<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
--------------------------------------------
(Mark One)
/X/ Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended July 31, 1997
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
_____ to _____
Commission File Number 0-26508
PURETEC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3376449
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
-----------------------------------------------------
(Address of principal executive offices and zip code)
(201) 941-6550
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
---------------------------------------
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
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date.
Class Outstanding at November 13, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 31,240,866
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $95,675,152 as of November 13, 1997.
Documents Incorporated by Reference: See Index to Exhibits.
<PAGE>
Item 1. BUSINESS
Introduction
PureTec Corporation ("PureTec" or the "Company") was formed as the
result of a merger (accounted for as a merger), effective as of July 31, 1995,
between the former Pure Tech International, Inc. and the significantly larger
Ozite Corporation ("Ozite"). Subsequently, in August 1995, PureTec acquired a
specialty vinyl resin plant from Occidental Chemical Corporation. The
combination of these three entities constitutes the active business operations
of PureTec Corporation. At the time of the merger, the legal name of the former
Pure Tech International, Inc. was changed to PTI Plastic, Inc. ("PTIP"). For
financial reporting purposes, most of the historical financial information
reported in this Form 10-K regarding the Company for fiscal years prior to 1996
is that of PTIP.
Prior to the merger, PTIP's principal businesses were the recycling of
glass, metals and plastics and the thermoplastic molding of custom parts using
both recycled and virgin materials. PTIP discontinued and sold its glass and
metal recycling and Material Recovery Facility ("MRF") operations during fiscal
1994 and 1995. PureTec discontinued and sold its thermoplastic molding
operations ("Styrex Industries") during fiscal 1997.
Prior to the merger, Ozite's principal businesses were the
manufacturing of hoses, tubing, and vinyl compounds. These operations now
constitute the major portion of PureTec's operations and product lines. The
Company discontinued the manufacturing of Ozite's non-woven textile products and
sold the related assets effective January 31, 1996.
As discussed in Note 18 to the Company's Financial Statements, on
November 11, 1997 the Company entered into a Merger Agreement with Tekni-Plex,
Inc. ("Tekni-Plex"). Subject to the approval of a majority of the shareholders
at a shareholders' meeting that the Company will arrange, the Merger Agreement
contemplates Tekni-Plex (i) purchasing all of the Company's outstanding Common
Stock for cash consideration of $3.50 per share, and (ii) assuming or
refinancing all of the Company's debt. The Merger Agreement and the Acquisition
have been unanimously approved and recommended to shareholders for adoption by
the Company's Board of Directors.
Description of Business
PureTec is a vertically integrated manufacturer of specialty plastic
products. Many of these products are leaders in their niche markets. PureTec is
a leading producer of garden hose, disposable medical tubing, and precision
tubing and gaskets. The Company also produces plastic materials that are used in
various specialized applications. For example, PureTec's Colorite Polymers group
is the worldwide leader in medical-grade vinyl compounds. The Company is also a
leader in plastic recycling, producing high-grade recycled polyethylene
terephthalate ("PET") for packaging and fiber applications.
The Company's operations consist of two manufacturing categories,
"Plastic Products," with approximately 60% of total sales; and "Plastic
Materials," with approximately 40% of total sales. The Company's major product
lines are listed below, with the manufacturing division names in parenthesis:
<TABLE>
<CAPTION>
Plastic Products Plastic Materials
- ---------------- -----------------
<S> <C>
Garden Hose (Colorite Plastics) Medical-grade Vinyl Compounds
(Colorite Polymers)
Medical Tubing (Plastron) Specialty Vinyl Polymers
(Colorite Polymers; Cybertech Polymers)
Specialty Tubing & Gaskets Recycled Plastics (Pure Tech Plastics)
(Action Technology;
American Gasket & Rubber)
</TABLE>
Each of these product lines has its own unique customer base,
competitive environment, cost and pricing structures, business cycles, and
related business strategies, as described in the following paragraphs.
2
<PAGE>
Garden Hose
PureTec believes that its Colorite Plastics division is the leading
producer of garden hose in the United States, with more than 40% of the market.
There are two other principal competitors in the United States, and several
smaller companies having substantially smaller market shares. Founded in 1949 in
Garfield, New Jersey, Colorite Plastics now manufactures in six modern
facilities throughout the United States and Canada.
Garden hose products are sold primarily to home centers, hardware
cooperatives, food, automotive, drug and mass merchandising chains and catalog
companies throughout the United States and Canada. Approximately 88% of sales
are to Colorite Plastics' ten largest customers. The remaining sales are divided
among approximately 350 smaller customer accounts. Colorite Plastics' ten
largest customers include some of the fastest growing and most widely respected
retail chains in North America. Colorite Plastics' market strategy is to provide
a complete line of innovative, high-quality products along with superior
customer service. Innovations have included the patented Colorite(R) Evenflow(R)
design and the "drinking water safe" product lines.
Products are sold directly through Colorite Plastics' salespeople and
also through approximately 20 independent representatives. The division sells
both private label and brand-name products to the retail market. Advertising is
limited to trade journals and advertising allowances to retailers.
Colorite Plastics manufactures vinyl garden hose by the plastic
extrusion process. The primary raw materials are vinyl compounds and brass
couplings that are produced by the Company, and nylon reinforcement fiber that
is purchased from suppliers. The Colorite Plastics division typically sets
prices for its garden hose products in advance of each season and, to the extent
that raw material costs increase more than anticipated, the additional costs
cannot be passed on during that season.
The garden hose business is highly seasonal with approximately 75% of
sales occurring in the second half of the Company's fiscal year. As a result of
the need to build up inventories in anticipation of such second-half sales, the
Company's working capital requirements have historically peaked in the second
and third quarters of the Company's fiscal year. In addition, this seasonality
has a significant impact on the Company's net income from quarter to quarter.
Colorite Plastics historically operates the first two quarters of the fiscal
year at a loss.
In addition to its core garden hose business, Colorite Plastics has
launched new products, such as a new line of irrigation products for the
do-it-yourself markets. For example, in recent years the division has introduced
an irrigator "soaker hose," composed of 65% recycled rubber, and the
Auto-Moist(TM) line of drip irrigation and watering products. Colorite Plastics
also manufactures specialty hose products such as air hose. Colorite Plastics,
like other PureTec divisions, is also expanding to international markets. In
1996, it began serving the Canadian market with a new facility in Mississauga,
Ontario.
Medical Tubing
The Company's Plastron division has been a leader in disposable medical
tubing for more than 40 years. Plastron's worldwide operation includes
strategically located plants in California, Georgia, and several production
lines at Action Technology Belgium that support sales to the medical industry.
These facilities include "clean room" extrusion operations. Plastron specializes
in high-quality, close tolerance tubing for various surgical procedures and
related medical applications. These applications include intravenous ("IV")
therapy, hemodialysis therapy, cardiovascular procedures such as coronary bypass
surgery, suction and aspiration products, and urinary drainage and catheter
products. Action Technology Belgium had sales from its medical tubing operation
of approximately $2,100,000 and $1,834,000 for fiscal years 1997 and 1996,
respectively.
The Company believes that its Plastron division is a leading producer
of medical tubing, with approximately 25% of the worldwide, non-captive market.
There are four other principal competitors serving the medical tubing market.
3
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Medical tubing is sold primarily to a small number of manufacturers of
medical devices. Approximately 50% of sales are to Plastron's five largest
customers. Products are sold directly through Plastron's salespeople.
Advertising is limited to trade journals and trade shows.
Plastron manufactures medical tubing by the plastic extrusion process.
The primary raw materials are proprietary vinyl compounds, which are produced by
Plastron, and certain other plastic materials, which are purchased from a select
number of suppliers. Raw material price increases generally can be passed on to
customers after a delay of two or three months, although competitive pressures
sometimes prevent price increases.
Medical tubing is one of the Company's fastest growing product lines.
Continued growth is expected to come from general market expansion and expansion
in international markets, as well as the addition of new customers and new
products. New products include microbore tubing, silicone substitute
formulations, and trilayer tubing substitutes. For example, Plastron has
developed microbore tubing with extremely small internal diameters. This
microbore tubing can be used to regulate the delivery of critical intravenous
fluids without the need for more expensive drip control devices. Medical
professionals can precisely control the drug delivery speed simply by selecting
the proper diameter tube, thereby improving accuracy and reducing cost.
Specialty Tubing & Gaskets
PureTec's specialty tubing and gasket product line consists of (i)
extruded plastic tubing, sold primarily to manufacturers of aerosol valves,
dispenser pumps, and writing instruments; (ii) rubber and thermoplastic gaskets
for the aerosol and dispenser pump markets; and (iii) consumer products, chiefly
consisting of swimming pool and other corrugated hose. These products are
manufactured primarily by the Company's Action Technology ("Action") division,
which includes the American Gasket and Rubber Company ("AGR"), Plastron, and
Action - Europe.
Most of Action's products are manufactured by the plastic extrusion
process and are sold throughout the United States, Europe, and selected
worldwide markets. Action is the largest tubing extruder in North America.
Writing instrument products include pen barrels and ink tubing as well as ink
reservoirs for felt-tip pens. Action's sales to the dispenser industry are
comprised of dip tubes which transmit the contents of a dispenser can to the
nozzle, and plastic and rubber gaskets and seals used in the manufacture of
dispenser valves and pumps. These products are manufactured to very precise
tolerances, according to the specifications developed by Action and its
customers for specific applications. Other OEM (Original Equipment Manufacturer)
sales include corrugated hose to manufacturers of floor care products, and
various types of hoses and tubing for other industrial applications. Action also
manufactures consumer products which are primarily sold to retail merchandisers,
including swimming pool and spa hose.
Action's principal competitive pressure is the possibility of internal
production by its customers. The Company believes Action's products compete
successfully based on product quality, prompt delivery, technical service and
price. Action believes that its ability to produce high volumes of products to
exact specifications has been a key to its success in the marketplace and the
longevity of its customer relationships.
Each Action facility is strategically located to supply multi-national
customers on a timely basis. In the United States, Action maintains plants in
New Jersey and Illinois. AGR's facilities are in Illinois, and Action's Plastron
subsidiary operates in California and Georgia. Action's European plants, in
Belgium and Italy, serve the European, Asian, and African markets with products
similar to those manufactured in the United States. Sales from its plants in
Belgium and Italy were approximately $13,458,000 and $12,450,000 for 1997 and
1996, respectively.
Action's OEM sales are conducted by technically trained full-time
employees who coordinate marketing activities directly with the managers of each
plant. Action also uses independent representatives to sell its pool hose
products. In addition, Action manufactures and markets pool hose nationwide
under a joint agreement with Haviland Consumer Products. This agreement utilizes
the technology and marketing strengths of both companies in their effort to
build a leadership position in the market for pool hose.
The raw materials for all of Action's products (primarily
polyethylene and polypropylene) are purchased from a number of different
suppliers. Some PVC compounds are purchased by Action from other PureTec
divisions. The
4
<PAGE>
Action division has generally been able to pass through increases in raw
material costs to its customers pursuant to multi-year contracts and other
agreements.
Medical-grade Vinyl Compounds
The Company believes that its Colorite Polymers division is the world's
largest producer of high-quality vinyl compounds for use in the medical
industry. Medical-grade compounds are sold primarily under the "Unichem
Products" brand. These compounds are sold to leading manufacturers of medical
devices and equipment. They are also sold to producers of tubing and closures
for the food and beverage industry and used in a variety of food contact
applications.
The market for medical-grade vinyl compounds is highly specialized,
with two significant competitors. For more than 30 years, Colorite Polymers has
been supplying these specialized vinyl compounds for FDA-regulated applications.
The Company believes it competes effectively based on product quality and
performance and prompt delivery, and that price is a secondary consideration for
its customers. Colorite Polymers' chemists work closely with customers to
develop compounds that address their specific requirements. Through this custom
work, the Company has introduced a number of breakthroughs to the medical device
industry by developing formulations with unique physical characteristics. For
example, Colorite Polymers has recently developed a new family of flexible vinyl
compounds designed to replace silicone rubber in a variety of medical and
commercial applications.
Medical-grade compounds are produced in the Company's facilities in
Ridgefield, New Jersey; Sparks, Nevada; and Belfast, Northern Ireland. The
Company sells these compounds in worldwide markets. Approximately 25% of
external sales are to Colorite Polymers' five largest customers. Products are
sold directly through the Company's salespeople. Advertising is limited to trade
journals and trade shows.
Colorite Polymers purchases raw materials for its compounding operation
(vinyl resins, plasticizers and stabilizers) from several sources. The Company
in the past has generally been able to pass on raw materials price increases for
Unichem Products on a relatively timely basis.
Specialty Vinyl Polymers
The Company's specialty vinyl polymers business consists of two
divisions of the Colorite Polymers group: Burlington Resins, Inc., doing
business as Colorite Specialty Vinyl Resins ("SVR"); and Cybertech Polymers.
SVR operates a plant in Burlington, New Jersey, with an annual
production capacity of 120 million pounds of vinyl resins. The plant was
purchased from Occidental Chemical Corporation in August 1995. The plant employs
specialized technology to produce dispersion, blending, and copolymer suspension
resins for a variety of industries, including floor covering, automotive
sealants and adhesives, coil coatings, plastisol compounding and PVC packaging.
Management believes that SVR has built a relatively unique position in
the specialty resins market by offering customized products for niche markets
that the larger commodity producers do not serve. SVR's business strategy is
built on individual customer service and the highest standards of quality.
Although SVR's market share in the overall specialty resins market is about 7%,
SVR's share in its target markets exceeds 20%. Approximately 50% of sales are to
the division's 10 largest customers.
SVR is actively developing new products to serve specific customer
applications. The division has also added to its product line by initiating a
technology exchange with Vinnolit Kunstsoff of Ismaning, Germany. The exchange
agreement enhances the Company's breadth of product line by offering specialty
resin formulations not previously available in North America.
SVR purchases raw materials from several large chemical companies. The
division in the past has generally been able to pass on raw materials price
increases for its specialty formulations, but to a lesser extent for its more
commodity-type products. The division has also experienced competitive pressure
from large chemical companies who offer a greater breadth of products.
5
<PAGE>
The Cybertech Polymers division produces a variety of specialized and
general purpose vinyl compounds. Approximately 70% of Cybertech Polymers'
outside sales are to manufacturers of wire and cable, with the remaining outside
sales going to the footwear, general purpose extrusion and molding markets.
Cybertech Polymers' compounds are sold throughout the United States by an
internal sales force and eight independent representatives. Approximately 50% of
Cybertech Polymers' overall production is used internally by PureTec's Colorite
Plastics division in the manufacture of garden hose.
The markets for Cybertech Polymers' vinyl compounds are highly
fragmented, and neither the Company nor any competitor has a controlling share.
The Company believes it competes effectively based on product quality,
performance and prompt delivery, and price.
Cybertech Polymers purchases raw materials from several sources and
also manufactures them internally. This division also recycles scrap vinyl.
Cybertech Polymers in the past generally has been able to pass on raw materials
price increases to customers on a relatively timely basis.
Recycled Plastics
PureTec believes that its Pure Tech Plastics division is the leading
supplier of high-quality recycled PET for reuse in bottle-grade and sheet
applications. The division has developed proprietary processes for cleaning,
sorting, and recycling post-consumer plastic bottles into clean PET flakes or
pellets. This technology has been optimized to produce extremely high quality
recycled PET, suitable for reuse in new bottles. The technology continues to be
refined by Company engineers, and has been licensed to other companies in a
number of countries, including Taiwan, South Korea, Canada, and Japan.
Raw materials used by the Pure Tech Plastics division consist mostly of
post-consumer soft drink bottles. This raw material is purchased from various
suppliers who obtain bottles in states with "deposit laws," or who conduct
curb-side pickup operations. Pure Tech Plastics competes with other recycling
facilities both to obtain materials for recycling and to sell recycled materials
to manufacturers. Competition for supplies of recyclable material is based upon
price and promptness of service in collecting or accepting material. Competition
for sales of recycled material is based on price and consistency of quality.
Prices for recycled PET have been volatile in recent years, causing
wide swings in the division's revenues and earnings. To reduce the impact of
this volatility, the Company has restructured its recycling operations and
linked supply contracts to the market price of recycled PET. This has resulted
in a more consistent spread between the cost of bottles and the price of
recycled PET, providing the Company with an opportunity to increase earnings by
reducing processing costs. This strategy is being followed with the planned
opening of a new state-of-the-art recycling facility in Huntington, West
Virginia in early 1998. The Huntington plant is expected to reduce processing
costs per pound.
Company Organization
The Company continues to assess and simplify its organizational
structure. In the current year, this has included the elimination of certain
non-performing entities, reducing the equity in non-core businesses, and
increasing the ownership of Plastic Specialties and Technology, Inc. ("PST"),
the Company's primary operating subsidiary. Although these actions have had a
short-term impact during the 1997 fiscal year, management believes that they
will be accretive to earnings in 1998 and beyond.
As of September 30, 1997, PureTec Corporation owned approximately 96.1%
of the outstanding common stock of PST, and 100% of Burlington Resins, Inc. The
following chart shows PureTec's principal divisions and subsidiaries and their
primary business function:
6
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-----------------------
| PureTec Corporation |
-----------------------
|
--------------------
| Ozite Corporation |
| (inactive) |
---------------------
|
---------------------------------------------------
| |
------------------------ |
| Plastic Specialties | |
| & Technologies, Inc. | |
------------------------ |
| |
|--- Action Technology (Specialty Tubing) |
| |
| -------------------------------- |
|--------| Action Technology Belgium NV | |
| | (Medical & Specialty Tubing) | |
| -------------------------------- |
| |
| -------------------------------- |
|--------| Action Technology Italia SpA | |
| | (Specialty Tubing & Gaskets) | |
| -------------------------------- |
| |
| --- American Gasket & Rubber (Dispenser Gaskets) |
| |
| --- Plastron (Medical Tubing) |
| |
|--- Colorite Plastics (Lawn & Garden Products) |
| |
|--- Colorite Polymers (Vinyl Polymers) |
| |
| --- Unichem Products (Medical-grade Plastics) |
| |
| -------------------------------- |
|--------| Colorite Europe, LTD | |
| | (Medical-grade Compounds) | |
| -------------------------------- |
| |
| --- Cybertech Polymers (Vinyl Compounds) |
| |
| -------------------------------- |
| | Burlington Resins |----------------
| | (Specialty Vinyl Resins) |
| --------------------------------
|
|--- Pure Tech Plastics (Recycled PET)
Patents and Trademarks
The Company seeks to protect its proprietary know-how through the
application of patent and trademark laws. However, in the opinion of management,
none of its patents or trademarks are material to its operations.
Research and Development
The Company employs certain professionals who, along with other
responsibilities, are engaged in research relating to the development of new
products and to the improvement of existing products. The Company works closely
with certain clients to develop and improve certain products and product lines.
Much of this product development is funded by clients and therefore is not
reflected in the Company's financial results. For the years ended July 31, 1997,
1996, and 1995, the Company recorded $654,000, $689,000 and $1,268,000 for
research and development activities.
Employees
As of July 31, 1997, the Company employed approximately 1,900 full-time
employees, of which approximately 1,650 were employed in the United States and
the balance in Europe and Canada. Certain employees at facilities in Ridgefield
and Rockaway, New Jersey are represented by the International Brotherhood of
Teamsters, under contracts that expire August 1, 2000. Certain employees at the
Burlington, New Jersey facility are represented by the Oil Chemical
7
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& Atomic Workers International Union, AFL-CIO, under contracts that expire July
1, 2001. Contracts with both of the above unions were successfully renegotiated
in 1997. Certain employees in East Farmingdale, New York are represented by the
Waste Material Sorters, Trimmers & Handlers Union, under a contract that expires
on April 30, 1998. Approximately 45% of all employees are members of unions
including a majority of the European and Canadian employees. The Company
believes that employee relations at all of its manufacturing facilities are
good, and it has not experienced any work stoppage since its formation.
Environmental Matters
As described in Item 3. Legal Proceedings, the Company is party to
environmental proceedings in the ordinary course of business, none of which
management believes are likely to have a material adverse effect on its
consolidated financial position or results of operations. Additionally, in
management's opinion none of these proceedings nor compliance with Federal,
state and local environmental laws and regulations are believed to require any
material estimated capital expenditures for environmental control facilities in
the foreseeable future.
Item 2. PROPERTIES
The Company believes that its facilities are suitable and have
sufficient productive capacity for its current and foreseeable operational and
administrative needs. Set forth below is a list and brief description of all of
the Company's offices and facilities, all of which are owned unless otherwise
indicated.
<TABLE>
<CAPTION>
Approximate
Location Function Square Feet
- -------- -------- -------------
<S> <C> <C>
Ridgefield, New Jersey (1) Corporate Headquarters 9,900
Tonawanda, New York (1) Manufactures brass couplings 31,000
Piscataway, New Jersey (3) Manufactures general purpose vinyl 150,000
compounds
Ridgefield, New Jersey Manufactures garden hose and 328,000
medical-grade vinyl compounds
Ridgefield, New Jersey (3) Warehouse 70,000
Sparks, Nevada (3) Manufactures garden hose and 250,000
medical grade vinyl compounds
Waco, Texas Manufactures garden hose 104,600
McKenzie, Tennessee (2) Manufactures porous pipe 20,000
Mississauga, Ontario (4) Manufactures garden hose 150,000
City of Industry, Manufactures medical tubing 110,000
California (5) and other specialty tubing
Clinton, Illinois Manufactures dip tubes, 62,500
writing instrument products
and corrugated hose
Dalton, Georgia Manufactures medical tubing 40,000
and other specialty tubing
Erembodegem Manufactures medical tubing 88,200
8
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(Aalst), Belgium and other specialty tubing
Milan (Gaggiano), Italy (6) Manufactures rubber compounds 15,000
Milan (Gaggiano), Italy Manufactures dispenser gaskets 25,800
and rubber injection-molded parts
Milan (Gaggiano), Italy (3) Manufactures specialty tubing 24,000
and related products
Rockaway, New Jersey Manufactures specialty tubing and 98,600
related products
Schiller Park, Illinois Manufactures rubber compounds 20,000
Schaumburg, Illinois (7) Manufactures dispenser gasket 58,000
Flint, Michigan (10) PET recycling plant (grinding only) 42,500
Howell, Michigan PET recycling plant (grinding only) 18,400
Livonia, Michigan (5) PET recycling plant 60,000
East Farmingdale, New York (1) PET recycling plant 49,000
Auburn, Maine (5) Plastics and aluminum baling operation 22,000
Lawrence Twp., New Jersey (8) PET recycling plant (inactive) 80,000
Hillside, New Jersey (9) Glass recycling plant (discontinued) 15,000
Newark, New Jersey Glass recycling plant & MRF (discontinued) 101,000
High Point, North Carolina (12) Plastic injection molding plant 100,000
Burlington, New Jersey Manufactures specialty PVC resin 107,000
Belfast, Ireland (11) Manufactures specialty compound 45,000
Huntington, West Virginia PET recycling plant Under construction
</TABLE>
- --------------------------------
(Years relate to calendar years)
(1) Lease expires in 2001.
(2) Leased on a month-to-month basis.
(3) Lease expires in 2002.
(4) Lease expires in 2005.
(5) Lease expires in 1999.
(6) Lease expires in 2000, with an option to renew for another six year
period.
(7) Lease expires in 2020.
(8) Facility not active
(9) Lease expires in 2000.
(10) Lease expires in 1998.
(11) Lease expires 2017.
(12) Facility sold in August 1997 in connection with sale of Styrex Industries,
Inc.
9
<PAGE>
Item 3. 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.
In June 1997, the Company filed suit against Occidental Chemical
Corporation ("OxyChem"), alleging that certain postretirement benefit
liabilities were substantially understated when Burlington acquired the
acquisition from OxyChem.(see Note 1). 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 is 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, based on which Ozite elected to proceed with the purchase of Dalen.
The seller counterclaimed for the 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 impact of the
settlement of the Dalen litigation has been reflected in the Company's net loss
from discontinued operations as of July 31, 1997, as Ozite had previously
reported the Dalen business which it had acquired as a discontinued operation in
1988. The settlement agreement with Dalen provided for Ozite to make two (2)
payments of $500,000 each by October 15, 1997 and a payment for $2,250,000 by
January 31, 1998. Interest accrues on the final payment of $2,250,000 from
October 15, 1997 until it is paid at the rate of 8% per annum. The Company has
made the required payments of $1,000,000 which were due on October 15, 1997. The
court in Cook County, Illinois retains jurisdiction for enforcement of the
settlement agreement in the event Ozite is unable to make any of these scheduled
payments. Management believes that it has a number of alternatives available to
finance the final settlement payment to Dalen, and therefore it expects to be
able to meet the final payment obligation by January 31, 1998 (See note 20(b)).
PTI 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 $30,000 of indebtedness, which
PTIP had acknowledged, and $14,000 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 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 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. Subsequent to July 31, 1997, 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. However, in light of the growing costs of
litigation, and the remaining uncertainty of the outcome of a trial, management
elected to settle these cases. The impact of the settlement of these cases is
reflected in the Company's net loss from discontinued operations for the year
ended July 31, 1997, as PST had
10
<PAGE>
previously reported Circuit Chemistry as discontinued operations as of 1989.
Total settlement payments to the plaintiffs in connection with this settlement
is $1,725,000.
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 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.
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 ("Davis"). In Davis, the United States has alleged
that certain private entities are liable, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), for cleanup
costs that have been incurred, and will be 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.
PST was also notified by Kraft in October 1989 of the existence of a
claim by the New Jersey Department of Environmental Protection and Energy
("NJDEPE") with respect to the Chemical Control site in Elizabeth, New Jersey,
but PST has not received any further information regarding this claim.
Information produced in the Davis matter indicated that Ware Chemical used a
hazardous waste transporter that sent hazardous wastes to the Chemical Control
site. PST has no basis at this time to determine whether it will be subject to
liability with respect to the Chemical Control site or the amount of said
liability. As noted above, Ware Chemical is a dormant company with no assets.
In addition to the above, PST is also subject to certain obligations
pursuant to the New Jersey Environmental Cleanup Responsibility Act ("ECRA")
(which has been amended and renamed the "Industrial Site Recovery Act"). Under
ECRA, the "transferor" of an industrial establishment was required to certify
that no hazardous substances had been discharged or released at the industrial
establishment before a transfer could take place; otherwise, the transferor is
required to prepare a cleanup plan or enter into a consent agreement with the
NJDEPE to investigate and remediate releases of hazardous substances pursuant to
NJDEPE-approved procedures. Dart & Kraft assumed responsibility for compliance
with ECRA in connection with the 1984 sale of its plastic sector to PST, and has
completed all of its obligations, except for the cleanup of Colorite's
Ridgefield, New Jersey facility and possible clean up of the Ware sites
described above. Kraft has an approved cleanup plan for the Colorite facility
and final papers for a negative declaration clearing the site from environmental
liability have been received.
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
11
<PAGE>
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.
There can be no assurance as to the ultimate outcome of these
litigations or their possible impact on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 26, 1997, the Company held its annual meeting of
stockholders at which the following items were submitted to a vote of
shareholders. As of the record voting date of January 3, 1997, there were
29,339,171 shares of Common Stock entitled to vote.
Votes For Votes Against
--------- -------------
1. To elect nine directors
for a term of one year or
until their successors
are elected and qualified:
Fred W. Broling 22,449,108 342,341
David C. Katz 22,172,750 618,699
Murray Fox 22,174,846 616,603
Leo Gans 22,265,525 525,924
Robert L. Guyett 22,440,238 208,541
Werner Haase 22,224,708 356,432
Edward P. Hamway 22,429,338 356,541
John J. Harvey 22,266,123 367,245
Peter R. Harvey 22,255,723 208,541
2. To ratify the selection and
appointment by the Company's
Board of Directors of Deloitte
& Touche LLP independent
certified public accountants,
as auditors for the Company
for the fiscal year ended
July 31, 1997. 22,620,910 93,787
12
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The following chart shows the quarterly high and low bid prices for
the Company's Common Stock available for the last two fiscal years. These
quotations have been reported by the National Association of Securities Dealers,
Inc. The prices represent quotations by the dealers without adjustments for
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
Calendar Quarter High Low
- ---------------- ---- ---
<S> <C> <C>
Third 1995 5 3/4 2 7/8
Fourth 1995 3 1/4 1 15/16
First 1996 2 7/8 2
Second 1996 4 1/4 2 3/32
Third 1996 3 9/16 2 1/4
Fourth 1996 2 7/16 1 5/8
First 1997 2 5/16 1 23/32
Second 1997 2 1/8 1 9/32
Third 1997 2 17/32 1 7/32
</TABLE>
The Company has approximately 1,000 record holders of its Common Stock
and believes that the approximate total number of beneficial holders of the
Common Stock of the Company to be in excess of 11,000, based on information
received from the transfer agent and those brokerage firms who hold the
Company's securities in custodial or "street" name.
Dividends
The Company has not paid any cash dividends in the last three fiscal
years and does not anticipate paying any cash dividends in the foreseeable
future.
Item 6. SELECTED FINANCIAL DATA
The summary of selected financial data for the five years in the period
ended July 31, 1997 should be read in conjunction with the financial statements
presented elsewhere herein. See Notes 1 and 2 for a discussion of the basis of
presentation, principles of consolidation and defined terms.
13
<PAGE>
Statement of Operations Data:
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
July 31, July 31, July 31, June 30, June 30,
1997 (2) 1996 (2) 1995 (1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales $315,334 $326,344 $ 30,189 $ 48,590 $16,793
Income (loss) from continuing operations $ 1,345 $ (4,407) $ (7,519) $(14,841) $ 2,183
Income (loss) from continuing operations
per share of common stock, Primary $ 0.05 $ (0.18) $ (0.42) $ (1.68) $ 0.36
Income (loss) from continuing operations
per share of common stock, Fully diluted $ 0.05 $ (0.18) $ (0.42) $ (1.68) $ 0.25
Weighted average shares of common
stock outstanding, Primary 29,429 27,268 17,751 8,857 6,116
Weighted average shares of common 29,429 27,268 17,751 8,857 8,763
stock outstanding, Fully diluted
Balance Sheet Data:
(000's omitted)
<CAPTION>
July 31, July 31, July 31, June 30, June 30,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Working capital $ 20,037 $ 21,744 $ 14,461 $ 3,725 $18,116
Total Assets 311,823 296,690 290,121 56,442 60,382
Long-term obligations 142,669 142,672 126,751 7,581 9,617
Stockholders' equity 67,177 70,708 73,519 34,290 42,399
Cash dividends per --- --- --- --- ---
share of stock
</TABLE>
(1) See Notes 9, 10 and 18 to the Consolidated Financial Statements with
respect to acquisitions, plant closings and discontinued operations.
(2) See Notes 1, 2, 9, 10 and 18 to the Consolidated Financial Statements
with respect to the acquisition of Ozite, other acquisitions,
write-offs of intangible assets, plant closings, and discontinued
operations.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (Dollars in thousands, except for per share
data).
Since the consummation of the transaction between PTI Plastics, Inc.
("PTIP") and Ozite Corporation ("Ozite") in which both became wholly-owned
subsidiaries of PureTec Corporation (the "Company" ), the Company's financial
14
<PAGE>
statements show historical information only for PTIP for periods prior to August
1995. Consequently, references to the Company with respect to such historical
financial information refer solely to PTIP, unless otherwise stated. The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
Results of Operations
Fiscal 1997 Compared to Fiscal 1996
Net sales for the year ended July 31, 1997 ("fiscal 1997") were
$315,334, a decrease of $11,010 or 3.4% compared to the year ended July 31, 1996
("fiscal 1996").
Domestic plastic product sales were $149,083, a decrease of $3,269 or
2.1% compared to 1996. The decrease represents volume shortfalls for garden hose
partially offset by increased volume of gaskets and medical and dip tubing.
Foreign plastic product sales of $35,300 increased $1,142 or 3.3%. The increase
represents volume growth in both medical tubing and rubber and plastic gaskets.
Plastic material products had sales of $154,064, an increase of $11,750 or 8.3%.
This increase represents volume growth in medical-grade compound and specialty
vinyl polymers as well as increased volume used internally by the plastic
products segment. Recycling sales were $18,681 which represents a decrease of
$15,567 or 45%. This decrease is a result of price decreases for recycled PET,
which in recent years has been very volatile.
Gross profit for fiscal 1997 was $66,915, an increase of $1,462
(2.2%) compared to $65,453 for fiscal 1996. Domestic plastic products had gross
profit of $38,061 for fiscal 1997 which is a decrease of $846 or 2.2% compared
to 1996. This decrease is a result of volume shortfall for garden hose partially
offset by increased volume of gaskets and medical and dip tubing. Foreign
plastic products had gross margins of $11,501, an increase of $1,254 or 12.2% as
compared to 1996. This is a result of increased volume and reduced operating
costs. Plastic material products had a gross margin of $16,942 which represents
an increase of $1,168 or 7.4% as compared to 1996. This increase represents
volume growth in medical-grade compounds and specialty vinyl polymers. This was
partially offset by start-up costs associated with Colorite Europe Limited.
Recycling gross margins of $1,528 represents a decrease of $414 or 21% compared
to 1996. This is a direct result of price decreases for recycled PET.
Selling, general and administrative expenses for fiscal 1997 were
$36,091, a $536 (1.5%) increase compared to fiscal 1996. As a percentage of net
sales, these expenses increased to 11.5% in fiscal 1997 from 10.9% in fiscal
1996. This increase is largely due to the start-up of Colorite Europe Limited in
Ireland and an increase in professional fees on a corporate basis which was
partially offset by reduced selling commissions for garden hose.
Operating income for fiscal 1997 and 1996 was $26,617 (8.4% of net
sales) and $20,868 (6.4% of net sales), respectively, an increase of $5,749 or
28%. Domestic plastic product's operating income of $21,822 for fiscal 1997
represents an increase of $2,456 or 12% compared to 1996. This increase is a
direct result of increased volume of gaskets and medical and dip tubing
partially offset by reduced volume for garden hose. Foreign plastic product's
operating income of $8,276 for fiscal 1997 is an increase of $1,901 or 31% as
compared to fiscal 1996. This increase is a result of improved volume in both
medical tubing and rubber and plastic gaskets. The plastic material products
segment had operating income of $6,533 for fiscal 1997, an increase of $626 or
11% compared to 1996. The increase is a result of volume growth in medical-grade
compounds and specialty vinyl polymers partially offset by start-up costs at
Colorite Europe Limited. Recycling had an operating loss of $197 which
represents an improvement of $255 (after the exclusion of $4,636 write-off of
goodwill and obsolete facilities). The improvement is due to the decrease in
costs and the stability of PET prices during the second half of 1997. An overall
comparison between 1997 and 1996 shows an aggregate write-off of goodwill and
obsolete assets of $4,636 in 1996. The majority of this write-off represents a
reserve for shutdown costs at the Company's Springfield recycling facility.
Interest expense for fiscal 1997 and 1996 was $18,108 and $18,702,
respectively, which represents a $594 (3.2%) decrease. This decrease is
primarily due to the interest related to the settlement of the OxyChem loan, the
payoff of certain Old Recycling loans during the current fiscal year and
improved borrowing rates from our primary lender.
15
<PAGE>
The tax provision for 1997 includes a current foreign tax provision of
$2,804, a current state tax provision of $150 and a deferred foreign tax
provision of $177. The tax provision for fiscal 1996 includes a current foreign
tax provision of $2,269, a current state tax provision of $288 and a deferred
foreign tax provision of $80.
The Company generated net income from continuing operations of $1,345
for fiscal 1997 compared to a loss of $4,407 in fiscal 1996. The increase is
partly attributed to write-offs of obsolete assets related to recycling
operations in 1996 of $4,636 as well as improvements within the plastic products
segment.
During 1997, the Company recognized losses on the discontinuance of its
injection molding operation of $3,476 (which includes a $2,250 loss related to
the disposal of the operation), an additional $672 loss on the disposal of its
Ozite Manufacturing operations, an additional $1,988 loss related to Circuit
Chemistry and a $2,000 gain from the Dalen lawsuit. During 1996, the Company
recorded a loss related to Ozite of $3,220 (which includes a $2,241 loss for
disposal of the operation) as well as a $546 loss from its injection molding
operation. See Note 17 for a further description related to the Company's
discontinued operations.
Fiscal 1996 Compared to Fiscal 1995
For the year end July 31, 1996, the Company recorded net sales of
$326,344 compared to $30,189 for fiscal 1995. The large increase was
attributable to the combination with Ozite and reflects the Company's greatly
expanded scope of operations together with the acquisition of Burlington Resins,
Inc. ("Burlington"). The Company's domestic and foreign plastic products and
plastic materials segments were acquired as part of the aforementioned mergers.
For the year ended July 31, 1996, net sales for the domestic and
foreign plastic products segments were $152,352 and $34,158, respectively. Net
sales for the plastic material segment were $142,314 for the year ended July 31,
1996, reflecting the addition of Burlington and the PVC compound operations. The
plastic materials segment provides PVC compound to the domestic plastic products
segment. Transfers are made at raw material cost plus a value added factor for
labor and overhead. For fiscal 1996, the plastic material segment transferred
approximately $32,000.
Net sales for the recycling operation were $34,248 for the year ended
July 31, 1996, an increase of $4,059 as compared to fiscal 1995.
Gross profit for fiscal 1996 was $65,453 as compared to $4,836 for
fiscal 1995. The $60,617 increase was primarily attributable the addition of
Ozite & Burlington.
Selling, general and administrative expenses were $35,555 and $301 for
fiscal 1996 and fiscal 1995, respectively. As a percentage of net sales, these
expenses were 10.9% for fiscal 1996 and 1.0% for fiscal 1995.
The Company's aggregate write-offs of goodwill and obsolete assets were
$4,636 for fiscal 1996. The majority of the write-off represents a reserve for
shutdown costs at the Company's Springfield recycling facility. For fiscal 1995,
the Company wrote-off approximately $2,803 of goodwill and other intangible
assets and $4,600 of obsolete equipment.
