<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: October 31, 1997
----------------
Commission File Number: 0-26508
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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
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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 December 10, 1997, there were 31,272,374 shares of common stock
outstanding.
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $95,771,642 as of December 10, 1997
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
C O N T E N T S
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Page
----
Part I FINANCIAL INFORMATION:
----------------------
Item 1. Financial Statements:
Consolidated Balance Sheets as of 3
October 31, 1997 and July 31, 1997
Consolidated Statements of Operations 4
for the three month periods ended
October 31, 1997 and 1996
Consolidated Statements of Cash Flows 5-6
for the three month periods ended
October 31, 1997 and 1996
Notes to Consolidated Financial 7-12
Statements
Item 2. Management's Discussion and Analysis 13-17
of Financial Condition and Results of
Operations
Part II OTHER INFORMATION:
------------------
Item 1 to Item 6. 18-19
Signatures 20
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
October 31, July 31,
1997 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 4,661 $ 6,745
Accounts receivable, less allowance for doubtful accounts of $1,473
as of October 31, 1997 and $1,154 as of July 31, 1997 .......... 42,538 56,736
Inventories ....................................................... 66,741 54,568
Prepaid expenses and other current assets ......................... 4,140 3,962
----------- -----------
TOTAL CURRENT ASSETS ......................................... 118,080 122,011
PROPERTY, PLANT AND EQUIPMENT, net ....................................... 89,177 88,367
GOODWILL, net of accumulated amortization of $7,467 and $6,660
as of October 31, 1997 and July 31, 1997, respectively ............ 88,065 90,192
OTHER INTANGIBLE ASSETS, net ............................................. 36 44
OTHER ASSETS, net ........................................................ 11,121 11,209
----------- -----------
TOTAL ASSETS ................................................. $ 306,479 $ 311,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings ............................................. $ 41,930 $ 38,665
Accounts payable .................................................. 26,688 27,751
Accrued plant closing and disposal costs .......................... 765 2,263
Accrued expenses .................................................. 23,419 25,809
Current portion of long-term debt ................................. 6,023 7,363
----------- -----------
TOTAL CURRENT LIABILITIES .................................... 98,825 101,851
OTHER LONG-TERM LIABILITIES .............................................. 3,532 3,464
PENSION AND POSTRETIREMENT LIABILITIES ................................... 7,914 8,274
DEFERRED INCOME TAXES .................................................... 1,548 1,457
LONG-TERM DEBT ........................................................... 128,501 129,504
----------- -----------
TOTAL LIABILITIES ............................................ 240,320 244,550
COMMITMENTS AND CONTINGENCIES (See Note 3)
MINORITY INTEREST ........................................................ 71 96
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 50,000,000 authorized; 31,605,707and
31,574,199 shares issued; 31,272,374 and 31,240,866 outstanding
at October 31, 1997 and July 31,1997, respectively ............. 316 315
Preferred stock, $.01 par value 1,000,000 authorized;
and no shares issued and outstanding ........................... -- --
Additional paid - in capital ........................................ 132,940 132,520
Accumulated Deficit ................................................. (63,708) (61,462)
Minimum pension liability ........................................... -- --
Cumulative foreign currency translation adjustment .................. (2,773) (3,509)
Treasury Stock ...................................................... (687) (687)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................................... 66,088 67,177
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 306,479 $ 311,823
=========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
--------------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
NET SALES .................................................... $ 67,693 $ 61,075
------------ ------------
COSTS AND EXPENSES:
Cost of goods sold .................................... 53,556 48,971
Selling, general and administrative ................... 9,156 7,800
Amortization of intangible assets ..................... 817 1,124
Research and development .............................. 146 158
------------ ------------
63,675 58,053
------------ ------------
INCOME FROM OPERATIONS ....................................... 4,018 3,022
OTHER EXPENSES (INCOME):
Interest expense ...................................... 4,445 4,364
Debt issuance cost and discount amortization........... 483 580
Equity in loss of affiliates .......................... 369 --
Other, net ............................................ 30 (14)
