UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q Quarterly Report Pursuant to Section 13 or 15 (d) of The Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1997 Commission file number : 333-32041 --------------- PRECISE TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Delaware 25-1205268 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 501 Mosside Boulevard North Versailles, PA 15137-2553 (Address of principal executive offices) (Zip Code) (412) 823-2100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ____ No __X__ As of November 1, 1997, one share of the Company's Common Stock was outstanding. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements 2 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of 9 Operations PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 12 (i) PART I - FINANCIAL INFORMATION Item 1. PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 455,283 $ 1,310,564 Accounts receivable, net 12,545,547 13,121,818 Inventories 7,336,793 9,856,257 Prepaid expenses and other 369,776 440,356 Deferred income taxes 1,544,578 1,496,164 Assets held for sale - 900,000 ------------- -------------- Total current assets 22,251,977 27,125,159 Property, plant and equipment, net 42,925,910 42,063,423 Intangible and other assets, net 28,574,566 29,870,714 ============= ============== Total assets $ 93,752,453 $99,059,296 ============= ============== LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY Current Liabilities: Line of credit $ - $ 300,000 Current maturities of long-term debt 2,702,363 7,641,105 Accounts payable 6,804,804 6,896,159 Accrued liabilities 5,980,985 4,865,381 Tooling deposits 1,693,136 2,063,833 ------------- -------------- Total current liabilities 17,181,288 21,766,478 Long-term debt, less current maturities 84,142,641 56,570,692 Deferred income taxes 2,234,296 5,189,259 Payable to Sunderland - 330,000 Commitments and contingencies - - Redeemable preferred stock - 8,250,000 Stockholder's (deficit) equity: Common stock, no par value; 1,000 shares authorized, and 1 share and 125 shares issued and outstanding at September 30, 1,000 3,315,617 1997 and December 31, 1996, respectively. Additional paid-in-capital 3,554,711 3,554,711 Retained (deficit) earnings (13,361,483) 82,539 ------------- -------------- Total stockholder's (deficit) equity (9,805,772) 6,952,867 ============= ============== Total liabilities and stockholder's $ 93,752,453 $99,059,296 (deficit) equity ============= ============== See accompanying notes 2 PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- (unaudited) (unaudited) Net sales .......... $ 24,616,210 $ 28,397,025 $ 76,416,604 $ 65,739,843 Cost of sales ...... 20,144,786 23,908,463 63,018,240 54,665,450 ------------ ------------ ------------ ------------ Gross profit ....... 4,471,424 4,488,562 13,398,364 11,074,393 Selling, general, and administrative 2,205,417 2,219,388 6,377,536 5,380,126 Plant closure costs -- 109,600 -- 109,600 Amortization of intangible assets 314,966 319,778 910,092 695,216 ------------ ------------ ------------ ------------ Operating income ... 1,951,041 1,839,796 6,110,736 4,889,451 Other expense (income): Interest expense . 2,522,025 1,915,388 6,409,672 4,075,747 Other ............ (4,433) (13,765) 987,437 (9,187) ------------ ------------ ------------ ------------ (Loss) income before income taxes and ........ (566,551) (61,827) (1,286,373) 822,891 extraordinary item (Benefit) provision for income taxes . (111,787) 96,900 502,832 737,618 ------------ ------------ ------------ ------------ Net (loss) income before ........... (454,764) (158,727) (1,789,205) 85,273 extraordinary item Extraordinary item, net of tax ....... -- -- (4,840,500) -- - ----------------------------------------------------------------------------------- Net (loss) income .. $ (454,764) $(158,727) $(6,629,705) $85,273 =================================================================================== See accompanying notes 3 PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1997 1996 ---- ---- Operating Activities (unaudited) - -------------------- ----------- Net (loss) income $ (6,629,705) $ 85,273 Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item, net of tax 4,840,500 - Depreciation and amortization 4,942,798 3,652,669 Amortization of original issue discount 513,152 470,696 and financing fees Loss on sale of equipment 229,466 13,581 Deferred income taxes 127,907 113,574 Changes in assets and liabilities: Accounts receivable 576,271 33,213 Inventories 2,519,464 384,258 Prepaids and other assets (92,214) (381,671) Accounts payable (91,355) 986,774 Tooling deposits (370,697) 596,055 Accrued liabilities 1,232,418 128,733 --------- ------- Net cash provided by operating activities 7,798,005 6,083,155 Investing Activities - -------------------- Capital expenditures (3,918,714) (1,727,085) Proceeds