Operating income for fiscal 1996 was $20,868 (6.4% of net sales) as
Interest expense was $18,702 for fiscal 1996, an $18,283 increase as
compared to fiscal 1995. The increase is due to the above-mentioned transaction
which includes PST which has subordinated notes of $125,000 and a $50,000
revolving credit facility, and includes Burlington which has approximately
$11,000 in debt at July 31, 1996.
The Company had recorded a gain of $1,000 during fiscal 1995 to reflect
a gain realized on the sale of an interest in the Company's reverse vending
machine subsidiary. The Company reduced its equity interest in Evolutions, Inc.
during fiscal 1996 from 75% to 42% and recorded a loss from its equity
investments in Evolutions and certain other equity investments.
The tax provision for fiscal 1996 includes a current foreign tax
provision of $2,269, a current state tax provision of $288 and a deferred
foreign tax provision of $80. For fiscal 1995, no tax provision was recorded.
16
<PAGE>
The Company had a net loss from continuing operations of $4,407 for
fiscal 1996 compared to a net loss from continuing operations of $7,519 in
fiscal 1995.
The Company recognized a loss on the sale of its Ozite Manufacturing
operations (non-woven textiles) in fiscal 1996. This loss amounted to $2,241.
Losses generated from these operations amounted to $979 in fiscal 1996. In
addition the Company disposed of its Styrex injection molding operation in
August 1997. Losses generated from this operation were $546 and $4,580 for
fiscal 1996 and 1995, respectively. Furthermore, the Company recorded a loss on
the disposal of its glass operations in fiscal 1995.
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
Company to continue to expand its operations may require additional funding.
Cash and cash equivalents increased $750 for fiscal year 1997 compared
to a $1,102 decrease for fiscal year ended July 31, 1996. The changes for these
periods were attributable to the factors discussed below.
The Company had working capital of approximately $20,160 at July 31,
1997 compared to working capital of approximately $21,744 at July 31, 1996. The
decrease in working capital is attributable to an increase in short term
borrowings of $18,495 partially offset by increases in inventory ($13,165),
accounts receivable($3,061), and lower accounts payable of $1,223.
Net cash (used in) operating activities was approximately $(5,444) in
fiscal 1997 compared to net cash provided by operating activities of
approximately $28,811 in fiscal 1996. The change was due principally to an
increase in inventory of 15,864, writeoffs of goodwill, other intangible assets,
and obsolete equipment. Net cash used in investing activities was approximately
$11,264 in fiscal 1997 and approximately $31,469 in fiscal 1996. The change was
primarily due to cash paid in the amount of $22,328 for the acquisitions of net
assets in the Burlington Resins transaction in fiscal 1996. Cash flows from
financing activities were approximately $18,823 for fiscal 1997, which included
a $19,964 increase in short term borrowings. For fiscal 1996, net cash provided
from financing activities was approximately $2,221 which included repayments of
short-term borrowings of $10,840 and proceeds from long-term debt of $18,630.
Net cash provided by operating activities was approximately $28,811 in
fiscal 1996 compared to approximately $1,589 in fiscal 1995. The change was due
principally to a reduction in the overall losses incurred by the Company,
write-offs of goodwill, other intangible assets, and obsolete equipment. Net
cash used in investing activities was approximately $31,469 and $14,077,
respectively in fiscal 1996 and 1995. The change was primarily due to cash paid
in the amount of $22,328 for the acquisitions of net assets in the Burlington
Resins transaction. Cash flows from financing activities were approximately
$2,221 for fiscal 1996, which represented a paydown of $7,056 of debt versus new
long term borrowing of $18,027. For fiscal 1995, net cash provided from
financing activities was approximately $18,766, which were provided principally
by the private placement of an aggregate of 3,308,672 shares of common stock
from October 1994 through July 1995 as well as the proceeds from the sale of
convertible debentures in the amount of approximately $8,371.
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
17
<PAGE>
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.
At July 31, 1997, the Company was not in compliance with certain of the
covenants of the Amended Agreement, including the requirement to reduce
borrowing to $20 million and the limitation on capital expenditures. The CLC has
provided a waiver of this non-compliance as of July 31, 1997.
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. 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.
At July 31, 1997 and 1996, short-term borrowings include revolving
credit advances of $36,772 and $14,138, respectively, under the Amended
Agreement and $2,087 of factored receivables. The CLC owes PST $422 related to
such receivables.
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 July 31,
1997 was 8.5%. At July 31, 1997, there was $1,893 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 July
31, 1997 there was $3,341 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 July 31, 1997. The Company also has a term loan provided by
Occidental Chemical
18
<PAGE>
Corporation. This loan is subordinated to the Commercial Bank debt. At July 31,
1997 there was $2,524 outstanding on this loan. This loan was repaid subsequent
to July 31, 1997, and as such has been classified as a current liability.
In February 1996, Styrex and Pure Tech 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. As of July 31, 1996, there was $3,839 outstanding under the revolving
credit line, and $2,692 under the term loan. 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 July 31,
1997 and 1996 the revolving loan and the term loan balances were $1,086 and
$1,156, respectively. The operations of Styrex were sold in August 1997.
Accordingly, these amounts are included in net assets held for sale in the
consolidated balance sheet which is included in other current assets.
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.
Subsequent Events
In August 1997, the operations of Styrex were sold and the operating
results of Styrex for fiscal 1997 were included within discontinued operations
(see Note 18). Accordingly, results for fiscal 1996 and 1995 were also reclassed
to discontinued operations.
In September 1997, Burlington Resins, Inc. settled a lawsuit it had
filed against OxyChem. The result of this settlement was to reduce goodwill at
Burlington by $1,476. (See Note 1).
In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry,
and Ozite settled the Dalen litigation. The impact of both settlements was
accounted for as discontinued operations (see Note 20(b) and Note 18).
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.
19
<PAGE>
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 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.
In connection with the Company's acceptance of the Tekni-Plex Offer,
Tekni-Plex has also agreed to lend to PureTec Corporation $5,000, as discussed
above.
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.
Construction has been completed 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 total capital costs for the Company in connection with this new Unichem
plant were approximately $6,000. The Company has received commitments for
certain grants, subsidies and other inducements from government authorities in
Northern Ireland. The Company has financed 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.
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 (see Note
20(b)). 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.
20
<PAGE>
Inflation
Generally, the Company's operations have benefited from relatively
stable or declining prices for raw materials. During 1997, the Company has
benefited domestically from declining raw material costs. Foreign operations saw
raw material costs continued 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.
Item 8. FINANCIAL STATEMENTS
The financial statements commence on Page F-1. Supplementary data is
not required to be presented.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
21
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the current directors and
executive officers of PureTec.
Name Age Position
---- --- --------
Fred W. Broling 62 Chairman of the Board and Chief
Executive Officer
David C. Katz 57 President, Chief Operating Officer and
Director
Murray Fox 74 Vice President and Director
Leo Gans 71 Vice President and Director
Robert Guyett 60 Director
Werner Haase 59 Director
Edward P. Hamway 49 Director
Peter R. Harvey 62 Director
John J. Harvey 66 Director
Joseph T. Bruno 62 Vice President
Thomas V. Gilboy 43 Vice President, Treasurer and Chief
Financial Officer
Paul Litwinczuk 44 Secretary
Gerard R. Giordano 47 Asst. Secretary and Vice President
Mr. Broling has served as the Chairman and Chief Executive Officer of
the Company since July 26, 1995. Prior to that, Mr. Broling was a Vice President
of PTIP. Mr. Broling has served as Chairman and President of PST since 1984 and
as Chairman and Chief Executive Officer of Ozite since 1990. Prior to 1984, Mr.
Broling served as President of the plastic specialty sector of Dart & Kraft.
Mr. Katz has served as President of the Company since its inception and
as President of PTIP since August 1988 and as a Director since September 1991.
He was appointed Chief Operating Officer in February 1994. From 1987 until
August 1988 he was an independent consultant to contract and food and beverage
packers. From 1982 until 1987, he was Vice President and operations director for
Taylor Wine Company, and was responsible for operation, distribution, purchasing
and maintenance of the plant owned by Taylor Wine Company in Hammondsport, New
York. From 1977 until 1982, he was U.S. manager of packaging for the Coca-Cola
Company in Atlanta, Georgia and in 1978 and 1979 he coordinated the introduction
of PET bottles to U.S. bottlers.
Mr. Fox has been a Director of PTIP since September 1991 and of the
Company since July 26, 1995. Mr. Fox also served as Secretary/Treasurer of PTIP
from September 1991 until July 1995. Mr. Fox was also Secretary/Treasurer of
REI Distributors, Inc. from 1981 until July 1995 and was a co-founder of that
company. Mr. Fox is also President of Recycling Enterprises, Inc., a company
engaged in glass recycling and fabrication of reprocessing equipment.
Mr. Gans has been a Vice President and director of the Company since
July 1995. Mr. Gans has served as Vice President since 1984 and was a director
of PST from 1989 to June 1993. He has also served as President of PST's Action
Technology Division since 1983.
Mr. Guyett has been a director of the Company since 1996. Mr. Guyett
serves as President, Chief Executive Officer of Crescent Management Enterprises,
LLC.
Mr. Haase has been a director of the Company since July 1995.
Mr. Haase has been the Chief Executive Officer of Journeycraft, Inc., a
privately held New York corporation involved in travel and sales promotion,
since 1986. Mr. Haase served as a Director of PTIP from 1987 to 1991. Mr. Haase
is also a director of Water-Jel Technologies, Inc., a publicly held company
which develops, produces and markets products which provide emergency first aid
on burns, and shields against heat and fires, and Multi-Media Tutorial Services,
Inc., a publicly held company which develops and markets personal educational
materials on videotape and CD-ROM formats.
22
<PAGE>
Mr. Hamway has served as a director of the Company since November 1995.
He has been Chairman of Round Hill Group, Ltd., a financial consulting firm,
since March 1995. Prior to that he held various executive positions with IBJ
Schroeder Bank & Trust Company.
Mr. John Harvey has served as Director of the Company since July 1995.
Mr. Harvey has served as a Director of Ozite since August 1990 and as a Director
of PST since October 1993. He has also served as the Chairman of the Board and
Chief Executive Officer of ARTRA Group Incorporated, a publicly held company
which manufactures and markets fashion jewelry, flexible packaging and
investments and as a director of The Lori Corporation (fashion jewelry) since
1985. Peter R. Harvey and John J. Harvey are brothers.
Mr. Peter Harvey has served as Director of the Company since July
1995. Mr. Harvey has served as a Director since 1993. He has been a director
of Ozite since 1984. He also has served as President, Chief Operating Officer
and a director of ARTRA Group Incorporated since 1986, a director of The Lori
Corporation since 1984, and a director of SoftNet Systems, Inc. since 1988. He
was also Chief Executive Officer and Chairman of SoftNet from 1985 to 1993.
Mr. Bruno has served as Vice President - Human Resources of the Company
since April 1996 and has held the same position with PST since 1986. Prior
thereto, from 1979 to 1985, he served as a Director and Vice President of
Personnel for Wilson Fiberfil International, a division of Dart & Kraft.
Mr. Gilboy has served as Vice President, Treasurer and Chief
Financial Officer of the Company since May 1996. Previously (from 1991 to 1996)
Mr. Gilboy had been Vice President and Chief Financial Officer of Troy
Corporation, a specialty chemical company.
Mr. Litwinczuk has served as Secretary of the Company since its
inception. Mr. Litwinczuk has served as the Secretary of Ozite and PST since
April 1996. He also served as Assistant Secretary of PTIP from September 1991 to
July 1995. Prior to 1991, Mr. Litwinczuk was Administrative Manager with REI
Distributors, Inc.
Mr. Giordano has served as Vice President of Corporate Finance since
February 1997 and was Vice president of Colorite since 1989. Previously (from
1983 - 1989) Mr. Giordano had been Vice President of Finance and Administration
for Ingredient Technology, a division of Crompton & Knowles Corporation.
PST is a subsidiary of Ozite, which is a wholly owned subsidiary of
PureTec.
Compensation Committee Interlocks and Insider Participation; Additional
Information
Compensation of executive officers is determined by the Company's
Board of Directors. Messrs. Fred Broling and Peter R. Harvey currently serve on
PST's Board of Directors and have served as directors and officers of PST and
continue to serve Ozite in such capacities. Mr. Broling is currently employed
as an officer of PST. See "Item 13. Certain Relationships and Related
Transactions."
Mr. Broling and Mr. Peter R. Harvey recommend to the Board of
Directors compensation payable to executive officers of the Company. Mr.
Broling's compensation is based on the actual performance of the Company
compared to the operating plan. The compensation of Mr. Gans is determined in
accordance with the performance of his operating division based on such plan.
Messrs. Broling and Harvey consider the performance of the Company, among other
factors, in determining the compensation of other executive officers; however,
neither they nor the Board of Directors have adopted compensation policies
applicable to such other executive officers.
23
<PAGE>
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Fiscal Stock All Other
Principal Position Year Salary Bonus Options Compensation (1)
- ------------------ ------ ------ ----- ------- ----------------
<S> <C> <C> <C> <C> <C>
Fred W. Broling 1997 $250,000 $250,000 100,000 $ 5,192
Chairman and Chief 1996 259,216 125,000 100,000 5,010
Executive Officer 1995 263,446 250,000 -- 11,232
David C. Katz 1997 165,000 165,000 100,000 4,362
President, Chief Operating 1996 152,385 75,000 -- 4,854
Officer, Director 1995 130,000 150,000 50,000 --
Leo Gans 1997 186,000 249,240 50,000 5,192
Vice President, Director, 1996 187,042 166,500 100,000 5,132
President of Action 1995 186,582 236,000 -- 9,987
Technologies
Thomas V. Gilboy 1997 176,000 176,000 100,000 5,192
Vice President, Treasurer & 1996 31,067 40,000 100,000 --
Chief Financial Officer 1995 -- -- -- --
Robert E. Brookman, Ph.D. 1997 197,000 73,100 50,000 5,192
President - Colorite 1996 191,582 49,454 50,000 4,992
Polymers Division 1995 190,703 99,000 --- 4,992
</TABLE>
- --------------------------
(1) The amounts in this column are contributions made by the Company to one
of the Savings Plan for Employees of PureTec or its affiliates and the
amount of premiums paid by the Company for life insurance policies for
the benefit of the named executive officers.
Director's Compensation
Directors who are officers of the Company receive no compensation for
serving as directors. Independent directors who serve on the compensation
committee participate in the 1995 Disinterested Director Stock Option Plan and
are paid a $10,000 annual fee.
24
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Potential
Realizable Realizable
Value at Value at
Assumed Assumed
Percent of Annual Annual
Total Rates of Rates of
Number of Options/ Stock Stock
Securities SARs Price Price
Under- Granted Apprecia- Apprecia-
lying to Exer- tion for tion for
Options/ Employees cise or Expi- Option Option
SARs in Fiscal Base ration Term Term
Name Granted Year Price Date 5% 10%
- ---- ---------- ---------- ------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fred W. Broling 100,000 13.9% $2.25 8/01/2005 $97,153 $234,841
David C. Katz 100,000 13.9% $2.25 8/01/2005 97,153 234,841
Leo Gans 50,000 6.9% $2.25 8/01/2005 48,577 117,420
Thomas V. Gilboy 100,000 13.9% $2.25 8/01/2005 97,153 234,841
Robert E. Brookman 50,000 6.9% $2.25 8/01/2005 48,577 117,420
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End FY-end
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ---- --------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Fred W. Broling --- --- 33,333/166,667 ---/---
David C. Katz --- --- 108,300/100,000 ---/---
Leo Gans --- --- 33,333/116,667 ---/---
Thomas V. Gilboy --- --- 33,333/166,667 ---/---
Robert E. Brookman --- --- 16,667/83,333 ---/---
</TABLE>
25
<PAGE>
Compensation Pursuant to PST Pension Plan
Pensions for salaried personnel of the Company are provided through the
Plastic Specialties and Technologies, Inc. And Affiliates Pension Plan,
effective as of May 10, 1984 and amended January 1, 1988 (the "PST Pension
Plan"). The following table illustrates the amount of the annual pension benefit
payable under the PST Pension Plan to a person in the specified average salary
and year-of-service classifications:
PENSION PLAN TABLE
Years of service
-------------------------------------------------------
Remuneration 15 20 25 30 35
- ------------ ------- ------- ------- ------- -------
$100,000 $15,000 $20,000 $25,000 $30,000 $35,000
125,000 18,740 25,000 31,250 37,500 43,750
150,000 or more 22,500 30,000 37,500 45,000 52,500
For purposes of the PST Pension Plan, compensation is defined as the
total wages, salaries, commissions, bonuses, overtime and special awards paid
during the year. All cash compensation reported in the Summary Compensation
Table under the columns "Salary" and "Bonus" is included in compensation under
the Pension Plan (subject to the dollar limitation shown in the Pension Plan
Table), for each officer listed.
The estimated number of credited years of service of each of the
executive officers listed in the Summary Compensation Table is as follows: Fred
W. Broling, 21 years; Thomas V Gilboy, 1 year; Leo Gans, 15 years; Joseph T.
Bruno; 18 years and Robert Brookman, 8 years. Mr. Katz is not presently covered
by the PST Pension Plan.
The PST Pension Plan provides a monthly benefit payable for life,
beginning at age 65, equal to one-twelfth of one percent of the total
compensation received during the period the employee participated in the PST
Pension Plan. None of the PST Pension benefits are subject to any deduction for
Social Security or other offset amounts.
26
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's voting securities as of October 14, 1997
by (i) each person who is known by the Company to own beneficially more than 5%
of the Company's outstanding Common Stock; (ii) each of the Company's directors
and named executive officers; and (iii) all officers and directors of the
Company as a group (unless otherwise indicated, all addresses are c/o the
Company, 65 Railroad Avenue, Ridgefield, New Jersey 07657):
Common Stock Beneficially Owned
Name and address Amount Percentage
- ---------------- ------------ ------------------
Fred W. Broling (1) 1,484,086 4.7%
David C. Katz (2) 118,200 *
Murray J. Fox (3) 725,872 2.3%
Leo Gans (1) 460,727 1.5%
Robert Guyett (4) 40,000 *
20 Parsonage Hill Road
Short Hills, NJ 07078
Werner Haase (5) 90,000 *
488 Madison Avenue
New York, NY
Edward Hamway (6) 23,000 *
174 Springfield Ave.
Summit, NJ 07901
John J. Harvey (5) 1,889,302 6.0%
500 Central Ave.
Northfield, IL 60093
Peter R. Harvey (5) 1,278,612 4.1%
500 Central Ave.
Northfield, IL 60093
Thomas V. Gilboy (1) 43,733 *
Paul Litwinczuk (7) 79,000 *
All Officers and Directors
as a Group (8) 6,232,532 19.6%
- --------------------
* = Less than 1%
(1) Includes shares issuable upon exercise of vested options to acquire
33,333 shares of Common Stock
(2) Includes shares issuable upon exercise of vested options to acquire
108,300 shares of common stock
(3) Includes 25,649 shares owned directly by Recycling Enterprises, Inc.
Mr. Fox is a director, officer and principal shareholder of Recycling
Enterprises, Inc. Also includes shares issuable upon exercise of vested
options to acquire 50,667 shares of Common Stock.
(4) Includes shares issuable upon exercise of vested options to acquire 10,000
shares of Common Stock.
(5) Includes shares issuable upon exercise of vested options to acquire
30,000 shares of common stock
(6) Includes shares issuable upon exercise of vested options to acquire 20,000
shares of common stock.
27
<PAGE>
(7) Includes shares issuable upon exercise of vested options to acquire 79,000
shares of common stock
(8) Includes shares issuable upon exercise of vested options to acquire an
aggregate of 457,966 shares of common stock.
28
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Companies
PureTec held 772,000 shares of common stock of Artra (the "Artra Common
Shares"), which was accounted for on the equity method. Through the Company's
recording of its share of the net losses of Artra, the carrying value of the
investment in the Artra Common Shares had been reduced to zero in the 1993
fiscal year.
Peter R. Harvey and John Harvey are the controlling stockholders of
Artra Group, Inc. ("Artra"). In addition, Peter R. Harvey is a director and the
President and Chief Operating Officer of Artra, and John Harvey is a director
and the Chairman of the Board and Chief Executive Officer of Artra.
In 1987, the Company acquired from Bagcraft Corporation of America
("Bagcraft") a $5,000,000 subordinated note bearing interest at a rate of
13-1/2% per annum and 50,000 shares of 13-1/2% cumulative redeemable preferred
stock with a liquidation preference of $5,000,000 for $10,000,000. Bagcraft is a
wholly-owned subsidiary of BCA Holdings, Inc. ("BCA) and BCA is wholly-owned
subsidiary of Artra. In March 1993, the Company received 675 shares of BCA
Preferred Stock having a liquidation preference equal to the amount of interest
due for the period from December 1, 1991 to November 30, 1992 ($675 in the
aggregate) in lieu of receipt of payment of interest from Bagcraft for such
period.
In connection with the Merger, on July 31, 1995, PST declared a
dividend of the 772,000 Artra Common Shares and 3,675 shares of BCA preferred
stock to all stockholders of record as of July 31, 1995. Based on this
declaration, 638,444 shares of Artra common stock and 3,039.23 shares of BCA
Class A preferred stock have been transferred to Ozite. The Company is in the
process of transferring 133,556 shares of Artra common stock and 635.77 shares
of BCA preferred stock to minority stockholders that existed at the date of the
declaration.
In December 1993, PST received from Bagcraft 3,000 shares of BCA
preferred stock as payment in full for unpaid interest due from Bagcraft.
Indebtedness of Management to the Company
During fiscal 1997, Mr. Broling was indebted to the Company in an
amount of $252,000 consisting of principal and interest outstanding on a demand
note dated June 15, 1988, bearing interest at 75% of the prime rate, not to
exceed 10%. Such indebtedness was incurred by Mr. Broling to finance the
purchase of common and preferred stock of the predecessor of Ozite. At October
31, 1997, the outstanding indebtedness was $252,000
During fiscal 1996, Mr. Brennan, the former Vice President, Chief
Financial Officer and a Director, was indebted to PureTec in an amount of
$150,800 consisting of principal and interest outstanding on; (i) a demand note
dated June 15, 1988, bearing interest at 75% of the prime rate, not to exceed
10%; and (ii) a non-interest bearing demand note dated August 20, 1990. Such
indebtedness was incurred by Mr. Brennan to finance the purchase of common and
preferred stock of the predecessor of Ozite and to finance unreimbursed moving
expenses incurred moving to Illinois at PureTec's request, respectively. Such
amounts were outstanding at October 31, 1997.
As of July 31, 1997, Mr. Peter R. Harvey was indebted to the Company in
an amount of $717,000 consisting of principal and interest outstanding on a
demand note dated May 20, 1988, bearing interest at the prime rate on the last
day of each fiscal year. Such indebtedness was a personal loan to Mr. Harvey.
As a potential offset to this indebtedness as of July 31, 1997, Mr.
Broling and Mr. Harvey have notes payable to them by the Company in the amounts
of $750,000 and $1,039,687 respectively. These notes are a result of the 1995
merger of Pure Tech International and Ozite, and were partial payment for Ozite
Preferred Stock. The notes payable to Messrs. Broling and Harvey are
non-interest bearing for the first four years.
29
<PAGE>
Transaction with Fox Engineering, Inc.
In September 1994, the Company sold 40% of the capital stock of
Multiple Container Recycler, Inc. ("MCR") to a company owned by the son of a
director and officer of the Company. The sale price was $1,000,000. The Company
received a note for a total of $1,000,000 plus accrued interest payable. All
acquired shares in MCR and 175,000 shares of previously acquired PureTec common
stock, (which had a value approximating the note as of the date of sale) have
been pledged as collateral against the loan. The Company recognized a gain of
$1,000,000 on this transaction.
In fiscal year 1997, the Company agreed to transfer the operations of
MCR to its minority owners. Under the terms of the agreement, the operations,
and all existing assets were transferred effective September 1, 1996. The
existing liabilities as of that date were retained by the Company. Liabilities
remaining at July 31, 1997 were approximately $100,000 Upon consummation of the
agreement, 333,333 shares of PureTec stock were transferred to the Company in
satisfaction of the $1,000,000 note. The Company incurred a loss of $312,000 in
conjunction with this transaction.
30
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Schedules
The financial statements listed in the Index to Financial
Statements under Part II, Item 8 and the financial statement
schedules listed under Exhibit 28 are filed as part of this
annual report.
(a)(2) Financial Statement Schedule - Schedule II - Valuation and
Qualifying Accounts
(a)(3) Exhibits
The exhibits listed on the Index to Exhibits following the
Signature Page herein are filed as part of this annual report
or by incorporation by reference from the documents there
listed.
31
<PAGE>
SIGNATURES
Pursuant to the requiremens 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: November 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
Registrant and in the capacities indicated.
<TABLE>
<S> <C> <C>
/s/ Fred W. Broling
- ----------------------------- Chairman of the Board and November 13, 1997
Fred W. Broling Chief Executive Officer
/s/ David C. Katz
- ----------------------------- Director, President and Chief November 13, 1997
David C. Katz Operating Officer
/s/ Murray J. Fox
- ----------------------------- Director November 13, 1997
Murray J. Fox
/s/ Leo Gans
- ----------------------------- Director and Vice President November 13, 1997
Leo Gans
/s/ Robert Guyett
- ----------------------------- Director November 13, 1997
Robert Guyett
/s/ Werner Haase
- ----------------------------- Director November 13, 1997
Werner Haase
/s/ Edward Hamway
- ----------------------------- Director November 13, 1997
Edward Hamway
/s/ John J. Harvey
- ----------------------------- Director November 13, 1997
John J. Harvey
/s/ Peter R. Harvey
- ----------------------------- Director November 13, 1997
Peter R. Harvey
</TABLE>
32
<PAGE>
Index To Exhibits
Number Exhibit
- --------------
2.1 Agreement and Plan of Merger dated as of November 11, 1997 among PureTec
Corporation, Plastic Specialties & Technologies, Inc., Tekni-Plex, Inc.
And P.T. Holding, Inc.
3.1 Articles of Incorporation (incorporated by reference from Exhibit 3(a)
of the Company's registration statement on Form S-4, file no. 33 -
82768).
3.2 By-laws (incorporated by reference from Exhibit 3(b) of the Company's
registration statement on Form S-4, file no. 33 - 82768).
4.1 Form of Indenture among Holdings, PST and IBJ Schroder Bank & Trust
Company, as Trustee, relating to the 13-1/8% Senior Subordinated Notes
due 1997 (incorporated by reference from Exhibit 4.10 of Amendment
No. 2 to PST's registration statement on Form S-1, file no. 33-11686).
4.2 Form of Specimen Senior Secured Note (incorporated by reference from
Exhibit 4.10 of Amendment No. 2 to PST's registration statement on Form
S-1, file no. 33-11686).
4.3 Form of 13% Convertible Senior Note among PureTec Corporation and
Tekni-Plex, Inc. dated November 11, 1997.
10.1 Agreement and Plan of Merger, dated July 6, 1994 by and among PTI, the
Company, Pure Tech Newco (PTI), Inc., Pure Tech Newco (Ozite), Inc.,
and Ozite (incorporated by reference from PTI's report on Form 8-K,
filed with the Commission on July 13, 1994) and Amendments Nos. 1 to 4
thereto (incorporated by reference from Exhibit 2(a) of the Company's
registration statement on Form S-4, file no. 33 - 82768).
10.2 Form of Amended and Restated Senior Loan Agreement dated as of November
8, 1993 between PST and General Electric Capital Corporation, as agent
and lender (incorporated by reference from Exhibit 10.3 of Ozite's Annual
Report on Form 10-K for the fiscal year ended July 31, 1993).
10.3 Plastic Specialties and Technologies, Inc. And Affiliates Pension Plan,
Amended and Restated Effective as of January 1, 1985 (incorporated by
reference from Exhibit 10.18 of PST's registration statement on Form
S-1, no. 33-11686).
10.4 1995 Stock Option Plan (incorporated by reference from Exhibit 10(s) of
the Company's registration statement on Form S-4, file no. 33 - 82768).
10.5 1995 Disinterested Directors' Stock Option Plan (incorporated by
reference from Exhibit 10(u) of the Company's registration statement on
Form S-4, file no. 33 - 82768).
10.6 Asset Transfer Agreement dated September 29, 1994 by and between
Occidental Chemical Corporation, as amended October 5, 1994, October
14, 1994, May 24, 1995, and August 18, 1995 (incorporated by reference
from Exhibit 2 of the Company's current report on Form 8-K filed
September 1, 1995).
10.8 Lease, dated June 1989, between Richard C. Lauer and Roy I. Anderson, as
lessor, and PST, as lessee, re: 19555 East Arenth Avenue, Industry
California (incorporated by reference from Exhibit 28.1 of PST's
quarterly report on Form 10-Q for the fiscal quarter ended October 31,
1992).
10.9 Lease, dated September 23, 1991, between E.T. Herman and Jane D. Herman
1978 Living Trust, as lessor, and the Colorite Plastics Division of
PST, as lessee, re: 909 East Glendale Avenue, Sparks, Nevada
(incorporated by reference from Exhibit 28.1 of PST's quarterly report
on Form 10-Q for the fiscal quarter ended October 31, 1992).
10.10 Lease, dated January 1, 1993, between OHR Realty Corporation, as lessor,
and PST, as lessee, re: Piscataway, New Jersey (incorporated by reference
from Exhibit 28.1 of PST's quarterly report on Form 10-Q for the fiscal
quarter ended October 1992).
10.11 Lease, dated April 24, 1972, between Pacific Western Warehouse, Inc. and
Dark Industries, Inc. (assigned by Dart Industries, Inc. to PST)
(incorporated by reference from Exhibit 10.8 to PST's registration
statement on Form S-1, file no. 33-11686).
23.1 Consent of Deloitte & Touche LLP with respect to Registration Statment
No. 33-98266 on Form S-8 and Registration Statement No. 33-98190 on
Form S-3.
27 Financial Data Schedule
99 Form 8-K, dated June 30, 1997.
33
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports:
Report of Deloitte & Touche LLP F-2
Report of Holtz Rubenstein & Co., LLP F-3
Consolidated Balance Sheets as of July 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the years F-5
ended July 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years F-6
ended July 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended F-7 - F-8
July 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements F-9 - F-39
Schedule II - Valuation and qualifying accounts F-40
Exhibit 23.1 - Independent Auditors' Consent F-41
All other schedules are not applicable and are therefore excluded.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PureTec Corporation
Ridgefield, New Jersey
We have audited the accompanying consolidated balance sheets of PureTec
Corporation and subsidiaries (the "Company") as of July 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended July 31, 1997. Our
audits also included the financial statement schedule listed in the index to the
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits. We did not audit the financial
statements of Styrex Industries, Inc. ("Styrex") (a consolidated subsidiary) for
the year ended July 31, 1995, which statements reflect total assets constituting
3% of the related consolidated totals for that year, and total revenues of
continuing operations (reclassified to discontinued operations in 1997)
constituting 40% of the related consolidated totals for that year. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Styrex for
the year ended July 31, 1995, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of July 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended July 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
November 13, 1997
F-2
<PAGE>
HOLTZ RUBENSTEIN & CO., LLP
Certified Public Accountants
Business Advisers
Independent Auditors' Report
September 12, 1995 (except for Note 6, as
to which the date is November 9, 1995)
To the Board of Directors and Stockholders of
Styrex Industries, Inc.
We have audited the accompanying statements of operations and deficit and cash
flows of Styrex Industries, Inc. for the year ended July 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Styrex Industries, Inc.'s operations and
its cash flows for the year ended July 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company is a
wholly-owned subsidiary of PTI Plastics, Inc. The Company has received funding
from its parent in the form of loans and advances and at July 31, 1995 advances
from its parent company approximated $3,373,000.
/s/ Holtz Rubenstein & Co., LLP
F-3
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
July 31, July 31,
ASSETS 1997 1996
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,745 $ 5,995
Accounts receivable, less allowance for doubtful accounts of $1,154
as of July 31, 1997 and $980 as of July 31, 1996 56,736 53,675
Inventories 54,568 41,403
Prepaid expenses and other current assets 3,962 3,955
--------- ---------
TOTAL CURRENT ASSETS 122,011 105,028
PROPERTY, PLANT AND EQUIPMENT, net 88,367 85,156
GOODWILL, net of accumulated amortization of $6,660 and $3,168
as of July 31, 1997 and 1996, respectively 90,192 92,570
OTHER INTANGIBLE ASSETS, net 44 1,344
OTHER ASSETS, net 11,209 12,592
--------- ---------
TOTAL ASSETS $ 311,823 $ 296,690
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 38,665 $ 20,170
Accounts payable 27,751 28,974
Accrued plant closing and disposal costs 2,263 3,901
Accrued expenses 25,809 24,947
Current portion of long-term debt 7,363 5,292
--------- ---------
TOTAL CURRENT LIABILITIES 101,851 83,284
OTHER LONG-TERM LIABILITIES 3,464 2,923
PENSION AND POSTRETIREMENT LIABILITIES 8,274 7,882
DEFERRED INCOME TAXES 1,457 1,280
LONG-TERM DEBT 129,504 130,587
--------- ---------
TOTAL LIABILITIES 244,550 225,956
COMMITMENTS AND CONTINGENCIES (See notes 8, 9, 11, 18 and 20)
MINORITY INTEREST 96 26
STOCKHOLDERS' EQUITY
Common stock, $.01 par value 50,000,000 authorized; 31,574,199
and 29,344,551 shares issued; 31,240,866 and 29,197,051 outstanding
at July 31, 1997 and 1996, respectively 315 293
Preferred stock, $.01 par value 1,000,000 authorized;
and no shares issued and outstanding - -
Additional paid-in capital 132,520 129,606
Accumulated Deficit (61,462) (58,671)
Minimum pension liability - (137)
Cumulative foreign currency translation adjustment (3,509) (383)
Treasury Stock (687) -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 67,177 70,708
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,823 $ 296,690
========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended July 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 315,334 $ 326,344 $ 30,189
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of goods sold 248,419 260,891 25,353
Selling, general and administrative 36,091 35,555 301
Amortization of intangible assets 3,553 3,705 2,148
Write-off of goodwill and obsolete assets/facilities - 4,636 7,403
Research and development 654 689 1,268
------------ ------------ ------------
288,717 305,476 36,473
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 26,617 20,868 (6,284)
OTHER EXPENSES (INCOME):
Interest expense 18,108 18,702 419
Debt issuance cost and discount amortization 1,641 2,180 -
Gain on sale and assignment of securities - - (1,000)
Equity in loss of affiliates 1,824 2,175 2,050
Other, net 135 (419) (234)
------------ ------------ ------------
21,708 22,638 1,235
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST AND INCOME TAXES 4,909 (1,770) (7,519)
Provision for income taxes 3,131 2,637 -
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST 1,778 (4,407) (7,519)
MINORITY INTEREST (433) - -
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,345 (4,407) (7,519)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (1,226) (1,525) (4,580)
Loss on disposal of discontinued operations (2,910) (2,241) (4,809)
------------ ------------ ------------
(4,136) (3,766) (9,389)
NET LOSS $ (2,791) $ (8,173) $ (16,908)
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ 0.05 $ (0.18) $ (0.42)
Loss from discontinued operations (0.14) (0.14) (0.53)
============ ============ ============
Net loss $ (0.09) $ (0.32) $ (0.95)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 29,429,415 27,268,435 17,751,141
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Treasury
Common Shares Shares
--------------------------------------------------- -----------
$.01 par $.05 par Amount Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance July 31, 1994 - 14,922,673 $ 746 -
Issuance of common stock in
connection with acquisitions - 533,191 27 350,000
Exercise of stock options - 33,534 2 -
Private placement, net of stock
issuance expense of $420 - 3,332,737 167 -
Debenture conversion - 1,714,780 86 -
Issuance of common stock to
settle liabilities - 113,890 5 -
Reclassifications and adjustments - 76,636 3 -
Conversion of common stock in
connection with Merger 20,727,441 (20,727,441) (829) -
Issuance of common stock in
connection with Merger 5,705,555 - 57 -
Issuance of common stock to
settle expenses of Merger 450,000 - 5 -
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1995 26,882,996 - $ 269 350,000
Preferred stock conversion 1,606,688 - 16 -
Private placement 585,000 - 6 -
Debenture conversion 227,273 - 2 -
Issuance of common stock to
settle liabilities 9,286 - - -
Contract requirements 33,308 - - -
Common stock sales by
Equity affiliate - - - (202,500)
Minimum pension liability - - - -
Foreign Exchange - - - -
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1996 29,344,551 - $ 293 147,500
Foreign exchange - - - -
Receipt of share in settlement of note receivable - - - 333,333
Common stock sales by equity affiliate - - - (147,500)
Other (5,382) - - -
Private placement - PST
exchange offer 2,235,030 - 22 -
Reversal of minimum pension liability - - - -
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1997 31,574,199 - $ 315 333,333
=========== =========== =========== ===========
<CAPTION>
Treasury
Shares Preferred Shares
----------- ------------------------------ Additional
Class A Paid-in
Amount $.01 par Amount Capital
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance July 31, 1994 $ - - $ - $ 66,607
Issuance of common stock in
connection with acquisitions - - - 808
Exercise of stock options - - - 44
Private placement, net of stock
issuance expense of $420 - - - 12,573
Debenture conversion - - - 7,285
Issuance of common stock to
settle liabilities - - - 433
Reclassifications and adjustments - - - (3)
Conversion of common stock in
connection with Merger - - - 829
Issuance of common stock in
connection with Merger - - - 32,122
Issuance of common stock to
settle expenses of Merger - - - 2,526
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1995 $ - - $ - $ 123,224
Preferred stock conversion - - - 3,782
Private placement - - - 994
Debenture conversion - - - 998
Issuance of common stock to
settle liabilities - - - 121
Contract requirements - - - -
Common stock sales by
Equity affiliate - - - 487
Minimum pension liability - - - -
Foreign Exchange - - - -
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1996 $ - - $ - $ 129,606
Foreign exchange - - - -
Receipt of share in settlement of note receivable (687) - - -
Common stock sales by equity affiliate - - - -
Other - - - -
Private placement - PST
exchange offer - - - 2,914
Reversal of minimum pension liability - - - -
Net loss - - - -
----------- ----------- ----------- -----------
Balance July 31, 1997 ($ 687) - $ - $ 132,520
=========== =========== =========== ===========
<CAPTION>
Minimum Total
Accumulated Foreign Pension Stockholders'
Deficit Exchange Liability Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance July 31, 1994 ($ 33,066) $ - $ - $ 34,287
Issuance of common stock in
connection with acquisitions - - - 835
Exercise of stock options - - - 46
Private placement, net of stock
issuance expense of $420 - - - 12,740
Debenture conversion - - - 7,371
Issuance of common stock to
settle liabilities - - - 438
Reclassifications and adjustments - - - -
Conversion of common stock in
connection with Merger - - - -
Issuance of common stock in
connection with Merger - - - 32,179
Issuance of common stock to
settle expenses of Merger - - - 2,531
Net loss (16,908) - - (16,908)
----------- ----------- ----------- -----------
Balance July 31, 1995 ($ 49,974) $ - $ - $ 73,519
Preferred stock conversion (524) - - 3,274
Private placement - - - 1,000
Debenture conversion - - - 1,000
Issuance of common stock to
settle liabilities - - - 121
Contract requirements - - - -
Common stock sales by
Equity affiliate - - - 487
Minimum pension liability - - (137) (137)
Foreign Exchange - (383) - (383)
Net loss (8,173) - - (8,173)
----------- ----------- ----------- -----------
Balance July 31, 1996 ($ 58,671) ($ 383) ($ 137) $ 70,708
Foreign exchange - (3,126) - (3,126)
Receipt of share in settlement of note receivable - - - (687)
Common stock sales by equity affiliate - - - -
Other - - - -
Private placement - PST
exchange offer - - - 2,936
Reversal of minimum pension liability - - 137 137
Net loss (2,791) - - (2,791)
----------- ----------- ----------- -----------
Balance July 31, 1997 ($ 61,462) ($ 3,509) $ - $ 67,177
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended July 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 1,345 $ (4,407) $ (7,519)
Adjustments to reconcile net loss to net cash
used in operating activities from continuing operations:
Depreciation and amortization 13,780 13,427 2,861
Gain (Loss) on disposal of property and equipment (17) 598 (8)
Gain on sale and assignment of securities - - (1,000)
Write-off of obsolete equipment and costs - 4,636 4,617
Write-off of goodwill and other intangible assets 976 - 6,493
Bad debt allowance 182 879 129
Deferred income tax benefit 471 80 (377)
Minority interest in consolidated subsidiaries 433 (3) (114)
Equity in loss of affiliates 1,824 2,175 2,050
Changes in operating assets and liabilities net of
effects from acquisition:
(Increase) decrease in assets:
Accounts receivable (9,361) (8,381) (379)
Accounts receivable factored 2,087 - -
Inventories (15,864) 4,288 958
Prepaid expenses and other current assets (20) (1,519) 833
Other assets (2,770) 7,199 (2,335)
Increase (decrease) in liabilities:
Accounts payable 1,804 4,226 1,594
Accrued plant closing and disposal costs (1,638) (1,784) (2,350)
Accrued expenses 1,183 9,272 1,461
Other liabilities 2,636 768 -
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
-------- -------- --------
FROM CONTINUING OPERATIONS (2,949) 31,454 6,914
-------- -------- --------
Loss from discontinued operations (4,136) (3,766) (9,389)
Depreciation of discontinued injection molding operation 754 1,123 1,291
Change in net operating assets of discontinued operations 887 - 2,773
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES FROM
DISCONTINUED OPERATIONS (2,495) (2,643) (5,325)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,444) 28,811 1,589
-------- -------- --------
(Continued)
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended
July 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (11,291) (10,509) (2,387)
Additions to intangibles - - (2,776)
Purchase of net assets (22,328) (155)
Proceeds from the sale of property, plant, & equipment 27 1,368 -
Purchase of Ozite Corporation, net of cash acquired of $4,741 - - (8,759)
Investment used for Burlington purchase - - -
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (11,264) (31,469) (14,077)
-------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (repayments) under revolving credit
facility and short-term borrowing, net 19,964 (10,840) (869)
Proceeds from long-term debt 4,150 18,630 687
Repayments of long-term debt (5,292) (7,056) (2,227)
Proceeds from private placements and sale by equity affiliate - 1,487 12,758
Proceeds from warrant/option exercise 1 - 46
Proceeds from the sale of debentures - - 8,371
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,823 2,221 18,766
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,365) (665) -
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 750 (1,102) 6,278
CASH AND CASH EQUIVALENTS, beginning of the period 5,995 7,097 819
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,745 $ 5,995 $ 7,097
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 17,849 $ 22,113 $ 1,054
Income taxes 3,301 2,557 -
Non-cash transactions:
Debenture conversion - 1,000 -
Preferred Stock conversion - (3,274) -
Issuance of common stock to settle liabilities - 121 438
Issuance of common stock in connection with acquisitions - 835
Issuance of common stock in connection with the Merger 34,710
Capitalized lease Colorite Europe Limited premises 3,784 - -
Acquisition of treasury stock to settle note payable (687) - -
Issuance of common stock in connection with PS&T Exchange Offer 2,936 - -
Goodwill in connection with PS&T tender offer 2,316
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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.