------------ ------------
5,327 4,930
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND INCOME TAXES ............................. (1,309) (1,908)
Provision for income taxes ........................... 726 547
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST ..................................... (2,035) (2,455)
MINORITY INTEREST ............................................ 25 --
------------ ------------
LOSS FROM CONTINUING OPERATIONS .............................. (2,010) (2,455)
DISCONTINUED OPERATIONS ...................................... (236) (298)
------------ ------------
NET LOSS ..................................................... $ (2,246) $ (2,753)
============ ============
LOSS PER COMMON SHARE:
Loss from continuing operations .................... $ (0.06) $ (0.08)
Loss from discontinued operations .................. (0.01) (0.01)
============ ============
Net loss .............................................. $ (0.07) $ (0.09)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING .................................... 31,267,527 29,339,172
============ ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
------------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ......................................... $ (2,010) $ (2,455)
Adjustments to reconcile net loss to net cash
used in operating activities from continuing operations:
Depreciation and amortization ................................. 3,501 4,081
Loss on disposal of property and equipment .................... -- (6)
Bad debt allowance ............................................ 316 433
Deferred income tax benefit ................................... -- (80)
Minority interest in consolidated subsidiaries ................ (25) --
Changes in operating assets and liabilities net of
effects from acquisition:
(Increase) decrease in assets:
Accounts receivable ......................................... 12,166 12,875
Accounts receivable factored ................................ 2,087 --
Inventories ................................................. (11,900) (19,091)
Prepaid expenses and other current assets ................... (172) (488)
Other assets ................................................ (194) (2,826)
Increase (decrease) in liabilities:
Accounts payable ............................................ (1,280) 338
Accrued plant closing and disposal costs .................... (1,498) (382)
Accrued expenses ............................................ (1,969) 2,772
Other liabilities ........................................... (610) (1,009)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES
FROM CONTINUING OPERATIONS .................................... (1,588) (5,838)
Loss from discontinued operations ....................................... (236) (298)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES
FROM DISCONTINUED OPERATIONS ........................ (236) (298)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ................................... (1,824) (6,136)
-------- --------
</TABLE>
(Continued)
See notes to consolidated financial statements
5
<PAGE>
PureTec Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended
October 31,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .......................... (2,695) (1,434)
Purchase of net assets .............................................. -- --
Proceeds from the sale of property, plant, & equipment............... 50 6
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................................... (2,645) (1,428)
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (repayments) under revolving credit
facility and short-term borrowing, net ......................... 3,265 4,366
Proceeds from long-term debt ........................................ 279 92
Repayments of long-term debt ........................................ (1,340) (1,547)
Proceeds from warrant/option exercise ............................... -- 1
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 2,204 2,912
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................. 181 (137)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................... (2,084) (4,789)
CASH AND CASH EQUIVALENTS, beginning of the period ...................... 6,745 5,995
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................ $ 4,661 $ 1,206
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................... $ 1,924 $ 826
Income taxes ....................................................... 2 233
Non cash transactions:
Reduction of subordinated note regarding Dalen settlement .......... (1,320) --
Adjustment of goodwill regarding Dalen settlement .................. 1,320 --
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. ORGANIZATION, DESCRIPTION OF BUSINESS AND ACQUISITIONS
PureTec's principal businesses are the manufacturing of garden hose,
specialty plastic compounds and fabricated precision plastic components for
niche consumer and industrial markets, the manufacturing of dispersion
(plastisol) and specialty suspension (copolymer and blending) polyvinyl chloride
("PVC") resins and the recycling of plastics. The Company services its markets
through its network of 21 manufacturing facilities, located in key points
throughout the United States, with three locations in Europe and one in Canada.