from sale of fixed assets 1,449,000 88,500 Net cash used in business acquisitions - (63,801,356) ---------- ----------- Net cash used in investing activities (2,469,714) (65,439,941) Financing Activities - -------------------- Borrowings on revolving line of credit 16,400,000 6,000,276 Payments on revolving line of credit (11,700,000) (6,884,523) Proceeds from bond issuance 75,000,000 - Repayment of long-term debt (60,813,389) (6,445,078) Prepayment of debt premiums (2,398,940) - Payment of financing costs (4,292,309) (4,743,748) Redemption of common stock (3,314,617) - Redemption of preferred stock (8,250,000) - Dividends paid on common and preferred stock (6,814,317) (732,894) Proceeds from senior term notes - 40,000,000 Proceeds from senior subordinated notes - 20,000,000 Proceeds from issuance of preferred stock - 8,250,000 Proceeds from term note - 3,585,000 Capital contribution - 750,000 ---------- ----------- Net cash (used in) provided by financing (6,183,572) 59,779,033 activities ---------- ----------- Net (decrease) increase in cash (855,281) 422,247 Cash at beginning of period 1,310,564 25,676 ============= ============ Cash at end of period $ 455,283 $ 447,923 ============= ============ 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Nine months ended September 30, 1997 1996 ---- ---- (unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,497,494 $ 3,033,091 ============= =============== Income taxes $ 390,461 $ 642,525 ============= =============== Supplemental schedule of noncash investing and financing activities: Capital lease agreements for equipment $ 1,644,541 $ 2,818,044 ============= =============== Assets acquired and liabilities assumed in connection with acquisitions Fair value of assets acquired $ $ 81,200,112 - Liabilities assumed - (12,248,954) ------------- --------------- Cash paid - 68,951,158 Less fees and expenses - (4,743,748) Less cash acquired - (406,054) ------------- --------------- Net cash used for business acquisitions $ - $ 63,801,356 ============= =============== See accompanying notes 5 PRECISE TECHNOLOGY, INC. (A WHOLLY OWNED SUBSIDIARY OF PRECISE HOLDING CORPORATION) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Financial Statement Presentation The consolidated balance sheet at September 30, 1997 and the consolidated statements of income and consolidated statements of cash flows for the periods ended September 30, 1997 and 1996 have been prepared by Precise Technology, Inc. (the "Company"), without audit. In the opinion of Management, all adjustments necessary to present fairly the financial position, results of operations and changes in cash flows at September 30, 1997 and for the periods presented have been made. The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated financial statements be read in conjunction with the Company's Form S-4 Registration Statement as filed with the Securities and Exchange Commission on October 17, 1997. The results of operations for the period ended September 30, 1997 are not necessarily indicative of the operating results to be expected for the full year. 2. Inventories The major components of inventories were as follows: September 30, December 31, 1997 1996 (unaudited) Finished products $ 2,347,728 $ 2,971,774 Raw materials 2,938,545 4,208,211 Tooling and dies 2,050,520 2,676,272 ============== ============ $ 7,336,793 $ 9,856,257 ============== ============ 3. Acquisitions There were two acquisitions during the 1996 fiscal year. On January 25, 1996, the Company acquired all of the issued and outstanding common stock of Unity Mold Corporation ("Unity") for $3.6 million plus $125,000 of fees and expenses in connection with the acquisition. On March 29, 1996, the Company acquired all of the issued and outstanding common stock of Tredegar Molded Products Company ("Tredegar") for $60.0 million plus $5.2 million of fees and expenses in connection with the acquisition (the "Tredegar Acquisition"). The purchase price in each acquisition exceeded the fair market value of the net assets acquired by an aggregate amount of $26.0 million which was recognized as goodwill and is being amortized over 25 years. 6 3. Acquisitions (continued) Both acquisitions have been accounted as purchases. The operating results of the acquisitions are included in the Company's consolidated results of operations from the respective dates of acquisition. 