At the shareholders' meeting on May 1, 1996, Pure Tech International
Inc., changed its name to PureTec Corporation. PureTec Corporation (the
"Company" or "PureTec") was formed in July 1994 for the express purpose of
becoming the parent of PTI Plastics, Inc. ("PTIP") and Ozite Corporation
("Ozite"). On July 26, 1995, the respective shareholders of PTIP and Ozite
approved the merger of each of their corporations with wholly-owned subsidiaries
of the Company (the "Merger"), effective at the close of business on July 31,
1995. PTIP and Ozite are now wholly-owned subsidiaries of the Company. For
accounting purposes , the Merger has been accounted for as a purchase of Ozite
by PureTec. For financial reporting purposes, the results of operations, and the
statement of cash flows for the year ended July 31, 1995 are those of PTIP. The
balance sheet information as of July 31, 1997 and 1996 and the results of
operations and the statement of cash flows for the years ended July 31,1997 and
1996 reflect the combined entities, including Ozite.
In connection with these mergers, holders of Ozite Common Stock received
an aggregate of 1,028,915 shares of PureTec Common Stock. Holders of Ozite
Preferred Stock received an aggregate of 4,627,317 shares of PureTec Common
Stock. A portion of the securities otherwise issuable to Ozite preferred
stockholders were instead issued to creditors of Ozite. Holders of Ozite
Preferred Stock also received 5,000 shares, with a $5,000 redemption value, of a
new class of PureTec's non-convertible preferred stock (See Note 13 (a)) and
$3,750 in 10-year subordinated notes. The principal of the subordinated notes
will be payable at maturity. Interest on the subordinated notes will accrue at
7% and is payable quarterly, except that no interest will accrue during the
first four years. PTIP owned 300,000 shares of Ozite Class A Preferred Stock and
did not participate in the distribution of PureTec securities pursuant to the
Merger.
Holders of PTIP Common Stock received PureTec's Common Stock on a
one-for-one basis for approximately 78% of PureTec's total outstanding voting
securities after the Merger.
In connection with the Merger, PureTec issued 450,000 shares of Common
Stock in consideration for investment banking and finders services, 15,684
shares of Common Stock to Ozite directors and officers in satisfaction of
outstanding options to acquire Ozite Common Stock and 33,639 shares of Common
Stock to holders of certain Ozite warrants who elected to receive such shares in
exchange for their Ozite warrants.
A summary of the transaction is as follows (reflecting the final
adjustments to the transaction made in 1996):
Fair Value of Net Assets Acquired:
Current assets $ 90,086
Non-current assets 72,368
Liabilities assumed (189,036)
-----------
(26,582)
Consideration Given:
6,155,555 Common shares including expenses 34,710
Preferred Stock and subordinated notes issued 4,393
Cash and other amounts due 26,022
-----------
65,125
-----------
Goodwill (being amortized over 30 years) $ 91,707
===========
F-9
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Ozite is the majority stockholder of Plastic Specialties and
Technologies, Inc. ("PST") and a 100% shareholder of Burlington Resins, Inc.
(See below). 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 July 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. A summary of the original transaction
and the adjustments made as of July 31, 1997 are as follows:
As originally As reported
recorded Adjustments herein
------------- ----------- -----------
Fair Value of Net Assets Acquired:
Current assets $ 8,217 $ -- $ 8,217
Non-current asset 21,495 -- 21,495
Liabilities assumed (5,877) -- (5,877)
--------- --------- ---------
23,835 -- 23,835
--------- --------- ---------
Consideration Given:
Seller financing 4,000 (1,476) 2,524
Cash and other amounts due 22,934 -- 22,934
--------- --------- ---------
26,934 (1,476) 25,458
--------- --------- ---------
Goodwill (being amortized over 30 years) $ 3,099 $ (1,476) $ 1,623
========= ========= =========
Under the terms of the Asset Transfer Agreement, OxyChem has indemnified
Burlington for a period of eight years from any environmental liability arising
from conditions existing prior to August 18, 1995. Any liabilities arising in
the first five years subsequent to August 18, 1995 will be 100% indemnified, and
any liability through year eight will be 50%
F-10
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
indemnified. Management has not identified any material environmental matter,
nor has Burlington been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
and corresponding state acts, in connection with any such matter.
As discussed in Note 18, on November 11, 1997 the Company entered into a
Merger Agreement with Tekni-Plex, Inc. ("Tekni-Plex"). Subject to the approval
of a majority of the shareholders at a shareholders' meeting that the Company
will arrange, the Merger Agreement contemplates Tekni-Plex (i) purchasing all of
the Company's outstanding Common Stock for cash consideration of $3.50 per
share, and (ii) assuming or refinancing all of the Comapny's debt. The Merger
Agreement and the Acquisition have been unanimously approved and recommended to
shareholders for adoption by the Company's Board of Directors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All significant intercompany
accounts and transactions are eliminated.
b. Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits, commercial paper,
time deposits, and cash on hand. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
c. Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
d. Goodwill
Goodwill, which relates primarily to the acquisition of Ozite, is being
amortized on a straight-line basis over the period expected to benefit, which is
estimated to be 30 years for current acquisitions and 10 to 40 years for
acquisitions prior to July 31, 1995.
The Company continually assesses the recoverability of its intangible
assets by determining whether the amortization of the excess of the cost of the
investment balance over its remaining useful life can be recovered through
projected undiscounted future cash flows. The amount of goodwill impairment, if
any, is measured based on projected undiscounted future cash flows in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Based on the Company's projected results of operations over the remaining
useful life, management believes that there has not been an impairment in the
value of the goodwill.
e. Property, Plant and Equipment
Property, plant and equipment is stated at cost and is primarily
depreciated by the straight-line method over the estimated useful lives of the
related assets. Repairs and maintenance are charged to expense as incurred.
Leasehold improvements are depreciated over the lesser of the term of the lease,
including renewal options, or the useful life of the asset. Depreciation is
calculated using the modified units of production method for Burlington
machinery and equipment.
F-11
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
The Company capitalized interest costs of $290 and $220 in 1997 and 1996,
respectively.
The principal estimated useful lives are as follows:
Building and improvements 20-31 years
Machinery and equipment 5-15 years
Office equipment, furniture and fixtures 5-10 years
In the event that facts and circumstances indicate that the cost of
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated fair value associated with the asset
would be compared to the asset's carrying amount to determine if a write-down to
fair value is required.
f. Intangible Assets
Other intangible assets are amortized using the straight-line method
over the following periods (See Note 6):
Process technology 10-20 years
Customer list 7 years
Other 5 years
g. Deferred Financing Costs
The financing costs incurred in securing debt are deferred and amortized
over the life of the related debt (See Notes 7, 8 and 11).
h. Income Taxes
The Company files a consolidated federal income tax return including all
of its qualifying domestic subsidiaries. Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
i. Revenue Recognition
The Company recognizes revenue when goods are shipped to customers. The
Company provides for returned goods and volume rebates on an estimated basis.
j. Foreign Subsidiaries
The Company translates financial statements denominated in foreign
currency by translating balance sheet accounts at the end of the period exchange
rate and statement of operations accounts at the average exchange rate for the
period. Translation gains and losses are recorded in stockholders' equity, and
transaction gains and losses are reflected in income.
k. Foreign Exchange Contracts
During fiscal 1997, the Company's Belgian subsidiary entered into
forward foreign exchange contracts to hedge intercompany payables and non
Belgian Franc accounts receivables and payables. Market value gains and losses
on such
F-12
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
contracts are currently recognized, and the resulting credit or debit offsets
foreign exchange gains or losses on the related balance sheet accounts. No
significant forward foreign exchange contracts were outstanding at July 31, 1997
and July 31, 1996.
l. Stock Based Compensation
In 1997, the Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 123 addresses the financial accounting and reporting
standards for stock based compensation plans and permits an entity to record the
effects of stock based employee compensation plans in its financial statements
or present proforma disclosures in the notes to the financial statements.
Compensation expense associated with awards to non-employees is required to be
measured using a fair value method. The Company has elected to continue to
account for employee compensation plans in accordance with Accounting Principles
Board Opinion No. 25 and has provided appropriate disclosures in the notes to
the consolidated financial statements.
m. Income (Loss) Per Common Share
Income (loss) per common and common equivalent share is computed based
upon the weighted-average number of shares and common share equivalents
outstanding during the period. The calculation does not give effect to the
conversion of options and warrants to purchase common stock when such securities
have an anti-dilutive effect. Net loss per common share is based upon the
weighted-average number of shares outstanding, as the impact of common share
equivalents is anti-dilutive. Primary earnings per share and fully diluted
earnings per share, are the same for all periods presented.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". This new standard, which supersedes
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). SFAS
No. 128 will require the Company to restate amounts previously reported as EPS
to comply with the new pronouncement. Had SFAS No. 128 been in effect for the
years ended July 31, 1997, 1996 and 1995, reported EPS would not have been
different from that reported under APB Opinion No. 15.
n. Other Recent Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 requires companies to disclose descriptive information
about securities and information about the liquidation preferences of preferred
stock and redeemable stock. SFAS 129 is effective for financial statements for
periods ending after December 15, 1997 (the Company's fiscal 1998 year).
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.130"). SFAS No.
130 requires companies to display, with the same prominence as other financial
statements, the components of other comprehensive income. SFAS No. 130 requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997 (the Company's 1999 fiscal
year). Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
F-13
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires that an enterprise disclose
certain information about operating segments. SFAS No. 131 is effective for
financial statements for periods beginning after December 15, 1997 (the
Company's 1998 fiscal year).
The Company has not determined the impact, if any, on the financial
statements or related matters of adopting these pronouncements.
o. Investment in Unconsolidated Affiliates
The Company's investments in affiliated companies which are not majority
owned or controlled are accounted for using the equity or cost method.
Investments recorded under these methods and the percentage interest owned
consist of Masplas International (25%), Les Plastiques Petco, Inc. (49%), and
Evolutions, Inc. (42%).
p. Environmental Costs
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to existing
conditions caused by past operations and that do not contribute to current or
future revenue generation are expensed. No costs relating to existing conditions
caused by past operations were incurred by the Company during the periods ended
July 31, 1997, 1996, or 1995.
Reserves for estimated costs are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, the Company uses the most current information available, including
similar past experiences, available technology, regulations in effect, the
timing of remediation and cost sharing arrangements. No environmental reserves
are required at July 31, 1997 and 1996.
q. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
r. Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
3. INVESTMENTS
a. In June 1994, the Company acquired an 80% interest in Evolutions,
Inc. ("Evolutions"), a marketing company focusing on consumer apparel products
manufactured from recycled material. The Company acquired newly issued shares of
Evolutions for cash and 153,850 shares of the Company's common stock, valued at
$4.55 per share (aggregating approximately $700). The aggregate value of the
acquisition was approximately $850. On March 1, 1995, the Company acquired an
additional interest in Evolutions, bringing its ownership up to 88%. The
additional investment was 350,000 shares of the Company's common stock, valued
at $1,925 and provided for the cancellation of any and all stock options
outstanding prior to the acquisition. All shares issued by the Company for the
investment are considered as treasury shares until sold to third parties. Such
shares are then recognized as issued. During fiscal 1996, the Company's
ownership percentage fell below 50% and the Company began accounting for this
investment using the equity method. The
F-14
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
statements of operations for all periods presented have been restated to reflect
this change in the reporting entity. As a result of evaluating the operations
and financial position of Evolutions, the Company wrote-off the carrying value
of its investment in Evolutions, recording a charge of approximately $800 to
equity in loss of affiliates during 1997.
b. In August 1994, the Company completed a transaction whereby it
acquired a 49% interest in Les Plastiques Petco, Inc., a Canadian corporation
("Petco"). In consideration for this interest, the Company issued 183,191 shares
of Common stock valued at $817 (and issued an additional 33,308 shares in fiscal
1996 as the market price of the stock did not meet certain market price
requirements), canceled $800 owed to the Company for equipment previously sold
to Petco and its affiliate by the Company and agreed to provide additional
equipment valued at $250. During fiscal 1995, the Company made an additional
cash investment in Petco of $155. The Company and Petco also entered into a
ten-year supply agreement whereby Petco, in exchange for the cancellation of
approximately $783 owed to the Company by a Petco affiliate, will make available
to the Company at least six million pounds of post-consumer PET annually. The
carrying value of the supply contract was reduced to zero during 1997 as the
future benefit to be provided by the asset was uncertain. During 1997, the
Company's investment in Petco increased by $446 due to the conversion of a note
receivable into additional preferred shares. Prior to 1997, the Company
accounted for this investment using the equity method. During 1997, due to the
level of influence the Company exerts over the operations of Petco, the Company
changed its method of accounting from the equity to the cost basis.
c. In August 1994, the Company completed a transaction whereby it
acquired a 25% interest in Masplas International, Compose de Plastique Inc. a
Canadian corporation ("Masplas") by converting $375 of a note receivable.
Masplas is a recycler of post-consumer PET, and is controlled by the same
majority shareholder as Petco. Prior to 1997, the Company accounted for this
investment using the equity method. During 1997, due to the level of influence
the Company exerts over the operations of Masplas, the Company changed its
method of accounting from the equity to the cost basis.
4. INVENTORIES
July 31, July 31,
1997 1996
-------- --------
Raw materials and supplies $ 22,353 $ 16,028
Recycled material 779 1,944
Work-in-process 1,288 2,074
Finished goods 30,148 21,357
--------- ---------
$ 54,568 $ 41,403
========= =========
5. PROPERTY, PLANT AND EQUIPMENT
July 31, July 31,
1997 1996
--------- --------
Land and land improvements $ 12,336 $ 13,138
Buildings and leasehold improvements 18,416 15,361
Machinery and equipment 64,116 60,610
Furniture and fixtures 2,577 2,727
Construction in progress 5,466 5,312
Property under lease 1,200 1,200
---------- -----------
104,111 98,348
Accumulated depreciation (15,744) (13,192)
---------- -----------
$ 88,367 $ 85,156
========== ===========
F-15
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
6. INTANGIBLE ASSETS
July 31, July 31,
1997 1996
-------- --------
Process Technology $ 108 $ 1,179
Customer list 770 770
Other 87 870
-------- ----------
965 2,819
Accumulated amortization (921) (1,475)
-------- ----------
$ 44 $ 1,344
======== ==========
During fiscal 1997, the Company has written off the Petco supply
contract in the amount of $541 (net of $242 of accumulated amortization) and
licenses related to the bottlewash system in the amount of $380 (net of
accumulated amortization of $691).
7. OTHER ASSETS
July 31, July 31,
1997 1996
--------- --------
Deferred financing costs (net of
accumulated amortization of $3,769 and
$2,688 at July 31, 1997 and 1996, respectively) $ 3,826 $ 4,566
Investments in affiliates (a) 2,635 3,097
Other 2,608 2,419
Grants (b) 985 --
Notes receivable 45 1,405
Notes and interest receivable from officers (c) 1,110 1,105
-------- --------
$ 11,209 $ 12,592
======== ========
(a) Represents the investment in Masplas International and Petco. (See
Note 3.)
(b) Represents a grant receivable from a government agency in Northern
Ireland, related to the start-up of Colorite Europe Limited.
(c) The notes and interest receivable from current and former officers
of $393 and $388 at July 31, 1997 and 1996, respectively, are due on demand and
bear interest at rates generally ranging from 75% of the prime rate to the prime
rate of interest. These notes receivable relate primarily to the purchase of
common and preferred stock of the predecessor of Ozite, un-reimbursed moving
expenses and a personal loan. In addition, a note and interest receivable of
$717 is due from a stockholder of PureTec and a former director of Ozite.
8. SHORT-TERM BORROWINGS
(a) Revolving Credit Advances:
On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement
(the "Agreement") with a commercial lending company ("CLC"). 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
F-16
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
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 Note 11) 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.
At July 31, 1997, the Company was not in compliance with certain of the
covenants of the Amended Agreement, including the requirement to reduce
borrowing to $20 million and the limitation on capital expenditures. The CLC has
provided a waiver of this non-compliance as of July 31, 1997.
At July 31, 1997 and 1996, borrowings under the Amended Agreement with
the CLC totaled $36,772 and $14,138, respectively. Amounts outstanding are
classified as current liabilities.
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 July
31, 1997, PST is obligated to collect and remit $2,087 to the CLC for Eligible
Receivables sold without recourse. The CLC owes PST $422 related to such
receivables.
(b) Revolving Credit Facility:
In connection with the acquisition from OxyChem, Burlington has entered
into a Credit Agreement (the "Agreement") with a bank that includes a revolving
credit facility for up to $5,500 based on specified levels of eligible inventory
and accounts receivable. Interest on this facility, which expires on August 18,
2002, is the prime rate plus 1.25 % and is due quarterly. The Agreement also
contains a contingent fee agreement, payable annually, based on earning levels
obtained. The Agreement has been amended by Burlington and the bank to provide
for certain developments at Burlington. Outstanding borrowings are $1,893 and
$2,193 at July 31, 1997 and 1996, respectively.
The Agreement contains certain covenants, the most restrictive of which
pertain to the maintenance of certain financial ratios, prohibition of the
incurrence of additional indebtedness, the payment of dividends, and certain
related party transactions. Borrowings under the Agreement are secured by
substantially all the assets of Burlington. As of July 31, 1997, Burlington was
not in compliance with certain covenants of the Agreement. The Company has
received a waiver for the period of time that the default existed. The Company
intends to repay the borrowings outstanding under the Agreement during fiscal
1998, and as such, has included the revolving credit facility as a current
liability at July 31, 1997.
F-17
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
9. PLANT CLOSING COSTS
In October 1993, the Company decided to consolidate its plastic
recycling operations. In connection with this consolidation, the Company closed
substantially all of its operations in Lawrence Township, New Jersey. Costs
associated with the shut down of this facility consisted of labor during the
phase-out period, rubbish removal and clean-up costs and associated overhead for
the dismantling and moving of equipment as well as future rental costs under
noncancellable operating leases. In July 1995, the Company adjusted the carrying
value of all remaining assets to their net realizable value including the
write-off of $3,262 of costs associated with the Lawrence Township Plant which
no longer have any value. In addition, in July 1995, the Company wrote off $210
of abandoned equipment relating to its old corporate office located at the
Lawrence Township location as a result of the move to its new quarters. At July
31, 1997 and 1996, the Company has $196 and $430 accrued, respectively, relating
to the lease which expires on June 30, 1998. This reserve is included in accrued
plant closing and disposal costs.
In July 1995, the Company wrote off equipment of $1,145 at its
Springfield, Massachusetts plant related to the original wash system as the
Plant was completely modified with an expansion of the "Pure Tech Process"
system in fiscal 1995. The Company has no future plans for the old system, and
was unsuccessful in attempts to sell the system.
In July 1996, the Company evaluated the operations of its Springfield
plant and decided to close it. In connection with this plant closing, the
Company ceased substantially all operations except for minor production and
clean-up that was completed in fiscal 1997. The Company accrued for all costs
associated with the shut down of this facility, which consisted of clean-up
costs, the breakdown of machinery and equipment, and future rental costs under a
noncancellable operating lease. In July 1996, the Company adjusted the carrying
value of all remaining assets to be disposed to their net realizable value. The
total loss incurred on the shut down of the Springfield operations of $4,236 is
included on the consolidated statement of operations in the write-off of
goodwill and obsolete assets/facilities. At July 31, 1997 and 1996, the Company
has accrued $1,397 and $2,387, respectively, relating to the closure of this
facility. The reserve is included in accrued plant closing and disposal costs.
The reserve at July 31, 1997 was predominantly related to the remaining lease
liability, which was settled subsequent to July 31, 1997. The Company holds
assets from the facility with a net realizable value of $1,910, which are to be
transferred to the new West Virginia facility in fiscal 1998.
In September 1994, the Company sold 40% of the capital stock of Multiple
Container Recycler, Inc. ("MCR") to a company owned by the son of a director and
officer of the Company. The sale price was $1,000. The Company received a note
for a total of $1,000 plus accrued interest payable in twelve equal principal
installments beginning October 1995, with a subsequent agreement extending the
due date six months until April 1996 (see below). All acquired shares in MCR and
175,000 shares of previously acquired PureTec common stock (which had a value
approximating the note as of the date of sale) have been pledged as collateral
against the loan. The Company recognized a gain of $1,000 on this transaction.
In fiscal year 1997, the Company agreed to transfer the net assets of
MCR to its minority owners. Under the terms of the agreement, the operations,
and all existing assets were transferred effective September 1, 1996. The
existing liabilities as of that date were retained by the Company. Liabilities
remaining at July 31, 1997 were approximately $100. Upon consummation of the
agreement, 333,333 shares of PureTec stock were transferred to the Company in
satisfaction of the $1,000 note. The Company incurred a loss of $312 in
conjunction with this transaction, which was provided for in the prior year.
The above amounts include management's best estimates of the net
realizable value of certain fixed assets to be retained by the Company and
estimated expenditures to be incurred. The ultimate amounts could differ
materially in the near term from the amounts assumed in arriving at the loss on
the shut down of these facilities.
F-18
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
10. ACCRUED EXPENSES
July 31, July 31,
1997 1996
-------- ---------
Salaries and wages $ 4,519 $ 6,714
Accrued interest 3,569 3,317
Accrued expenses related to
discontinued operations 656 566
Other(a) 17,065 14,350
--------- ---------
$ 25,809 $ 24,947
========= =========
(a) Included in other in 1997 and 1996 is a $3,000 disputed note payable
which arose in connection with Ozite's acquisition of Dalen Trading Co.
("Dalen") in 1987. The note payable and related accrued interest alleged to be
due to Dalen's previous owner were in dispute and the subject of litigation
since 1987. Subsequent to July 31, 1997, this litigation was settled (See Note
20(b)).
11. LONG-TERM DEBT
July 31, July 31,
1997 1996
-------- --------
11-1/4% Senior Secured Notes due December 1, 2003 (a)
(discounted at an estimated effective interest rate
of 12.7%) $118,248 $117,017
7% Subordinated Notes (principal amount of $3,750)
issued in connection with the acquisition of Ozite
(discounted at an estimated effective interest rate
of 16%) (See Note 1)(b) 1,860 1,606
7-1/10% Foreign Term Loan payable in Belgian Francs,
with quarterly interest payments, eight semi-annual
principal payments of approximately $550 and a balloon
payment of $693 due on January 31, 1997. The loan is
secured by a pledge of working capital and a lien on
certain fixed assets of the Company's foreign operations --- 693
Mortgage payable, bearing interest at prime plus 11/2%,
payable in monthly installments of $4, plus interest
with a balloon payment of $322 due in January, 2000 329 372
Equipment financing loans and other notes payable in
monthly installments through October 1998 at interest
ranging from 10.4% to 11.1% 198 256
5.25% Direct Loan Promissory Note, payable in 24 equal
monthly installments of interest only commencing March
1996; and thereafter payable by 12 equal monthly
installments of $10 plus interest, commencing March
1998 through February 1999 251 347
Term loan(f) --- 2,692
Equipment financing loans and other notes payable in
monthly installments through 1997 at interest rates
ranging from 6-3/4% to 16% --- 676
6.10% Foreign Term Loan payable in Belgium Francs,
with interest in twenty quarterly installments
from June 1996 through March 2001 822 1,263
3.75% Foreign Term Loan payable in Belgium Francs,
with five equal yearly installments with first
payment commencing December 1997 791 ---
9.93% Foreign Term Loan payable in Italian Lira --- 956
F-19
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
9.78% Foreign Term Loan payable in Italian Lira --- 1,090
8.40% Foreign Term Loan payable in Italian Lira,
repayable semi-annually including principal and
interest through 2001 1,295 ---
5.30% Foreign Term Loan payable in Italian Lira,
with five equal yearly installments with first
payment commencing May 1998. Interest is payable
quarterly 1,065 ---
Foreign Term Loan payable in British Pounds, in 13
equal semi-annual installments of $151, commencing
June 1998, with a final payment due December 2004
at 1.75% plus LIBOR(approximately 7.75% at July 31,
1997)(c) 2,302 ---
Capitalized Lease Obligation, 20 years, commencing
February 1997 3,841 ---
Bank financing(d) 3,341 4,911
Occidental Chemical Corporation(e) 2,524 4,000
-------- --------
136,867 135,879
Less: current portion 7,363 5,292
-------- --------
$129,504 $130,587
======== ========
As described below, substantially all assets of the Company are pledged
as security under outstanding debt agreements.
a. In November 1993, PST issued $125,000 principal amount of Senior
Secured Notes due 2003 (the "Senior Secured Notes"). Interest payments on the
Senior Secured Notes, at a rate of 11-1/4% are payable semiannually and
commenced June 1, 1994. For the years ended July 31, 1997 and 1996, the Company
recorded $1,231 and $1,095, respectively, in interest expense relating to the
accretion of these notes.
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 described 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. At July 31, 1997,
PST is unable to pay dividends.
b. For the years ended July 31, 1997 and 1996, the Company recorded $254
and $487, respectively, in interest expense relating to the accretion of these
notes.
c. The Agreement with the UK Commercial Bank is payable in 13 equal
semi-annual installments of $151 commencing June 20, 1998 with a final payment
of $158 on December 31, 2004.
d. The Term Loan Agreement with a Commercial Bank that Burlington has
entered into contains a $5,500 term loan payable in 28 quarterly installments of
approximately $196 plus interest accrued at the prime rate plus 1.25 %
commencing October 31, 1995. In addition, the Company is required to make yearly
mandatory cash flow prepayments, as defined in the Agreement. The loan is
secured by the property, plant, and equipment acquired from OxyChem. As
described in Note 8(b), Burlington is not in compliance with certain covenants
of the Agreement for which it has obtained a waiver. Additionally, 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 July 31, 1997.
F-20
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
e. As described in Note 1, this amount represents the renegotiated
Seller Financing, arising from the purchase of Burlington from OxyChem. This
loan was repaid subsequent to July 31, 1997 and as such has been classified as a
current liability.
f. In February 1996, Styrex and Pure Tech 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. As of July 31, 1996, there was $3,839 outstanding under the
revolving credit line, and $2,692 under the term loan. 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 July 31, 1997 and 1996 the revolving loan and the term loan balances were
$1,086 and $1,156, respectively. The operations of Styrex were sold in August
1997. Accordingly, these amounts are included in net assets held for sale in the
consolidated balance sheet which is included in other current assets.
Maturities of long-term debt are as follows:
Years Ending
July 31,
-----------------
1998 $ 7,363
1999 1,626
2000 1,446
2001 1,308
2002 646
Thereafter 124,478
--------
$136,867
========
12. INCOME TAXES
The provision for income taxes from continuing operations consists of
the following:
Year Ended
-------------------------------------------
July 31, 1997 July 31, 1996 July 31, 1995
------------- ------------- -------------
Current Tax Provision
Federal $ --- $ --- $ ---
Foreign 2,804 2,269 ---
State 150 288 ---
------- ------- -------
2,954 2,557 ---
------- -------
Deferred Tax Provision (Benefit)
Federal --- --- ---
Foreign 177 80 ---
State --- --- ---
------- ------- -------
177 80 ---
------- ------- -------
Total $ 3,131 $ 2,637 $ ---
======= ======= =======
F-21
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The Company's tax provision for the year ended July 31, 1997 and 1996
are primarily due to the Company's foreign operations. The Company's tax benefit
for the year ended July 31, 1995 reflects the reduction in previously recorded
temporary differences. 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.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, net of
operating losses and income tax credit carryforwards. The income tax effects of
significant items comprising the Company's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
July 31, 1997 July 31, 1996
--------------------------- ----------------------------
Current Non-current Current Non-current
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Assets
Net operating loss carry forward $ -- $ 27,200 $ -- $ 31,363
Expenses currently not deductible 3,308 1,518 2,044 --
Allowance for doubtful accounts 235 -- 200 --
Capitalization of inventory costs 556 -- 421 --
Employee benefits liabilities -- 1,956 -- 2,218
Pension -- 638 -- 570
Liabilities
Difference between book and tax
basis of property and equipment -- (10,186) -- (11,531)
Discount -- (2,701) -- (3,193)
-------- --------- -------- ---------
Net deferred tax asset $ 4,099 18,425 2,665 19,427
Less valuation allowance (4,099) (19,882) (2,665) (20,707)
-------- --------- -------- ---------
Net deferred income taxes $ -- $ (1,457) $ -- $ (1,280)
========== ========= ========= ==========
</TABLE>
The net deferred tax asset has been subject to a valuation allowance
except for the net deferred tax liability as of July 31, 1997 and 1996 of $1,457
and $1,280 which relates to income taxes in foreign jurisdictions which can not
be offset against U.S. income taxes. The valuation allowance has changed in the
current year due to revisions of previously estimated amounts, changes in the
deferred tax amounts and additions to the net operating losses, which are fully
reserved. The domestic net operating losses are subject to matters discussed
below and are subject to change due to the restructuring occurring at the
corporate subsidiary level, as well as adjustment for the timing of inclusion of
expenses and losses in the federal returns as compared to amounts included for
financial statement purposes.
Net Operating Losses
The Company and its U.S. subsidiaries will file a consolidated tax
return for the year ended July 31, 1997. The net operating loss ("NOL")
carryforwards involve complex issues of federal tax law and are subject to
various limitations as follows:
$55,200 Subject to IRC Section 382 annual limitation of
approximately $3,900; this includes $4,700 of losses
incurred prior to 1992 which are subject to additional
limitations. Approximately $26,000 of these losses were
incurred after the IRC Section 382 change of ownership
occurred and are not subject to
F-22
<PAGE>
Section 382 limitations; expire 2001-2010.
$20,800 Subject to IRC Section 382 annual limitation of
approximately $3,100, Separate Return Limitation Year
("SRLY") as to Ozite Corporation; expire 1997-2005.
$ 4,000 Subject to IRC Section 382 annual limitation of
approximately $3,100. (This is part of, and not in addition
to $3,100 IRC Section 382 limitation discussed immediately
above). SRLY as to Ozite and Subs.; expires 2009.
To the extent the Ozite amounts of NOL's are subsequently recognized,
they will cause changes in the goodwill arising from the transaction. In
addition to the domestic NOL balances, the Company has incurred losses relating
to CEL, a subsidiary of the Company, taxable in Northern Ireland. Fiscal 1997
losses aggregated $1,430 which have no expiration date. The Company believes
that it is more likely than not that this deferred tax asset will not be
realized and has recorded a full valuation allowance on these amounts. Such
temporary differences do not include deferred United States income taxes on
undistributed earnings of approximately $25,833 of Ozite's foreign subsidiaries
as the Company has the ability and intent to permanently reinvest such earnings.
See Note 20(b) for a discussion of Ozite's Belgian subsidiary income tax
assessment.
13. STOCKHOLDERS' EQUITY
a. Capitalization
The Company's authorized capital consists of 50,000,000 shares of common
stock, $.01 par value and 1,000,000 shares of preferred stock, $.01 value.
The holders of the Company's common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of shareholders.
The holders of the Company's common stock have no cumulative voting rights in
the election of directors. Subject to the prior rights of the holders of the
Company's preferred stock, all holders of common stock are entitled to share
equally in dividends from sources available therefore when, as and if declared
by the Board of Directors, and upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the Company
available for distribution to stockholders. Stockholders have no preemptive
rights. There is no cumulative voting, redemption right or right of conversion
in existence with respect to the common stock. All outstanding shares issued are
fully paid and non-assessable and legally issued. The Board of Directors is
authorized to issue additional common stock within the limits authorized by the
Company's charter and without stockholder action.
The authorized shares of preferred stock, $.01 par value, are issuable
at any time and from time to time, by action of the Board of Directors without
further authorization from the stockholders, except as otherwise required by
applicable law or regulations, to such persons and for such consideration (but
not less than the par value thereof) as the Board of Directors determines. The
Board of Directors can fix the exact terms of each series of preferred stock,
including number of shares, designation, preferences, privileges, restriction
and rights with respect to dividends, conversion, voting, redemption and other
matters, at or before the time such series is to be sold or issued based upon
factors such as market conditions and negotiations with respective purchasers
existing at that time. There were 5,000 shares of preferred stock to be issued
which were considered outstanding at July 31, 1995 in connection with the Ozite
Merger. Such shares were issued in fiscal 1996.
F-23
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Effective as of July 31, 1996, the holders of the then outstanding
redeemable preferred stock entered into an agreement with the Company to convert
such shares into 1,606,688 shares of common stock of the Company (the "Exchange
Agreement"). The exchange rate of this conversion was 321.3368 shares of common
stock for each preferred share, with fractional shares rounded up to the next
whole share. Of the total shares issued, 50%, or 803,344, were delivered to the
holders of the Preferred Stock and are restricted from sale until October 1,
2001 (the "Exchange Shares"). The remaining 50% were delivered to an escrow
agent pending release as described below (the "Escrow Shares").