Ozite Corporation, a wholly owned subsidiary ("Ozite") is the majority
stockholder of Plastic Specialties and Technologies, Inc. ("PST") and a 100%
shareholder of Burlington Resins, Inc. ("Burlington"). On June 27, 1997, PureTec
completed a private placement offer for most of the stock of PST not already
owned, in exchange for new unregistered shares of PureTec common stock that were
privately placed by PureTec. Prior to the completion of the exchange offer,
PureTec, through its ownership of Ozite, indirectly owned 82.7% of the
outstanding common stock of PST. In the exchange offer, PureTec, through Ozite
offered to exchange two new unregistered shares of PureTec common stock for each
share of PST common stock validly tendered . In total, 1,117,515 shares, or
13.4%, of the PST common stock outstanding were accepted for exchange by Ozite
in the private exchange offer. The transaction was accounted for as a
step-acquisition by the Company, and resulted in an increase to goodwill of
approximately $2,300. As of October 31, 1997, Ozite owned approximately 96% of
the outstanding common stock of PST.
Burlington Resins, Inc. ("Burlington") is a special purpose subsidiary of
the Company. Burlington was formed on September 26, 1994 for the express purpose
of acquiring substantially all of the assets and assuming all of the liabilities
of Occidental Chemical Corporation's ("OxyChem") specialty PVC resin
manufacturing facility location in Burlington, New Jersey. On August 18, 1995,
Burlington completed the acquisition from OxyChem, which was accounted for as a
purchase, and commenced operations.
In June 1997, the Company filed suit against OxyChem, alleging that
certain postretirement benefit liabilities were substantially understated at the
acquisition date. In August 1997, the Company and OxyChem agreed to settle this
litigation. Pursuant to the terms of the settlement agreement, the Company has
agreed to release OxyChem from any claim related to this liability in exchange
for OxyChem's agreement to settle a $4 million subordinated term loan including
accrued interest ("seller financing") for $3 million. A portion of the
settlement has been accounted for as an adjustment to the purchase price, with
the offset recorded against goodwill, with the remainder adjusting accrued
interest based upon the seller financing.
On November 11, 1997, the Company announced that it had signed an
Agreement and Plan of Merger ("Agreement") with Tekni-Plex, Inc., ("Tekni-Plex")
a privately-owned company, pursuant to which the Company would, through a
merger ("Merger") become a wholly-owned subsidiary of Tekni-Plex. The Agreement
provides that the owner of each share of common stock of the Company would
receive $3.50 in cash for that share in the Merger. The Agreement and the Merger
will be submitted to the shareholders of the Company for approval at the
Company's annual shareholders' meeting expected to be held in January 1998. The
Agreement and the Merger have been unanimously approved, and recommended to
shareholders for adoption, by the Company's Board of Directors. Officers and
directors of the Company owning approximately 10% of the outstanding common
stock of the Company have agreed to vote their shares in favor of the Merger.
The Agreement contains a number of conditions which must be satisfied in
order for the Merger to occur, including the successful completion of a consent
solicitation and tender offer for PST's 11.25% Senior Secured
7
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Notes due 2003, the receipt of all necessary governmental and regulatory
approvals, and the absence of any changes occurring prior to the closing date
which would have a material adverse significance with respect to the value of
the Company and its subsidiaries, taken as a whole.
The Agreement also requires that the outstanding minority common
shareholders' interest in PST be eliminated, either through purchase or a
short-form merger procedure under Delaware law, not later than immediately prior
to completion of the Merger, at a price of $7.00 per share of PST common stock.
The Merger is further subject to the receipt by Tekni-Plex of sufficient
financing to pay for the Company shares, purchase the PST Notes tendered in the
tender offer, and fund all other cash requirements of the Merger. Tekni-Plex has
received commitments from Morgan Guaranty Trust Company of New York to provide
senior bank financing and subordinated bridge loans in an aggregate amount which
the parties believe will be sufficient to complete the Merger, subject to a
number of conditions.
The Agreement is terminable by Tekni-Plex , the Company, or either of
them under certain circumstances. In the event the Agreement is terminated
because the Company's Board of Directors withdraws or materially modifies its
approval or recommendation of the Merger or the Agreement or another person,
entity or group acquires beneficial ownership of 50% or more of the outstanding
shares of the Company's Common Stock, the Company is obligated to pay a fee of
$10 million to Tekni-Plex and to reimburse Tekni-Plex for up to $5 million of
its expenses in connection with the Agreement and related transactions. The
Company expects the Merger to be completed in February 1998, but cannot assure
that all of the conditions to the Merger will be satisfied.
