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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
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AMENDMENT TO APPLICATION OR REPORT
Filed Pursuant to Section 12, 15, or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26508
PURETEC CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-3376449
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(State of Incorporation) (I.R.S. Employer Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
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(Address of principal executive offices and zip code)
(201) 941-6550
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(Registrant's telephone number, including area code)
AMENDMENT NO. 1
TO FORM 10-Q
The undersigned registrant hereby amends the following items of its
Quarterly Report on Form 10-Q for the Quarter Ended October 31, 1997, as set
forth in the pages attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
PURETEC CORPORATION
(Registrant)
By /s/ Thomas V. Gilboy
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Thomas V. Gilboy
Chief Financial Officer and Vice President
Date: January 14, 1998
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
The following table sets forth the percentage of net sales of the
Company represented by the components of income and expense for the three month
periods ended October 31, 1997 and 1996:
1997 1996
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Net sales.......................................... 100.0% 100.0%
Cost of goods sold................................. (79.1) (80.2)
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Gross profit....................................... 20.9 19.8
Selling, general and administrative expenses....... (13.5) (12.8)
Amortization of intangible assets.................. (1.2) (1.8)
Research and development........................... (0.2) (0.2)
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Income from operations............................. 6.0 5.0
Interest expense................................... (6.6) (7.1)
Debt issuance cost and discount amortization... (0.7) (1.0)
Equity in loss of affiliates....................... (0.6)
Other, net......................................... (0.0) (0.0)
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Loss from continuing operations
before minority interest and income taxes...... (1.9) (3.1)
Provision for income taxes......................... (1.1) ( 0.9)
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Loss from continuing operations before
minority interest.............................. (3.0) (4.0)
Minority interest.................................. ------ ------
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Loss from continuing operations.................... (3.0) (4.0)
Discontinued operations............................ (0.3) (0.5)
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Net loss........................................... (3.3)% (4.5)%
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Three months ended October 31, 1997 vs. Three months ended October 31, 1996:
Net sales from continuing operations in the three month period ended
October 31, 1997 were $67,693 compared to $61,075 in the three month period
ended October 31, 1996. The increase is mainly attributable to increases in
sales volume for specialty resins, recycled plastics, and garden hose.
Gross profit for the three months ended October 31, 1997 was $14,137,
an increase of $2,033, (16.8 %) compared to a gross profit of $12,104 for the
three months ended October 31, 1996. Gross profit as a percentage of sales
increased to 20.9% from 19.8% for the same period. Gross profit was favorably
affected primarily as a result of the increased sales volume as mentioned above
as well as improved manufacturing efficiencies.
Selling, general and administrative expenses for the three months ended
October 31, 1997 were $9,156, a $1,356 (21.2%) increase compared to the three
months ended October 31, 1996. As a percentage of net sales, these expenses
increased to 13.5% from 12.8%. The increase is primarily a result of the
reversal of certain previously accrued expenses in the first quarter of 1996
including management compensation.
Operating income for the three months ended October 31, 1997 and 1996
was $4,018 and $3,022, respectively. The $996 increase in operating income is
primarily attributable to increased sales volumes, partly offset by higher cost
of goods sold and higher selling, general and administrative expenses.
Additionally, this increase in operating income was partially offset by startup
expenses at the Company's new plant in Northern Ireland.
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Interest expense for the three month period ended October 31, 1997 was
$4,445, an $81 increase compared to the three months ended October 31, 1996,
respectively.
The income tax provisions for the three months ended October 31, 1997
and 1996 is comprised of foreign tax provisions of $726 and $547, respectively.
The Company had a loss from continuing operations for the three month
period ended October 31, 1997 and 1996 of $2,010 and $2,455, respectively.
As mentioned in Note 6, the Company completed the sale of its Styrex
injection molding operation. Accordingly, the Company has included a loss of
$298 relating to this operation for the three months ended October 31, 1996
within discontinued operations. For the three months ended October 31, 1997 the
Company recorded a loss of $236 within discontinued operations related to the
Circuit Chemistry lawsuit settlement (See Note 3).
Liquidity and Capital Resources
In the past, the Company has expanded its operations through the
expansion of existing activities, acquisitions of new facilities and various
business combinations. Historically, the Company's sources of liquidity and
capital resources have been net cash provided by operations, bank financing,
private placements of the Company's securities and other private and public
financial sources.
While the management of the Company believes that the Company will be
able to operate on a positive cash flow basis with respect to continuing
operations during the fiscal year ending July 31, 1998, the ability of the
Company to continue to expand its operations may require additional funding.