Under the terms of the Exchange Agreement, Escrow Shares will be
released back to the Company if such specified litigation is settled prior to
July 31, 2001 in excess of amounts defined in the Exchange Agreement. The shares
released to the Company will be based on an exchange price of $3.2016 per share
or the then market price of the common stock, whichever is greater. If the
incremental cost to the Company exceeds the released value of the Escrow Shares,
the Company will obtain Exchange Shares, valued as indicated above, for the cost
of the settlement in excess of the released value of the Escrow Shares. Escrow
Shares not released to the Company as indicated above by July 31, 2001, will
then be released to the holders of the Preferred Stock. The Exchange and Escrow
Shares must be registered within 180 days of the settlement of the specified
litigation or July 31, 2001, whichever occurs first.
In addition, pursuant to the terms of the Company's 7% Subordinated
Notes (see Note 11), the Company also has the ability to offset principal
payments due on these Subordinated Notes against any excess cost of settlement
in the litigation referred to above. See further discussion at Note 20(b).
The Exchange Shares have been valued by the Company at the date of
conversion at the five day trailing market price of the Company's common stock.
The Escrow Shares have been valued based on such price, less a liquidity
discount due to the nature of such shares. The total value of the Exchange and
Escrow Shares approximated the value of the Preferred Stock on the date of
conversion, July 31, 1996. Therefore, the above transaction has had no effect on
the net equity position of the Company.
b. Stock Issuances
(i) Private Placements
Common Stock:
During the period from October 1994 to July 1995, the Company issued an
aggregate of 3,332,737 shares of common stock under three private placements
made entirely to foreign persons and companies under Regulation S of the
Securities Act of 1933. Net proceeds from these placements aggregated $13,160
before expenses.
In January 1996, the Company made a private placement of 250,000 shares
of common stock for proceeds of $500. In March 1996, the Company made an
additional private placement of 250,000 shares of common stock for proceeds of
$500. In both cases, the proceeds were used to reduce outstanding debt.
As described in Note 1, on June 27, 1997, PureTec completed a private
placement through Ozite, of 2,235,030 shares of its common stock, in exchange
for 1,117,515 shares, or an additional 13.4%, of PST common stock outstanding.
Convertible Debentures:
During the period from February 1995 to June 1995, the Company received
$8,371 and, in exchange, issued Convertible Debentures in the same amount. The
debentures matured at various times from December 1, 1995 to February 1996 and
bore interest at 3% per annum. The holders of the debentures were entitled, at
their option, at any time
F-24
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
after a three-month holding period, to convert the principal amount, or any
portion of the debenture, into shares of common stock of the Company at 80% of
the market price of the Company's common stock. As of July 31, 1995, debentures
in the amount of $7,371 were converted into 1,714,780 shares of the Company's
common stock. In August 1995, the remaining $1,000 was converted into 227,273
shares of common stock.
(ii) Other Issuances
In March 1995, the Company acquired an additional interest in Evolutions
for 350,000 shares of common stock. The issued shares are accounted for by the
Company as Treasury stock. During 1996, Evolutions sold 202,500 shares of the
Company's common stock, resulting in an increase to paid-in capital of $487.
The Company issued 113,890 shares of Common Stock as the result of a
settlement of a lawsuit in October 1995. The value of the shares approximated
$438 at such date and has been charged to expense in 1995.
During fiscal 1997, 333,333 shares of common stock were transferred to
the Company in settlement of a $1,000 note in conjunction with the transfer of
the MCR Vending operations to its minority owners.
c. Stock Option Plans
As part of the Merger, the Company has adopted a stock option plan (the
"1995 Plan") covering 5,000,000 shares of the Company's common stock, par value
$.01, pursuant to which officers, directors, employees and consultants are
eligible to receive options. The options issued under this plan may be ISOs or
non-statutory options. No options may be granted after December 31, 2002. Each
option granted under the 1995 Plan may be exercised for a period of not more
than ten years after the date of grant, or until the expiration of the plan,
whichever occurs first. The option price must not be less than fair market value
for ISOs and 85% of fair market value for non-statutory options. In total,
options to acquire 1,068,366 shares of Company common stock have been
transferred from previously existing Pure Tech plans to the 1995 Plan at
exercise prices ranging from $2.03 to $6.88 per share.
In March 1995, the Company reclassified options to acquire 154,571
shares of common stock as "plan" options. These options have exercise prices
ranging from $2.03 to $7.50.
In fiscal 1996, the Company issued 1,236,500 plan options at an exercise
price of $3.00 per share and 300,000 plan options with an exercise price of
$4.25.
In fiscal 1997, the Company issued 840,000 plan options at an exercise
price of $2.25 per share.
The following summarizes transactions under the employee stock option
plan for the years ended July 31, 1997, 1996, and 1995.
F-25
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Number of Shares Weighted Average
Exercise Price
---------------- ----------------
Outstanding, June 30, 1994 710,404 $ 5.83
Granted 427,000 5.97
Reclassified 154,571 5.83
Exercised and canceled (223,609) 5.83
---------- ------
Outstanding, July 31, 1995 1,068,366 3.62
Granted 1,536,500 3.24
Canceled (20,000) 6.57
---------- ------
Outstanding, July 31, 1996 2,584,866 3.32
Granted 840,000 2.25
Canceled (256,500) 3.49
---------- ------
Outstanding, July 31, 1997 3,168,366 $ 3.03
========== ======
At July 31, 1997 and 1996, approximately 1,372,000 and 923,000 options,
respectively, were vested and exercisable at weighted-average prices of $3.11
and $3.62, respectively.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock plans. Accordingly, no compensation cost has been
recognized for stock option grants issued under any of the Company's stock
option plans. Had compensation cost for stock option grants issued during 1997
and 1996 been determined under the provisions of SFAS No. 123, the Company's net
loss and loss per share would have been $3,475 and $.12 in 1997 and $9,741 and
$.36 in 1996. The pro forma effect on net loss and net loss per share in 1996
incudes the effect of modifying the terms of approximately 771,000 options that
were granted prior to July 31, 1995. In November 1996, all options outstanding
at the beginning of the year with an exercise price of $7.50 or greater were
modified to reduce the exercise price to $3 or $4.25 per share. The pro forma
effect on net loss and loss per share for 1997 and 1996 is not representative of
the pro forma effect on net income in future years, because it does not take
into consideration pro forma compensation expense related to all other grants
made prior to 1996.
The fair value of each stock option granted in 1997 and 1996 under the
Company's plans was estimated on the date of grant using the Black-Scholes
option-pricing model. The following weighted-average assumptions were used to
value grants issued under the plans in 1997 and 1996:
F-26
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1997 1996
---- ----
Dividend yield N/A N/A
Volatility 37.00% 34.36%
Risk-free interest rate 6.00% 6.00%
Expected term of options (in years) 8.30 9.80
The weighted-average fair values per share of stock options granted
during 1997 and 1996 were $1.29 and $.91, respectively.
The exercise price ranges and average remaining lives for options
outstanding and exercisable at July 31, 1997 were:
Range of Number of Weighted Average Number of Weighted-
Exercise Shares Remaining Exercise Shares Average
Prices Outstanding Life (in Price Exercisable Exercise
at 7/31/97 Yrs.) Price
- --------- ------------ ---------- --------- ----------- ---------
2.03 - 3.00 2,749,700 7.90 $2.74 1,020,322 $2.96
3.44 - 6.88 418,666 8.00 4.88 351,966 4.88
--------- ---- ----- --------- -----
Total: 3,168,366 7.91 $3.03 1,372,288 $3.11
========= ==== ===== ========= =====
d. Stock Warrants/Options
The following options and warrants were issued to non-employees of the
Company:
In August 1994, the Company issued non-plan options to acquire 100,000
shares of common stock. These options have an exercise price of $6.88.
In January 1995, the Company issued non-plan options to acquire 685,000
shares of common stock. These options have exercise prices ranging between $5.50
and $5.62.
In March 1995, the Company reclassified non-plan options to acquire
154,571 shares of common stock. These options have exercise prices ranging from
$2.03 to $7.50.
The above transactions did not result in any compensation cost or
expenses, as the exercise prices equaled or exceeded the fair market value of
the stock. In the case of the reclassified options, the exercise price at the
time of original issue equaled or exceeded the fair market value of the stock.
In December 1994, the Company entered into a settlement of certain
litigation which provides for the issuance of 450,000 warrants to acquire the
Company's common stock at an exercise price of $4.61 per share (See Note 20
(b)).
F-27
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The following table summarizes the status of stock options and warrants
issued to non-employees of the Company:
Options/
Number Warrant
of Shares Prices
--------- --------
Outstanding, June 30, 1994 521,000 $ 2.03-$ 22.00
Granted 1,235,000 4.64- 6.88
Reclassified (154,571) 2.03- 7.50
Exercised and canceled (32,985) 7.50
----------
Outstanding, July 31, 1995 1,568,444 2.03- 22.00
Canceled (200,000) 5.50
----------
Outstanding, July 31, 1996 1,368,444 4.25- 22.00
Exercised (122) 4.61
Canceled (56,000) 4.25
----------
Outstanding, July 31, 1997 1,312,322 4.25- 22.00
==========
At July 31, 1997, all of the stock options/warrants issued to
non-employees of the Company were exercisable, and expired at various dates
during fiscal 1998 and 1999.
14. RETIREMENT PLANS
(a) PST Pension Plan:
PST maintains a noncontributory defined benefit pension plan. The plan
covers substantially all employees of PST and substantially all salaried
employees of Burlington who are not covered by a collective bargaining
agreement, who have completed one year of service and are not participants in
any other pension plan. The funding policy of the Company is to make
contributions to the plan based on actuarial computations of the minimum
required contribution for the plan year. The plan's assets are invested
primarily in the Master Trust Fund of PST in accordance with the investment
agreements of the plan.
Net pension costs consist of the following:
Year Ended
July 31, July 31,
1997 1996
---- ----
Service cost $ 667 $ 647
Interest cost on projected benefit obligation 589 542
Actual return on plan assets (1,854) (557)
Net amortization and deferrals 1,287 88
-------- ------
$689 $ 720
======== ======
F-28
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The funded status of the Plan is as follows:
July 31, July 31,
1997 1996
--------- --------
Vested benefit obligation $ (6,548) $ (5,831)
========= =========
Accumulated benefit obligation $ (6,843) $ (6,089)
========= =========
Projected benefit obligation $ (8,540) $ (7,807)
Plan assets at fair value 8,339 6,029
--------- ---------
Projected benefit obligation in
excess of plan assets (201) (1,778)
Unrecognized net gains (1,946) (415)
Less unrecognized actuarial gains and
losses and prior service costs attributable
to minority interest in PST (15) 295
--------- ---------
Accrued pension obligation $ (2,162) $ (1,898)
========= =========
The expected long-term rate of return on plan assets of the plan was 9%
for all periods presented and the discount rate was 8% at July 31, 1997 and
1996.
(b) Burlington Hourly Pension Plan:
Burlington has a noncontributory defined benefit pension plan that
covers substantially all hourly compensated employees covered by a collective
bargaining agreement, who have completed one year of service. The funding policy
of the Company is to make contributions to this plan based on actuarial
computations of the minimum required contribution for the plan year. The plan's
assets are invested primarily in the Master Trust Fund of PST. Net pension costs
consist of the following:
Year Ended
-----------------------------
July 31, 1997 July 31, 1996
------------- -------------
Service cost $ 110 $ 108
Interest cost on projected benefit obligation 309 278
Actual return on plan assets (780) (165)
Net amortization and deferrals 487 (104)
-------- --------
$ 126 $ 117
======== ========
July 31, 1997 July 31, 1996
------------- -------------
Vested benefit obligation $(4,103) $(3,682)
======== ========
Accumulated benefit obligation $(4,503) $(3,888)
======== ========
Projected benefit obligation $(4,503) $(3,888)
Plan assets at fair value 4,169 3,222
-------- --------
Projected benefit obligation in excess of
plan assets (334) (666)
Unrecognized net loss (gain) (262) 180
Adjustment to recognize minimum required
liability -- (180)
Unrecognized prior service cost 238 --
-------- --------
Accrued pension costs $ (358) $ (666)
======== ========
F-29
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The expected long-term rate of return on plan assets was 9% for the period
and the discount rate was 8% for the year ended July 31, 1997.
In July 1997, the Plan was amended due to an agreement reached with the
labor union representing the majority of hourly workers at Burlington. This
agreement increased retirement benefits from $25, multiplied by the number of
years of benefit service, to $26, effective June 1998, and $27, effective June
2000. These changes are reflected in the year-end disclosure information above,
with the increase in liability established as a prior service cost.
(c) Postretirement Liabilities
--------------------------
In addition to providing pension benefits, the company also sponsors the
Burlington Retiree Welfare Plan, which provides certain health care benefits for
retired employees who were employed on an hourly basis and covered under a
collective bargaining agreement. Employees and their families become eligible
for these benefits after the employee completes five years of service, if
retiring at age fifty-five, or at age sixty-five, the normal retirement age.
Post retirement health care benefits paid during the year ended July 31, 1997
and 1996 amounted to $139 and $110, respectively.
Effective June 23, 1997, the plan was amended to provide a zero-premium
Medicare risk HMO coverage for all future post-age-65 retirees, as well as many
of the Company's current retirees. This amendment to the plan was accounted for
as a negative plan amendment pursuant to Statement of Financial Accounting
Standards No. 106. The resulting reduction in the accrued postretirement
liability of $3,200 will be recognized and amortized as a reduction of net
periodic post retirement benefit cost over the next eight years at the rate of
$400 per year. The amortization period represents the average period of time
over which an under-55 employee attains full eligibility for this post
retirement benefit.
Net periodic postretirement benefit cost for 1997 was $553 and was
comprised of $133 of service cost and $420 of interest cost. Net periodic
postretirement benefit cost for 1996 was $513 and was comprised of $123 of
service cost and $390 of interest cost.
The funded status of the plan is as follows:
<TABLE>
July 31, 1997 July 31, 1996
------------- -------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $(1,099) $(1,511)
Fully eligible active plan participants (408) (2,138)
Other active participants (310) (1,672)
------- -------
Total (1,817) (5,321)
Unrecognized net gain (737) (19)
------- -------
Sub-total (2,554) (5,340)
Unrecognized prior service cost relating to
negative plan amendment (see above) (3,200) -
------- -------
Accrued Post retirement costs $(5,754) $(5,340)
======= =======
</TABLE>
The accumulated postretirement benefit obligation was determined using an 8%
discount rate for the years ended July 31, 1997 and 1996. The health care cost
trend rate for medical benefits was assumed to be 8% for 1996, gradually
declining until it reaches a constant annual rate of 5% in 2002. The health care
cost trend rate assumption has a significant effect on the amounts reported. A
1% increase in health care trend rate would increase the accumulated Post
retirement benefit obligation by $943 and increase the service and interest
components by $100 at July 31, 1997.
F-30
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(d) Savings Plans
-------------
Additionally, PST has a savings plan for all non-collective bargaining
employees whereby PST will match each employee's contribution up to 2% of the
employee's earnings. The savings plan is also made available to PST affiliates
who bear their respective costs. Such contribution amounted to approximately
$492 and $505 for the year ended July 31, 1997 and 1996, respectively.
Burlington employees who are covered under a collective bargaining agreement
participate in the Pure Tech International, Inc. Savings and Investment Plan for
Hourly Employees at Burlington, New Jersey. The Company will match each
employee's contribution up to 50% of the contributions not in excess of 6% of
the employee's compensation. Such contribution amounted to approximately $73 and
$96 for the year ended July 31, 1997 and 1996, respectively.
15. SEGMENT INFORMATION
The Company operates in three industry segments: plastic products, plastic
materials and recycling. The plastic products segment principally produces lawn
and garden hose, medical tubing and specialty tubing and gaskets. The plastics
materials segment principally produces recycled and general purpose plastics and
medical grade vinyl compounds. The recycling segment consists of the operating
of material recovery facilities and the recycling of plastics and some aluminum.
The plastic products segment has operations in the United States, Europe and
Canada (Canadian operations commencing in 1996, which are included in the
domestic amounts below). The plastic materials and recycling segments operate
principally in the United States.
Financial information concerning the Company's business segments and the
geographic areas in which it operates is as follows:
<TABLE>
Year ended
-----------------------------------------------------------------------
July 31, 1997 July 31, 1996 July 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales:
Plastic Products:
Domestic $149,083 $152,352 $ -
Europe 35,300 34,158 -
Plastic Material 154,064 142,314 -
Recycling 18,681 34,248 30,189
Corporate & elimination (41,794) (36,728) -
--------- --------- ---------
Total Net Sales $315,334 $326,344 $ 30,189
========= ========= =========
Operating Income (Loss):
Plastic Products:
Domestic $ 21,822 $ 19,366 $ -
Europe 8,276 6,375 -
Plastic Material 6,533 5,907 -
Recycling (197) (5,088) 1,020
Corporate & elimination (9,817) (5,692) (7,304)
--------- --------- ----------
Total Operating Income (Loss) $ 26,617 $ 20,868 $ (6,284)
========= ========= ==========
</TABLE>
F-31
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
<TABLE>
<S> <C> <C> <C>
Depreciation and Amortization:
Plastic Products:
Domestic $ 4,998 $ 4,622 $ -
Europe 1,641 1,496 -
Plastic Material 3,123 3,589 -
Recycling 1,101 1,263 2,473
Corporate & elimination 2,917 2,457 388
-------- -------- --------
Total Depreciation & Amortization $ 13,780 $ 13,427 $ 2,861
======== ======== ========
Capital Expenditures:
Plastic Products:
Domestic $ 2,553 $ 2,440 $ -
Europe 1,852 3,804 -
Plastic Material 9,502 1,726 -
Recycling 717 916 2,727
Corporate and discontinued operations 451 1,623 216
-------- -------- --------
Total Capital Expenditures $ 15,075 $ 10,509 $ 2,943
======== ======== ========
Identifiable Assets:
Plastic Products:
Domestic $145,150 $135,095 $134,147
Europe 36,760 37,907 36,667
Plastic Material 103,998 85,900 73,708
Recycling 10,186 19,520 27,998
Corporate and discontinued operations 15,729 18,268 17,601
--------- --------- ---------
Total Identifiable Assets $311,823 $296,690 $290,121
========= ========= =========
</TABLE>
Operating income (loss) is total sales less cost of goods sold and operating
expenses of each segment before deductions for general corporate expenses not
directly related to an individual segment. In computing operating income (loss),
none of the following items have been added or deducted: interest expense,
income taxes (benefit) and loss from discontinued operations. Identifiable
assets by industry are those assets that are used in the Company's operation in
each industry segment, including assigned value of goodwill. Corporate
identifiable assets consist primarily of cash, prepaid expenses, fixed assets
and deferred debt costs offset by the elimination of intersegment profit in
ending inventories.
16. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company recorded certain adjustments
aggregating. $1,200. The Company recorded additional inventory of approximately
$1,800 based on the results of a book to physical reconciliation. Additionally,
the Company recorded a charge of approximately $600 as the result of reconciling
intercompany accounts. It cannot be specifically determined to which quarters in
the year these amounts relate.
Additionally, during the fourth quarter of 1997, the Company recorded
certain adjustments aggregating $3,158. These adjustments relate to the
write-off of licenses and a supply agreement ($920), the reversal of a portion
of the Dalen litigation reserve ($2,000), the recording of the Circuit Chemistry
settlement ($1,988), and the loss on disposal of Styrex ($2,250).
F-32
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
During the fourth quarter of 1996, the Company recorded certain adjustments
aggregating approximately $7,194. These adjustments related to the shut down of
the Springfield location ($4,236), losses recorded in connection with equity
investments ($1,188), the final exit of the Ozite Mfg. location ($570) and the
decision to dispose of the MCR operations ($400). In addition to the above,
certain adjustments were recorded at Burlington in the fourth quarter ($800)
that related to operations throughout the year. It cannot be specifically
determined what quarters in the year these amounts relate to.
During the fourth quarter of 1995, the Company recorded certain adjustments
aggregating approximately $11,110. These adjustments were related to the
write-off of obsolete equipment ($4,617) and the write-off of intangibles
($6,493). The write-off of intangibles included $3,707 related to Styrex.
17. DISCONTINUED OPERATIONS:
The following table summarizes the loss from operations and disposal of
discontinued operations of the Company for the years ended July 31, 1997, 1996
and 1995:
1997 1996 1995
---- ---- ----
Glass operations (a)
Loss from discontinued operations $ -- $ -- $ --
Loss on disposal from discontinued operations -- -- (4,809)
------- ------- -------
-- -- (4,809)
======= ======= =======
Ozite Manufacturing (b)
Loss from discontinued operations -- (979) --
Loss on disposal from discontinued operations (672) (2,241) --
------- ------- -------
(672) (3,220) --
======= ======= =======
Injection molding operations (Styrex) (c)
Loss from discontinued operations (1,226) (546) (4,580)
Loss on disposal from discontinued operations (2,250) -- --
------- ------- -------
(3,476) (546) (4,580)
======= ======= =======
Circuit Chemistry (d)
Loss from discontinued operations -- -- --
Loss on disposal from discontinued operations (1,988) -- --
------- ------- -------
(1,988) -- --
======= ======= =======
Dalen (e)
Loss from discontinued operations -- -- --
Gain on disposal from discontinued operations 2,000 -- --
------- ------- -------
2,000 -- --
======= ======= =======
Total discontinued operations
Loss from discontinued operations (1,226) (1,525) (4,580)
Loss on disposal from discontinued operations (2,910) (2,241) (4,809)
------- ------- -------
$(4,136) $(3,766) $(9,389)
======= ======= =======
F-33
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
a) Glass operations
During 1994 and 1995, the Company discontinued and arranged for the
disposal of its various glass, metal, and material recovery facility ("MRF")
operations. In April 1995, the Company leased its Newark, New Jersey glass
processing and MRF facilities to Automated Recycling Technologies, Inc. ("ARTS")
for an initial period of two years. At the conclusion of the initial two-year
period, ARTS had the right, to extend at its option, the lease agreement for
eight consecutive one-year periods. ARTS exercised that right and extended the
lease at the Newark glass processing operation, while vacating the MRF facility.
The Company has accrued $1,216 and $1,660 for various liabilities related to
these operations at July 31, 1997 and 1996, respectively. These reserves are
included in accrued plant closing and disposal costs in current liabilities and
long-term debt. These liabilities relate primarily to rent, clean-up costs, and
mortgage and equipment financing loans.
b) Ozite Manufacturing
On December 21, 1995, PST entered into an Asset Purchase Agreement with Foss
Manufacturing Company, Inc. ("Foss") for the sale of certain assets of PST's
Ozite Manufacturing Division ("Ozite Mfg.") in Libertyville, Illinois to Foss as
of January 31, 1996. Under the terms of this agreement, Foss purchased Ozite
Mfg.'s accounts receivable and inventory, net of reserves, as well as certain
prepaid expenses, trade names, trademarks, and patents for approximately $3,025,
which was received by PST on February 12, 1996. Furthermore, the agreement
provided for the company to receive a minimum of $450 for all of its machinery
and equipment at the facility. During the fourth quarter of fiscal 1996,
adjustments were made to increase by $570 the estimated loss on disposal
recorded in the second quarter due to the final shut down of these facilities.
Accordingly, the Ozite Mfg. operations have been reflected as discontinued
operations in the statement of operations for all periods presented. Net sales
generated from these operations amounted to $4,882 and $11,714 for the years
ended July 31, 1996 and 1995, respectively. During fiscal 1997, the Company
settled certain litigation related to Ozite Mfg. (see Note 20(b)). These
settlements resulted in charges of $672. Certain litigation remains ongoing,
however management believes any potential exposure to the Company is covered by
insurance.
c) Styrex
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. In connection therewith, the Company
recorded a loss on disposal of $2,250. Accordingly, operating results for Styrex
have been shown as a discontinued operation within the consolidated statement of
operations for the years 1997, 1996 and 1995. Net sales for this operation were
$14,767, $17,979 and $21,713 for the years ended July 31, 1997, 1996 and 1995,
respectively. The net loss for this operation of $1,226 for this operation for
fiscal 1997 was also included within discontinued operations. In addition, the
net assets for Styrex of $270 have been included in other current assets on the
consolidated balance sheet at July 31, 1997. The measurement date for this
discontinued operation is April 30, 1997. In August 1997, the operations of
Styrex were sold for cash. The Company has accrued $656 for various liabilities
related to the closing of this operation, which are included in accrued
expenses.
d) Relates to K&B Liquidating Corp. Lawsuit (see Note 20).
e) Relates to reduction of accrued expenses for Dalen lawsuit (see Note 20).
18. SUBSEQUENT EVENTS
In August 1997, the operations of Styrex were sold and the operating results
of Styrex for fiscal 1997 were included within discontinued operations (see Note
17). Accordingly, results for fiscal 1996 and 1995 were also reclassed to
discontinued operations.
F-34
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
In September 1997, Burlington Resins, Inc. settled a lawsuit it had
filed against OxyChem. The result of this settlement was to reduce goodwill at
Burlington by $1,476. (See Note 1).
In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry,
and Ozite settled the Dalen litigation. The impact of both settlements was
accounted for as adjustments to previously recorded discontinued operations (see
Notes 20(b) and Note 17).
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 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.
F-35
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
19. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash and cash equivalents, accounts
receivable, notes and interest receivable from officers, short-term borrowings,
accounts payable and long-term debt, excluding those items discussed below,
approximate those amounts reflected in the balance sheet based on pertinent
information available to management. Management estimates the fair value of the
Senior Secured Notes approximates $135,000 as these notes were trading at a
price of approximately 108 at July 31, 1997. Management estimates the fair value
of the OxyChem notes at July 31, 1997 approximates the carrying value.
In connection with the acquisition from OxyChem, Burlington entered into
two separate supply agreements and one supply and license agreement with OxyChem
to supply certain critical components and chemicals utilized in production of
the Company's products. These agreements extend for varying periods of time and
each contain specified purchase prices and minimum purchase requirements for
such materials. Burlington is entitled to search for new suppliers for these
components, but is required to allow OxyChem to requote the price of the
components if the price quote obtained in the market is more favorable to
Burlington. Management believes that other suppliers could provide similar
components to Burlington on comparable terms. During the years ended July 31,
1997 and 1996, Burlington purchased approximately $20,800 and $18,000,
respectively of products from OxyChem under such agreements. Amounts due to
OxyChem at July 31, 1997 and 1996 amounted to approximately $5,300 and $2,700,
respectively. In addition, Burlington recorded sales to OxyChem in the year
ended July 31, 1997 and 1996 of approximately $1,200 and $1,000, respectively.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Although credit
risk related to the Company's trade receivables is limited due to the large
number of customers in differing industries and geographic areas, sales to one
customer accounted for approximately 12.7% ,16.9% and 19.8% of the company's net
sales for the years ended July 31, 1997, 1996 and 1995, respectively.
20. COMMITMENTS AND CONTINGENCIES
a. Leases
The Company leases certain facilities under non-cancelable operating
leases expiring through the year 2020. The Company is responsible for all taxes,
insurance and maintenance on the facilities.
Rent expense from continuing operations under operating leases
approximated $4,479, $5,250 and $1,855 for the years ended July 31, 1997, 1996
and 1995, respectively. Included in rent expense for each year is approximately
$150, attributable to a lease from a related party.
A summary of the future minimum lease payments for continuing operations
is as follows:
Years Ending
July 31,
------------
1998 $4,719
1999 4,344
2000 4,112
2001 3,932
2002 3,302
Thereafter 3,735
-------
$24,144
-------
-------
F-36
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
b. Litigation
On February 18, 1993, the 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 ("Davis"). In Davis, the United States has
alleged that certain private entities 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 respect
to the 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.
In June 1997, the Company filed suit against Occidental Chemical
Corporation ("OxyChem"), alleging that certain postretirement benefit
liabilities were substantially understated when Burlington acquired the
acquisition from OxyChem (see Note 1). 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 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 impact of the
settlement of the Dalen litigation has been reflected in the Company's net loss
from discontinued operations as of July 31, 1997, as Ozite had previously
reported the Dalen business which it had acquired as a discontinued operation in
1988. 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. If Ozite fails to make the
payments required on October 15 and January 31, 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 (see Note 13(a)). The Dalen
litigation was settled for approximately $2,800 in excess of the amount defined
in the agreements. Once the amount and the recovery of excess settlement costs
is determined, the recovery of these excess costs will result in the reduction
of goodwill, to be recorded by the Company in 1998.
In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $1,979 (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
$843 (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
F-37
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 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 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. Subsequent to July 31, 1997, 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. During fiscal 1997, PST filed for a summary
judgement to dismiss all claims from Czaja and Hutchinson. This summary
judgement motion was denied by the court. In light of the growing costs of
litigation, and the remaining uncertainty of the outcome of a trial, management
elected to settle these cases. The impact of the settlement of these cases is
reflected in the Company's net loss from discontinued operations for the year
ended July 31, 1997, as PST had previously reported Circuit Chemistry as a
discontinued operation as of 1989. Total settlement payments to the plaintiffs
in connection with this settlement are $1,725, which are accrued together with
related legal costs at July 31, 1997.
During February 1994, the Company and certain officers were named in
five lawsuits purporting to be class actions which essentially allege that the
Company failed to previously adequately disclose facts which resulted in
significant losses reported by the Company. The Company entered into a
settlement of these suits, whereby the Company (i) issued 450,000 warrants to
acquire the Company's common stock at an exercise price of $4.61 per share, (ii)
established an administration fund of $100 to cover the expenses and costs of
administering the settlement and (iii) paid certain out-of-pocket costs not
exceeding $50. The Company recorded $150 relating to items (ii) and (iii) in the
year ended July 31, 1995 and $100 in the year ended July 31, 1996, upon issuance
of the warrants.
In the current year, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled. (See Note 17)
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.
F-38
<PAGE>
PURETEC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
c. Employment Agreements
The following summarizes, in the aggregate, minimum annual salary and
consulting fees that are due under various agreements:
Years Ending Minimum
July 31, Commitment
-------- ----------
1998 $453
1999 175
2000 22
d. Letters of Credit
As of July 31, 1997, PST had available letters of credit of up to $1,000
from the CLC, of which $353 was outstanding.
e. Bonuses
Under the terms of the Asset Transfer Agreement with OxyChem, the
Company is required to pay annual bonuses to salaried employees still employed
by the Company through fiscal year 1998. For the years ended July 31, 1997 and
1996 these payments amounted to approximately $152 and $157, respectively.
F-39
<PAGE>
SCHEDULE II
PURETEC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions/
(Reductions)
Balance at Charged to
Beginning Costs and Addition Related Accounts Balance at End
Classification of Period Expenses to Ozite Merger Charged off of Period
- -------------- --------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended July 31, 1995
Allowance for doubtful
receivables $100 $ 49 $ -- (*) $ -- $ 149
Year Ended July 31, 1996
Allowance for doubtful
receivables $149 $831 $ -- $ -- $ 980
Year Ended July 31, 1997
Allowance for doubtful
receivables $980 $274 $ -- $ (100) $1,154
</TABLE>
(*)Reserves of $2,550 related to Ozite receivables have been considered as
reducing the related receivable balances to fair value.
F-40
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated as of
November 11, 1997
among
PURETEC CORPORATION,
PLASTIC SPECIALTIES & TECHNOLOGIES, INC.,
TEKNI-PLEX, INC.
and
P. T. HOLDING, INC.
<PAGE>
TABLE OF CONTENTS1
----------------------
PAGE
----
ARTICLE (1)
THE MERGER
SECTION 1.01. The Merger .................................................. 1
SECTION 1.02. Conversion of Shares.......................................... 2
SECTION 1.03. Surrender and Payment......................................... 3
SECTION 1.04. Dissenting Shares............................................. 4
SECTION 1.05. Stock Options................................................. 4
SECTION 1.06. Company Debt.................................................. 5
SECTION 1.07. PS&T Minority Interest........................................ 6
SECTION 1.08. Intercompany Loans............................................ 6
SECTION 1.09. Upstream Guarantees........................................... 6
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation.................................. 6
SECTION 2.02. Bylaws .................................................. 6
SECTION 2.03. Directors and Officers........................................ 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.01. Corporate Existence and Power................................. 7
SECTION 3.02. Corporate Authorization....................................... 7
SECTION 3.03. Governmental Authorization.................................... 7
SECTION 3.04. Non-contravention............................................. 8
SECTION 3.05. Capitalization................................................ 8
SECTION 3.06. Subsidiaries and Investees.................................... 9
SECTION 3.07. SEC Filings ..................................................10
SECTION 3.08. Financial Statements..........................................11
SECTION 3.09. Disclosure Documents..........................................11
SECTION 3.10. Absence of Certain Changes....................................12
SECTION 3.11. No Undisclosed Material Liabilities...........................13
SECTION 3.12. Litigation ..................................................14
SECTION 3.13. Taxes ..................................................14
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(1) The Table of Contents is not a part of this Agreement.
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SECTION 3.14. Employee Benefits.............................................15
SECTION 3.15. Labor Matters.................................................18
SECTION 3.16. Compliance with Laws..........................................19
SECTION 3.17. Finders' Fees.................................................20
SECTION 3.18. Other Information.............................................20
SECTION 3.19. Environmental Matters.........................................20
SECTION 3.20. Material Contracts............................................23
SECTION 3.21. Properties ..................................................24
SECTION 3.22. Intellectual Property.........................................26
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY
SECTION 4.01. Corporate Existence and Power.................................27
SECTION 4.02. Corporate Authorization.......................................27
SECTION 4.03. Governmental Authorization....................................27
SECTION 4.04. Non-contravention.............................................28
SECTION 4.05. Disclosure Documents..........................................28
SECTION 4.06. Finders' Fees.................................................28
SECTION 4.07. Financing ..................................................29
SECTION 4.08. Absence of Certain Changes....................................29
SECTION 4.09. Buyer Financial Statements....................................29
ARTICLE 5
COVENANTS OF THE COMPANY
SECTION 5.01. Conduct of the Company........................................30
SECTION 5.02. Stockholder Meeting; Proxy Material...........................31
SECTION 5.03. Access to Information.........................................32
SECTION 5.04. Other Offers..................................................32
SECTION 5.05. Notices of Certain Events.....................................33
SECTION 5.06. Cooperative Efforts...........................................33
SECTION 5.07. Loans to Affiliated Persons...................................34
SECTION 5.08. Severance Package.............................................34
SECTION 5.09. Proceeds of Convertible Note..................................34
ARTICLE 6
COVENANTS OF BUYER AND MERGER SUBSIDIARY
SECTION 6.01. Obligations of Merger Subsidiary..............................35
SECTION 6.02. Voting of Shares..............................................35
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SECTION 6.03. Director and Officer Liability................................35
SECTION 6.04. Commitment Letters and Financing Agreements...................35
SECTION 6.05. Repurchase of Bonds...........................................36
ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
SECTION 7.01. Best Efforts..................................................36
SECTION 7.02. Certain Filings...............................................36
SECTION 7.03. Public Announcements..........................................37
SECTION 7.04. Further Assurances............................................37
ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party...................37
SECTION 8.02. Conditions to the Obligations of Buyer and
Merger Subsidiary.................................38
SECTION 8.03. Conditions to the Obligations of the Company..................40
ARTICLE 9
TERMINATION
SECTION 9.01. Termination ..................................................41
SECTION 9.02. Effect of Termination.........................................42
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices ..................................................43
SECTION 10.02. Survival of Representations and Warranties...................44
SECTION 10.03. Amendments; No Waivers.......................................44
SECTION 10.04. Expenses ..................................................44
SECTION 10.05. Successors and Assigns.......................................45
SECTION 10.06. Governing Law................................................45
SECTION 10.07. Counterparts; Effectiveness..................................45
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of November 11, 1997 among
PureTec Corporation, a Delaware corporation (the "Company"), Plastic Specialties
& Technologies, Inc., a Delaware corporation ("PS&T"), Tekni-Plex, Inc., a
Delaware corporation ("Buyer"), and P.T. Holding, Inc., a Delaware corporation
and a wholly-owned subsidiary of Buyer ("Merger Subsidiary").
WHEREAS, as a condition to Buyer's and Merger Subsidiary's willingness
to enter into this Agreement, simultaneously with the execution of this
Agreement Buyer is entering into a Stockholder Voting and Option Agreement (the
"Voting Agreement") with certain stockholders of the Company;
WHEREAS, simultaneously with the execution of this Agreement, Buyer, at
the request of the Company and PS&T, is lending the Company $5,000,000 in
exchange for a Convertible Note (the "Convertible Note") in order to bridge
finance certain working capital needs of the Company and PS&T during the term of
this Agreement;
In consideration for the various agreements contained herein, in the
Voting Agreement and in the Convertible Note, the parties hereto agree as
follows:
ARTICLE 1
THE MERGER
SECTION 1.01. The Merger. (a) At the Effective Time, Merger Subsidiary
shall be merged (the "Merger") with and into the Company in accordance with the
General Corporation Law of the State of Delaware (the "Delaware Law"), whereupon
the separate existence of Merger Subsidiary shall cease, and the Company shall
be the surviving corporation (the "Surviving Corporation"). At the election of
Buyer, the Merger may be structured so that the Company shall be merged with and
into Merger Subsidiary with the result that Merger Subsidiary shall be the
Surviving Corporation.
(b) At the earliest time following satisfaction or, to the extent
permitted hereunder, waiver of all conditions to the Merger, the Company and
Merger Subsidiary will file a certificate of merger with the Secretary of State
of the State of Delaware and make all other filings or recordings required by
Delaware Law in connection with the Merger. The Merger shall become effective at
such time as
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the certificate of merger is duly filed with the Secretary of State of the State
of Delaware or at such later time as is specified in the certificate of merger
(the "Effective Time").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities and duties of the Company and Merger
Subsidiary, all as provided under Delaware Law.