Concurrently with execution of the Merger Agreement, Tekni-Plex purchased
a Convertible Note issued by PureTec in the amount of $5 million. The loan will
assist PureTec and PST in meeting expected cash requirements in the period prior
to completion of the Merger. The Convertible Note bears interest at 13% and is
convertible at any time following the 60th day after any termination of the
Agreement into a number of shares of Common Stock sufficient to retire the
principal amount of the Note plus accrued interest or in any event at a base
conversion rate of one share of Common Stock per $2.72 of obligations owed under
the Note. The Company is required to file a registration statement with respect
to the Common Stock issuable upon conversion promptly following a termination of
the Merger Agreement. The Convertible Note matures on September 30, 1998. The
Convertible Note is subject to prepayment by the Company in cash at any time,
and contains covenants and events of default customary for a debt instrument of
this type.
The consolidated statement of operations for the three months ended
October 31, 1996 have been restated for the effects of the discontinuance of the
Styrex injection molding operation which occurred in August 1997 as disclosed in
the Form 10-K for the year ended July 31, 1997.
2. INTERIM FINANCIAL INFORMATION
The consolidated balance sheet of the Company as of October 31, 1997, the
consolidated statements of operations for the three month periods ended October
31, 1997 and 1996 and the consolidated statements of cash flows for the three
months ended October 31, 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.
8
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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, 1997 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 for the year ended July 31, 1997.
3. COMMITMENTS AND CONTINGENCIES
In June 1997, the Company filed suit against Occidental Chemical
Corporation ("OxyChem"), alleging that certain postretirement benefit
liabilities were substantially understated at the acquisition date,
In August 1997, the Company and OxyChem agreed to settle this litigation.
Pursuant to the terms of the settlement agreement, the Company has agreed to
release OxyChem from any claim related to this liability in exchange for
OxyChem's agreement to settle a $4 million subordinated term loan including
accrued interest ("seller financing") for $3 million. A portion of the
settlement has been accounted for as an adjustment to the purchase price, with
the offset recorded against goodwill, with the remainder adjusting accrued
interest based upon the seller financing. Settlement was paid in the first
quarter of fiscal 1998.
Ozite is also engaged in litigation in which it seeks damages from the
former owner of 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 the seller for various
misrepresentations made in its financial statements and other miscellaneous
information presented on which Ozite elected to proceed with the purchase of
such assets. The seller has counterclaimed for the enforcement of the seller's
rights in the subject matter and for recovery of the balance of the purchase
price in an amount approximately equal to $3,000 plus accrued interest, amounts
claimed to be due under a consulting agreement, and punitive damages. Subsequent
to July 31, 1997, the Dalen litigation has been settled. The settlement
agreement with Dalen provided for Ozite to make two (2) payments of $500 each by
October 15, 1997, and a payment for $2,250 by January 31, 1998. Interest accrues
on the final payment of $2,250 from October 15, 1997, until it is paid at the
rate of 8% per annum. Ozite has made the two (2) payments of $500 as of October
15, 1997. If Ozite fails to make the payment required on January 31, 1998 and
such failure continues for 30 days after notice to Ozite, then following
procedural steps, Ozite will be deemed to have confessed judgement on the amount
due plus interest and the court will be free to pursue any available remedy in
order to collect the amount due. Management believes that it has a number of
alternatives available to finance the settlement payments to Dalen, and
therefore it expects to be able to meet these final payment obligations by
January 31, 1998. The Company has adjusted the previously established reserves
for this litigation as the Company deems the settlement probable.