Cash and cash equivalents decreased $2,084 for the three months ended
October 31, 1997 compared to a $4,789 decrease for the three months ended
October 31, 1996. The changes for these periods were attributable to the factors
discussed below.
The Company had working capital of approximately $19,255 at October 31,
1997 compared to working capital of approximately $20,160 at July 31, 1997. The
decrease in working capital is attributable to an increase in short term
borrowings of $3,265, a decrease in accounts receivable of $14,198 partially
offset by increases in inventory ($12,173), lower accrued expenses of $2,390 and
lower accrued plant closing costs of $1,498. Given the seasonal nature of the
business, inventory generally tends to increase during this time as the Company
builds inventory in anticipation of its peak selling season during the Company's
third and fourth quarters.
Net cash used in operating activities was approximately $1,824 for the
three months ended October 31, 1997. The change was due principally to an
increase in inventory of $11,900, partly offset by an increase in accounts
receivable of $12,166. Net cash used in investing activities was approximately
$2,645 and $1,428 for the three months ended October 31, 1997 and 1996,
respectively. Cash flows from financing activities were approximately $2,204 for
the three months ended October 31, 1997, which included a $3,265 increase in
short term borrowings. For the three months ended October 31, 1996, net cash
provided from financing activities was approximately $2,912 which included a
$4,366 increase in short-term borrowings and repayments of long-term debt of
$1,547.
The Company's businesses are relatively stable and mature and do not
generally require significant ongoing additions to plant and equipment. Capital
expenditures for the three month period ended October 31, 1997 and 1996 were
$2,695 and $1,434, respectively.
Borrowings, Debt Offerings and Redemptions
On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement
(the "Agreement") with a commercial lending company ("CLC"). Proceeds were used
to repay the borrowings outstanding under a prior loan
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and security agreement with a bank. The Agreement contains covenants, the most
restrictive of which are maintenance of certain financial ratios, prohibition of
the occurrence of additional indebtedness, the payment of dividends, certain
related party transactions and limitations on capital expenditures. Borrowings
under the Agreement are secured by substantially all the domestic current assets
of PST. Additionally, the CLC has a security interest in PST's intangible
assets, and this security interest ranks pari passu with the security interest
of the Senior Secured Notes (see below) in PST's intangible assets. Revolving
credit advances under the Agreement are based on eligible receivables and
inventory.
Effective January 31, 1997, PST amended this Agreement with the CLC
("Amended Agreement"), representing the fourth amendment to the Agreement. The
Amended Agreement provides, among other things, for revolving credit advances of
up to $50,000 through July 31, 2000 and letters of credit of up to $1,000. The
Amended Agreement provides for certain pricing performance adjustments based on
defined Performance Ratios. The Company will pay interest at a defined Index
Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to 0.25%) or,
at the election of PST, the LIBOR Rate plus the Applicable LIBOR Margin (ranging
from 2.50% to 3.00%). The Amended Agreement also provides that outstanding
revolving credit advances shall not exceed $20,000 for 30 consecutive days
during the period from July 1 to September 30 for each year. Furthermore, the
Amended Agreement provides that domestic capital expenditures are limited to
$8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and 1999 (and each
fiscal year thereafter), respectively. The Company also has the right to cancel
the Agreement on 30 days' written notice and pay the CLC an early termination
fee of $175 if such cancellation occurs prior to January 31, 1998, and $100 if
cancellation occurs on or after January 31, 1998 and prior to September 30,
1998.
In addition, on January 31, 1997 PST signed a Receivables Agreement
with the CLC that provides PST with the ability to sell a 100% ownership
interest, without recourse, in certain Eligible Receivables generated by PST.
The CLC's commitment to purchase said receivables from PST are restricted to the
period beginning each February 1 and ending on each May 31. The aggregate
invoice face amount of purchased receivables will not exceed $12,000. PST is
obligated to service the Eligible Receivables that it sells to the CLC.
At October 31, 1997 and July 31, 1997, short-term borrowings include
revolving credit advances of $37,338 and $36,772, respectively, under the
Amended Agreement and $2,087 of factored receivables at July 31, 1997. There
were no factored receivables outstanding as of October 31, 1997.