(d) The Company hereby represents that its Board of Directors, at a
meeting duly called and held, has (i) unanimously determined that this Agreement
and the transactions contemplated hereby, including the Merger, are fair to and
in the best interest of the Company's stockholders, (ii) unanimously approved
this Agreement and the transactions contemplated hereby, including the Merger,
which approval satisfies in full the requirements of Delaware Law, and (iii)
unanimously resolved to recommend approval and adoption of this Agreement and
the Merger by its stockholders; provided, that such recommendation may be
withdrawn, modified or amended to the extent the Board of Directors of the
Company deems it necessary to do so in the exercise of its fiduciary obligations
to the Company's stockholders after being so advised by outside counsel. The
Company further represents that Schroder & Co. Inc. ("Schroders") has delivered
to the Company's Board of Directors its written opinion that the Merger
Consideration is fair to the holders of Shares from a financial point of view.
The Company has been advised that all of its directors and executive officers
currently intend to vote their Shares in favor of the approval and adoption of
this Agreement and the Merger.
SECTION 1.02. Conversion of Shares. At the Effective Time:
(a) each outstanding share (each a "Share") of common stock,
$0.01 par value (the "Common Stock") of the Company held by the
Company as treasury stock or owned by Buyer or any subsidiary of
Buyer immediately prior to the Effective Time shall be canceled, and
no payment shall be made with respect thereto;
(b) each share of common stock of Merger Subsidiary outstanding
immediately prior to the Effective Time shall be converted into and
become one share of common stock of the Surviving Corporation with the
same rights, powers and privileges as the shares so converted and shall
constitute the only outstanding shares of capital stock of the
Surviving Corporation; and
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(c) each Share outstanding immediately prior to the Effective
Time shall, except as otherwise provided in Section 1.02(a) or as
provided in Section 1.04 with respect to Shares as to which appraisal
rights have been exercised, be converted into the right to receive
$3.50 in cash, without interest (the "Merger Consideration").
SECTION 1.03. Surrender and Payment. (a) Prior to the Effective Time,
Buyer shall appoint an agent (the "Exchange Agent") for the purpose of
exchanging certificates representing Shares for the Merger Consideration. Buyer
will make available to the Exchange Agent, as needed, the Merger Consideration
to be paid in respect of the Shares. For purposes of determining the Merger
Consideration to be made available, Buyer shall assume that no holder of Shares
will perfect his right to appraisal of his Shares. As soon as practicable after
the Effective Time, Buyer will send, or will cause the Exchange Agent to send,
to each holder of Shares at the Effective Time a letter of transmittal for use
in such exchange (which shall specify that the delivery shall be effected, and
risk of loss and title shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent).
(b) Each holder of Shares that have been converted into a right to
receive the Merger Consideration, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares. Until so
surrendered, each such certificate shall, after the Effective Time, represent
for all purposes, only the right to receive such Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a
Person other than the registered holder of the Shares represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the Person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a Person other than the
registered holder of such Shares or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable. For purposes of
this Agreement, "Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof.
(d) After the Effective Time, there shall be no further registration
of transfers of Shares. If, after the Effective Time, certificates representing
Shares are presented to the Surviving Corporation, they shall be canceled and
exchanged
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for the Merger Consideration provided for, and in accordance with the procedures
set forth, in this Article 1.
(e) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.03(a) that remains unclaimed by the holders
of Shares six months after the Effective Time shall be returned to Buyer, upon
demand, and any such holder who has not exchanged his Shares for the Merger
Consideration in accordance with this Section prior to that time shall
thereafter look only to Buyer for payment of the Merger Consideration in respect
of his Shares. Notwithstanding the foregoing, Buyer shall not be liable to any
holder of Shares for any amount paid to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of Shares
two years after the Effective Time (or such earlier date immediately prior to
such time as such amounts would otherwise escheat to or become property of any
governmental entity) shall, to the extent permitted by applicable law, become
the property of Buyer free and clear of any claims or interest of any Person
previously entitled thereto.
(f) Any portion of the Merger Consideration made available to the
Exchange Agent pursuant to Section 1.03(a) to pay for Shares for which appraisal
rights have been perfected shall be returned to Buyer, upon demand.
SECTION 1.04. Dissenting Shares. Notwithstanding Section 1.02, Shares
outstanding immediately prior to the Effective Time and held by a holder who has
not voted in favor of the Merger or consented thereto in writing and who has
demanded appraisal for such Shares in accordance with Delaware Law shall not be
converted into a right to receive the Merger Consideration, unless such holder
fails to perfect or withdraws or otherwise loses his right to appraisal. If
after the Effective Time such holder fails to perfect or withdraws or loses his
right to appraisal, such Shares shall be treated as if they had been converted
as of the Effective Time into a right to receive the Merger Consideration. The
Company shall give Buyer prompt notice of any demands received by the Company
for appraisal of Shares, and Buyer shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Buyer, make any payment with
respect to, or settle or offer to settle, any such demands.
SECTION 1.05. Stock Options. (a) At the Effective Time, each holder of
an outstanding stock option to purchase Shares, whether or not then vested or
exercisable, granted under any employee or director stock option or compensation
plan or arrangement of the Company shall be paid by the Company promptly upon
surrender of such stock option an amount determined by multiplying (i) the
excess, if any, of $3.50 per Share over the applicable exercise price per share
of
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such option by (ii) the number of Shares such holder could have purchased
(assuming full vesting of all options) had such holder exercised such option in
full immediately prior to the Effective Time.
(b) Promptly following the Effective Time, the Company shall notify
all holders of outstanding options or warrants to purchase Shares other than
those referred to in subsection (a) above that such holders are entitled to
receive the Merger Consideration upon surrender of such options or warrants and
payment to the Company by the holder thereof of the applicable exercise price
(and in the case of options referred to in Section 1.05(a), of such right to
receive the payment described in Section 1.05(a) in lieu of exercising such
option).
SECTION 1.06. Company Debt. (a) PS&T Senior Notes. The Company shall
cause PS&T to promptly commence a combined consent solicitation and offer to
purchase (the "Debt Offer"), in accordance with applicable law and pursuant to
documentation reasonably satisfactory to Buyer, any and all of PS&T's
outstanding 11.25% Senior Secured Notes due 2003 (the "PS&T Notes") at a cash
price to be specified by Buyer or at such other price as Buyer may specify from
time to time thereafter. The Company shall cause PS&T to purchase the PS&T Notes
tendered pursuant to the Debt Offer at the Effective Time. The Debt Offer shall
be subject to the conditions that (i) there shall be validly tendered and not
withdrawn in accordance with the terms of the Debt Offer prior to the expiration
date of the Debt Offer, PS&T Notes in an aggregate principal amount representing
at least a majority in principal amount of the PS&T Notes, (ii) the holders of
at least a majority in principal amount of the PS&T Notes shall have consented
prior to the Effective Time to amend the indenture dated as of October 29, 1993
between PS&T and First Fidelity Bank, N.A. Pennsylvania, as Trustee (the "PS&T
Indenture") to delete such covenants, events of default and other provisions of
the PS&T Indenture as Buyer shall specify and to make such other amendments to
the PS&T Indenture as Buyer may require, and (iii) Buyer shall have consummated
or, simultaneously with the consummation of the Debt Offer, shall consummate the
Merger.
(b) Other Subsidiary Debt. Prior to or simultaneously with the
consummation of the Merger, the Company shall cause each of its Subsidiaries (as
defined in Section 3.06) to repay and retire such of its outstanding debt (other
than any PS&T Notes not tendered in the Debt Offer) as Buyer may require (it
being understood that Buyer may require the Company and its Subsidiaries to
retire any or all such debt).
SECTION 1.07. PS&T Minority Interest. The Company shall eliminate the
minority shareholders' interest in PS&T, either pursuant to an offer to purchase
such minority shares or pursuant to section 253 of the Delaware Law, at a price
of $7.00
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per share of common stock of PS&T, at any time prior to but no later than
immediately prior to the consummation of the Merger.
SECTION 1.08. Intercompany Loans. Simultaneously with the consummation
of the Merger, Buyer shall loan to each of the Company and its Subsidiaries,
amounts sufficient to enable each of the Company and its Subsidiaries to comply
with its obligations under Sections 1.05, 1.06, and 1.07. The loans referred to
in this Section 1.08 are hereinafter referred to as the "Intercompany Loans".
The obligations of the Company and its Subsidiaries under Sections 1.05, 1.06,
and 1.07 are contingent upon receipt of Intercompany Loans in amounts sufficient
to discharge such obligations.
SECTION 1.09. Upstream Guarantees. Effective as of the Effective Time,
the Company shall and shall cause each of its domestic Subsidiaries to guarantee
(i) Buyer's 11 1/4% Senior Subordinated Notes due 2007, to the extent required
by the indenture dated as of April 1, 1997 among Buyer, Dolco Packaging Corp.
and Marine Midland Bank, as Trustee (the "Tekni-Plex Indenture"), and (ii) any
indebtedness of Buyer issued to finance the transactions contemplated hereby.
The guarantees to be issued pursuant to this Section 1.09 are hereinafter
referred to as the "Upstream Guarantees".
ARTICLE 2
THE SURVIVING CORPORATION
SECTION 2.01. Certificate of Incorporation. The certificate of
incorporation of Merger Subsidiary in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable law, except that the name of the Surviving
Corporation shall be changed to "PureTec Corporation".
SECTION 2.02. Bylaws. The bylaws of Merger Subsidiary in effect at
the Effective Time shall be the bylaws of the Surviving Corporation until
amended in accordance with applicable law.
SECTION 2.03. Directors and Officers. From and after the Effective
Time, until successors are duly elected or appointed and qualified in accordance
with applicable law, (a) the directors of Merger Subsidiary at the Effective
Time shall be the directors of the Surviving Corporation, and (b) the officers
of the Company at the Effective Time shall be the officers of the Surviving
Corporation, except for
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the Chief Executive Officer, who from and after the Effective Time shall be the
Chief Executive Officer of the Merger Subsidiary
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer that:
SECTION 3.01. Corporate Existence and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Company is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), business,
assets, results of operations or prospects of the Company and the Subsidiaries
taken as a whole (a "Material Adverse Effect"). The Company has heretofore
delivered to Buyer true and complete copies of the Company's certificate of
incorporation and bylaws as currently in effect.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance by the Company of each of this Agreement and the Convertible Note
and the consummation by the Company of the transactions contemplated hereby and
thereby are within the Company's corporate powers and, except for any required
approval by the Company's stockholders in connection with the consummation of
the Merger, have been duly authorized by all necessary corporate action. Each of
this Agreement and the Convertible Note constitutes a valid and binding
agreement of the Company.
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by the Company of each of this Agreement and the Convertible Note
and the consummation of the Merger by the Company require no action by or in
respect of, or filing with, any governmental body, agency, official or
authority, domestic or foreign, other than (a) the filing of a certificate of
merger in accordance with Delaware Law; (b) compliance with any applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"); (c) compliance with any applicable requirements of the Securities
Exchange Act
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of 1934 and the rules and regulations promulgated thereunder (the "Exchange
Act"); and (d) compliance with any applicable requirements of the New Jersey
Industrial Site Recovery Act, as amended, and any rules or regulations
promulgated thereunder ("ISRA").
SECTION 3.04. Non-contravention. Except as disclosed in Schedule 3.04,
the execution, delivery and performance by the Company of each of this Agreement
and the Convertible Note and the consummation by the Company of the transactions
contemplated hereby and thereby do not and will not (a) contravene or conflict
with the certificate of incorporation or bylaws of the Company, (b) assuming
compliance with the matters referred to in Section 3.03, contravene or conflict
with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to the Company
or any Subsidiary, (c) constitute a default under or give rise to a right of
termination, cancellation or acceleration of any right or obligation of the
Company or any Subsidiary or to a loss of any benefit to which the Company or
any Subsidiary is entitled under any provision of any agreement, contract or
other instrument binding upon the Company or any Subsidiary or any license,
franchise, permit or other similar authorization held by the Company or any
Subsidiary, or (d) result in the creation or imposition of any Lien on any asset
of the Company or any Subsidiary. For purposes of this Agreement, "Lien" means,
with respect to any asset, any mortgage, lien, pledge, charge, security interest
or encumbrance of any kind in respect of such asset.
SECTION 3.05. Capitalization. The authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock, $0.01 par value (the "Preferred Stock"). As of October 31,
1997, there were outstanding 31,240,866 shares of Common Stock, and no shares of
Preferred Stock. As of October 31, 1997, there were outstanding stock options
(including employee stock options) and warrants to purchase shares of Common
Stock as set forth in Schedule 3.05. The Board of Directors of the Company, as
the applicable committee responsible for the 1995 Disinterested Directors Stock
Option Plan and the 1995 Stock Option Plan (the "Company Option Plans"), has
passed resolutions relating to the terms of the Company Option Plans clarifying,
pursuant to the terms thereof, that following the Effective Time, each holder of
an outstanding stock option to purchase Shares granted under either Company
Option Plan shall thereafter have the right to receive Merger Consideration upon
payment to the Company by such holder of the applicable exercise price therefor.
All outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. Except as set forth in
this Section and except for changes after October 31, 1997 resulting from the
exercise of employee stock options outstanding on such date and except for the
Convertible Note, there are outstanding (a) no shares of capital stock or other
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voting securities of the Company, (b) no securities of the Company convertible
into or exchangeable for shares of capital stock or voting securities of the
Company, and (c) no options or other rights to acquire from the Company, and no
obligation of the Company to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Company (the items in clauses 3.05(a), 3.05(b) and 3.05(c)
being referred to collectively as the "Company Securities"). There are no
outstanding obligations of the Company or any Subsidiary to repurchase, redeem
or otherwise acquire any Company Securities.
SECTION 3.06. Subsidiaries and Investees. (a) Except as disclosed in
Schedule 3.06(a), each Subsidiary is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted and is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction where the character of the property owned
or leased by it or the nature of its activities makes such qualification
necessary, except for those jurisdictions where failure to be so qualified would
not, individually or in the aggregate, have a Material Adverse Effect. For
purposes of this Agreement, "Subsidiary" means any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are directly or indirectly owned by the Company. All Subsidiaries and
their respective jurisdictions of incorporation are identified in the Company's
annual report on Form 10-K for the fiscal year ended July 31, 1997 (the "Company
10-K").
(b) Except as disclosed in Schedule 3.06(b), all of the outstanding
capital stock of, or other ownership interests in, each Subsidiary, is owned by
the Company, directly or indirectly, free and clear of any Lien and free of any
other limitation or restriction (including any restriction on the right to vote,
sell or otherwise dispose of such capital stock or other ownership interests).
There are no outstanding (i) securities of the Company or any Subsidiary
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Subsidiary, and (ii) options or other
rights to acquire from the Company or any Subsidiary, and no other obligation of
the Company or any Subsidiary to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or exchangeable
for any capital stock, voting securities or ownership interests in, any
Subsidiary (the items in clauses 3.06(b)(i) and 3.06(b)(ii) being referred to
collectively as the "Subsidiary Securities"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities.
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(c) Schedule 3.06(c) sets forth (i) the name of each corporation,
partnership, limited liability company or other entity (other than the
Subsidiaries) in which the Company or any Subsidiary holds an equity interest
(each an "Investee"), (ii) a description of such interests and the Investee and
(iii) each agreement (including any agreements with other investors in such
Investee) relating to the investment in such Investee.
(d) Except as disclosed in Schedule 3.06(c), the interest of the
Company or any Subsidiary in each Investee is owned by the Company, directly or
indirectly, free and clear of any Liens and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such interest). Except as set forth in Schedule 3.06(c), there are no
outstanding obligations of the Company or the Subsidiaries to invest in,
contribute to or purchase any securities of or otherwise become obligated to
invest in or contribute to or purchase any securities of any Investee.
SECTION 3.07. SEC Filings. (a) Each of the Company and PS&T has
delivered to Buyer (i) the annual reports on Form 10-K for its fiscal years
ended July 31, 1995, 1996 and 1997, (ii) its quarterly reports on Form 10-Q for
its fiscal quarters ended October 31, 1996, January 31, 1997 and April 30, 1997
and any quarterly reports on Form 10-Q filed subsequent thereto, (iii) its proxy
or information statements relating to meetings of, or actions taken without a
meeting by, the stockholders of the Company held since February 1, 1996, and
(iv) all of its other reports, statements, schedules and registration statements
filed with the Securities and Exchange Commission (the "SEC") since February 1,
1996.
(b) As of its filing date, each such report or statement filed
pursuant to the Exchange Act did not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading.
(c) Each such registration statement, as amended or supplemented, if
applicable, filed pursuant to the Securities Act of 1933 as of the date such
statement or amendment became effective did not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
SECTION 3.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company included in its annual reports on Form 10-K and the quarterly reports on
Form 10-Q referred to in Section 3.07 fairly present, in conformity with
generally accepted accounting principles applied on a consistent basis (except
as may be
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indicated in the notes thereto), the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and their
consolidated results of operations and changes in financial position for the
periods then ended (subject to normal year-end adjustments in the case of any
unaudited interim financial statements). For purposes of this Agreement,
"Balance Sheet" means the consolidated balance sheet of the Company as of July
31, 1997 and the footnotes thereto set forth in the Company 10-K and "Balance
Sheet Date" means July 31, 1997.
SECTION 3.09. Disclosure Documents. (a) Each document required to be
filed by the Company with the SEC or required to be distributed to the
securityholders of the Company or its Subsidiaries in connection with the
transactions contemplated by this Agreement (the "Company Disclosure
Documents"), including, without limitation, the proxy statement of the Company
(the "Company Proxy Statement") to be filed with the SEC in connection with the
Merger, and the offer to purchase the PS&T Notes pursuant to the Debt Offer and
any related documents (the "Debt Offer Documents") and any amendments or
supplements thereto, when filed and /or mailed, as applicable, will comply as to
form in all material respects with the applicable requirements of the Exchange
Act.
(b) At the time the Company Proxy Statement or any amendment or
supplement thereto is first mailed to stockholders of the Company, at the time
such stockholders vote on adoption of this Agreement and at the Effective Time,
the Company Proxy Statement, as supplemented or amended, if applicable, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. At the time of the
filing of any Company Disclosure Document other than the Company Proxy Statement
and at the time of any distribution thereof, such Company Disclosure Document
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 3.09(b) will not apply
to statements or omissions included in the Company Disclosure Documents based
upon information furnished to the Company in writing by Buyer specifically for
use therein.
(c) The information with respect to the Company or any Subsidiary that
the Company furnishes to Buyer in writing specifically for use in connection
with the proposed offering of bonds of Buyer described in the Commitment Letters
(the "New Bond Offering") will not, at the time of the filing, if any, thereof,
at the time of any distribution thereof and at the time of the consummation of
the
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Debt Offer, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading.
SECTION 3.10. Absence of Certain Changes. Except for the transactions
contemplated hereby, since the Balance Sheet Date, the Company and its
Subsidiaries have conducted their business in the ordinary course consistent
with past practice and there has not been:
(a) any event, occurrence or development of a state of
circumstances or facts which has had or reasonably could be expected
to have a Material Adverse Effect;
(b) except as disclosed in Schedule 3.10(b), any declaration,
setting aside or payment of any dividend or other distribution with
respect to any shares of capital stock of the Company, or any
repurchase, redemption or other acquisition by the Company or any
Subsidiary of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any
Subsidiary;
(c) any amendment of any material term of any outstanding
security of the Company or any Subsidiary;
(d) except for the Convertible Note or as disclosed in Schedule
3.10(d), any incurrence, assumption or guarantee by the Company or any
Subsidiary of any indebtedness for borrowed money;
(e) except as disclosed in Schedule 3.10(e), any creation or
assumption by the Company or any Subsidiary of any Lien on any material
asset other than in the ordinary course of business consistent with
past practices;
(f) except as disclosed in Schedule 3.10(f), any making of any
loan, advance or capital contributions to or investment in any Person
other than loans, advances or capital contributions to or investments
in wholly-owned Subsidiaries made in the ordinary course of business
consistent with past practices;
(g) any damage, destruction or other casualty loss (whether or
not covered by insurance) affecting the business or assets of the
Company or any Subsidiary which, individually or in the aggregate,
has had or would reasonably be expected to have a Material Adverse
Effect;
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(h) except as disclosed in Schedule 3.10(h), any transaction or
commitment made, or any contract or agreement entered into, by the
Company or any Subsidiary relating to its assets or business (including
the acquisition or disposition of any assets) or any relinquishment by
the Company or any Subsidiary of any contract or other right, in either
case, material to the Company and the Subsidiaries taken as a whole,
other than transactions and commitments in the ordinary course of
business consistent with past practice and those contemplated by this
Agreement and except for the sale of Styrex Industries, Inc.;
(i) any change in any method of accounting or accounting
practice by the Company or any Subsidiary, except for any such change
required by reason of a concurrent change in generally accepted
accounting principles;
(j) except as contemplated by Section 5.08 or as disclosed in
Schedule 3.10(j), any (i) grant of any severance or termination pay to
any director, officer or employee of the Company or any Subsidiary,
(ii) entering into of any employment, deferred compensation or other
similar agreement (or any amendment to any such existing agreement)
with any director, officer or employee of the Company or any
Subsidiary, (iii) increase in benefits payable under any existing
severance or termination pay policies or employment agreements or (iv)
increase in compensation, bonus or other benefits payable to
directors, officers or employees of the Company or any Subsidiary,
other than in the ordinary course of business consistent with past
practice; or
(k) any labor dispute, other than routine individual
grievances, or any activity or proceeding by a labor union or
representative thereof to organize any employees of the Company or any
Subsidiary, which employees were not subject to a collective
bargaining agreement at the Balance Sheet Date, or any lockouts,
strikes, slowdowns, work stoppages or threats thereof by or with
respect to such employees.
SECTION 3.11. No Undisclosed Material Liabilities. Except as disclosed
in Schedule 3.11, there are no liabilities of the Company or any Subsidiary of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, and there is no existing condition, situation or set
of circumstances which could reasonably be expected to result in such a
liability, other than:
(a) liabilities disclosed and provided for in the Balance Sheet;
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(b) liabilities fully and specifically identified as such in the
Company 10-K;
(c) the Convertible Note;
(d) liabilities incurred in the ordinary course of business
consistent with past practice since the Balance Sheet Date, which
(except for customary purchase orders) in the aggregate are not
material to the Company and the Subsidiaries, taken as a whole; and
(e) liabilities under this Agreement.
SECTION 3.12. Litigation. Except as disclosed in Schedule 3.12, there
is no action, suit, investigation or proceeding pending against, or to the
knowledge of the Company threatened against or affecting, the Company or any
Subsidiary (or any present or former officers, directors or employees of the
Company or any Subsidiary for which the Company or any Subsidiary may be liable)
or any of their respective properties before any court or arbitrator or any
governmental body, agency or official which, if determined or resolved adversely
to the Company or any Subsidiary in accordance with the plaintiff's demands,
would reasonably be expected to have a Material Adverse Effect or which in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the
Merger or any of the other transactions contemplated hereby.
SECTION 3.13. Taxes. (a) For purposes of this Agreement, the following
terms shall have the following meanings: "Tax" means any U.S. federal, state or
local or foreign net or gross income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental, customs duties, capital stock, franchise, profits, withholding on
amounts paid to or by the Company, social security (or similar), unemployment,
disability, ad valorem, sales, use, transfer, recording, documentary,
conveyancing, gains, registration, value added, alternative, or add-on minimum,
estimated or other tax, governmental fee or other like assessment or charge of
any kind whatsoever, however denominated, including any interest, penalty, or
addition thereto, whether disputed or not, and "Tax Return" means any return,
declaration, report, claim for refund or information return or statement
relating to any Tax, including any schedule or attachment thereto, and including
any amendment thereof.
(b) Except as disclosed in Schedule 3.13(b), each of the Company and
its Subsidiaries has filed all material Tax Returns required to be filed by it
for Tax years ended prior to the date of this Agreement or requests for
extensions have been timely filed and any such request shall have been granted
and not expired and all such Tax Returns are true, correct and complete in all
material respects,
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paid or accrued all material Taxes shown to be due and payable on such Tax
Returns and properly accrued in all material respects all such Taxes for such
periods subsequent to the periods covered by such Tax Returns.
(c) Except as disclosed in Schedule 3.13(c), no deficiency for any
Taxes has been proposed, asserted or assessed against the Company or any
Subsidiary which has not been resolved and paid in full.
(d) There are no outstanding requests, agreements, consents or waivers
to extend the statutory period of limitations applicable to the assessment of
any Taxes or deficiencies against the Company or any Subsidiary, and no power of
attorney granted by either the Company or any Subsidiary with respect to any
Taxes is currently in force.
(e) Except as disclosed in Schedule 3.13(e), neither the Company nor
any Subsidiary has been a member of any group of entities (other than a group of
which the Company is the common parent) filing an affiliated, combined,
consolidated, unitary or similar Tax Return or is a party to any agreement
providing for the allocation or sharing of Taxes.
(f) Schedule 3.13(f) contains a complete and accurate list, as of July
31, 1996, of all of the accrued and unexpired net operating loss carryforward
amounts of the Company and its Subsidiaries and their corresponding annual
limitations under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code").
SECTION 3.14. Employee Benefits. (a) Schedule 3.14(a) sets forth a list
of each "employee benefit plan", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), which (i) is subject to any
provision of ERISA and (ii) is maintained, administered or contributed to by the
Company or any Subsidiary and covers any employee or former employee of the
Company or any Subsidiary or under which the Company or any Subsidiary has any
liability. Copies of such plans (and, if applicable, related trust agreements)
and all amendments thereto and written interpretations thereof have been
furnished to Buyer together with (A) the three most recent annual reports (Form
5500 including, if applicable, Schedule B thereto) prepared in connection with
any such plan and (B) the most recent actuarial valuation report prepared in
connection with any such plan. Such plans are referred to collectively herein as
the "Employee Plans". The only Employee Plans which individually or collectively
would constitute an "employee pension benefit plan" as defined in Section 3(2)
of ERISA (the "Pension Plans") are identified as such in the list referred to
above. The Company has provided Buyer with complete age, salary, service and
related data as of July 31, 1997 for employees and former employees
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of the Company and any Subsidiary covered under the Pension Plans. As of the
Effective Time, no Employee Plan will provide for and the Company will not be
obligated to provide equity-based compensation or benefits.
(b) Except as otherwise identified in the list referred to in Section
3.14(a), no Employee Plan constitutes a "multiemployer plan", as defined in
Section 3(37) of ERISA (a "Multiemployer Plan"), and no Employee Plan is
maintained in connection with any trust described in Section 501(c)(9) of the
Code. The only Employee Plans that are subject to Title IV of ERISA (the
"Retirement Plans") are identified in the list of such Plans heretofore provided
to Buyer by the Company. Except as otherwise disclosed fully and specifically in
the Company 10-K in accordance with Statement of Financial Accounting Standards
("SFAS") No. 87, as of the Balance Sheet Date, the fair market value of the
assets of each Retirement Plan (excluding for these purposes any accrued but
unpaid contributions) exceeded the projected benefit obligation for such plan
determined in accordance with SFAS No. 87. No "accumulated funding deficiency",
as defined in Section 412 of the Code, has been incurred with respect to any
Pension Plan, whether or not waived. The Company knows of no "reportable event",
within the meaning of Section 4043 of ERISA, and no event described in Section
4041, 4042, 4062 or 4063 of ERISA has occurred in connection with any Employee
Plan, other than a "reportable event" that will not have a Material Adverse
Effect. The assets of the Company and all of its Subsidiaries are not now, nor
will they after the passage of time be, subject to any lien imposed under Code
Section 412(n) by reason of a failure of any of the Company or any Subsidiary to
make timely installments or other payments required under Code Section 412. No
condition exists and no event has occurred that could constitute grounds for
termination of any Retirement Plan or, with respect to any Employee Plan which
is a Multiemployer Plan, presents a material risk of a complete or partial
withdrawal under Title IV of ERISA and neither the Company nor any of its
affiliates has incurred any material liability under Title IV of ERISA arising
in connection with the termination of, or complete or partial withdrawal from,
any plan covered or previously covered by Title IV of ERISA, which liability has
not been paid in full. If a "complete withdrawal" by the Company and all of its
affiliates were to occur as of the Effective Time with respect to all Employee
Plans which are Multiemployer Plans, neither the Company nor any affiliate would
incur any withdrawal liability under Title IV of ERISA that would have or
reasonably be expected to have a Material Adverse Effect. Nothing done or
omitted to be done and no transaction or holding of any asset under or in
connection with any Employee Plan has or will make the Company or any
Subsidiary, any officer or director of the Company or any Subsidiary subject to
any liability under Title I of ERISA or liable for any tax pursuant to Section
4975 of the Code that could have a Material Adverse Effect.
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(c) To the Company's knowledge, each Employee Plan which is intended
to be qualified under Section 401(a) of the Code is so qualified and has been so
qualified during the period from its adoption to date, and each trust forming a
part thereof is exempt from tax pursuant to Section 501(a) of the Code. The
Company has furnished to the Buyer copies of the most recent Internal Revenue
Service determination letters with respect to each such Plan. Each Employee Plan
has been maintained in substantial compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including but not limited to ERISA and the Code, which are applicable to such
Plan.
(d) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company or any Subsidiary that, individually
or collectively, could give rise to the payment of any amount that would not be
deductible pursuant to the terms of Section 280G of the Code.
(e) Schedule 3.14(e) sets forth each written and material unwritten
employment, severance or similar contract or arrangement or any written or any
material unwritten plan, policy, fund, program or contract or arrangement of the
Company and its Subsidiaries providing for compensation, bonus, profit-sharing,
stock option, or other stock related rights or other forms of incentive or
deferred compensation, vacation benefits, insurance coverage (including any
self-insured arrangements), health or medical benefits, disability benefits,
workers' compensation, supplemental unemployment benefits, severance benefits
and post-employment or retirement benefits (including compensation, pension,
health, medical or life insurance or other benefits) which (i) is not an
Employee Plan, (ii) is entered into, maintained or contributed to, as the case
may be, by the Company or any of its Subsidiaries and (iii) covers any employee
or former employee of the Company or any of its Subsidiaries. Such contracts,
plans and arrangements as are described above, copies or descriptions of all of
which have been furnished previously to Buyer are referred to collectively
herein as the "Benefit Arrangements". Each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations that are
applicable to such Benefit Arrangement.
(f) The excess of the present value of the projected liability in
respect of post-retirement health and medical benefits for retired employees of
the Company and its affiliates, determined using assumptions that are reasonable
in the aggregate, over the fair market value of any fund, reserve or other
assets segregated for the purpose of satisfying such liability (including for
such purposes any fund established pursuant to Section 401(h) of the Code) has
been disclosed fully and specifically in the Company 10-K and in accordance with
SFAS No.
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106. To the Company's knowledge, no condition exists that would prevent the
Company or any Subsidiary from amending or terminating any Employee Plan or
Benefit Arrangement providing health or medical benefits other than limitations
imposed under the terms of a collective bargaining agreement.
(g) Except as disclosed on Schedule 3.14(g), there has been no
amendment to, written interpretation or announcement (whether or not written) by
the Company or any of its Subsidiaries relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement which
would increase materially the expense of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended on the Balance Sheet Date.
(h) Except as disclosed in Schedule 3.14(e), 3.14(h), and Schedule
3.15, neither the Company nor any Subsidiary is a party to any employment
contract or arrangement providing for future compensation with any officer,
consultant, director or employee.
(i) Schedule 3.14(i) sets forth a true and complete list of (a) the
names, titles, annual salaries and other compensation of all officers of the
Company and its Subsidiaries and all other employees of the Company and its
Subsidiaries whose annual base salary exceeds $50,000 and (b) the wage rates for
non-salaried employees of the Company and its Subsidiaries (by classification).
None of such employees and no other key employee of the Company and its
Subsidiaries has indicated to the Company and its Subsidiaries that he intends
to resign or retire as a result of the transactions contemplated by this
Agreement or otherwise within one year after the Closing Date.
SECTION 3.15. Labor Matters. The Company and the Subsidiaries are in
compliance with all currently applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and are not engaged in any unfair labor practice, failure to comply with which
or engagement in which, as the case may be, would reasonably be expected to have
a Material Adverse Effect. Except as disclosed in Schedule 3.15, (i) neither the
Company nor any Subsidiary is a party, or is otherwise subject, to any
collective bargaining agreement or other labor union contract applicable to its
employees, (ii) there are no activities or proceedings by a labor union or
representative thereof to organize any employees of the Company or any
Subsidiary or to challenge the representative status of any union that currently
represents such employees, (iii) there are no pending negotiations between the
Company or any Subsidiary and any labor union or representative thereof, (iv)
there are no pending, and the Company and the Subsidiaries have not experienced
since January 1, 1995, any labor disputes, lockouts, strikes, slowdowns, work
stoppages, or threats thereof,
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(v) the Company and the Subsidiaries, and to the knowledge of the Company and
the Subsidiaries, their employees, are not in default and have not breached in
any material respect the terms of any applicable collective bargaining or other
labor union contract, and there are no material grievances outstanding against
the Company, any Subsidiary or, to the knowledge of the Company and the
Subsidiaries, their employees under any such agreement or contract, (vi) there
is no unfair labor practice complaint pending, or to the knowledge of the
Company and the Subsidiaries threatened, against the Company or any Subsidiary
before the National Labor Relations Board or any other investigation, charge,
prosecution, suite or other proceeding before any court or arbitrator or any
governmental body, agency or official relating to the employees of the Company
or the Subsidiaries or the representation thereof, (vii) there are no claims or
actions pending, or to the knowledge of the Company and the Subsidiaries,
threatened, between the Company and the Subsidiaries and any of their employees
or labor organizations representing or seeking to represent such employees,
(viii) the Company and the Subsidiaries have complied with the Worker Adjustment
and Retraining Notification Act of 1988 and any similar state or local laws
regulating layoffs or employment terminations and (ix) to the knowledge of the
Company and the Subsidiaries, there are no facts or circumstances involving any
employee that would form the basis of, or give rise to, any cause of action,
including, without limitation, unlawful termination based on discrimination of
any kind.
SECTION 3.16. Compliance with Laws. (a) Neither the Company nor any
Subsidiary is in violation of, or has violated in the past five years, any
applicable provisions of any laws, statutes, ordinances or regulations, except
where such violations individually or in the aggregate do not have or reasonably
would not be expected to have a Material Adverse Effect.
(b) Each of the products produced or sold by the Company or any
Subsidiary is, and at all times up to and including the sale thereof has been,
(i) in compliance in all material respects with all applicable federal, state,
local and foreign laws and regulations and (ii) fit for the ordinary purposes
for which it is intended to be used and conforms in all material respects to any
promises or affirmations of fact made on the container or label for such product
or in connection with its sale, except where such noncompliance or failure to be
fit individually or in the aggregate do not have and would not reasonably be
expected to have a Material Adverse Effect. There is no design defect with
respect to any of such products and each of such products contains adequate
warnings, presented in a reasonably prominent manner, in accordance with
applicable laws, rules and regulations and current industry practice with
respect to its contents and use, except where such defects or failure to provide
adequate warnings do not have and would not reasonably be expected to have a
Material Adverse Effect.
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(c) Schedule 3.16 correctly describes each license, franchise, permit,
certificate, approval or other similar authorization affecting, or relating in
any way to, the assets or business of the Company and its Subsidiaries, the
absence of which would prevent the Company or any Subsidiary from operating in
the ordinary course of business (the "Permits"). The Permits are valid and in
full force and effect. Neither the Company nor any Subsidiary is in default
under, and no condition exists that with notice or lapse of time or both would
constitute a default under, the Permits. None of the Permits will be terminated
or impaired or become terminable, in whole or in part, as a result of the
transactions contemplated hereby.
SECTION 3.17. Finders' Fees. Except for Schroders, a copy of whose
engagement agreement has been provided to Buyer, there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf, of the Company or any Subsidiary who might be entitled to any
fee or commission from Buyer or any of its affiliates upon consummation of the
transactions contemplated by this Agreement.
SECTION 3.18. Other Information. The Confidential Information
Memorandum dated July 1997, previously delivered to Buyer, except for the
projections contained therein, did not, as of its date, contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not misleading. The financial
projections relating to the Company and the Subsidiaries delivered to Buyer were
based upon reasonable assumptions as of the date of such projections. Except for
the requirement that the Company comply with Section 5.01(d), the Company is not
currently aware of any fact or information that would lead it to believe that
such projections are incorrect or misleading in any material respect.