Pursuant to the terms of the Exchange Agreement and 7% Subordinated
Notes, upon the settlement of the Dalen litigation in excess of defined amounts,
the Company has the ability to reclaim Exchange and Escrow shares or to reduce
principal payments due on the 7% Subordinated Notes. The Dalen litigation was
settled for approximately $2,800 in excess of the amount defined in the
agreements. At October 31, 1997 the Company recorded the effect of the reduction
of the principal amount of the 7% Subordinated Notes as a result of the final
determination of the excess costs of the Dalen settlement. The principal amount
of the 7% Notes was reduced by $2,555, and unamortized discount was reduced by
$1,235 for a net reduction in the carrying value of the 7% Subordinated Notes of
$1,320. The Company also recorded a $1,320 reduction of goodwill at October 31,
1997. As a result of these reductions, the amortization expense and the interest
expense recognized in connection with goodwill and the 7% Subordinated Note will
be reduced in the future.
In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating
9
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
approximately $2,114 (75,247,000 Belgian Francs) for the disallowance of certain
foreign tax credits and investment losses claimed for the years ended July 31,
1990 and 1991. Additionally, in January 1995, the subsidiary received an income
tax assessment of approximately $902 (32,083,000 Belgian Francs) for the year
ended July 31, 1992. Although the future outcome of these matters are uncertain,
the Company believes that its tax position was appropriate and that the
assessments are without merit. Therefore, the Company has appealed and has not
paid or accrued for the assessments. Based on the advice of legal counsel in
Belgium, the Company believes that the assessment appeals will be accepted by
the tax authorities in Belgium, although there can be no assurance whether or
when such appeals will be accepted.
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 and two similar lawsuits
from Michael and Albert Tammera, have 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&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 alleged 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. The cases brought by Czaja and
Hutchinson have been settled by PST. Previously, management had expected these
cases to be litigated, and management had expected that PST would win these
cases. Total settlement payments to the plaintiffs in connection with this
settlement were $1,725 and have been paid out of the Company's working capital
as of October 31, 1997
During fiscal 1997, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled.
Additionally, the Company is party to certain other litigations and
environmental proceedings in the ordinary course of business, none of which it
believes are likely to have a material adverse effect on its financial position
or results of operations.
10
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. INVENTORIES
October 31, July 31,
1997 1997
-------- --------
(Unaudited)
Raw materials and supplies $ 21,849 $ 22,353
Recycled material 647 779
Work-in-process 1,712 1,288
Finished goods 42,533 30,148
-------- --------
$ 66,741 $ 54,568
======== ========
11
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
5. INCOME TAXES
The Company's tax provision for the periods ended October 31, 1997 and
1996 are primarily due to the Company's foreign operations. The tax provision
does 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 Form 10-K for the year ended July 31, 1997.
6. STYREX AND DISCONTINUED OPERATIONS
Styrex Industries, Inc. ("Styrex") was a wholly owned subsidiary of the
Company engaged in thermoplastic and injection molding operations. In August
1997, the operations of Styrex were sold for cash. Accordingly, operating
results for Styrex have been shown as a discontinued operation within the
consolidated statement of operations for the period ending October 31, 1996. Net
sales for this operation were $4,885 for the period ended October 31, 1996. The
net loss for this operation of $298 for the three months ending October 31, 1996
was also included within discontinued operations. The measurement date for this
discontinued operation was April 30, 1997. The Company has accrued $656 for
various liabilities related to the closing of this operation, which are included
in accrued expenses. The net assets of Styrex are included in prepaid expenses
and other current assets at July 31, 1997. In addition, for the three months
ended October 31, 1997, the Company recorded a loss of $236 within discontinued
operations related to the Circuit Chemistry lawsuit settlement (See Note 3).