On November 8, 1993, PST issued $125,000 principal amount of 11-1/4%
Senior Secured Notes due in 2003. The Senior Secured Notes are senior secured
obligations of PST, ranking pari passu in right of payment with all existing and
future senior indebtedness of PST and senior to all subordinated indebtedness of
PST, if any. The Senior Secured Notes are secured by substantially all real
property, machinery, equipment, general intangibles and other intellectual
property now owned or hereafter acquired by PST and by a pledge of all
outstanding capital stock of Plastic Specialties and Technologies Investments,
Inc., a wholly-owned subsidiary of PST. The indenture for the Senior Secured
Notes contains covenants which restrict, among other matters, the ability of PST
and its subsidiaries to incur additional indebtedness, pay dividends, (except as
defined in the indenture) redeem capital stock, prepay subordinated
indebtedness, create liens, dispose of certain assets, engage in sale and merger
transactions, make contributions, loans or advances and enter into transactions
with affiliates.
On August 16, 1995, in connection with its acquisition of the
Burlington, New Jersey facility, the Company's Burlington Resins, Inc.
subsidiary has entered into a revolving credit facility with a Commercial Bank
for up to $5,500 based on levels of inventory and accounts receivable. Interest
on this facility is the prime rate plus 1.25%. The prime rate as of October 31,
1997 was 8.5%. At October 31, 1997 and July 31, 1997 there was $4,592 and
$1,893, respectively, outstanding on this loan. The Company has also received a
term loan from the Commercial Bank in the principal amount of $5,500. This term
loan is payable in 28 quarterly installments of approximately $196 plus interest
accrued at the prime rate plus 1.25%. At October 31, 1997 and July 31, 1997
there was $3,620 and $3,341, respectively, outstanding on this term loan. The
Commercial Bank agreement contains covenants, the most restrictive of which are
the maintenance of certain financial ratios, prohibition of the incurrence of
additional indebtedness, the payment of dividends, certain related party
transactions and limitations on capital expenditures. The loans are secured by
the property, plant and equipment, accounts receivable and inventory of
Burlington Resins, Inc. As the Company intends to repay the borrowings
outstanding under the Agreement during 1998, the entire amount has been
classified in current portion of long-term debt at October 31, 1997. The
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Company also has a term loan provided by Occidental Chemical Corporation. This
loan is subordinated to the Commercial Bank debt. This loan was repaid during
the first quarter of fiscal 1998.
Concurrently with execution of the Merger Agreement (as discussed in
Note 1), Tekni-Plex purchased a Convertible Note issued by PureTec in the amount
of $5 million. The loan will assist PureTec and PST in meeting expected cash
requirements in the period prior to completion of the Merger. The Convertible
Note bears interest at 13% and is convertible at any time following the 60th day
after any termination of the Agreement into a number of shares of Common Stock
sufficient to retire the principal amount of the Note plus accrued interest or
in any event at a base conversion rate of one share of Common Stock per $2.72 of
obligations owed under the Note. The Company is required to file a registration
statement with respect to the Common Stock issuable upon conversion promptly
following a termination of the Merger Agreement. The Convertible Note matures on
September 30, 1998. The Convertible Note is subject to prepayment by the Company
in cash at any time, and contains covenants and events of default customary for
a debt instrument of this type.
Future Capital Expenditure and Commitments
The Company's businesses are relatively mature and as a result do not
require significant ongoing additions to plant and equipment, except for the
expansion discussed below. The Company generally finances its ongoing capital
expenditure requirements from its cash flow provided from operations and
borrowings under its Revolving Credit Facility.
The Company is in the process of constructing a state-of-the-art
recycling facility in Huntington, West Virginia. The facility is expected to
open early in calendar 1998. The Company will invest approximately $8 million in
the facility, which will recycle PET containers, such as soft drink bottles and
food packaging. Management is still evaluating various financing alternatives
for this new facility.
In October 1997, the Company settled a lawsuit pertaining to Circuit
Chemistry, a discontinued operation. Total settlement payments were $1,725 as of
October 31, 1997. Additionally, in October 1997, in accordance with the Dalen
litigation settlement, Ozite Corp. made two (2) payments of $500 each. These
payments were made out of the Company's current working capital. Management
believes that it has a number of alternatives available to finance the final
settlement payment of $2,250 related to Dalen by January 31, 1998.
Inflation
Generally, the Company's operations have benefited from relatively
stable or declining prices for raw materials. During fiscal 1998, the Company
has benefited domestically from declining raw material costs. In the event
significant inflationary trends were to resume, management believes that the
Company will generally be able to offset the effects thereof through continuing
improvements in operating efficiencies and increasing prices, to the extent
permitted by competitive factors. However, there can be no assurance that all
such cost increases can be passed through to customers.
