (accordingly,
references to Dart & Kraft herein include only Kraft after the effective date
of the split-up).
Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") and state laws similar to CERCLA, PST may be subject to
liability for cleanup costs and other damages resulting from past off-site
disposal of hazardous substances by PST or its corporate predecessors, or for
the contamination of property currently owned by PST with respect to such
materials. PST is unaware of any on-site or off-site hazardous substance
contamination for which it is reasonably likely to be liable. There are also
several matters governed by
17
<PAGE>
CERCLA resulting from the activities of a former PST division, Synthetic
Products Co. (sold to Cookson America, Inc. ("Cookson") in August 1988) and a
PST subsidiary, Ware Chemical Co. ("Ware Chemical"), that is no longer in
operation and whose assets were also sold to Cookson in 1988.
The Company's operations are subject to requirements imposed under certain
federal, state and local environmental and health and safety laws and
regulations, including the federal Clean Water Act, Clean Air Act, Resource
Conservation and Recovery Act ("RCRA"), CERCLA and OSHA and comparable state
laws, relating to waste water discharges, air emissions, solid waste management
and disposal practices, work place safety and real property use and ownership.
The Company believes that it is in substantial compliance with such laws and
regulations. No assurances can be given, however, that the Company will
continue to be able to secure, renew, and maintain compliance with the terms
and conditions of the required environmental permits and approvals, that other
environmental permits or approvals may not be required for the Company's
operations or that penalties will not be imposed by regulatory entities for any
failures to have secured all required environmental permits or approvals.
Further, there can be no assurances that more stringent statutory or regulatory
environmental or work place safety requirements will not be enacted or adopted
in the future which could have a material adverse effect on or materially
restrict the Company's operations or business.
Item 2. CHANGES IN SECURITIES: None
Item 3. DEFAULT UPON SENIOR SECURITIES: None
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS: None
Item 5. OTHER INFORMATION: None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K: None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PURETEC CORPORATION
By: /s/ Thomas V. Gilboy
--------------------------------------------------
Thomas V. Gilboy
Chief Financial Officer and Vice President
Dated: June 11, 1997
19
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