4. Long-Term Debt On June 13, 1997, the Company issued $75,000,000 of 11-1/8% Senior Subordinated Notes due 2007 ("Notes"). The Company used the net proceeds from the issuance of the Notes and approximately $8,200,000 of borrowings under its New Credit Agreement ("NCA") to extinguish certain existing indebtedness, redeem its redeemable preferred stock, repurchase certain shares of its common stock, make a distribution to its Parent, and pay related fees and expenses (the "Refinancing"). The Refinancing resulted in the recording of an extraordinary loss during June 1997 of approximately $4,841,000, net of tax. The Notes are subordinate in right of payment to all existing and future senior indebtedness of the Company and are guaranteed on a senior subordinated basis by all of the Company's subsidiaries. On June 13, 1997, as part of the Refinancing, the Company entered into a $30,000,000 NCA with a financial institution. Borrowings under the NCA may be used to fund the Company's working capital requirements, finance certain permitted acquisitions and general corporate requirements of the Company and pay fees and expenses related to the foregoing. 5. Commitments and Contingencies The Company is involved from time to time in lawsuits that arise in the normal course of business. The Company actively and vigorously defends all lawsuits. Management believes that there are no lawsuits that will have a material affect on the Company's financial position. 6. Financial Information for Subsidiary Guarantors The Company's payment obligations under the Notes are fully and unconditionally guaranteed on a joint and several basis (collectively, the "Subsidiary Guarantees") by Precise Technology of Delaware, Inc., Precise Technology of Illinois, Inc., Precise TMP, Inc., Precise Polestar, Inc., and Massie Tool, Mold and Die, Inc. each a direct or indirect wholly-owned subsidiary of the Company and each a "Guarantor." These subsidiaries represent substantially all of the operations of the Company conducted in the United States. In accordance with previous positions taken by the Securities and Exchange Commission, the following summarized financial information illustrates the composition of the combined Guarantors. Separate complete financial statements of the respective Guarantors are not presented because management has determined that they would not provide additional material information that would be useful in assessing the financial composition of the Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in the event of a default on its Subsidiary Guarantee other than its subordination to senior indebtedness described in Note 4. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. 7 6. Financial Information for Subsidiary Guarantors (continued) Summarized Combined Financial Information For the nine months ended September 30, 1997 (unaudited) Guarantor Consolidated Parent Subsidiaries Elimination's Total Current assets .............. $ 4,848,299 $ 55,659,446 $(38,255,768 $ 22,251,977 Non-current assets .......... 84,236,708 56,095,674 (68,831,906) 71,500,476 Current liabilities ......... 34,000,129 21,436,927 (38,255,768) 17,181,288 Non-current liabilities ..... 80,575,878 5,801,059 -- 86,376,937 Net sales ................... 13,554,517 63,168,581 (306,494) 76,416,604 Gross profit ................ 2,491,027 10,907,337 -- 13,398,364 (Loss) income from continuing operations before extraordinary item.. (11,234,203) 9,444,998 -- (1,789,205) Net (loss) income ......... (12,245,975) 5,616,270 -- (6,629,705) 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's operating data for the three and nine months ended September 30, 1997 and 1996 are set forth below as percentages of net sales: Three Months Nine Months Ended Ended September 30, September 30, -------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 81.8 84.2 82.5 83.2 -------- -------- --------- -------- Gross profit 18.2 15.8 17.5 16.8 Selling, general and administrative 9.0 7.8 8.3 8.2 Plant closure costs 0.0 0.4 0.0 0.2 Amortization of intangible assets 1.3 1.1 1.2 1.0 -------- -------- --------- -------- Operating income 7.9 6.5 8.0 7.4 Other expense (income): Interest expense 10.2 6.7 8.4 6.2 Other 0.0 0.0 1.3 0.0 -------- -------- --------- -------- (Loss) income before income taxes and extraordinary item (2.3) (0.2) (1.7) 1.2 (Benefit) provision for income taxes (0.5) 0.3 0.6 1.1 -------- -------- --------- -------- Net (loss) income before (1.8) (0.5) (2.3) 0.1 extraordinary item Extraordinary item, net of tax 0.0 0.0 (6.3) 0.0 ======== ======== ========= ======== Net (loss) income (1.8)% (0.5)% (8.7)% 0.1% ======== ======== ========= ======== RESULTS OF OPERATIONS Three Months Ended September 30, 1997 compared to Three Months Ended September 30, 1996 NET SALES. The Company's net sales decreased to $24.6 million for the three months ended September 30, 1997, a decrease of $3.8 million, or 13.3%, from the comparable period in the prior year. The decrease in net sales was primarily attributable to lower volume requirements of certain customers' end-products, the discontinuance of a low margin proprietary manufacturing process, and the loss of a molding program. GROSS PROFIT. The Company's gross profit remained constant at $4.5 million in the three months ended September 30, 1997 from the comparable period in the prior year. Gross profit margin, however, increased to 18.2% for the three months ended September 30, 1997 from 15.8% in the comparable period in the prior year. The increase in gross profit margin is the result of significant cost improvement measures implemented during the transition phase of the Tredegar Acquisition, increased sales volume at the Company's extensively automated Delaware facility and the discontinuance of a low margin proprietary manufacturing process, all of which was partially offset by lower overall sales volume. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses for the three months ended September 30, 1997 remained level with the comparable period in the prior year totaling approximately $2.2 million. Certain increases in information technology expenditures included the hiring of two specialists during 1997 and the incurrence of consulting fees relating to the evaluation and implementation of a new MRP system which will begin its installation and training phase during 1998. These increases in selling, general and administrative expense were offset by lower sales and marketing costs resulting from the elimination of an outside sales representative during the fourth quarter of 1996 and the non-recurrence of production costs associated with a new marketing brochure in 1996. 9 INTEREST EXPENSE. Interest expense increased to $2.5 million for the three months ended September 30, 1997 from $1.9 million in the comparable period in the prior year primarily as a result of the increased level of indebtedness incurred by the Company following the Refinancing in June 1997. PROVISION FOR INCOME TAX. The Company's effective tax rates differed from the applicable statutory rates for the nine months ended September 30, 1997 and 1996 primarily due to nondeductible goodwill amortization. In addition, the September 30, 1997 tax rate was effected by the expiration of certain state tax net operating losses. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES. The Company's net sales increased to $76.4 million for the nine months ended September 30, 1997, an increase of $10.7 million, or 16.2%, over the comparable period in the prior year. The increase in net sales was attributable to the non-comparability of nine month operating periods resulting from the lack of inclusion of Tredegar sales for 1996 prior to the Tredegar Acquisition. This increase in net sales was partially offset by lower volume requirements of certain customers' end-products, the discontinuance of a low proprietary manufacturing process, and the loss of a molding program. GROSS PROFIT. The Company's gross profit increased to $13.4 million for the nine months ended September 30, 1997, an increase of $2.3 million, or 21.0%, over the comparable period in the prior year. The increase in gross profit is primarily due to higher sales volume resulting from the Tredegar Acquisition. Gross profit margin increased to 17.5% for the nine months ended September 30, 1997 from 16.8% in the comparable period in the prior year. The increase in gross profit margin was primarily due to the positive impact on direct and indirect manufacturing costs resulting from the overall cost improvement measures implemented during the transition phase of the Tredegar Acquisition. The overall improvement in gross profit margin was offset, however, by a lower volume of sales during 1997 in comparison to 1996. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased to $6.4 million for the nine months ended September 30, 1997, an increase of $1.0 million, or 18.5%, over the comparable period in the prior year. The increase in selling, general and administrative expenses was primarily due to incremental expenses related to the Tredegar Acquisition and the subsequent hiring of additional sales persons. AMORTIZATION. The Company's amortization of intangible assets increased to $910,000 for the nine months ended September 30, 1997 from $695,000 in the comparable period in the prior year. This increase resulted primarily from the amortization of goodwill and non-compete agreements associated with the Tredegar Acquisition. INTEREST EXPENSE. Interest expense increased to $6.4 million for the nine months ended September 30, 1997 from $4.1 million in the comparable period in the prior year primarily as a result of the increased level of indebtedness incurred by the Company following the Refinancing in June 1997. OTHER EXPENSES (INCOME). Other expenses increased to $987,000 for the nine months ended September 30, 1997 from income of $9,000 in the comparable period in the prior year due primarily to non-recurring charges from related parties totaling $555,000 for financial advisory fees and out-of-pocket expenses and $300,000 in legal fees each related to the Refinancing. PROVISION FOR INCOME TAX. The Company's effective tax rates differed from the applicable statutory rates for the nine months ended September 30, 1997 and 1996 primarily due to nondeductible goodwill amortization. In addition, the September 30, 1997 tax rate was effected by the expiration of certain state tax net operating losses. EXTRAORDINARY ITEM. The Company recorded an extraordinary loss of approximately $4.8 million, net of tax benefits, for the nine months ended September 30, 1997, due to the early extinguishment of indebtedness resulting from the repayment of certain indebtedness incurred in connection with the Tredegar Acquisition. 