SECTION 3.19. Environmental Matters. (a) Except as disclosed on
Schedule 3.19(a):
(i) no written notice, notification, demand, request for
information, citation, summons, complaint or order has been received
by, or, to the knowledge of the Company or any Subsidiary, is pending
or threatened by any Person against, the Company or any Subsidiary nor
has any material penalty been assessed against the Company or any
Subsidiary with respect to any (A) alleged violation of any
Environmental Law or liability thereunder, (B) alleged failure to have
any permit, certificate, license, approval, registration or
authorization required under any Environmental Law, (C) generation,
treatment, storage, recycling, transportation or disposal of any
Hazardous Substance or (D) discharge, emission or release of any
Hazardous Substance;
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(ii) no polychlorinated biphenyls, radioactive material, lead,
asbestos-containing material, incinerator, sump, surface impoundment,
lagoon, landfill, septic, wastewater treatment or other disposal system
or underground storage tank (active or inactive) is or has been present
at, on or under any property now or previously owned, leased or
operated by the Company or any Subsidiary, except where the presence of
such items individually or in the aggregate would not reasonably be
expected to have a Material Adverse Effect;
(iii) the Company and its Subsidiaries are and have been in
material compliance with all Environmental Laws (including without
limitation ISRA and its predecessors and the new system performance
standards and upgrading requirements for underground storage tanks
contained in Subtitle I of the Resource Conservation and Recovery Act,
42 U.S.C. section 6991, et seq., as amended, and any rules or
regulations promulgated thereunder, including 40 C.F.R. section
280.20, et seq.) and have obtained and are and have been in material
compliance with all Environmental Permits; and such Environmental
Permits are valid and in full force and effect and will not be
terminated or impaired or become terminable, in whole or in part, as
a result of the transactions contemplated hereby;
(iv) no property now or previously owned, leased or operated by
the Company or any Subsidiary nor any property to which the Company
or any Subsidiary has, directly or indirectly, transported or arranged
for the transportation of any Hazardous Substances is listed or, to the
Company's knowledge, proposed for listing, on the National Priorities
List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA)
or on any similar federal, state or foreign list of sites requiring
investigation or clean-up;
(v) neither the Company nor any Subsidiary owns, leases or
operates or has owned, leased or operated any property or has
conducted any operations in New Jersey or Connecticut;
(vi) except as in compliance with applicable Environmental Laws
and in a manner which is not reasonably likely to effect adversely the
Company or any of its Subsidiaries or any of their currently or
previously owned, leased or operated properties, no Hazardous
Substance has been discharged, disposed of, dumped, injected, pumped,
deposited, spilled, leaked, emitted, released or is present at any
property now or previously owned, leased or operated by the Company or
any Subsidiary, and
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(vii) there are no liabilities of or relating to the Company
and any Subsidiary, whether contingent or fixed, actual or potential,
known or unknown, which (A) arise under or relate to matters covered by
Environmental Laws and (B) relate to actions occurring or conditions
existing on or prior to the Effective Time, except for such liabilities
which individually or in the aggregate would not reasonably be expected
to have a Material Adverse Effect.
(b) Except as set forth in Schedule 3.19(b), there has been no
environmental investigation, study, audit, test, review or other analysis
conducted of which the Company has knowledge in relation to the current or prior
business of the Company or any property or facility now or previously owned or
leased by the Company or any Subsidiary.
(c) For purposes of this Section, the following terms shall have the
meanings set forth below:
(i) "CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and any rules or
regulations promulgated thereunder;
(ii) "Company" and "Subsidiary" shall include any entity which
is, in whole or in part, a predecessor of the Company or any
Subsidiary;
(iii) "Environmental Laws" means any and all federal, state,
local and foreign statutes, laws, judicial decisions, regulations,
ordinances, rules, judgments, orders, decrees, codes, plans,
injunctions, permits, concessions, grants, franchises, licenses,
agreements and governmental restrictions, relating to human health,
the environment or to emissions, discharges or releases of pollutants,
contaminants or other hazardous substances or wastes into the
environment, including without limitation ambient air, surface water,
ground water or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or other hazardous
substances or wastes or the clean-up or other remediation thereof; and
(iv) "Hazardous Substances" means any toxic, radioactive,
corrosive or otherwise hazardous substance, including petroleum, its
derivatives, by-products and other hydrocarbons, or any substance
having any constituent elements displaying any of the foregoing
characteristics, which in any event is regulated under Environmental
Laws.
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SECTION 3.20. Material Contracts. (a) Except as filed as an exhibit
to the Company 10-K or as disclosed in Schedule 3.20(a), neither the Company
nor any Subsidiary is a party to or bound by:
(i) any (A) lease of real property or (B) any lease of personal
property providing for annual rentals of $50,000 or more;
(ii) any agreement greater than three months in term for the
purchase of materials, supplies, goods, services, equipment or other
assets providing for annual payments by the Company and its
Subsidiaries of $500,000 or more;
(iii) any sales, distribution or other similar agreement
greater than three months in term providing for the sale by the
Company or any Subsidiary of materials, supplies, goods, services,
equipment or other assets that provides for annual payments to the
Company and the Subsidiaries of $1,000,000 or more;
(iv) any partnership, joint venture or other similar agreement
or arrangement;
(v) any agreement relating to the acquisition or disposition of
any business (whether by merger, sale of stock, sale of assets or
otherwise);
(vi) any agreement relating to indebtedness for borrowed money
or the deferred purchase price of property (in either case, whether
incurred, assumed, guaranteed or secured by any asset) other than the
Convertible Note and (as of the Effective Time of the Merger) the
Upstream Guarantees;
(vii) any option, license, franchise or similar agreement;
(viii) any agency, dealer, sales representative, marketing or
other similar agreement (A) providing for annual sales of $250,000 or
more, (B) under which the Company expects to provide for annual sales
of $250,000 or more or (C) with any party with whom the Company made
$250,000 or more of sales during the fiscal year ended July 31, 1997;
(ix) any agreement that limits the freedom of the Company or any
Subsidiary to compete in any line of business or with any Person or in
any area or which would so limit the freedom of the Company or any
Subsidiary after the Closing Date;
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(x) any agreement with (A) any Person directly or indirectly
owning, controlling or holding with power to vote, 5% or more of the
outstanding voting securities of the Company or any of its Affiliates,
or (B) any director or officer of the Company or any Subsidiary or any
"associates" or members of the "immediate family" (as such terms are
respectively defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act)
of any such director or officer; or
(xi) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business that is material to the
Company and the Subsidiaries, taken as a whole.
(b) Each agreement, contract, plan, lease, arrangement or commitment
disclosed in any Schedule to this Agreement or required to be disclosed pursuant
to this Section is a valid and binding agreement of the Company or a Subsidiary,
as the case may be, and is in full force and effect, and, except as disclosed in
Schedule 3.20(b) none of the Company, any Subsidiary or, to the knowledge of the
Company and its Subsidiaries, any other party thereto is in default or breach in
any material respect under the terms of any such agreement, contract, plan,
lease, arrangement or commitment, and, to the knowledge of the Company and its
Subsidiaries, no event or circumstance has occurred that, with notice or lapse
of time or both, would constitute such an event of default thereunder. True and
complete copies of each such agreement, contract, plan, lease, arrangement or
commitment have been delivered to Buyer, unless the failure to deliver such
agreement, contract, plan, lease, arrangement or commitment is indicated next to
such item in Schedule 3.20(a).
(c) All of the Company's and its Subsidiaries' indebtedness for
borrowed money may be prepaid at any time without penalty, except as set forth
in Schedule 3.20(c).
SECTION 3.21. Properties. (a) Except as set forth in Schedule 3.21, the
Company and the Subsidiaries have good and marketable, indefeasible, fee simple
title to, or in the case of leased property and assets have valid leasehold
interests in, all property and assets (whether real, personal, tangible or
intangible) reflected on the Balance Sheet or acquired after the Balance Sheet
Date, except for properties and assets sold since the Balance Sheet Date in the
ordinary course of business consistent with past practices. None of such
property or assets is subject to any Lien, except:
(i) Liens disclosed on the Balance Sheet;
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(ii) Liens fully and specifically identified as such in the
Company 10-K;
(iii) Liens for taxes not yet due or being contested in good
faith (and for which adequate accruals or reserves have been
established on the Balance Sheet); or
(iv) Liens which do not materially detract from the value or
materially interfere with any present or intended use of such property
or assets (clauses (i)-(iii) of this Section 3.21(a) are,
collectively, the "Permitted Liens").
(b) There are no developments affecting any such property or assets
pending or, to the knowledge of the Company or any Subsidiary threatened, which
might materially detract from the value, materially interfere with any present
or intended use or materially adversely affect the marketability of any such
property or assets.
(c) All leases of such real property and personal property are in good
standing and are valid, binding and enforceable in accordance with their
respective terms and there does not exist under any such lease any default or
any event which with notice or lapse of time or both would constitute a default.
(d) The plants, buildings, structures and equipment owned by the
Company or any Subsidiary have no material defects, are in good operating
condition and repair and have been reasonably maintained consistent with
standards generally followed in the industry (giving due account to the age and
length of use of same, ordinary wear and tear excepted), are adequate and
suitable for their present uses and, in the case of plants, buildings and other
structures (including, without limitation, the roofs thereof), are structurally
sound.
(e) The plants, buildings and structures owned by the Company or any
Subsidiary currently have access to (i) public roads or valid easements over
private streets or private property for such ingress to and egress from all such
plants, buildings and structures and (ii) water supply, storm and sanitary sewer
facilities, telephone, gas and electrical connections, fire protection, drainage
and other public utilities, in each case as is necessary for the conduct of the
businesses of the Company or any Subsidiary as heretofore conducted. None of the
structures on any such owned or leased real property encroaches upon real
property of another Person, and no structure of any other Person substantially
encroaches upon any of such owned or leased real property.
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(f) Such real property, and its continued use, occupancy and operation
as currently used, occupied and operated, does not constitute a nonconforming
use under all applicable building, zoning, subdivision and other land use and
similar laws, regulations and ordinances, the presence of which would reasonably
be expected to have a Material Adverse Effect.
SECTION 3.22. Intellectual Property. (a) Schedule 3.22(a) contains a
list of all Intellectual Property Rights owned or licensed and used or held for
use by the Company or any Subsidiary ("Company Intellectual Property Rights"),
specifying as to each, as applicable: the nature of such Intellectual Property
Right, the owner of such Intellectual Property Right, the jurisdictions by or in
which such Intellectual Property Right is recognized (without regard to
registration) or has been issued or registered or in which an application for
such issuance or registration has been filed, the registration or application
numbers and the termination or expiration dates. "Intellectual Property Right"
means any trademark, service mark, trade name, mask work, invention, patent,
trade secret, copyright, know-how (including any registrations or applications
for registration of any of the foregoing) or any other similar type of
proprietary intellectual property right.
(b) Schedule 3.22(b) sets forth a list of all licenses, sublicenses and
other agreements as to which the Company or any Subsidiary is a party and
pursuant to which any Person is authorized to use any Company Intellectual
Property Right, including (i) the identity of all parties thereto, (ii) a
description of the nature and subject matter thereof, (iii) the applicable
royalty and (iv) the term thereof.
(c) (i) Since January 1, 1993, neither the Company nor any Subsidiary
has been a defendant in any action, suit, investigation or proceeding relating
to, or otherwise has been notified of, any alleged claim of infringement of any
Intellectual Property Right, and the Company nor any Subsidiary has any
knowledge of any other such infringement by the Company or any Subsidiary and
(ii) the Company nor any Subsidiary has no outstanding claim or suit for, and
has no knowledge of, any continuing infringement by any other Person of any
Company Intellectual Property Rights. No Company Intellectual Property Right is
subject to any outstanding judgment, injunction, order, decree or agreement
restricting the use thereof by the Company or any Subsidiary or restricting the
licensing thereof by the Company or any Subsidiary to any Person. Neither the
Company nor any Subsidiary has entered into any agreement to indemnify any other
Person against any charge of infringement of any Intellectual Property Right.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY
Each of Buyer and Merger Subsidiary, jointly and severally, represents
and warrants to the Company that:
SECTION 4.01. Corporate Existence and Power. Each of Buyer and Merger
Subsidiary is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted. Since
the date of its incorporation, Merger Subsidiary has not engaged in any
activities other than in connection with or as contemplated by this Agreement or
in connection with arranging any financing required to consummate the
transactions contemplated hereby.
SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated
hereby are within the corporate powers of Buyer and Merger Subsidiary and have
been duly authorized by all necessary corporate action. This Agreement
constitutes a valid and binding agreement of each of Buyer and Merger
Subsidiary. The Commitment Letters (as defined in Section 4.07) have been duly
authorized by all necessary corporate action of Buyer and constitute valid and
binding agreements of Buyer.
SECTION 4.03. Governmental Authorization. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
consummation by Buyer and Merger Subsidiary of the transactions contemplated by
this Agreement and the Commitment Letters require no action by or in respect of,
or filing with, any governmental body, agency, official or authority, domestic
or foreign, other than (a) the filing of a certificate of merger in accordance
with Delaware Law, (b) compliance with any applicable requirements of the HSR
Act; (c) compliance with any applicable requirements of the Securities Act of
1933, the Exchange Act and state securities and "blue sky" laws, (d) compliance
with any applicable requirements of ISRA and (e) filings and recordings of
financing statements, mortgages and other instruments in connection with the
perfection of liens contemplated by the Commitment Letters.
SECTION 4.04. Non-contravention. The execution, delivery and
performance by Buyer and Merger Subsidiary of this Agreement and the
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consummation by Buyer and Merger Subsidiary of the transactions contemplated
hereby do not and will not, subject to the consummation of the transactions
contemplated by Section 6.05, if necessary, (a) contravene or conflict with the
certificate of incorporation or bylaws of Buyer or Merger Subsidiary, (b)
assuming compliance with the matters referred to in Section 4.03, contravene or
conflict with any provision of law, regulation, judgment, order or decree
binding upon Buyer or Merger Subsidiary, or (c) constitute a default under or
give rise to any right of termination, cancellation or acceleration of any right
or obligation of Buyer or Merger Subsidiary or to a loss of any benefit to which
Buyer or Merger Subsidiary is entitled under any agreement, contract or other
instrument binding upon Buyer or Merger Subsidiary, including without
limitation, the Tekni-Plex Indenture, other than under Buyer's $75 million
revolving credit facility with Morgan Guaranty Trust Company of New York, the
commitments under which are expected to be terminated and all amounts owed
thereunder to be repaid pursuant to the terms of the Financing (as defined in
Section 4.07). Buyer is not in default or in breach in any material respect
under the Tekni-Plex Indenture, and to the knowledge of Buyer, no event or
circumstance has occurred that, with notice or lapse of time or both, would
constitute an event of default thereunder.
SECTION 4.05. Disclosure Documents. The information with respect to
Buyer and its subsidiaries that Buyer furnishes to the Company in writing
specifically for use in any Company Disclosure Document will not contain, any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading (i) in the case of the Company Proxy
Statement at the time the Company Proxy Statement or any amendment or supplement
thereto is first mailed to stockholders of the Company, at the time the
stockholders vote on adoption of this Agreement and at the Effective Time, and
(ii) in the case of any Company Disclosure Document other than the Company Proxy
Statement, at the time of the filing thereof and at the time of any distribution
thereof.
SECTION 4.06. Finders' Fees. Except for J.P. Morgan & Co. Incorporated,
whose fees will be paid by Buyer, there is no investment banker, broker, finder
or other intermediary who might be entitled to any fee or commission from the
Company or any of its affiliates upon consummation of the transactions
contemplated by this Agreement.
SECTION 4.07. Financing. Buyer has received and furnished copies to the
Company of (i) a commitment letter from Morgan Guaranty Trust Company of New
York (the "Lender") dated as of November 11, 1997 pursuant to which the Lender
has committed, subject to the terms and conditions thereof, to provide up to
$255 million of senior secured financing (the "Senior Secured Commitment
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Letter") and (ii) a commitment letter from the Lender dated as of November 11,
1997, pursuant to which the Lender has committed, subject to the terms and
conditions thereof, to enter into a bridge loan agreement with Buyer to provide
$225 million of senior subordinated bridge financing (the "Bridge Commitment
Letter", together with the Senior Secured Commitment Letter, the "Commitment
Letters"). The credit agreement and the bridge loan agreement referred to in the
Commitment Letters are referred to herein as the "Financing Agreements", and the
financing to be provided thereunder or under any alternative arrangements made
by Buyer is referred to herein as the "Financing". As of the date hereof, Buyer
knows of no facts or circumstances that are reasonably likely to result in any
of the conditions set forth in the Commitment Letters not being satisfied. As of
the date hereof, Buyer knows of no facts or circumstances that would permit the
Lender to terminate either of the Commitment Letters pursuant to the terms
thereof.
SECTION 4.08. Absence of Certain Changes. Since June 27, 1997, there
has not been any event, occurrence or development of a state of circumstances or
fact which has had or reasonably could be expected to have a material adverse
effect on the business, condition (financial or other), results of operations or
prospects of the Company and Buyer, taken as whole.
SECTION 4.09. Buyer Financial Statements. The audited consolidated
financial statements of Buyer contained in the Buyer's Registration Statement on
Form S-4, as amended (File No. 333-28157) fairly present, in conformity with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated in the notes thereto), the consolidated financial position
of Buyer and its consolidated subsidiaries as of the date thereof and their
consolidated results of operations and changes in financial position for the
periods then ended.
ARTICLE 5
COVENANTS OF THE COMPANY
The Company agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
Effective Time, the Company and the Subsidiaries shall conduct their business
in the ordinary course consistent with past practice and shall use their best
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
employees. Without
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limiting the generality of the foregoing, except as disclosed in Schedule 5.01,
from the date hereof until the Effective Time:
(a) the Company will not adopt or propose any change in its
certificate of incorporation or bylaws;
(b) the Company will not, and will not permit any Subsidiary
to, merge or consolidate with any other Person or acquire a material
amount of assets of any other Person;
(c) the Company will not, and will not permit any Subsidiary
to, sell, lease, license or otherwise dispose of any material assets
or property except (i) pursuant to existing contracts or commitments
and (ii) inventory in the ordinary course consistent with past
practice;
(d) the Company will not, and will not permit any Subsidiary to,
commit to make or make any capital expenditures without the prior
written consent of Buyer, other than (x) in respect of commitments
existing on the date hereof as disclosed on Schedule 5.01(d) or (y)
maintenance capital expenditures in the ordinary course of business and
in an aggregate amount for clauses (x) and (y) on a combined basis not
to exceed $100,000 per calendar month during the period beginning on
November 1, 1997 and ending on March 31, 1998; and the Company will not
and will not permit any Subsidiary to, commit to make any capital
expenditure without the prior written consent of Buyer to the extent
that any such capital expenditures are payable after March 31, 1998;
(e) the Company shall cause the aggregate dollar value
(determined in accordance with generally accepted accounting
principles applied on a consistent basis) of inventories comprising
the asset base for the PS&T Credit Agreement (as defined in Section
5.09) and owned by PS&T or its Subsidiaries to remain at or below (i)
$59 million during the month of November 1997, (ii) $60.4 million
during the month of December 1997, (iii) $57 million during the month
of January 1998, (iv) $55.5 million during the month of February 1998
and (v) $51.8 million during the month of March 1998;
(f) the Company shall cause the aggregate accounts payable
(determined in accordance with generally accepted accounting
principles applied on a consistent basis but excluding fees and
expenses arising out of the transactions contemplated by this
Agreement) of the Company and its Subsidiaries on a consolidated basis
(exclusive of accounts payable by Burlington Resins, Inc. and accounts
payable by any European
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Subsidiaries) to remain at or to exceed (i) $17.5 million during the
month of November 1997, (ii) $17.0 million during the month of December
1997, (iii) $21.5 million during the month of January 1998, (iv) $23.6
million during the month of February 1998 and (v) $24.1 million during
the month of March 1998;
(g) the Company will not, and will not permit any Subsidiary
to, incur any additional indebtedness for borrowed money except for
borrowings in the ordinary course of business by certain Subsidiaries
under existing working capital facilities disclosed in Schedule
3.10(d), as in effect on the date hereof, and, in the case of PS&T, in
accordance with Section 5.09;
(h) the Company will not, and will not permit any Subsidiary to,
agree or commit to do any of the foregoing; or
(i) the Company will not, and will not permit any Subsidiary to
(i) take or agree or commit to take any action that would make (x) any
representation and warranty of the Company hereunder that is qualified
as to materiality inaccurate in any respect or (y) any representation
and warranty of the Company hereunder that is not qualified as to
materially inaccurate in any material respect, in each case at, or as
of any time prior to, the Effective Time or (ii) omit or agree or
commit to omit to take any action necessary to prevent any such
representation or warranty from being inaccurate in any respect (or,
with respect to representations and warranties described in clause (y),
in any material respect) at any such time.
SECTION 5.02. Stockholder Meeting; Proxy Material. The Company shall
cause a meeting of its stockholders (the "Company Stockholder Meeting") to be
duly called and held as soon as reasonably practicable for the purpose of voting
on the approval and adoption of this Agreement and the Merger unless a vote of
stockholders of the Company is not required by Delaware Law. The Directors of
the Company shall, subject to their fiduciary duties as advised by counsel,
recommend approval and adoption of this Agreement and the Merger by the
Company's stockholders. In connection with such meeting, the Company (a) will
promptly prepare and file with the SEC, will use its best efforts to have
cleared by the SEC and will thereafter mail to its stockholders as promptly as
practicable the Company Proxy Statement and all other related materials for such
meeting, (b) will use its best efforts to obtain the necessary approvals by its
stockholders of this Agreement and the transactions contemplated hereby and (c)
will otherwise comply with all legal requirements applicable to such meeting.
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SECTION 5.03. Access to Information. From the date hereof until the
Effective Time, the Company will give Buyer, its counsel, financial advisors,
auditors and other authorized representatives full access to the offices,
properties, books and records of the Company and the Subsidiaries (including
access to perform physical examinations and to take samples of the soil,
groundwater, air, products or other areas as desired by Buyer in its sole
discretion), will furnish to Buyer, its counsel, financial advisors, auditors
and other authorized representatives such financial and operating data and other
information as such Persons may reasonably request and will instruct the
Company's employees, counsel and financial advisors to cooperate with Buyer in
its investigation of the business of the Company and the Subsidiaries.
SECTION 5.04. Other Offers. From the date hereof until the termination
hereof, the Company and the Subsidiaries and the officers, directors, employees
or other agents of the Company and the Subsidiaries will not, directly or
indirectly, (i) take any action to solicit, initiate or take any action
knowingly to facilitate the submission of any Acquisition Proposal or (ii)
subject to the fiduciary duties of the Board of Directors under applicable law
as advised by Winthrop, Stimson, Putnam & Roberts, counsel to the Company,
engage in negotiations with, or disclose any nonpublic information relating to
the Company or any Subsidiary or afford access to the properties, books or
records of the Company or any Subsidiary to, any Person, except to customers and
suppliers of the Company and its Subsidiaries in the ordinary course of
business. The Company will promptly notify Buyer after receipt of any
Acquisition Proposal or any indication that any Person is considering making an
Acquisition Proposal or any request for nonpublic information relating to the
Company or any Subsidiary or for access to the properties, books or records of
the Company or any Subsidiary by any Person that may be considering making, or
has made, an Acquisition Proposal and will keep Buyer fully informed of the
status and, subject to the fiduciary duties of the Board of Directors of the
Company under Delaware Law, details of any such Acquisition Proposal, indication
or request. For purposes of this Agreement, "Acquisition Proposal" means any
offer or proposal for, or any indication of interest in, a merger or other
business combination involving the Company or any Subsidiary or the acquisition
of any equity interest in, or a substantial portion of the assets of, the
Company or any Subsidiary, other than the transactions contemplated by this
Agreement. Notwithstanding the foregoing, if the Board of Directors of the
Company receives an Acquisition Proposal which it determines in good faith will
provide greater value to the Company and its stockholders than the transactions
contemplated hereby (a "Superior Proposal"), the Board of Directors of the
Company may, prior to the receipt of approval of the Merger from the
stockholders of the Company, withdraw or modify its approval or recommendation
of the Merger and this Agreement, approve or recommend a Superior Proposal or
terminate this Agreement in accordance with Section 9.01(i)
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but in each case, only at a time that is at least five business days after
Buyer's receipt of written notice advising Buyer that the Board of Directors of
the Company has received a Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and the names of the person or persons
making such Superior Proposal. Within the five-business-day period referred to
herein, Buyer may propose an improved transaction to the Board of Directors of
the Company.
SECTION 5.05. Notices of Certain Events. The Company shall promptly
notify Buyer of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to the best of its knowledge threatened against, relating
to or involving or otherwise affecting the Company or any Subsidiary
which, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 3.12 or which
relate to the consummation of the transactions contemplated by this
Agreement.
SECTION 5.06. Cooperative Efforts. (a) The Company agrees, and agrees
to cause each of its Subsidiaries, to cooperate with and use its best efforts to
assist Buyer in connection with the New Bond Offering, including but not limited
to, participating in marketing efforts, participating in the preparation of
disclosure relating to the Company and the Subsidiaries to be included in any
related offering documents, and participating in the preparation of pro forma
financial information relating to the Buyer and the Company on a combined basis.
(b) The Company shall, and shall cause PS&T to, use its best efforts
to consummate the Debt Offer on a timely basis. The Company shall keep Buyer
apprised on a regular and timely basis of all significant developments relating
to the Debt Offer and shall consult with Buyer prior to taking any significant
actions or making any significant decisions in connection therewith.
SECTION 5.07. Loans to Affiliated Persons. The Company shall cause
all loans extended by the Company or any of the Subsidiaries to the officers and
directors of the Company and the Subsidiaries on the date hereof to be repaid in
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full, whether or not then due, prior to or concurrently with the consummation of
the Merger and shall use its best efforts to cause all loans extended by the
Company or any of the Subsidiaries to former officers and directors, current
employees (except for loans to facilitate relocations of current employees as
set forth on Schedule 3.20(a)) and former employees and associates of the
Company to be repaid in full, whether or not then due, prior to or concurrently
with the consummation of the Merger. Buyer consents to the discharge of such
loans dollar for dollar through the surrender and cancellation without payment
of the same principal amount of 7% Subordinated Notes of the Company referred to
in Schedule 3.20(a).
SECTION 5.08. Severance Package. Prior to the Effective Time, the
Company shall adopt a severance payment plan having the terms set forth in
Schedule 5.08 pursuant to documentation satisfactory to each of Buyer and the
Company. Such severance plan shall be adopted in lieu of and shall replace any
existing severance payment plan covering any current or future employees of the
Company and its Subsidiaries.
SECTION 5.09. Proceeds of Convertible Note. The Company shall make
$4,600,000 of the proceeds of the Convertible Note available to PS&T immediately
upon receipt of such proceeds. PS&T shall apply the $4,600,000 received from the
Company in accordance herewith to pay down its debt under the revolving credit
facility described in the Amended and Restated Senior Loan Agreement dated as of
November 8, 1993, as amended, among PS&T, the lenders listed therein and General
Electric Capital Corporation, as Agent (the "PS&T Credit Agreement"). PS&T
further agrees to borrow under the PS&T Credit Agreement only after reasonable
consultation with Buyer in the event that immediately following such borrowing,
less than $4,600,000 of undrawn capacity for borrowing would remain available to
PS&T.
ARTICLE 6
COVENANTS OF BUYER AND MERGER SUBSIDIARY
Each of Buyer and Merger Subsidiary, jointly and severally, agrees
that:
SECTION 6.01. Obligations of Merger Subsidiary. Buyer will take all
action necessary to cause Merger Subsidiary to perform its obligations under
this Agreement and to consummate the Merger on the terms and conditions set
forth in this Agreement.
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SECTION 6.02. Voting of Shares. Buyer agrees to vote all Shares
beneficially owned by it in favor of adoption of this Agreement at the Company
Stockholder Meeting.
SECTION 6.03. Director and Officer Liability. Each of the Surviving
Corporation and PS&T will, pursuant to provisions in their respective
certificates of incorporation and by-laws, indemnify and hold harmless the
present and former officers and directors of the Company and PS&T, respectively,
in respect of acts or omissions occurring while such persons are officers and
directors to the same extent as is provided under each of the Company's and
PS&T's, respectively, certificate of incorporation and bylaws in effect on the
date hereof, and Buyer will not amend, repeal or modify such provisions in any
manner that would adversely affect the rights thereunder of such persons;
provided that such indemnification shall be subject to any limitation imposed
from time to time under applicable law. For four years after the Effective Time,
Buyer will cause each of the Surviving Corporation and PS&T, respectively, to
use its best efforts to provide officers' and directors' liability insurance in
respect of acts or omissions occurring prior to the Effective Time covering each
such Person currently covered by the Company's and PS&T's officers' and
directors' liability insurance policy on terms with respect to coverage and
amount no less favorable in the aggregate than those of the applicable policy in
effect on the date hereof, provided that in satisfying its obligation under this
Section, Buyer shall not be obligated to cause the Surviving Corporation or PS&T
to purchase an amount of such insurance in excess of the amount that can be
purchased for premiums of 120% of the amount per annum the Company or PS&T paid
in its last full fiscal year, which amount has been disclosed to Buyer.
SECTION 6.04. Commitment Letters and Financing Agreements. Buyer (i)
will not amend or otherwise modify the Commitment Letters in any material
respect adverse to Buyer or the Company, or grant any waivers with respect
thereto, without the prior consent of the Company, (ii) will provide the Company
with drafts of the Financing Agreements as soon as they are provided by Lender
or its counsel, (iii) will use its best efforts to obtain the Financing and (iv)
will inform the Company in writing within five business days of its becoming
aware of any facts or circumstances that might reasonably be expected to result
in (x) the Commitment Letters being terminated or any of the conditions therein
not being satisfied, or (y) the amount of the Financing to be provided pursuant
to the Commitment Letters or the Financing Agreements not being sufficient to
complete all of the transactions contemplated hereby.
SECTION 6.05. Repurchase of Bonds. In the event that the consummation
of the Merger or the drawing of funds under the Financing Agreements would be
reasonably likely to violate or cause an event of default under the Tekni-Plex
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Indenture, Buyer shall, at the earliest practicable time following Buyer's
obtaining knowledge thereof, notify the Company of such fact and commence a
combined consent solicitation and offer to purchase any and all of the 11 1/4%
Senior Subordinated Notes due 2007 issued thereunder. The documentation for such
offer and consent solicitation, including without limitation the conditions
thereto, shall be reasonably satisfactory to the Company, and Buyer shall take
all actions reasonably necessary in connection therewith to obtain the consent
of holders of the principal amount of notes which would be sufficient to amend
or eliminate those provisions of the Tekni-Plex Indenture which would be
contravened by the consummation of the Merger.
ARTICLE 7
COVENANTS OF BUYER AND THE COMPANY
The parties hereto agree that:
SECTION 7.01. Best Efforts. Subject to the terms and conditions of this
Agreement, each party will use its best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement.
SECTION 7.02. Certain Filings. The Company and Buyer shall cooperate
with one another (a) in connection with the preparation of the Company
Disclosure Documents and (b) in determining whether any action by or in respect
of, or filing with, any governmental body, agency or official, or authority is
required, or any actions, consents, approvals or waivers are required to be
obtained from parties to any material contracts, in connection with the
consummation of the transactions contemplated by this Agreement and (c) in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith or with the
Company Disclosure Documents and seeking timely to obtain any such actions,
consents, approvals or waivers.
SECTION 7.03. Public Announcements. Buyer and the Company will consult
with each other before issuing any press release or making any public statement
with respect to this Agreement and the transactions contemplated hereby and,
except as may be required by applicable law, any policy or regulation of the
Nasdaq Stock Market or the fiduciary duties of the Company's Board of
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Directors under Delaware Law, will not issue any such press release or make any
such public statement prior to such consultation.
SECTION 7.04. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Merger
Subsidiary, any deeds, bills of sale, assignments or assurances and to take and
do, in the name and on behalf of the Company or Merger Subsidiary, any other
actions and things to vest, perfect or confirm of record or otherwise in the
Surviving Corporation any and all right, title and interest in, to and under any
of the rights, properties or assets of the Company acquired or to be acquired by
the Surviving Corporation as a result of, or in connection with, the Merger.
ARTICLE 8
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party. The
obligations of the Company, Buyer and Merger Subsidiary to consummate the Merger
are subject to the satisfaction of the following conditions:
(a) this Agreement shall have been adopted by the stockholders
of the Company in accordance with Delaware Law;
(b) any applicable waiting period under the HSR Act relating to
the Merger shall have expired;
(c) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation
of the Merger;
(d) all actions by or in respect of or filings with any
governmental body, agency, official, or authority domestic or foreign,
required to permit the consummation of the Merger including without
limitation, filing a certificate of merger pursuant to Delaware Law,
and any filings required pursuant to ISRA, the substance of all of
which is reasonably satisfactory to the Company and the Buyer, shall
have been taken, made or obtained.
37
<PAGE>
SECTION 8.02. Conditions to the Obligations of Buyer and Merger
Subsidiary. The obligations of Buyer and Merger Subsidiary to consummate the
Merger are subject to the satisfaction of the following further conditions:
(a) (i) the Company shall have performed in all material
respects all of its obligations hereunder required to be performed by
it at or prior to the Effective Time, the representations and
warranties of the Company contained in this Agreement and in any
certificate or other writing delivered by the Company pursuant hereto
shall be true when made and (x) in respect of those representations
and warranties that are qualified as to materiality, shall be true at
and as of the Effective Time as if made at and as of such time, any
(y) in respect of those representations and warranties that are not so
qualified, shall be true in all material respects at and as of the
Effective Time as if made at and as of such time (in each case except
to the extent that such representations and warranties speak as of an
earlier date); provided that the accuracy of such representations and
warranties at and as of the Effective Time shall be determined without
reference to any actions, claims or proceedings brought against the
Company or any Subsidiary arising out of or as a result of the actions
taken or proposed to be taken by the Company and its Subsidiaries
pursuant to Section 1.07 hereof ("Section 1.07 Claims") and (ii) Buyer
shall have received a certificate signed by each of the Chief
Executive Officer, the President and the Chief Financial Officer of
the Company to the foregoing effect;
(b) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or any of the transactions contemplated
hereby or the effective operation of the business of the Company and
the Subsidiaries after the Effective Time, and no proceeding which is
likely to (i) prohibit, alter, prevent or materially delay the Merger,
or (ii) except for any Section 1.07 Claims, prohibit, alter, prevent
or materially delay the other transactions contemplated hereby shall
have been instituted by any Person before any court, arbitrator or
governmental body, agency or official and be pending;
(c) Buyer shall have received a certificate signed by each of
the President and the Chief Executive Officer of the Company to the
effect that neither the Company nor any of its Subsidiaries has been a
United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified
in Section 897(c)(A)(ii) of the Code;
38
<PAGE>
(d) Buyer has obtained sufficient financing on terms
satisfactory to it to (i) provide the Intercompany Loans, (ii) pay the
Merger Consideration and consummate the Merger, (iii) retire, if
necessary, the currently outstanding 11 1/4% Senior Subordinated Notes
due 2007 issued under the Tekni-Plex Indenture, (iv) pay related fees
and expenses not to exceed $8 million in the aggregate, and (v) provide
undrawn revolving lines of Credit as contemplated by the Commitment
Letters; provided that (x) Buyer shall not be obligated to draw down
the bridge loan contemplated in the Bridge Loan Commitment Letter prior
to the later of January 31, 1998 or 15 business days after the
stockholders of the Company shall have voted to approve the Merger; and
(y) Buyer acknowledges that the terms of the Financing described in the
Commitment Letters are reasonable and satisfactory to Buyer;
(e) the transactions described in Sections 1.06 and 1.07 shall
have been, or concurrently will be, consummated;
(f) the Company shall have obtained the consents listed on
Schedule 3.04 (except with respect to any debt of any Subsidiary that
Buyer elects not to repay as permitted by Section 1.06(b));
(g) Buyer shall have received, in respect of any operations
conducted in, and in respect of each facility or real property owned,
leased or operated by the Company or any Subsidiary which is located
in, the State of New Jersey, evidence of full compliance by the
Company with the requirements of ISRA. Such evidence shall be in a
form satisfactory to Buyer in its sole discretion and shall not
impose upon Buyer, the Company or any Subsidiary any obligations or
liabilities to which Buyer shall not have consented in writing prior
to the Closing.
(h) no change shall have occurred in the business, assets,
liabilities, financial condition, capitalization, operations, results
of operations or prospects of the Company or any Subsidiary and Buyer
shall not have become aware of any facts not previously known by Buyer
as of the date hereof that in either case, in the reasonable judgment
of Buyer, have or are likely to have a material adverse significance
with respect to the value of the Company and its Subsidiaries, taken as
a whole, excluding (i) the transactions contemplated by the Merger
Agreement, or (ii) any Section 1.07 Claims; and
(i) Buyer shall have received all documents it may reasonably
request relating to the existence of the Company and the Subsidiaries
and
39
<PAGE>
the authority of the Company for this Agreement, all in form and
substance satisfactory to Buyer.
SECTION 8.03. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger are subject to the
satisfaction of the following further conditions:
(a) (i) Each of Buyer and Merger Subsidiary shall have
performed in all material respects all of its obligations hereunder
required to be performed by it at or prior to the Effective Time, the
representations and warranties of Buyer and Merger Subsidiary
contained in this Agreement and in any certificate or other writing
delivered by Buyer or Merger Subsidiary pursuant hereto shall be true
when made and (x) in respect of those representations and warranties
that are qualified as to materiality, shall be true at and as to the
Effective Time as if made at and as of such time, and (y) in respect
of those representations and warranties that are not so qualified,
shall be true in all material respects at and as of the Effective Time
as if made at and as of such time (in each case except to the extent
that such representations and warranties speak as of an earlier date)
and (ii) the Company shall have received a certificate signed by the
Chief Executive Officer of Buyer to the foregoing effect;
(b) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger and no proceeding which is likely to (i)
prohibit, alter, prevent or materially delay the Merger, or (ii)
except for any Section 1.07 Claims, prohibit, alter, prevent or
materially delay the transactions contemplated hereby shall have been
instituted by any Person before any court, arbitrator or governmental
body, agency or official and be pending; and
(c) the Company shall have received all documents that the
Company shall have reasonably requested relating to the existence of
Buyer and Merger Subsidiary and the authority of the Buyer and Merger
Subsidiary to enter into this Agreement, the Commitment Letters and
the Financing Agreements, all in form and substance satisfactory to
the Company.