12
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
PART I
FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
Item 1. FINANCIAL STATEMENTS
See pages 3 through 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
The following table sets forth the percentage of net sales of the
Company represented by the components of income and expense for the three month
periods endd October 31, 1997 and 1996:
1997 1996
---- ----
Net sales ......................................... 100.0% 100.0%
Cost of goods sold ................................ (79.1) (80.2)
----- -----
Gross profit ...................................... 20.9 19.8
Selling, general and administrative expenses....... (13.5) (12.8)
Amortization of intangible assets ................. (1.2) (1.8)
Research and development .......................... (0.2) (0.2)
----- -----
Income from operations ............................ 6.0 5.0
Interest expense .................................. (6.6) (7.1)
Debt issuance cost and discount amortization ...... (0.7) (1.0)
Equity in loss of affiliates ...................... (0.6)
Other, net ........................................ (0.0) (0.0)
----- -----
Loss from continuing operations
before minority interest and income taxes ..... (1.9) (3.1)
Provision for income taxes ........................ (1.1) (0.9)
----- -----
Loss from continuing operations before
minority interest ............................. (3.0) (4.0)
Minority interest ................................. -- --
----- -----
Loss from continuing operations ................... (3.0) (4.0)
Discontinued operations ........................... (0.3) (0.5)
----- -----
Net loss .......................................... (3.3)% (4.5)%
===== =====
13
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Three months ended October 31, 1997 vs. Three months ended October 31, 1996:
Net sales from continuing operations in the three month period ended
October 31, 1997 were $67,693 compared to $61,075 in the three month period
ended October 31, 1996. The increase is mainly attributable to increases in
sales volume for specialty resins, recycled plastics, and garden hose
Gross profit for the three months ended October 31, 1997 was $14,137, an
increase of $2,033, (16.8 %) compared to a gross profit of $12,104 for the three
months ended October 31, 1996. Gross profit as a percentage of sales increased
to 20.9% from 19.8% for the same period. Gross profit was favorably affected
primarily as a result of the increased sales volume as mentioned above as well
as improved manufacturing efficiencies.
Selling, general and administrative expenses for the three months ended
October 31, 1997 were $9,156, a $1,356 (21.2%) increase compared to the three
months ended October 31, 1996. As a percentage of net sales, these expenses
increased to 13.5% from 12.8%. The increase is primarily a result of the
reversal of certain previously accrued expenses in the first quarter of 1996
including management compensation.
Operating income for the three months ended October 31, 1997 and 1996
was $4,018 and $3,022, respectively. The $996 increase in operating income is
primarily attributable to increased sales volumes, partly offset by higher cost
of goods sold and higher selling, general and administrative expenses.
Additionally, this increase in operating income was partially offset by startup
expenses at the Company's new plant in Northern Ireland.
Interest expense for the three month period ended October 31, 1997 was
$4,445, an $81 increase compared to the three months ended October 31, 1996,
respectively.
The income tax provisions for the three months ended October 31, 1997
and 1996 is comprised of foreign tax provisions of $726 and $547, respectively.
The Company had a loss from continuing operations for the three month
period ended October 31, 1997 and 1996 of $2,010 and $2,455, respectively.
As mentioned in Note 6, the Company completed the sale of its Styrex
injection molding operation. Accordingly, the Company has included a loss of
$298 relating to this operation for the three months ended October 31, 1996,
respectively, within discontinued operations. For the three months ended October
31, 1997 the Company recorded a loss of $236 within discontinued operations
related to the Circuit Chemistry lawsuit settlement (See Note 3).
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, 1998, the ability of the
14
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Company to continue to expand its operations may require additional funding.
Cash and cash equivalents decreased $2,084 for the three months ended
October 31, 1997 compared to a $4,789 decrease for the three months ended
October 31, 1996. The changes for these periods were attributable to the factors
discussed below.
The Company had working capital of approximately $19,255 at October 31,
1997 compared to working capital of approximately $20,160 at July 31, 1997. The
decrease in working capital is attributable to an increase in short term
borrowings of $3,265, a decrease in accounts receivable of $14,198 partially
offset by increases in inventory ($12,173), lower accrued expenses of $2,390 and
lower accrued plant closing costs of $1,498.
Net cash used in operating activities was approximately $1,824 for the
three months ended October 31, 1997. The change was due principally to an
increase in inventory of $11,900, partly offset by an increase in accounts
receivable of $12,166. Net cash used in investing activities was approximately
$2,645 and $1,428 for the three months ended October 31, 1997 and 1996,
respectively. Cash flows from financing activities were approximately $2,204 for
the three months ended October 31, 1997, which included a $3,265 increase in
short term borrowings. For the three months ended October 31, 1996, net cash
provided from financing activities was approximately $2,912 which included a
$4,366 increase in short-term borrowings and repayments of long-term debt of
$1,547.