10 LIQUIDITY AND CAPITAL RESOURCES The Company generated cash flows from operations totaling $7.8 million and $6.1 million in the nine months ended September 30, 1997 and 1996, respectively. The increase in cash flows from operations was primarily impacted by a decrease in accounts receivable due to an improved collection cycle, a decrease in inventory due to increased levels being placed on consignment and an increase in the level of accrued interest due to semi-annual payments under the Notes. The Company's cash flows used in investing activities totaled $2.5 million and $65.4 million, excluding capital lease agreements for equipment totaling $1.6 million and $2.8 million, in the nine months ended September 30, 1997 and 1996, respectively. During the first nine months of 1997, the Company expended $3.9 million in cash capital expenditures primarily for a new MRP system and building improvements and ancillary equipment for a significant new molding program expected to begin production in January 1998. These expenditures were partially offset by proceeds received from the sale of its Rochester, New York facility in the amount of $1.3 million. The Company's cash flows (used in) provided by financing activities totaled $(6.2) million and $59.8 million for the nine months ended September 30, 1997 and 1996, respectively. During the nine months ended September 30, 1997, the extinguishment of certain indebtedness incurred in connection with the Tredegar Acquisition with proceeds from the Notes contributed to the cash used in financing activities. During the nine months ended September 30, 1996, proceeds from indebtedness incurred in connection with the Tredegar Acquisition contributed significantly to resulting cash provided. Management believes that the Company's cash flow from operations, together with borrowings under the NCA provides it with sufficient liquidity necessary to fund capital improvements, service indebtedness and meet working capital requirements for the Company's existing operations. RECENT ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 129 Disclosure of Information About Capital Structure. SFAS 129 requires the disclosure of certain information about an entity's capital structure, which would include a brief discussion of rights and privileges for securities outstanding. The implementation of SFAS 129 in not expected to have an impact on the Company's financial statements. The standard will be effective for financial statement periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 130 is expected to impact the Company in the event that a minimum pension liability is required by SFAS No. 87, Employers' Accounting for Pensions, in that separate disclosure of comprehensive income and its components must be displayed in equal prominence with net income. The standard will be effective for the Company for the year ended December 31, 1998. In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, which changes the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. In accordance with SFAS No. 131, the Company will be required to make expanded disclosures relating to its products and markets. The standard will be effective for the Company for the year ended December 31, 1998 and for interim periods in the year ended December 31, 1999. 11 Cautionary Statement on Forward-Looking Statements This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that any forward-looking statements, including statements regarding the intent, belief, or current expectations of the Company or its management, are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors including, but not limited to (I) reliance on key customers and supply contracts, (ii) volatility of customer demand, (iii) exposure to fluctuations in resin cost and supply and (iv) other risks detailed from time to time in the Company's Securities and Exchange Commission filing. The Company does not intend to update these forward-looking statements. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Precise Technology, Inc. Date: November 14, 1997 /s/John R. Weeks ----------------- ------------------------------ John R. Weeks President and Chief Executive Officer Date: November 14, 1997 /s/William L. Remley ----------------- ------------------------------ William L. Remley Treasurer 12