40
<PAGE>
ARTICLE 9
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of the
Company):
(a) by mutual written consent of the Company and Buyer;
(b) by either the Company or Buyer, if the Merger has not been
consummated by March 31, 1998;
(c) by either the Company or Buyer, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining
Buyer or the Company from consummating the Merger is entered and such
judgment, injunction, order or decree shall become final and
nonappealable; or
(d) by Buyer, if any Person, entity or "group" (as defined in
Section 13(d)(3) of the Exchange Act) other than Buyer or Merger
Subsidiary acquires beneficial ownership of 50% or more of the
outstanding Shares;
(e) by Buyer, if prior to the Effective Time, the Board of
Directors of the Company shall have withdrawn or materially modified
its approval or recommendation of the Merger or this Agreement,
recommended another Acquisition Proposal or entered into a definitive
agreement or agreement in principle with respect to another
Acquisition Proposal, or resolved to do any of the foregoing;
(f) by Buyer, if prior to the consummation of the Merger, a
tender or exchange offer for some or all of the Shares shall have been
publicly proposed to be made or shall have been made by another
person, or it shall have been publicly disclosed or Buyer shall have
otherwise learned that any person, entity or "group" (as defined in
Section 13(d)(3) of the Exchange Act) other than Buyer or Merger
Subsidiary shall have acquired or proposed to acquire beneficial
ownership of more than 20% of any class or series of capital stock of
the Company (including the Shares), through the acquisition of stock,
the formation of a group or otherwise, or shall have been granted any
option, right or warrant, conditional or
41
<PAGE>
otherwise, to acquire beneficial ownership of more than 20% of any
class or series of capital stock of the Company (including the Shares);
(g) by either Buyer or the Company, if the Company Stockholder
Meeting shall have been held and the stockholders of the Company shall
have failed to approve and adopt this Agreement and the Merger at such
meeting;
(h) by either Buyer or the Company, if Buyer shall have
received any communication from the Department of Justice or Federal
Trade Commission (each an "HSR Authority") (which communication shall
be confirmed to the other parties by the HSR Authority) that causes
such party to reasonably believe that any HSR Authority has authorized
the institution of litigation challenging the transactions
contemplated by this Agreement under the U.S. antitrust laws, which
litigation will include a motion seeking an order or injunction
prohibiting the consummation of any of the transactions contemplated
by this Agreement; and
(i) by the Company, if (x) the Board of Directors of the Company
concludes in good faith, based on written advice from outside counsel,
that, in order to prevent the Board of Directors of the Company from
breaching its fiduciary duties to the stockholders of the Company, it
must withdraw or materially modify its approval or recommendation of
the Merger or this Agreement, and it withdraws or materially modifies
such approval or recommendation, (y) the Company complies with its
obligations under Section 5.04, and (z) the Company pays all amounts
due to Buyer pursuant to Section 10.04(a) in advance of such
termination. At least two business days prior to terminating pursuant
to this Section 9.01(i), the Company shall notify Buyer of its
intention to terminate pursuant to this Section 9.01(i) and shall
request that Buyer submit the amount of its costs and expenses payable
under section 10.04(a).
The party desiring to terminate this Agreement pursuant to clauses 9.01(b),
9.01(c), 9.01(d), 9.01(e), 9.01(f), 9.01(g), 9.01(h) or 9.01(i) shall give
written notice of such termination to the other party in accordance with Section
10.01.
SECTION 9.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 9.01, this Agreement shall become void and of no effect with
no liability on the part of any party hereto, except that the agreements
contained in Section 10.04 shall survive the termination hereof.
42
<PAGE>
ARTICLE 10
MISCELLANEOUS
SECTION 10.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including telecopy
or similar writing) and shall be given,
if to Buyer or Merger Subsidiary, to:
Dr. F. Patrick Smith
Chairman and Chief Executive Officer
Tekni-Plex, Inc.
201 Industrial Parkway
Somerville, New Jersey 08876
Telecopy: (908) 722-4967
with a copy to:
Phillip R. Mills
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopy: (212) 450-4800
if to the Company or PS&T, to:
Fred W. Broling
Chairman of the Board and Chief Executive Officer
PureTec Corporation
65 Railroad Avenue
Ridgefield, New Jersey 07657
Telecopy: (201) 941-0602
with a copy to:
David P. Falck
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004-1490
Telecopy: (212) 858-1500
or such other address or telecopy number as such party may hereafter specify for
the purpose by notice to the other parties hereto. Each such notice, request or
43
<PAGE>
other communication shall be effective (a) if given by telecopy, when such
telecopy is transmitted to the telecopy number specified in this Section and the
appropriate telecopy confirmation is received or (b) if given by any other
means, when delivered at the address specified in this Section.
SECTION 10.02. Survival of Representations and Warranties. The
representations and warranties and agreements contained herein and in any
certificate or other writing delivered pursuant hereto shall not survive the
Effective Time or the termination of this Agreement except for the agreements
set forth in Section 10.04.
SECTION 10.03. Amendments; No Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Effective Time if, and only if,
such amendment or waiver is in writing and signed, in the case of an amendment,
by the Company, Buyer and Merger Subsidiary or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that after the
adoption of this Agreement by the stockholders of the Company, there shall be
made no amendment or waiver that by law requires further approval by such
stockholders without the further approval of such stockholders.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 10.04. Expenses. (a) The Company and PS&T jointly and severally
agree to pay Buyer, in immediately available funds, promptly, but in no event
later than two business days, after (or, in the case of termination under
Section 9.01(i), prior to) the termination of this Agreement pursuant to clauses
(d), (e) or (i) of Section 9.01, (x) a fee of $10,000,000 and (y) reasonable and
documented costs and expenses, not to exceed $5,000,000 in the aggregate,
incurred by Buyer and its subsidiaries and their representatives in connection
with the transactions contemplated by this Agreement, which costs and expenses
shall include, without limitation, fees and expenses payable by the Company to
the Lender pursuant to the Commitment Letters, the costs and expenses in
connection with the New Bond Offering, and fees and expenses of counsel and
costs and expenses of the due diligence investigations of the Company and its
Subsidiaries; provided, that payment of any amounts by the Company or PS&T
pursuant to this Section 10.04(a) shall constitute a complete accord and
satisfaction of all claims pursuant to this Agreement that either Buyer or
Merger Subsidiary may have against the Company or PS&T and all claims that the
Company or PS&T may have against Buyer or Merger Subsidiary, arising out of such
termination and
44
<PAGE>
relating to this Agreement (it being understood that the foregoing shall not
affect in any respect the Company's obligations under the Convertible Note or
the Voting Agreement).
(b) Subject to Section 10.04(a) and Section 10.04(c), all costs and
expenses incurred in connection with this Agreement shall be paid by the party
incurring such cost or expense.
(c) In the event this Agreement is terminated as a result of Buyer
having breached its obligations hereunder or as a result of Buyer's failure to
obtain the Financing for any reason, in whole or in part, not related to the
Company's or the Subsidiaries' actions and, in either case, all of the other
conditions set forth in Sections 8.01 and 8.02 shall have been satisfied, Buyer
shall pay the out-of-pocket costs and expenses incurred by the Company and its
Subsidiaries solely in connection with the New Bond Offering.
SECTION 10.05. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 10.06. Governing Law. This Agreement shall be construed in
accordance with and governed by the law of the State of Delaware.
SECTION 10.07. Counterparts; Effectiveness. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof and of the Convertible Note signed by all of
the other parties hereto and thereto.
45
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
PURETEC CORPORATION
By: ______________________________
Name:
Title:
PLASTIC SPECIALTIES &
TECHNOLOGIES, INC.
By: ______________________________
Name:
Title:
TEKNI-PLEX, INC.
By: ______________________________
Name:
Title:
P.T. HOLDING, INC.
By: ______________________________
Name:
Title:
46
<PAGE>
Schedule 3.05 Options and Warrants
<TABLE>
<CAPTION>
# Options/Warrants # Options/Warrants Range of # Options/Warrants Expiring in:
In the Money Out of the Money Exercise
Type of Security $0-$3.49 $3.50 and above Price 1997 1998 1999 2005
<S> <C> <C> <C> <C> <C> <C> <C>
1995 INCENTIVE
PLAN OPTIONS 795,000 $2.00 - $3.00 795,000
1,888,700 $3.00 - $4.00 37,000 1,851,700
216,666 $4.00 - $5.00 216,666
56,000 $5.00 - $6.00 56,000
92,000 $6.00 - $7.00 92,000
TOTAL: 3,048,366 2,683,700 364,666 37,000 3,011,366
=============================================================================== ========================== ========================
1995 DIRECTOR $2.25
PLAN OPTIONS 120,000 120,000
TOTAL: 120,000 120,000 120,000
=============================================================================== ========================== ========================
NON-PLAN
OPTIONS 491,000 $4.00 - $5.00 435,000 56,000
50,000 $5.00 - $6.00 50,000
25,000 $22.00 25,000
TOTAL: 510,000 566,000 566,000
=============================================================================== ========================== ========================
SETTLEMENT
WARRANTS 449,878 $4.61 449,878
TOTAL: 449,878 449,878 449,878
=============================================================================== ========================== ========================
"APR" WARRANTS
116,444 $20 - $22 116,444
TOTAL: 116,444 116,444 116,444
=============================================================================== ========================== ========================
COAST RECYCLING
WARRANTS
36,000 $22.00 36,000
TOTAL: 36,000 36,000 36,000
=============================================================================== ========================== ========================
SPP WARRANTS
100,000 10.50-12.00 100,000
TOTAL: 100,000 100,000 100,000
=============================================================================== ========================== ========================
TOTAL: 4,436,688 2,803,700 1,632,988 37,000 626,444 585,878 3,131,366
========= ========= ========= ====== ======= ======= =========
47
<PAGE>
CROSS-REFERENCE TARGET LIST
NOTE: Due to the number of targets some target names may not appear in the
target pull-down list. (This list is for the use of the wordprocessor only, is
not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME
?.............................................co.oblig.appoint
?.................................................buy.desig.no
?..................................................comp.action
?....................................................file.14d9
?................................................co.board.unan
?........................................................offer
?..............................................file.sec.tender
?...............................................offer.commence
?..............................................majority.of.bod
?..................................................co.no.nj.ct
?............................................severance.package
?.............................................buy.offer.comply
?..........................................real.prop.trans.tax
?..................................................amend.terms
?....................................................offer.art
?................................................no.union.cont
?................................................conv.debt.sec
1...................................................merger.art
1.01....................................................merger
1.01(a)..............................................surv.corp
1.01(b).......................................file.cert.merger
1.01(c), 1.01(d)...............................possess.all.rts
1.02...............................................conv.shares
1.02(a)........................................co.share.cancel
1.02(b).........................................sub.share.conv
1.02(c).........................................out.share.conv
1.03..................................................surr.pay
?....................................................directors
1.03(a)..............................................exc.agent
1.03(b).........................................jt.venture.aff
1.03(b)........................................holder.entitled
1.03(c)..........................................cert.endorsed
1.03(d).......................................no.furth.reg.shr
1.03(e)..........................................unclaimed.ret
1.03(f).........................................shares.ret.buy
1.04.........................................dissenting.shares
1.05.............................................stock.options
1.05(a)............................................emp.stk.can
1.06..............................................company.debt
1.06(a)...........................................senior.notes
1.06(b)..................................other.subsidiary.debt
1.07..........................................pst.min.interest
1.07..........................................pst.min.interest
1.08...............................................inter.loans
1.09.......................................upstream.guarantees
2................................................surv.corp.art
2.01..................................................cert.inc
2.02....................................................bylaws
2.03...................................................dir.off
3...................................................rep.war.co
3.01..................................................co.exist
3.02..................................................co.autho
3.03..............................................co.gov.autho
3.04................................................co.non.con
3.05....................................................co.cap
3.05(a).........................................no.out.shr.cap
3.05(b)........................................no.sec.conv.shr
3.05(c).............................................no.options
3.06....................................................co.sub
3.06(a)...............................................sub.corp
3.06(b).........................................co.own.sub.stk
3.06(b)(i)........................................nno.vtng.sec
3.06(b)(ii)..........................................no.rights
3.06(c).....................................corp.part.lim.liab
3.07............................................co.sec.filings
3.07(a).........................................co.del.buy.sec
3.07(b)............................................report.true
3.07(c)..........................................co.not.untrue
3.08...............................................co.fin.stmt
3.09..............................................co.disc.docs
3.09(a).........................................co.docs.comply
3.09(b)..........................................co.proxy.true
3.09(c).......................................co.sub.info.true
3.10...........................................co.abs.cert.chg
3.10(a)..........................................co.no.mat.adv
3.10(b)..........................................co.no.div.cap
3.10(c)........................................co.no.amend.sec
3.10(d)...........................................co.no.indebt
3.10(e).............................................co.no.lien
3.10(f).............................................co.no.loan
3.10(g)...........................................co.no.damage
3.10(h)............................................co.no.trans
3.10(i).........................................co.no.chg.acct
3.10(j)............................................co.no.sever
3.10(k).......................................co.no.labor.disp
3.11..........................................co.no.undis.liab
3.11(a)................................................co.liab
3.11(c), 3.11(d)...................................co.ord.liab
3.11(e)............................................co.liab.agt
3.12...................................................co.liti
3.13..................................................co.taxes
3.13(a)...............................................tax.defs
3.13(b)..............................co.has.filed.and.paid.tax
3.13(c)...............................no.tax.deficiency.unpaid
3.13(d)............................no.extention.or.pwr.of.atty
3.13(e)..............................co.not.member.tax.sharing
3.13(f).....................................tax.comp.accrue.ex
3.14..................................................co.erisa
3.14(a)..........................................emp.bene.plan
3.14(b).......................................no.multiemp.plan
3.14(c)..........................................emp.plan.qual
3.14(d).........................................no.con.cov.emp
3.14(e).........................................list.emp.sever
3.14(f)........................................excess.post.ret
3.14(g)........................................co.no.amend.emp
3.14(h)........................................emp.ben.dis.con
3.14(i).....................................true.complete.list
3.15.............................................labor.matters
3.15(a)(i)....................................neither.comp.sub
3.16...............................................co.comp.law
3.17.............................................co.finder.fee
3.18.............................................co.other.info
3.19................................................co.env.mat
3.19(a)..........................................co.except.10k
3.19(b).......................................co.no.env.invest
3.19(c).............................................co.env.def
3.20........................................material.contracts
3.20(a)...................................mat.contracts.except
3.20(a)(i)...........................................any.lease
3.20(a)(ii)......................................any.agreement
3.20(a)(iii).........................................any.sales
3.20(a)(iv)...................................any.partnerships
3.20(a)(ix)............................................any.agt
3.20(a)(v)........................................any.relating
3.20(a)(vi)...................................any.indebtedness
3.20(a)(vii)........................................any.option
3.20(a)(viii).......................................any.agency
3.20(a)(x)..........................................any.person
3.20(a)(xi)..........................................any.other
3.20(b)................................each.agreement.contract
3.20(c).................................except.ps&t.notes.comp
3.21................................................properties
3.21(a)...........................................company.prop
3.21(a)(i).....................................liens.disclosed
3.21(a)(iii)...................................liens.for.taxes
3.21(a)(iv)......................................liens.detract
3.21(b)........................................no.developments
3.21(c).............................................all.leases
3.21(d).............................................the.plants
3.21(e)..............................................buildings
3.21(f).........................................such.real.prop
3.22.............................................intellec.prop
3.22(a)....................................intellec.prop.sched
3.22(b)..........................................schedule.sets
3.22(c).............................................since.date
4..................................................rep.war.buy
4.01.................................................buy.exist
4.02.................................................buy.autho
4.03.............................................buy.gov.autho
4.04...............................................buy.non.con
4.05.........................................buy.sub.info.true
4.05.............................................buy.disc.docs
4.06............................................buy.finder.fee
4.07.............................................buy.financing
5.......................................................cov.co
5.01................................................co.conduct
5.01(a)........................................co.not.chg.cert
5.01(b)...........................................co.not.merge
5.01(c)............................................co.not.sell
5.01(d).....................................comp.sub.com.expen
5.01(h)...........................................co.not.agree
5.01(i).............................................co.not.lie
5.02..........................................co.stk.mtg.proxy
5.03............................................co.access.info
5.04...........................................co.other.offers
5.05..........................................co.notice.events
5.05(a)........................................co.consent.pers
5.05(b).....................................not.gov.reg.agency
5.05(c)...........................................note.actions
5.07...................................loan.affiliated.persons
5.09.................................proceeds.convertible.note
6......................................................cov.buy
6.01..........................................oblig.merger.sub
6.02.............................................voting.shares
6.04...................................commit.ltrs.finan.agree
6.05..........................................repurch.of.bonds
7...................................................cov.buy.co
7.01..............................................best.efforts
7.02...........................................certain.filings
7.03...........................................public.announce
7.04.............................................further.assur
8..............................................cond.merger.art
8.01...........................................cond.oblig.each
8.01(a)..........................................adopt.del.law
8.01(b)...........................................hsr.wait.exp
8.01(c)........................................no.law.prohibit
8.01(d).......................................actions.obtained
8.02...........................................cond.obl.buy.sub
8.02(a).......................................co.perf.all.oblig
8.02(b)........................................no.court.iss.ord
8.02(c).....................................co.not.897(c)(2).co
8.02(i)........................................buy.rec.all.docs
9......................................................term.art
9.01.......................................................term
9.01(a)..........................................mutual.consent
9.01(b)........................................offer.not.consum
9.01(c)..........................................merger.illegal
9.01(d)............................................acq.bene.own
9.01(e)............................................bod.approval
9.01(g)............................................meeting.held
9.01(h).....................................buyer.received.comm
9.01(i).......................................prev.breach.fiduc
9.02................................................effect.term
10......................................................misc.art
10.01....................................................notices
10.02...............................................surv.rep.war
10.03..............................................amend.waivers
10.03(a)..................................................signed
10.03(b).........................................delay.not.waive
10.04...................................................expenses
10.04(a)..............................................expenses.a
10.04(b)..............................................expenses.b
10.04(c)........................................agree.terminated
10.05...............................................succ.assigns
10.06..............................................governing.law
10.07.............................................counter.effect
</TABLE>
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT
IN COMPLIANCE THEREWITH.
$ 5,000,000
PURETEC CORPORATION
13% Convertible Senior Note
PureTec Corporation, a Delaware corporation (together with its
successors and assigns, the "Issuer"), for value received hereby promises to pay
to Tekni-Plex Inc., a Delaware corporation (together with its successors,
transferees and assigns, the "Holder") the principal sum of Five Million Dollars
($ 5,000,000) (the "Original Principal Sum") by wire transfer of immediately
available funds to the Holder's account (the "Bank Account") at a bank in the
United States specified in writing by the Holder from time to time, on the
Maturity Date, in such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public and private
debts, and to pay interest on the Original Principal Sum and on all accrued
interest added to the Principal Sum on a quarterly basis (together the
"Principal Sum") outstanding from time to time in like coin or currency, at the
rates per annum set forth below, by wire transfer of immediately available funds
to the Bank Account, from the date hereof, until payment in full of such amounts
has been made.
This Note shall bear interest, commencing on the date hereof, at a rate
per annum (the "Interest Rate") equal to 13% and payable on the Maturity Date;
provided that (i) in the event that either a registration statement or an
application for listing on NASDAQ covering all of the Base Shares and the Make
Whole Shares issuable upon conversion of the Note pursuant to Article 4 (the
"Conversion Shares") has not been filed by the First Trigger Date, the Interest
Rate shall be increased, commencing on such First Trigger Date, by an additional
2.5% per annum, (ii) in the event that a registration statement relating to the
Conversion Shares has not been declared effective or the Conversion Shares have
not been listed on NASDAQ by the Second Trigger Date, the Interest Rate shall be
increased, commencing on such Second Trigger Date, by an additional 2.5% per
annum and (iii) in the event that a registration statement relating to the
Conversion Shares has not been declared effective or the Conversion Shares have
not been listed on NASDAQ by the Third Trigger Date, the Interest Rate shall be
increased, commencing on such Third Trigger Date, by an additional 2% per annum.
Further, the Interest Rate shall be increased by an additional 2% per annum,
commencing on the day an Event of Default (other than a failure to
<PAGE>
register or list the Conversion Shares in accordance with Article 6) occurs. All
increases in the Interest Rate provided herein shall be separate and in addition
to any other increase provided herein; provided that the Interest Rate shall not
be increased at any time by more than 2% per annum due to the occurrence of more
than one Event of Default (other than a failure to register or list the
Conversion Shares in accordance with Article 6).
Interest on this Note will be calculated on the basis of a 360-day year
of twelve 30-day months. Accrued interest on this Note will be added to the
Principal Sum quarterly, commencing on January 31, 1998.
Notwithstanding anything herein to the contrary, the interest payable
by the Issuer with respect to this Note shall not exceed the maximum amount
permitted by applicable law and, to the extent that any payments in excess of
such permitted amount are received by the Holder, such excess shall be
considered payments in respect of the principal amount of this Note. All sums
paid or agreed to be paid to the Holder for the use, forbearance or retention of
the indebtedness of the Issuer to the Holder shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
term of such indebtedness until payment in full of the principal so that the
interest on account of such indebtedness shall not exceed the maximum amount
permitted by applicable law.
This Note is the duly authorized convertible senior note (the "Note")
of the Issuer. This Note is a direct, unconditional, unsubordinated obligation
of the Issuer ranking pari passu with all other senior obligations of the
Issuer. This Note is transferable and assignable, in whole or in part, on or
after the Second Trigger Date to one or more purchasers, provided that such
transfer or assignment is made in compliance with the Securities Act of 1933, as
amended, and any applicable state and foreign securities laws. The Issuer agrees
to issue from time to time a replacement Note or Notes, in the form hereof and
in such denominations as the Holder may request to facilitate such transfers and
assignments. In addition, after delivery of an indemnity in form and substance
reasonably satisfactory to the Issuer, the Issuer also agrees to issue a
replacement Note if this Note has been lost, stolen, mutilated or destroyed.
The Note shall be issuable only in registered form without coupons.
No provision of this Note shall alter or impair the obligations of the
Issuer, which are absolute and unconditional, to pay the principal of and
interest on this Note at the place, times, and rate, and in the currency, herein
prescribed.
2
<PAGE>
ARTICLE 1
DEFINITIONS
SECTION 1.01. Certain Terms Defined. The following terms shall have the
respective meanings specified below. All accounting terms used herein and not
expressly defined shall have the meanings given to them in accordance with U.S.
generally accepted accounting principles as in effect from time to time. The
terms defined in this Section 1.01 include the plural as well as the singular.
"Acceleration Notice" has the meaning set forth in Section 3.01.
"Affiliate" means, with respect to any party, any Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such party. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.
"Asset Sale" means, with respect to the Issuer or any Subsidiary, the
sale, lease, conveyance or other disposition (including, without limitation, by
way of merger or consolidation, and whether by operation of law or otherwise) of
any of the Issuer's or such Subsidiary's assets, whether owned on the date
hereof or subsequently acquired, in one transaction or a series of related
transactions.
"Board of Directors" means the Board of Directors of the Issuer or any
committee thereof duly authorized to act on behalf of such Board.
"Burlington" means Burlington Resins, Inc, a Delaware corporation and a
wholly-owned indirect Subsidiary of the Issuer.
"Change of Control" with respect to a the Issuer or any Subsidiary
means the occurrence of any of the following at any time after the date hereof:
(i) any person or group (within the meaning of Rule 13d-1
under the Exchange Act) of persons shall have become the
beneficial owner of more than 50% of the then outstanding
voting securities of the Issuer or such Subsidiary;
3
<PAGE>
(ii) a majority of the Board of Directors of the Issuer or
such Subsidiary shall consist at such time of individuals
other than (x) members of the Board of Directors of such
Issuer or such Subsidiary on the date hereof and (y) other
members of such Board of Directors recommended, elected or
approved to succeed or become a director of such Issuer or
such Subsidiary by a majority of such members referred to in
clause (x) or by members so recommended, elected or approved;
or
(iii) the Board of Directors or the shareholders of the Issuer
or such Subsidiary shall have approved the sale of all or
substantially all the assets of such Issuer or such Subsidiary
in one transaction or a series of related transactions.
"Common Share Equivalent" means, with respect to any security of the
Issuer and as of a given date, a number which is, (i) in the case of a share of
Common Stock, one, (ii) in the case of all or a portion of any right, option,
warrant or other security which may be exercised for a share or shares of Common
Stock, the number of shares of Common Stock receivable upon exercise of such
security (or such portion of such security) and (iii) in the case of any
security convertible or exchangeable into a share or shares of Common Stock, the
number of shares of Common Stock that would be received if such security were
converted or exchanged on such date.
"Common Stock" means any and all shares of common stock, par value
$0.01 per share, of the Issuer.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit or other
similar instruments (or reimbursement obligations with respect thereto), (iv)
all obligations of such Person to pay the deferred purchase price of property or
services, except Trade Payables, (v) all obligations of such Person as lessee
under capital leases, (vi) all Debt of others secured by a Lien on any asset of
such Person, whether or not such Debt is assumed by such Person and (vii) all
Debt of others Guaranteed by such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
4
<PAGE>
"Event of Default" means any event or condition specified as such in
Section 4.01 which shall have continued for the period of time, if any, therein
designated.
"Fair Market Value" means (except as otherwise provided in Section
4.01(a) or Section 4.01(c)) on any date for a share of Common Stock,
(i) if share of Common Stock are the listed or admitted to
trading on any national securities exchange or traded
on any national market system, the average of the daily
closing prices for the 10 trading days before such date,
excluding any trades which are not bona fide, arm's length
transactions. The closing price for each day shall be the
last sale price on such date or, if no such sale takes
place on such date, the average of the closing bid and
asked prices on such date, in each case as officially
reported on the principal national securities exchange or
national market system on which such shares are then listed,
admitted to trading or traded;
(ii) if no shares of Common Stock are then listed or admitted
to trading on any national securities exchange or traded
on any national market system, the average of the reported
closing bid and asked prices thereof on such date in the
over-the-counter market as shown by the National Association
of Securities Dealers automated quotation system or, if such
shares are not then quoted in such system, as published by
the National Quotation Bureau, Incorporated or any similar
successor organization, and in either case as reported by
any member firm of the NASDAQ Stock Market selected by the
Holder; and
(iii) if no shares of Common Stock are then listed or admitted to
trading on any national securities exchange or traded on
any national market system, and if no closing bid and asked
prices thereof are then so quoted or published in the
over-the-counter market, the Fair Market Value of a share
of Common Stock shall be as mutually agreed by the Issuer
and the Holder seeking a determination of Fair Market Value;
provided that if the Issuer and such Holder are unable to
mutually agree upon the Fair Market Value, the Issuer and
such Holder shall, within five days from the date that
either party determines that they cannot agree and so
notifies the other party in writing, jointly retain an
investment banking firm (a "Valuation Firm"), satisfactory
to each of them. If the Issuer and such Holder are unable
to agree on the selection of such a Valuation Firm within
such five day period, the Issuer and
5
<PAGE>
such Holder shall, within 20 days after expiration of such
five day period, each retain a separate Valuation Firm (which
Valuation Firm, in either case, shall not be the investment
banking firm or accounting firm regularly retained by the
Issuer or the Holder). If either the Issuer or the Holder
fail to retain a Valuation Firm during such 20 day period,
then the Valuation Firm retained by the Holder or the
Issuer, as the case may be, shall alone take the actions
described below. Such Valuation Firms shall select a third
Valuation Firm (which Valuation Firm shall not be an
investment banking firm regularly retained by the Issuer or
the Holder) and the Valuation Firm so selected shall
determine within 30 days of being retained the Fair Market
Value of a share of Common Stock and deliver its opinion in
writing to the Issuer and to the Holder as to such Fair
Market Value of a share of Common Stock and deliver its
opinion in writing to the Issuer and to the Holder as to
such Fair Market Value. The determination so made shall be
conclusive and binding on the Issuer and the Holder. The
fees and expenses all Valuation Firms incur in performing
the services contemplated by this paragraph (C) shall be
paid by the Issuer.
"First Trigger Date" means the 30th day following the termination of
the Merger Agreement for any reason.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
forego ing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation of such other Person (whether arising
by virtue of partnership arrangements, by agreement to keepwell, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Debt or other obligation for
the payment thereof or to protect such obligee against loss in respect thereof
(in whole or in part), provided that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Lien" means any mortgage, lien, pledge, security interest, charge or
encumbrance of any kind (including any conditional sale or other title retention
agreement, any lease in the nature thereof and any agreement to give any
security interest).
6
<PAGE>
"Liquid Investments" shall mean (i) certificates of deposit maturing
within 90 days of the acquisition thereof denominated in U.S. dollars and issued
by a bank or trust company having combined capital and surplus of at least
$500,000,000 and which has (or which is a Subsidiary of a bank holding company
which has) publicly traded debt securities rated AA or higher by Standard and
Poors Ratings Group, a division of the McGraw Hill Companies, Inc. ("S&P"), or
Aa-2 or higher by Moody's Investors Service, Inc. ("Moody's"); (ii) obligations
issued or guaranteed by the United States of America, with maturities not more
than one year after the date of issue; and (iii) commercial paper with
maturities of not more than 90 days and a published rating of not less than A-1
from S&P or P- 1 from Moody's.
"Make Whole Date" means the day on which the Holder receives written
notice of the occurrence of the following events: (i) a registration statement
relating to the Conversion Shares is declared effective, (ii) the Conversion
Shares are listed on NASDAQ and (iii) the Conversion Shares are otherwise freely
transferable.
"Maturity Date" means September 30, 1998.
"Merger" has the meaning set forth in the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger dated as
of the date hereof among the Issuer, PS&T, the Holder and P.T. Holding, Inc., a
wholly-owned subsidiary of the Holder.
"NASDAQ" means the NASDAQ Stock Market.
"Person" means an individual or a corporation, partnership,
association, trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"PS&T" means Plastic Specialties & Technologies, Inc., a Delaware
corporation and a 96%-owned indirect Subsidiary of the Issuer.
"SEC" means the Securities and Exchange Commission.
"Second Trigger Date" means the 60th day following the termination of
the Merger Agreement for any reason.
"Securities Act" means the Securities Act of 1933, as amended from time
to time or any successor statute.
7
<PAGE>
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of the capital stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by (i) such Person, (ii) such Person and one or more
Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person.
"Third Trigger Date" means the 90th day following the termination of
the Merger Agreement for any reason.
"Trade Payables" means accounts payable or any other indebtedness or
monetary obligations created or assumed by the Issuer in the ordinary course of
business in connection with the obtaining of goods and services.
ARTICLE 2
COVENANTS
SECTION 2.01. Corporate Existence. The Issuer shall not and shall not
permit any Subsidiary to, without the written consent of the Holder, amend,
alter or repeal, whether by merger, consolidation, combination, reclassification
or otherwise, its Certificate of Incorporation or By-laws or any provision
thereof (including the adoption of a new provision thereof).
SECTION 2.02. Capital Stock. The Issuer shall not and shall not
permit any Subsidiary to, without the written consent of the Holder:
(a) issue or obligate itself to issue shares of any class of stock or
any other security convertible into or exchangeable for shares of any class of
stock except for (i) shares of Common Stock issuable upon exercise or conversion
of warrants and options outstanding on the date hereof, (ii) shares issuable
upon conversion of this Note and (iii) shares issued to the Issuer or any
Subsidiary; or
(b) authorize any liquidation, dissolution, recapitalization or
reorganization, any merger or consolidation with or into any other person of the
Issuer or any Subsidiary, any sale or transfer of all or substantially all of
the assets of the Issuer or any of its Subsidiaries or any acquisition of a
material amount of assets of any other person.
SECTION 2.03. Limitation on Debt. The Issuer will not and will not
permit any of its Subsidiaries to directly or indirectly create, incur, issue,
assume,
8
<PAGE>
guarantee or otherwise become directly or indirectly liable with respect to or
become responsible for the payment of, contingently or otherwise, any Debt
except for borrowings in the ordinary course of business by certain Subsidiaries
under existing working capital facilities as such facilities are in effect today
and, in the case of PS&T, in accordance with Section 2.12.
SECTION 2.04. Limitation on Liens. The Issuer will not and will not
permit any of its Subsidiaries to directly or indirectly create, incur, assume
or suffer to exist any Lien upon any of its assets or properties now owned or
hereafter acquired, or any income or profits therefrom, or assign or convey any
right to receive income therefrom other than Liens arising in the ordinary
course of business of the Issuer and its Subsidiaries which are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
and which do not materially distract from the value of the Issuer's and its
Subsidiaries' property.
SECTION 2.05. Restricted Payments. The Issuer will not and will not
permit any Subsidiary to, directly or indirectly:
(a) declare or pay any dividends on any class of equity interest of
the Issuer or such Subsidiary other than payments of dividends to the Issuer or
any Subsidiary;
(b) make any payment on account of, or set apart money for a sinking
or other analogous fund for the purchase, redemption, or other retirement of any
equity interest of the Issuer or such Subsidiary other than (i) payments to the
Issuer or any Subsidiary and (ii) payments made to repurchase the equity
interests of PS&T;
(c) make any distribution in respect of any equity interest of the
Issuer or such Subsidiary (including through mergers, liquidations or other
transactions commonly known as leveraged buyouts) other than (i) a distribution
to the Issuer or any Subsidiary, (ii) a distribution in respect of the equity
interests of PS&T in connection with the merger of PS&T with or into a
wholly-owned Subsidiary of the Issuer as contemplated by the Merger Agreement
(the "Minority Interest Transaction") and (iii) distributions in respect of the
Merger;
(d) purchase, defease, redeem or otherwise retire any Debt issued by
the Issuer or any Subsidiary other than the purchase of the 11.25% Senior
Secured Notes due 2003 of PS&T and ordinary course reductions in borrowings
under the working capital facilities described in Section 2.03; or
9
<PAGE>
(e) make any investment, whether in cash or property or in obligations
of the Issuer or any Subsidiary, other than Liquid Investments and the Minority
Interest Transaction.
SECTION 2.06. Limitations on Dividend and Other Payment Restrictions.
The Issuer will not and will not permit any of its Subsidiaries to directly or
indirectly create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on any kind on the ability of any
Subsidiary to (i) pay dividends or make any other distributions to the Issuer or
any other Subsidiaries, (ii) pay a Debt owned to the Issuer or any other
Subsidiary, (iii) make loans or advances to the Issuer or any other Subsidiary
or (iv) transfer any of its properties or assets to the Issuer or any other
Subsidiary, except for such encumbrances or restrictions existing under or by
reason of (a) financing or credit agreements in effect as of the date of this
Note or (b) this Note.
SECTION 2.07. Asset Dispositions. The Issuer will not, and will not
permit any of its Subsidiaries to, directly or indirectly, sell, lease, license
or otherwise dispose of any material assets or property except (i) pursuant to
existing contracts or commitments and (ii) inventory in the ordinary course of
business consistent with past practice.
SECTION 2.08. Limitation on Sale and Leaseback Transactions. The Issuer
will not, and will not permit any of its Subsidiaries to, enter into any
arrangement with any Person providing for the leasing by the Issuer or any such
Subsidiary of any real property or tangible personal property which property has
been or is to be sold or transferred by the Issuer or such Subsidiary to such
Person in contemplation of such leasing.
SECTION 2.09. Limitation on Transactions with Affiliates. The Issuer
and its Subsidiaries will not, directly or indirectly, enter into any
transaction or series of related transactions with or for the benefit of any of
their respective Affiliates (other than payments under existing policies and
arrangements for services rendered as employees or directors).
SECTION 2.10. Cash Flow Management. (a) The Issuer shall not, and shall
not permit any Subsidiary to, commit to make or make any capital expenditures
without the prior written consent of the Holder, other than (x) in respect of
commitments existing on the date hereof as disclosed in Schedule 5.01(d) to the
Merger Agreement or (y) maintenance capital expenditures in the ordinary course
of business and in an aggregate amount for clauses (x) and (y) on a combined
basis not to exceed $100,000 per calendar month during the period beginning on
November 1, 1997 and ending on March 31, 1998; and the Issuer will not and will
not permit any Subsidiary to, commit to make any capital expenditure without the
10
<PAGE>
prior written consent of the Holder to the extent that any such capital
expenditures are payable after March 31, 1998.
(b) The Issuer shall cause the aggregate dollar value (determined in
accordance with generally accepted accounting principles applied on a consistent
basis) of inventories comprising the asset base for the PS&T Credit Agreement
(as defined in Section 2.12) and owned by PS&T or its Subsidiaries to remain at
or below (i) $59 million during the month of November 1997, (ii) $60.4 million
during the month of December 1997, (iii) $57 million during the month of January
1998, (iv) $55.5 million during the month of February 1998 and (v) $51.8 million
during the month of March 1998.
(c) The Issuer shall cause the aggregate accounts payable (determined
in accordance with generally accepted accounting principles applied on a
consistent basis but excluding fees and expenses arising out of the transactions
contemplated by this Agreement) of the Issuer and its Subsidiaries on a
consolidated basis (exclusive of accounts payable by Burlington Resins, Inc. and
accounts payable by any European Subsidiaries) to remain at or to exceed (i)
$17.5 million during the month of November 1997, (ii) $17.0 million during the
month of December 1997, (iii) $21.5 million during the month of January 1998,
(iv) $23.6 million during the month of February 1998 and (v) $24.1 million
during the month of March 1998.
SECTION 2.11. Current Debt Restrictions. Except to the extent waived by
the Holder, the Issuer shall and shall cause each of its Subsidiaries to comply
with all covenants and agreements contained in any instrument evidencing any
Debt of the Issuer or such Subsidiary as such covenants and agreements are in
effect as of the date hereof, whether or not such instruments are later amended,
terminated or otherwise modified in any respect.
SECTION 2.12. Use of Proceeds. The Issuer shall use the proceeds of the
issuance and sale of the Note to repay certain receivables in an aggregate
amount of $4,600,000 owed to PS&T; provided that the Issuer shall cause PS&T to
apply such proceeds to pay down its Debt under the revolving credit facility
described in the Amended and Restated Senior Loan Agreement dated as of November
8, 1993, as amended, among PS&T, the lenders listed therein and General Electric
Capital Corporation, as Agent (the "PS&T Credit Agreement"); provided further
that the Issuer shall cause PS&T to borrow under the PS&T Credit Agreement only
after reasonable consultation with the Holder in the event that immediately
following such borrowing, less than $4,600,000 in undrawn capacity for borrowing
would remain available to PS&T.