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 three month period ended October 31, 1997 and 1996 were
$2,695 and $1,434, 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
15
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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. The aggregate invoice face
amount of purchased receivables will not exceed $12,000.
PST is obligated to service the Eligible Receivables that it sells to the CLC.
At October 31, 1997 and July 31, 1997, short-term borrowings include
revolving credit advances of $37,338 and $36,772, respectively, under the
Amended Agreement and $2,087 of factored receivables at July 31, 1997. There
were no factored receivables outstanding as of October 31, 1997.
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 October 31,
1997 was 8.5%. At October 31, 1997 and July 31, 1997 there was $4,592 and
$1,893, respectively, 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 October 31, 1997 and July 31, 1997
there was $3,620 and $3,341, respectively, 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 capital expenditures. The loans are secured by
the property, plant and equipment, accounts receivable and inventory of
Burlington Resins, Inc. As the Company intends to repay the borrowings
outstanding under the Agreement during 1998, the entire amount has been
classified in current portion of long-term debt at October 31, 1997. The Company
also had a term loan provided by Occidental Chemical Corporation. This loan is
subordinated to the Commercial Bank debt. This loan was repaid during the first
quarter of fiscal 1998.
Concurrently with execution of the Merger Agreement (as discussed in
Note 1), Tekni-Plex purchased a Convertible Note issued by PureTec in the amount
of $5 million. The loan will assist PureTec and PST in meeting expected cash
requirements in the period prior to completion of the Merger. The Convertible
Note bears interest at 13% and is convertible at any time following the 60th day
after any termination of the Agreement into a number of shares of Common Stock
sufficient to retire the principal amount of the Note plus accrued interest or
in any event at a base conversion rate of one share of Common Stock per $2.72 of
obligations owed under the Note. The Company is required to file a
16
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
registration statement with respect to the Common Stock issuable upon conversion
promptly following a termination of the Merger Agreement. The Convertible Note
matures on September 30, 1998. The Convertible Note is subject to prepayment by
the Company in cash at any time, and contains covenants and events of default
customary for a debt instrument of this type.
Future Capital Expenditure and Commitments
The Company's businesses are relatively mature and as a result do not
require significant ongoing additions to plant and equipment, except for the
expansion discussed below. The Company generally finances its ongoing capital
expenditure requirements from its cash flow provided from operations and
borrowings under its Revolving Credit Facility.
The Company is in the process of constructing a state-of-the-art
recycling facility in Huntington, West Virginia. The facility is expected to
open early in calendar 1998. The Company will invest approximately $8 million in
the facility, which will recycle PET containers, such as soft drink bottles and
food packaging. Management is still evaluating various financing alternatives
for this new facility.
In October 1997, the Company settled a lawsuit pertaining to Circuit
Chemistry, a discontinued operation. Total settlement payments were $1,725 as of
October 31, 1997. Additionally, in October 1997, in accordance with the Dalen
litigation settlement, Ozite Corp. made two (2) payments of $500 each. These
payments were made out of the Company's current working capital. Management
believes that it has a number of alternatives available to finance the final
settlement payment of $2,250 related to Dalen by January 31, 1998.
Inflation
Generally, the Company's operations have benefited from relatively
stable or declining prices for raw materials. During fiscal 1998, the Company
has benefited domestically from declining raw material costs. 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.
17
<PAGE>
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In June 1997, the Company filed suit against Occidental Chemical
Corporation ("OxyChem"), alleging that certain postretirement benefit
liabilities were substantially understated at the acquisition date. In August
1997, the Company and OxyChem agreed to settle this litigation. Pursuant to the
terms of the settlement agreement, the Company has agreed to release OxyChem
from any claim related to this liability in exchange for OxyChem's agreement to
settle a $4 million subordinated term loan including accrued interest ("seller
financing") for $3 million. A portion of the settlement has been accounted for
as an adjustment to the purchase price, with the offset recorded against
goodwill, with the remainder adjusting accrued interest based upon the seller
financing.