11
<PAGE>
SECTION 2.13. Merger Agreement. The Issuer will not, and will not
permit any Subsidiary to (i) take or agree or commit to take any action that
would make (x) any representation and warranty of the Issuer under the Merger
Agreement that is qualified as to materiality inaccurate in any respect or (y)
any representation and warranty that is not so qualified inaccurate in any
material respect, in each case at, or as of any time prior to, the Effective
Time (as defined therein) or (ii) omit or agree or commit to omit to take any
action necessary to prevent any such representation or warranty from being
inaccurate in any respect (or, with respect to any representation any warranty
described in clause (y), in any material respect) at any such time.
ARTICLE 3
EVENTS OF DEFAULT
SECTION 3.01. Event of Default Defined; Acceleration of Maturity;
Waiver of Default. In case one or more of the following Events of Default
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing:
(a) default in the payment of any interest upon the Note as and when
the same shall become due and payable, at maturity, upon redemption, by
declaration or otherwise; or
(b) default in the payment of all or any part of the principal of the
Note as and when the same shall become due and payable, at maturity, upon
redemption, by declaration or otherwise; or
(c) failure on the part of the Issuer or its Subsidiaries duly to
observe or perform any of the covenants or agreements on the part of the Issuer
or its Subsidiaries contained in this Note or in the Merger Agreement;
(d) any default shall occur under the terms of any Debt of the
Issuer or any of its Subsidiaries; or
(e) any event or condition shall occur which results in the
acceleration of the maturity of any Debt of the Issuer or any of its
Subsidiaries; or
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(f) a judgment or order for the payment of money shall be rendered
against the Issuer or any of its Subsidiaries other than judgement or order
enforcing the payment obligations of the Issuer and its Subsidiaries under the
Settlement Agreement and Mutual General Release of all Claims dated October 3,
1997 among Dalen Trading Co., Ozite Corporation and MGC, Inc.; or
(g) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Issuer or any of its Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the Issuer or any of
its Subsidiaries or for any substantial part of the property of the Issuer or
any of its Subsidiaries or ordering the winding up or liquidation of the affairs
of the Issuer or any of its Subsidiaries; or
(h) the Issuer or any of its Subsidiaries shall commence a voluntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Issuer or any of its Subsidiaries or for any
substantial part of the property of the Issuer or any of its Subsidiaries, or
the Issuer or any of its Subsidiaries shall make any general assignment for the
benefit of creditors;
(i) any representation or warranty made by the Issuer in the Merger
Agreement or in any certificate, financial statement or other document delivered
pursuant to the Merger Agreement shall prove to have been incorrect when made;
(j) failure on the part of the Issuer to file a registration statement
with respect to the Conversion Share's with the SEC on or prior to the First
Trigger Date;
(k) failure on the part of the Issuer to file a listing application
with respect to the Conversion shares with NASDAQ on or prior to the First
Trigger Date;
(l) failure on the part of the Issuer cause a registration statement
covering the Conversion Shares to become effective under the Securities Act on
or prior to the Third Trigger Date;
(m) failure on the part of the Issuer to list the Conversion Shares on
NASDAQ on or prior to the Third Trigger Date;
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(n) failure on the part of the Issuer to cause the Conversion Shares
to be freely transferable on or prior to the Third Trigger Date;
(o) a Change of Control of the Issuer or PS&T shall occur, other than
pursuant to the Merger;
then, and in each and every such case (other than an Event of Default specified
in Section 3.01(g) or 3.01(h) hereof), the Holder, by notice in writing to the
Issuer (the "Acceleration Notice"), may declare the entire Principal Sum of the
Note and the interest accrued thereon to be due and payable immediately, and
upon any such declaration the same shall become immediately due and payable;
provided that if an Event of Default specified in Section 3.01(g) or 3.01(h)
occurs, the Principal Sum of and accrued interest on the Notes shall become and
be immedi ately due and payable without any declaration or other act on the part
of any Holder.
SECTION 3.02. Powers and Remedies Cumulative; Delay or Omission Not
Waiver of Default . No right or remedy herein conferred upon or reserved to the
Holder is intended to be exclusive of any other right or remedy, and every right
and remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise. The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
No delay or omission of the Holder to exercise any right or power
accruing upon any Event of Default occurring and continuing as aforesaid shall
impair any such right or power or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein; and every power and remedy given by
the Note or by law may be exercised from time to time, and as often as shall be
deemed expedient, by the Holder.
ARTICLE 4
CONVERSION; REDEMPTION
SECTION 4.01. Conversion Rights. The Holder shall have conversion
rights as follows (the "Conversion Rights"):
(a) Conversion at Option of Holder. This Note shall be convertible, in
whole or in part, without the payment of any additional consideration by the
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Holder, at the option of the Holder at any time after the Second Trigger Date
and until payment of all amounts owed hereunder shall have been made in full,
including without limitation after acceleration or maturity hereof into (i) such
number of fully paid and nonassessable shares of Common Stock (the "Base
Shares") as is determined by dividing the Principal Sum of the Note together
with all accrued interest to the date of conversion, by $2.72, as adjusted in
accordance with Article 5; plus (ii) such number of fully paid and nonassessable
shares of Common Stock (the "Make Whole Shares") having a Fair Market Value
equal to the Excess Amount determined as provided in subparagraph 4.01(c);
provided that if the Holder sells the Make Whole Shares in bonafide sales
transactions within three business days of receiving such Make Whole Shares the
sale price of such Make Whole Shares shall be deemed to be the Fair Market Value
of such Make Whole Shares.
(b) Mechanics of Conversion. The Notes shall be converted in
accordance with the following provisions:
(i) In order to exercise the conversion option in subparagraph
4.01(a), the Holder of the Note shall surrender such Note at the office
of the Issuer, with a written notice of election to convert, completed
and signed, specifying the amount of the Principal Sum of the Note to
be converted and the amount of accrued interest thereon, if any, to be
converted. Unless the shares issuable on conversion are to be issued in
the same name as the name in which such Note is registered, the Note
shall be accompanied by an instrument of transfer, in form reasonably
satisfactory to the Issuer, duly executed by the Holder or the Holder's
duly authorized attorney and an amount sufficient to pay any transfer
or similar tax.
(ii) As promptly as practicable after the surrender by the Holder of
the Note as aforesaid, the Issuer shall issue and shall deliver to such
Holder, or on such Holder's written order to such Holder's transferee,
a certificate or certificates for the whole number of shares of Common
Stock issuable upon the conversion of such Notes in accordance with the
provisions of this Section 4.01.
(iii) Each conversion shall be deemed to have been effected
immediately prior to the close of business on the date on which the
Note shall have been surrendered and such notice received by the
Issuer as aforesaid, and the person in whose name or names any
certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the
holder of record of the shares of Common Stock represented thereby
at such time on such date. All shares of Common Stock delivered upon
conversion of the Notes will
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upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any
preemptive rights. Upon the surrender of the Note, in the event the
Holder elects to convert the entire Principal Sum of and interest
accrued on the Note, such Note shall no longer be deemed to be
outstanding and all rights of a Holder with respect to such Note
surrendered for conversion shall immediately terminate except the right
to receive the Common Stock. In the event the Holder elects to convert
the Note only in part, the Issuer shall as promptly as practicable
after the surrender of the Note, issue and deliver to the Holder a new
Note with a Principal Sum equal to the unconverted Principal Sum and
accrued interest of such surrendered Note.
(iv) Prior to the delivery of any securities which the Issuer
shall be obligated to deliver upon conversion of the Notes,
the Issuer shall comply with all applicable federal and state
laws and regulations which require action to be taken by the
Issuer.
(c) Excess Amount. The "Excess Amount" shall be an amount equal to the
excess, if any, of (i) the Principal Sum of the Note plus accrued interest over
(ii) the Fair Market Value of the Base Shares on the Make Whole Date less any
brokerage commissions, fees and expenses incurred in connection with the sale by
the Holder of the Conversion Shares and less any expenses of the Holder
described in Section 7.06; provided that if the Holder sells the Base Shares in
bonafide sales transactions within three business days of receiving such Base
Shares the sale price of such Base Shares shall be deemed to be the Fair Market
Value of such Base Shares.
(d) Reserved Shares. The Issuer shall at all times reserve and keep
available, free from preemptive rights, for issuance hereunder all of its
authorized but unissued shares of Common Stock.
(e) Payment of Taxes. The Issuer will pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on conversion of the Note pursuant hereto;
provided that the Issuer shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of shares
of Common Stock in a name other than that of the Holder of the Note to be
converted and no such issue or delivery shall be made unless and until the
person requesting such issue or delivery has paid to the Issuer the amount of
any such tax or has established, to the reasonable satisfaction of the Issuer,
that such tax has been paid.
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(f) Fractional Interests. In connection with the conversion of the
Note, no fractions of shares of Common Stock shall be issued, but in lieu
thereof the Issuer shall pay a cash adjustment in respect of such fractional
interest, equal to such fraction multiplied by $2.72 multiplied by a fraction
the numerator of which the unadjusted number of Base Shares and the denominator
of which shall be the number of Base Shares as adjusted in accordance with
Article 7.
SECTION 4.02. Redemption. (a) In accordance with the provisions of this
Section 4.02, the Issuer may at any time elect to redeem the Note, in whole but
not in part, for an amount in cash equal to the Principal Sum of the Note plus
accrued interest; provided that until the fifth business day following the Make
Whole Date, the redemption price shall be the greater of (i) the Principal Sum
of the Note plus accrued interest and (ii) the Fair Market Value of the
Conversion Shares at that time, determined as though such Conversion Shares were
registered in accordance with the Securities Act, were listed on NASDAQ and were
otherwise freely transferable on such date.
(b) In the event the Issuer elects to redeem the Note in accordance
with Section 4.01(a), the Issuer shall send to the Holder not less than 5
business days before the date on which the Note will be redeemed (the
"Redemption Date") written notice advising the Holder of the proposed redemption
specifying the Redemption Date and the Principal Sum and accrued and
uncapitalized interest to be repaid.
(c) Notwithstanding its receipt of notice from the Issuer of a
proposed redemption, the Holder shall continue to have available to it all of
its rights hereunder, including its conversion rights pursuant to this Article
4, until the Redemption Date.
ARTICLE 5
ANTI-DILUTION
So long as this Note (or any portion thereof) is outstanding, the
number of Base Shares issuable upon conversion shall be subject to change or
adjustment as follows:
SECTION 5.01. Common Stock Dividends, Subdivisions or Combinations. In
case the Issuer shall (i) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or
reclassify the outstanding shares of its Common Stock into a larger number of
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shares or (iii) combine or reclassify the outstanding shares of its Common Stock
into a smaller number of shares, then in each such case the number of Base
Shares shall be adjusted to equal the number of such shares to which the Holder
of this Note would have been entitled upon the occurrence of such event had this
Note been converted immediately prior to the happening of such event or, in the
case of a stock dividend or other distribution, prior to the record date for
determination of shareholders entitled thereto. An adjustment made pursuant to
this Section 5.01 shall become effective immediately after such record date, in
the case of a dividend or distribution, and immediately after the effective
date, in the case of a subdivision, split, combination or reclassification.
SECTION 5.02. Reorganizations or Reclassifications. In case of any
capital reorganization or any reclassification of the capital stock of the
Issuer (whether pursuant to a merger or consolidation or otherwise), this Note
shall thereafter be exercisable for the number of shares of stock or other
securities or property receivable upon such capital reorganization or
reclassification of capital stock, as the case may be, by a holder of the number
of shares of Common Stock into which this Note was exercisable immediately prior
to such capital reorganization or reclassification of capital stock; and, in any
case, appropriate adjustment shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
Holder of this Note to the end that the provisions set forth herein shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other securities or property thereafter deliverable upon the
exercise of this Note.
SECTION 5.03. Distributions of Assets or Securities Other Than Common
Stock. In case the Issuer shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any of its capital stock (other than
Common Stock), rights or warrants to purchase any of its securities (other than
those referred to in Section 5.04), cash, other assets or evidences of its
indebtedness, then in each such case the number of Base Shares shall be adjusted
by multiplying such number immediately prior to the date of such dividend or
distribution by a fraction, of which the numerator shall be the Fair Market
Value per share of Common Stock at the record date for determining shareholders
entitled to such dividend or distribution, and of which the denominator shall be
such Fair Market Value per share less the fair market value (as determined in
good faith by the Board of Directors of the Company; provided that if the Holder
in its discretion does not agree with such determination, such fair market value
shall be determined by a nationally recognized firm of investment bankers
reasonably acceptable to the Issuer and the Holder, whose fees shall be paid by
the Issuer) of the portion of the securities, cash, assets or evidences of
indebtedness so distributed applicable to one share of Common Stock.
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SECTION 5.04. Below Market Issuances or Distributions of Common Stock.
In case the Issuer shall issue Common Stock (or options, rights, warrants or
other securities convertible into or exchangeable or exercisable for shares of
Common Stock, including options issued pursuant to the 1995 Disinterested
Directors Stock Option Plan and the 1995 Stock Incentive Plan (the "Option
Plans") at a price per share (or having an effective exercise, exchange or
conversion price per share together with the purchase price thereof) less than
the Fair Market Value per share of Common Stock on the date such Common Stock
(or options, rights, warrants or other securities convertible into or
exchangeable or exercisable for shares of Common Stock, including options issued
pursuant to the Option Plans) is sold or issued (provided that no sale of
securities pursuant to an underwritten public offering shall be deemed to be for
less than Fair Market Value), then in each such case the number of Base Shares
shall thereafter be adjusted by multiplying the such number immediately prior to
the date of issuance of such Common Stock (or options, rights, warrants or other
securities) by a fraction, the numerator of which shall be (x) the sum of (i)
the number of Common Share Equivalents represented by all securities outstanding
immediately prior to such issuance and (ii) the number of additional Common
Share Equivalents represented by all securities so issued multiplied by (y) the
Fair Market Value of a share of Common Stock immediately prior to the date of
such issuance, and the denominator of which shall be (x) the product of (A) the
Fair Market Value of a share of Common Stock immediately prior to the date of
such issuance and (B) the number of Common Share Equivalents represented by all
securities outstanding immediately prior to such issuance plus (y) the aggregate
consideration received by the Issuer for the total number of securities so
issued plus, (z) in the case of options, rights, warrants or other securities
convertible into or exchangeable or exercisable for shares of Common Stock, the
additional consideration required to be received by the Issuer upon the
exercise, exchange or conversion of such securities; provided, however, that in
the event that such rights, options or warrants are not so issued or expire
unexercised, or in the event of a change in the number of shares of Common Stock
to which the holders of such rights, options or warrants are entitled, the
number of Base Shares shall again be adjusted to be the number of Base Shares
which would then be in effect if such rights, options or warrants had never been
issued, in the former event, or the number of Base Shares which would then be in
effect if such holder had initially been entitled to such changed number of
shares of Common Stock, in the latter event. An adjustment made pursuant to this
Section 5.04 shall become effective immediately after the date such Common Stock
or other security is sold or issued. For purposes of this Section 5.04, in the
case of an issuance in the ordinary course of business consistent with past
practice of any options, rights, warrants or other securities or any shares of
Common Stock (whether treasury shares or newly issued shares) pursuant to the
Fair Market Value of such shares of Common Stock (or of the shares of Common
Stock issuable upon the exercise,
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exchange or conversion of such options, rights, warrants or other securities) at
the time such shares of Common Stock (or options, rights, warrants or other
securities) are issued shall be deemed to be equal to the fair market value of
such securities as determined pursuant to the provisions of such plan or
program. Notwithstanding anything herein to the contrary, (1) no further
adjustment to the number of Base Shares shall be made upon the issuance or sale
of Common Stock pursuant to (x) the exercise of any options, rights or warrants
or (y) the conversion or exchange of any convertible securities, if in each case
the adjustment in the number of Base Shares was made as required hereby upon the
issuance or sale of such options, rights, warrants or securities or no
adjustment was required hereby at the time such option, right, warrant or
convertible security was issued and (2) no adjustment to the number of Base
Shares shall be made upon the issuance or sale of Common Stock (x) upon the
conversion of the Note or (y) upon the exercise of any warrants or options
existing on the date hereof, without regard to the exercise price thereof. For
purposes of this Section 5.04, if the Issuer issues Common Stock (or options,
rights, warrants or other securities convertible into or exchangeable or
exercisable for shares of Common Stock) for consideration wholly or partially
other than cash, including services rendered, the fair market value of such
consideration and of such Common Stock (or options, rights, warrants or other
securities, convertible into or exchangeable or exercisable for shares of Common
Stock, including options issued pursuant to the Option Plans) issued in
connection therewith shall be as determined in good faith by the Board of
Directors of the Issuer; provided that if the Holder in its discretion does not
agree with such determination, such fair market value shall be determined by a
nationally recognized firm of investment bankers reasonably acceptable to the
Issuer and the Holder, whose fees shall be paid by the Issuer.
SECTION 5.05. Below Market Distributions or Issuances of Preferred
Stock or Other Securities. In case the Issuer shall issue nonconvertible and
nonexchangeable preferred stock (or other securities of the Issuer other than
Common Stock or options, rights, warrants or other securities convertible into
or exchangeable or exercisable for shares of Common Stock) at a price per share
(or other similar unit) less than the Fair Market Value per share (or other
similar unit) of such preferred stock (or other security) on the date such
preferred stock (or other security) is sold (provided that no sale of preferred
stock or other security pursuant to an underwritten public offering shall be
deemed to be for less than its fair market value), then in each such case the
number of Base Shares shall thereafter be adjusted by multiplying the number of
Base Shares immediately prior to the date of issuance of such preferred stock
(or other security) by a fraction, the numerator of which shall be the product
of (i) the number of Common Share Equivalents represented by all securities
outstanding immediately prior to such issuance and (ii) the Fair Market Value of
a share of Common Stock immediately prior to the date of such issuance, and the
denominator of which
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shall be (x) the product of (A) the number of Common Share Equivalents
represented by all securities outstanding immediately prior to such issuance and
(B) the Fair Market Value of a share of the Common Stock immediately prior to
the date of such issuance minus (y) the difference between (I) the aggregate
Fair Market Value of such preferred stock (or other security) and (II) the
aggregate consideration received by the Issuer for such preferred stock (or
other security). An adjustment made pursuant to this Section 5.05 shall become
effective immediately after the date such preferred stock (or other security) is
sold.
SECTION 5.06. Above Market Repurchases of Common Stock. If at any time
or from time to time the Issuer or any Subsidiary thereof shall repurchase, by
self-tender offer or otherwise, any shares of Common Stock of the Issuer (or any
security convertible into or exercisable or exchangeable for shares of Common
Stock) at a weighted average purchase price in excess of the Fair Market Value
thereof, on the business day immediately prior to the earliest of (i) the date
of such repurchase, (ii) the commencement of an offer to repurchase or (iii) the
public announcement of either (such date being referred to as the "Determination
Date"), the number of Base Shares shall be determined by multiplying the number
of Base Shares immediately prior to such Determination Date by a fraction, the
numerator of which shall be the product of (1) the number of Common Share
Equivalents represented by all securities outstanding immediately prior to such
Determination Date minus the number of Common Share Equivalents represented by
the securities repurchased or to be purchased by the Issuer or any Subsidiary
thereof in such repurchase and (2) the Fair Market Value of a share of Common
Stock immediately prior to such Determination Date, and the denominator of which
shall be (x) the product of (A) the number of Common Share Equivalents
represented by all securities outstanding immediately prior to the Determination
Date and (B) the Fair Market Value of a share of Common Stock immediately prior
to such Determination Date minus (y) the sum of (I) the aggregate consideration
paid by the Issuer in connection with such repurchase and (II) in the case of
options, rights, warrants or other securities convertible into or exchangeable
or exercisable for shares of Common Stock, the additional consideration required
to be received by the Issuer upon the exercise, exchange or conversion of such
securities. An adjustment made pursuant to this Section 5.06 shall become
effective immediately after the effective date of such repurchase.
SECTION 5.07. Above Market Repurchases of Preferred Stock or Other
Securities. If at any time or from time to time the Issuer or any Subsidiary
thereof shall repurchase, by self-tender offer or otherwise, any shares of
nonconvertible and nonexchangeable preferred stock (or other securities of the
Issuer other than Common Stock or options, rights, warrants or other securities
convertible into or exchangeable or exercisable for shares of Common Stock), at
a weighted average purchase price in excess of the Fair Market Value thereof, on
the business day
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immediately prior to the Determination Date, the number of Base Shares shall be
determined by multiplying the number of Base Shares immediately prior to the
Determination Date by a fraction, the numerator of which shall be the product of
(i) the number of Common Shares Equivalents represented by all securities
outstanding immediately prior to such Determination Date and (ii) the Fair
Market Value of a share of Common Stock immediately prior to such Determination
Date, and the denominator of which shall be (x) the product of (A) the number of
Common Share Equivalents represented by all securities outstanding immediately
prior to such Determination Date and (B) the Fair Market Value of a share of
Common Stock immediately prior to such Determination Date minus (y) the
difference between (I) the aggregate consideration paid by the Issuer in
connection with such repurchase and (II) an aggregate Fair Market Value of such
preferred stock (or other security). An adjustment made pursuant to this Section
5.07 shall become effective immediately after the effective date of such
repurchase.
SECTION 5.08. No Impairment . The Issuer will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Issuer, but will at all
times in good faith assist in the carrying out of all the provisions of this
Article 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against
impairment.
SECTION 5.09. Certificate as to Adjustments. . Upon the occurrence of
each adjustment or readjustment of the number of Base Shares pursuant to this
Article 5, the Issuer at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Issuer shall,
upon the written request at any time of the Holder, furnish or cause to be
furnished to the Holder a like certificate setting forth (1) such adjustments
and readjustments and (2) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of this Note.
SECTION 5.10. Notices. (a) In the event that the Issuer shall propose
at any time to effect any transaction of the type described in this Article 5
hereof or to take any similar extraordinary corporate action affecting the
Issuer's capital stock, then, in connection with each such event, the Issuer
shall send to the Holder at least 10 days prior to (x) in the case of a dividend
or other distribution, the applicable record date, a notice specifying the
record date for purposes of such dividend or distribution and the date on which
such dividend or other distribution
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is to be made, and (y) in any other case, the date on which such event is to
become effective or the first date on which the Issuer intends to effect any
such transaction, as the case may be, in each case specifying in reasonable
detail what the transaction or event consists of and, if applicable, the
aggregate amount or value of any cash or property proposed to be distributed,
paid, purchased or received by the Issuer in connection therewith.
(b) Unless notice is otherwise required pursuant to Section 5.10(a)
hereof, the Issuer shall send written notice to the Holder immediately upon any
public announcement with respect to an open market repurchase program for, any
self-tender offer for and any other repurchase of shares of Common Stock.
ARTICLE 6
REGISTRATION AND LISTING
SECTION 6.01. Registration Rights. (a) The Issuer shall use its best
efforts to cause a registration statement covering the Conversion Shares to be
declared effective under the Securities Act and to list such Conversion Shares
on NASDAQ as soon as practicable following the termination of the Merger
Agreement but in no event later than the Third Trigger Date. On or prior to the
First Trigger Date, the Issuer will prepare and file with the SEC a registration
statement with respect to the Conversion Shares. The Issuer shall use its best
efforts cause such registration statement to be declared effective on or prior
to the Third Trigger Date and to have such Registration Statement remain
effective under the Securities Act until the Conversion Shares are transferred
by the Holder under such registration statement or the Note is repaid in full in
cash, but in no event later than twelve months following the effective date of
such registration statement (the "Registration Period"). In addition, the Issuer
shall use its best efforts to register or qualify the Conversion Shares under
the securities or Blue Sky laws of each jurisdiction within the United States in
which such registration or qualification is necessary in connection with the
issuance and delivery of such Conversion Shares to the Holder of the Note on or
prior to the Third Trigger Date.
(b) In connection with the registration and qualification referred to
in Section 6.01(a), the Issuer covenants and agrees:
(i) as expeditiously as possible, to prepare and file with the SEC
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep
such registration statement effective throughout the Registration
Period;
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(ii) as expeditiously as possible, to take such action as may be
necessary or desirable to maintain the registration and qualification
of the Conversion Shares under the securities or Blue Sky laws of the
jurisdictions referred to in Section 6.01(a); and
(iii) to pay all expenses incurred by the Issuer in complying in with
this Article 6, including (A) all registration and filing fees, (B) all
printing expenses, (C) all fees and disbursements of its counsel and
independent public accountants and (D) all Blue Sky fees and expenses
(including fees and disbursements of counsel).
(c) The obligations of the Issuer under this Section 6.01 are
conditioned upon the Holder furnishing to the Issuer, on a timely basis, such
information relating to the Holder as may be required to be included in the
registration statement relating to the Conversion Shares under applicable
securities laws, and to otherwise cooperate with the Issuer in the preparation
and filing of such registration statement.
SECTION 6.02. Indemnification by the Issuer. The Issuer agrees to
indemnify and hold harmless each of the Holder, its officers, directors and
agents, and each Person, if any, who controls such Holder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act from and
against any and all losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Conversion Securities (as
amended or supplemented if the Issuer shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Issuer by the Holder or on the Holder's
behalf expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of the Holder from whom the person asserting any such loss,
claim, damage or liability purchased the Conversion Shares if (i) it is
determined that it was the responsibility of the Holder to provide such person
with a current copy of the prospectus, (ii) the Holder had been furnished with
copies of such current prospectus within a reasonable time prior to such
purchase, and (iii) such current copy of the prospectus would have cured the
defect giving rise to such loss, claim, damage or liability. The Issuer also
agrees to indemnify any underwriters of the Conversion Shares, their officers
and directors and each person who controls such
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underwriters on substantially the same basis as that of the indemnification of
the Holder provided in this Section 6.02.
SECTION 6.03. Indemnification by Holder. The Holder agrees to indemnify
and hold harmless the Issuer, its officers, directors and agents and each
Person, if any, who controls the Issuer within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Issuer to the Holder, but only with reference
to information related to the Holder furnished in writing by the Holder or on
the Holder's behalf expressly for use in any registration statement or
prospectus relating to the Conversion Shares, or any amendment or supplement
thereto, or any preliminary prospectus; provided that the liability of the
Holder to the Issuer and its officers, directors, agents and control persons set
forth in this Section 6.03 shall be limited to the net proceeds received by the
Holder as a result of his or its sale of Conversion Shares pursuant to such
registration statement or prospectus (including amendments and supplements
thereto). In case any action or proceeding shall be brought against the Issuer
or its officers, directors or agents or any such controlling person, in respect
of which indemnity may be sought against the Holder, the Holder shall have the
rights and duties given to the Issuer, and the Issuer or its officers, directors
or agents or such controlling person shall have the rights and duties given to
the Holder, by the preceding paragraph. Notwithstanding the foregoing, the
Holder also agrees to indemnify and hold harmless the underwriters of the
Conversion Shares, their officers and directors and each person who controls
such underwriters on substantially the same basis as that of the indemnification
of the Issuer provided in this Section 6.03.
SECTION 6.04. Conduct of Indemnification Proceedings. In case any
proceeding (including any governmental investigation) shall be instituted
involving any person in respect of which indemnity may be sought pursuant to
Section 6.02 or 6.03, such person (an "Indemnified Party") shall promptly notify
the person against whom such indemnity may be sought (an "Indemnifying Party")
in writing and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Party, and shall assume the payment of all fees and expenses. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel, (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnified Party and the Indemnifying Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them as reasonably determined by the Indemnified
Party or (iii) the Indemnifying Party fails to retain counsel or diligently
pursue the defense. It is
25
<PAGE>
understood that the Indemnifying Party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for all such Indemnified Parties, and
that all such fees and expenses shall be reimbursed as they are incurred. In the
case of any such separate firm for the Indemnified Parties, such firm shall be
designated in writing by the Indemnified Parties. The Indemnifying Party shall
not be liable for any settlement of any proceeding effected without its consent,
but if settled with such consent, or if there be a final judgment for the
plaintiff, the Indemnifying Party shall indemnify and hold harmless such
Indemnified Parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an Indemnified Party shall have requested an
Indemnifying Party to reimburse the Indemnified Party for fees and expenses of
counsel as contemplated by the third sentence of this paragraph, the
Indemnifying Party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 business days after receipt by such Indemnifying Party
of the aforesaid request and (ii) such Indemnifying Party shall not have
reimbursed the Indemnified Party in accordance with such request prior to the
date of such settlement. No Indemnifying Party shall, without the prior written
consent of the Indemnified Party, effect any settlement of any pending or
threatened proceeding in respect of with any Indemnified Party is or could have
been a party and indemnity could have been sought hereunder by such Indemnified
Party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability arising out of such proceeding.
SECTION 6.05. Contribution. If the indemnification provided for in this
Article 6 is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein, then each such Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such losses,
claims, damages or liabilities (i) as between the Issuer and the Holder (subject
to the limitations on liabilities of the Holder to the Issuer set forth in the
proviso contained in Section 6.03 hereof) on the one hand and the underwriters
on the other, in such proportion as is appropriate to reflect the relative
benefits received by the Issuer and the Holder on the one hand and the
underwriters on the other from the offering of the Conversion Shares, or if such
allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits but also the relative
fault of the Issuer and the Holder on the one hand and of the underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations and (ii) as between the Issuer on the one hand and the Holder on
the other, in such proportion as is appropriate to reflect the relative
26
<PAGE>
fault of the Issuer and of the Holder in connection with such statements or
omissions, as well as any other relevant equitable considerations. The relative
benefits received by the Issuer and the Holder on the one hand and the
underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Issuer and the Holder bear to the
total underwriting discounts and commissions received by the underwriters, in
each case as set forth in the table on the cover page of the prospectus. The
relative fault of the Issuer and the Holder on the one hand and of the
underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Issuer and the Holder or by the underwriters. The relative fault
of the Issuer on the one hand and of the Holder on the other shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Issuer and the Holder agree that it would not be just and equitable
if contribution pursuant to this Section 6.05 were determined by pro rata
allocation (even if the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages or liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 6.05, no underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Conversion Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and the Holder shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Conversion Shares of the Holder were offered to the
public exceeds the amount of any damages which the Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
27
<PAGE>
SECTION 6.06. Listing Rights. On or prior to the First Trigger Date,
the Issuer will prepare and file with NASDAQ an application for listing the
Conversion Shares. The Issuer will use its best efforts to cause the Conversion
Shares to be listed and to remain listed on NASDAQ during the Registration
Period.
ARTICLE 7
MISCELLANEOUS
SECTION 7.01. Modification of Notes. Any provision of this Note may be
amended or waived with the written consent of the Issuer and the Holders of a
majority of the Principal Sum of all of the Notes then outstanding; provided
that no such amendment or waiver shall (a) extend the final maturity of the
Note, or reduce the Principal Sum thereof, or reduce the rate or extend the time
of payment of interest thereon, or reduce any amount payable on the redemption
thereof, or change the conversion rate thereof, or impair or affect the rights
of any Holder to institute suit for the payment thereof or adversely affect the
ranking of the Note with respect to the outstanding Debt of the Issuer, in each
such case, without the consent of each Holder of the Note so affected or (b)
reduce the aforesaid percentage of Note, the consent of the Holders of which is
required for any such amendment or waiver, without the consent of all of the
Holders of Note. The Issuer shall promptly notify all Holders after the making
of any amendment or waiver pursuant to this Section 7.01.
SECTION 7.02. Notices. All notices and other communications required or
permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) five
(5) days after deposit with the U.S. Postal Service or other applicable postal
service, if delivered by first class mail, postage prepaid, (b) upon delivery,
if delivered by hand, (c) one business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid or (d) one
business day after the business day of facsimile transmission, if delivered by
facsimile transmission with copy by first class mail, postage prepaid, and shall
be addressed to each holder of record at his address appearing on the books of
the corporation.
SECTION 7.03. Governing Law. This Note shall be deemed to be a contract
under the laws of the State of New York, and for all purposes shall be construed
in accordance with the laws of said State, except as may otherwise be required
by mandatory provisions of law. The parties hereto hereby waive presentment,
demand, notice, protest and all other demands and notices in
28
<PAGE>
connection with the delivery, acceptance, performance and enforcement of this
Note, except as specifically provided herein. The Holder of this Note by accep
tance hereof agrees to be bound by the provisions of the Notes which are
expressly binding on the Holder.
SECTION 7.04. Headings. The Section headings herein are for
convenience only and shall not affect the construction hereof.
SECTION 7.05. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Note is not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof in addition to any other
remedy to which they are entitled at law or in equity.
SECTION 7.06. Expenses; Indemnification. (a) The Issuer shall pay (i)
all out-of-pocket expenses of the Holder, including fees and disbursements of
counsel for the Holder, in connection with any waiver or consent hereunder or
any amendment hereof or any Default or Event of Default hereunder and (ii) if an
Event of Default occurs, all out-of-pocket expenses incurred by the Holder,
including fees and disbursements of counsel, in connection with such Event of
Default and collection, bankruptcy, insolvency and other enforcement proceedings
resulting therefrom.
(b) The Issuer agrees to indemnify the Holder, its affiliates and the
directors, officers, agents and employees of the foregoing (each an
"Indemnitee") and hold each Indemnitee harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind, including, without
limitation, the reasonable fees and disbursements of counsel, which may be
incurred by such Indemnitee in connection with any investigative, administrative
or judicial proceeding (whether or not such Indemnitee shall be designated a
party thereto) brought or threatened relating to or arising out of this Note or
any actual or proposed use of proceeds the sale of this Note hereunder; provided
that no Indemnitee shall have the right to be indemnified hereunder for such
Indemnitee's own gross negligence or willful misconduct as determined by a court
of competent jurisdiction.
SECTION 7.07. Survival. Notwithstanding the surrender and cancellation
of this Note in connection with the conversion of the Note, the covenants and
agreements contained in Section 4.01 (other than Section 4.01(d)), Article 6 and
Article 7 shall survive such surrender and cancellation and shall remain in full
force and effect.
29
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed.
Dated: November 11, 1997
PURETEC CORPORATION
By: ______________________________
Name:
Title:
30
<PAGE>
CROSS-REFERENCE TARGET LIST
---------------------------
NOTE: Due to the number of targets some target names may not appear in the
target pull-down list. (This list is for the use of the wordprocessor only, is
not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME
- --------------- -----------
1............................................definitions
1.01...............................certain.terms.defined
?..................................payment.conds.funding
?.............................payment.principal.interest
2.......................................covenants.issuer
2.01.................................corporate.existence
2.02.......................................capital.stock
2.02(a)..........................create.auth.issue.oblig
2.02(b)...........................auth.liquid.diss.recap
?............................redeem.purch.acquire.shares
2.03.....................................limitation.debt
2.04....................................limitation.liens
2.05...........................limitation.restr.payments
2.05(a)................................declare.pay.divid
2.05(b)...............................payment.account.of
2.05(c).........................distr.respect.equity.int
2.05(d).............................purch.defease.redeem
2.05(e)..................................make.investment
2.06..........................limit.divd.other.pmt.restr
2.07..................................asset.dispositions
2.08........................limitation.sale.leaseb.trans
2.09..............................limitation.trans.affil
2.10......................................cash.flow.mgmt
2.10(a)...............................comp.sub.com.expen
2.10(b)...............................dollar.value.below
2.10(c)..................................accts.pay.below
2.11......................................pst.burlington
2.12........................................use.proceeds
3.........................................events.default
3.01...............................event.default.defined
3.01(a)........................default.pmt.interest.note
3.01(b)...........................default.pmt.princ.note
3.01(c)..........................failure.observe.perform
?....................................failure.part.issuer
3.01(d).............................issuer.fail.make.pmt
3.01(f).............................issuer.fail.make.pmt
3.01(g)...............................court.decree.order
3.01(h)................................issuer.volun.case
3.02...............................powers.remedies.cumul
?...................................waiver.past.defaults
4.............................................conversion
4.01...................................conversion.rights
4.01(a).........................conversion.option.bidder
4.01(b).............................mechanics.conversion
4.01(b)(i)........................exer.conversion.option
4.01(b)(iii).................conversion.deemed.effective
4.01(b)(iv)....................prior.delivery.securities
4.01(c)....................................excess.amount
4.01(d)..................................reserved.shares
4.01(e)....................................payment.taxes
4.01(f).............................fractional.interests
4.02..........................................redemption
5..........................................anti.dilution
5.01...................................common.stock.divs
5.02......................................reorgs.reclass
5.03..............................dist.assets.secs.other
5.04..............................below.market.issuances
5.05..........................below.market.distributions
5.06............................above.market.repurchases
5.07........................above.market.reps.pref.stock
5.08.......................................no.impairment
5.09....................................cert.adjustments
5.10...........................................notices.1
6............................registration.listing.rights
6.01..........................................reg.rights
6.01(a)...................................prior.thir.day
6.01(b)....................................conn.reg.qual
6.01(b)(i)..............................prepare.file.sec
6.01(b)(ii).........................reg.qual.conv.shares
6.01(b)(iii)................pay.expenses.incurred.issuer
6.02.............................indemnification.company
6.03.............................indemn.holders.reg.secs
6.04.............................conduct.indemn.proceeds
6.05........................................contribution
7...................................................misc
7.01.........................................modif.notes
7.02.............................................notices
7.02(a)................................five.days.deposit
7.02(b)....................................upon.delivery
7.02(c)...........................one.business.day.fedex
7.02(d).............................one.business.day.fax
7.03.......................................governing.law
7.04............................................headings
7.06............................expenses.indemnification
7.07............................................survival
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-98266 of PureTec Corporation on Form S- 8 and Registration Statement No.
33-98190 on Form S-3 of our report dated November 13, 1997, appearing in this
Annual Report on Form 10-K of PureTec Corporation for the year ended July 31,
1997.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
November 13, 1997
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<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
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<RECEIVABLES> 57,890
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<CURRENT-ASSETS> 3,962
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<CURRENT-LIABILITIES> 101,851
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0
0
<COMMON> 315
<OTHER-SE> 66,862
<TOTAL-LIABILITY-AND-EQUITY> 311,823
<SALES> 315,334
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<DISCONTINUED> (4,136)
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