Ozite was also engaged in litigation in which it seeks damages from the
former owner of 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 the seller for various
misrepresentations made in its financial statements and other miscellaneous
information presented on which Ozite elected to proceed with the purchase of
such assets. The seller has counterclaimed for the enforcement of the seller's
rights in the subject matter and for recovery of the balance of the purchase
price in an amount approximately equal to $3,000 plus accrued interest, amounts
claimed to be due under a consulting agreement, and punitive damages. Subsequent
to July 31, 1997, the Dalen litigation has been settled. The settlement
agreement with Dalen provided for Ozite to make two (2) payments of $500 each by
October 15, 1997, and a payment for $2,250 by January 31, 1998. Interest accrues
on the final payment of $2,250 from October 15, 1997, until it is paid at the
rate of 8% per annum. Ozite has made the two (2) payments of $500 as of October
15, 1997. If Ozite fails to make the payment required on January 31, 1998 and
such failure continues for 30 days after notice to Ozite, then following
procedural steps, Ozite will be deemed to have confessed judgement on the amount
due plus interest and the court will be free to pursue any available remedy in
order to collect the amount due. Management believes that it has a number of
alternatives available to finance the settlement payments to Dalen, and
therefore it expects to be able to meet these final payment obligations by
January 31, 1998. The Company has adjusted the previously established reserves
for this litigation as the Company deems the settlement probable.
Pursuant to the terms of the Exchange Agreement and 7% Subordinated
Notes, upon the settlement of the Dalen litigation in excess of defined amounts,
the Company has the ability to reclaim Exchange and Escrow shares or to reduce
principal payments due on the 7% Subordinated Notes. The Dalen litigation was
settled for approximately $2,800 in excess of the amount defined in the
agreements. At October 31, 1997 the Company recorded the effect of the reduction
of the principal amount of the 7% Subordinated Notes as a result of the final
determination of the excess costs of the Dalen settlement. The principal amount
of the 7% Notes was reduced by $2,555, and unamortized discount was reduced by
$1,235 for a net reduction in the carrying value of the 7% Subordinated Notes of
$1,320. The Company also recorded a $1,320 reduction of goodwill at October 31,
1997. As a result of these reductions, the amortization expense and the interest
expense recognized in connection with goodwill and the 7% Subordinated Note will
be reduced in the future.
In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $2,114 (75,247,000 Belgian
Francs) for the disallowance of certain foreign tax credits and investment
losses claimed for the years ended July 31, 1990 and 1991. Additionally, in
January 1995, the subsidiary received an income tax assessment of approximately
$902 (32,083,000 Belgian Francs) for the year ended July 31, 1992. Although the
future outcome of these matters are uncertain, the Company believes that its tax
position was appropriate and that the assessments are without merit. Therefore,
the Company has appealed and has not paid or
18
<PAGE>
accrued for the assessments. Based on the advice of legal counsel in Belgium,
the Company believes that the assessment appeals will be accepted by the tax
authorities in Belgium, although there can be no assurance whether or when such
appeals will be accepted.
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 and two similar lawsuits
from Michael and Albert Tammera, have 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&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 alleged 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. The cases brought by Czaja and
Hutchinson have been settled by PST with the settlement recorded by the Company
in the year ended July 31, 1997. Previously, management had expected these
cases to be litigated, and management had expected that PST would win these
cases. Total settlement payments to the plaintiffs in connection with this
settlement were $1,725 and have been paid out of the Company's working capital
as of October 31, 1997.
During fiscal 1997, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled.
The Company is party to certain litigation and environmental proceedings
in the ordinary course of business, none of which it believes are likely to have
a material adverse effect on its financial position or results of operations
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:
Exhibit 27. Financial Data Schedule
Exhibit 99 Form S-3, dated November 19, 1997 incorporated by
reference to Registration Statement No. 33-66338).
19
<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: December 12, 1997
20
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