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
OR
/ / 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 34-11686
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2515864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 941-6550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: N/A
The number of shares of common stock of the Registrant outstanding as of
November 13, 1997 was 8,319,833 of which 323,985 of such shares were held by
unaffiliated persons. The Company is not aware of the market value of the
unaffiliated shares.
DOCUMENTS INCORPORATED BY REFERENCE - None.
PART I
Item 1. Business
Introduction
Plastic Specialties and Technologies, Inc. ("PST" or the "Company"), a
Delaware corporation, was formed in March 1984 by senior management to acquire
the assets of the plastic specialty sector of Dart & Kraft, Inc. ("Dart &
Kraft") in a leveraged buyout. PST was acquired by Ozite Corporation ("Ozite")
in 1990.
Ozite merged with PureTec Corporation ("PureTec"), formerly Pure Tech
International, Inc., at the close of business on July 31, 1995 (the "Merger").
As of July 31, 1997, PureTec, through its ownership of Ozite, owned
approximately 96% of the outstanding common stock of PST.
The Company discontinued the manufacturing of non-woven textile
products and sold the related assets of this segment effective January 31, 1996.
(See Note 15 to the Consolidated Financial Statements included in Item 8 to this
Form 10-K).
In September 1996, the Company acquired the recycling operations of
PureTec, comprised of certain fixed assets, raw materials inventory and certain
other assets for $4,400,000. The acquisition was accounted for at historical
cost in a manner similar to the pooling-of-interests method of accounting as it
was a transaction between entities under common control. As a result of the
acquisition, the recycling business constitutes approximately 7% of PST's
operations and product lines. (See Note 14 to the Consolidated Financial
Statements included in Item 8 to this Form 10-K).
As discussed in Note 16 to the Company's Financial Statements, on
November 11, 1997 PureTec 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 PureTec will arrange, the Merger Agreement
contemplates Tekni-Plex (i) purchasing all of PureTec's outstanding Common Stock
for cash consideration of $3.50 per share, and (ii) assuming or refinancing all
of PureTec's debt. The Merger Agreement and the Acquisition have been
unanimously approved and recommended to PureTec shareholders for adoption by
PureTec's Board of Directors.
Description of Business
PST is a vertically integrated manufacturer of specialty plastic
products. Many of these products are leaders in their niche markets. PST 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, PST'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 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 parentheses:
Plastic Products Plastic Materials
---------------- -----------------
Garden Hose (Colorite Plastics) Medical-grade Vinyl Compounds (Colorite Polymers)
Medical Tubing (Plastron) Vinyl Compounds (Cybertech Polymers)
Specialty Tubing & Gaskets (Action Technology; Recycled Plastics (Pure Tech Plastics)
American Gasket & Rubber)
Each of these product lines has its own unique customer base,
competitive environment, cost and pricing
2
structures, business cycles, and related business strategies, as described in
the following paragraphs.
Garden Hose
PST 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 PST 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 therapy,
hemodialysis therapy, cardio-vascular procedures such as coronary bypass
surgery, suction and aspiration products, and urinary drainage and catheter
products.
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.
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
3
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
PST'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.
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 PST and PureTec divisions. The
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.
4
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 Ridgefield, New
Jersey; Sparks, Nevada; and Belfast, Northern Ireland facilities, which is in a
start-up phase. 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.
Vinyl Compounds
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 PST'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
PST 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
5
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.
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 is 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.
For the years ended July 31, 1997, 1996, and 1995, $635,000, $642,000 and
$877,000, respectively, were expended on research and development activities.
Employees
As of July 31, 1997, the Company employed approximately 1,750 full-time
employees, of which approximately 1,500 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. These contracts 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 43% 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.
Approximate
Location Function Square Feet
- -------- -------- -----------
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
6
Ridgefield, New Jersey (3) Warehouse 70,000
Sparks, Nevada (3) Manufactures garden hose and 250,000
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
(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
and related products 24,000
Rockaway, New Jersey Manufactures specialty tubing and
related products 98,600
Schiller Park, Illinois Manufactures rubber compounds 20,000
Schaumburg, Illinois (7) Manufactures dispenser gasket 58,000
Flint, Michigan (8) 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 (10) PET recycling plant (inactive) 80,000
Belfast, Ireland (9) Manufactures medical compound 45,000
Huntington, West Virginia PET recycling plant Under construction
7
- ----------------------------
(Years relate to calendar years)
(1) Lease expires in 2001.
(2) Lease terms are 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) Lease expires in 1998.
(9) Lease expires February, 2017
(10) Lease expires June, 1998
- ----------------------------
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. There can be no assurance as to the
ultimate outcome of these litigations or their possible impact on the Company.
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 January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $1,979,000 (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
$843,000 (32,083,000 Belgian Francs) for the year ended July 31, 1992. Although
the future outcome of these matters are uncertain, the Company believes that its
tax position was appropriate and that the assessments are without merit.
Therefore, the Company has appealed and has not paid or accrued for the
assessments. Based on the advice of legal counsel in Belgium, the Company
believes that the assessment appeals will be accepted by the tax authorities in
Belgium, although there can be no assurance whether or when such appeals will be
accepted.
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 $1,725,000 which are accrued
for at July 31, 1997.
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").
8
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 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.
In the current year, litigation relating to Ozite Manufacturing (which
was a subsidiary of PST) with MDC Wallcoverings and Ashley Alsip was settled.
(See Note 15 "Discontinued Operations").
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter ended July 31, 1997, there were no matters
submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Common Equity
As of July 31, 1997, approximately 96% of the common stock, par value
$.01 per share, of the Company was owned by PureTec Corporation, through its
ownership of Ozite. This ownership increased approximately 13% during 1997 as
the result of a private placement offer. There are no established public trading
markets for the common stock of the Company.
Dividend Restrictions
On November 8, 1993, PST issued $125,000,000 principal amount of
11-1/2% Senior Secured Notes due 2003 (the "Senior Secured Notes"). The terms of
the bond indenture governing the Senior Secured Notes limit the amount of
dividends that PST is permitted to pay up to the sum of 50% of the cumulative
consolidated net income since November 8, 1993, plus 100% of certain net
proceeds received by PST from the sale of capital stock, contributions to
capital and the aggregate net proceeds of any indebtedness converted into
capital stock. However, PST's ability to pay dividends is restricted by the
Restated Agreement with the CLC, described below. PST is, however, permitted
under the indenture to (i) declare and pay dividends of up to $6,000,000 on its
outstanding common stock from the proceeds received by it from the sale of the
Senior Secured Notes; (ii) distribute the $5,000,000 13-1/2% subordinated note
of Bagcraft Corporation of America ("Bagcraft") issued to PST and the 50,000
shares of 13-1/2% cumulative redeemable preferred stock of Bagcraft held of
record by PST (collectively, the "Bagcraft Investment"), or payments thereon or
proceeds therefrom, if any, received by PST, and (iii) distribute the 772,000
shares of Artra Group, Inc. ("Artra") which
9
PST holds ("Artra Common Shares").
The Amended and Restated Senior Loan Agreement (the "Restated
Agreement") dated as of November 8, 1993 between PST and a Commercial Lending
Company ("CLC") further prohibits PST's payment of dividends or distribution in
respect of its common stock or its purchase or retirement of any shares of its
common stock except for (i) the distribution of the Bagcraft Investment, or
payments thereon or proceeds therefrom, if any, received by PST, (ii) the
payment of dividends of up to $6,000,000 from the proceeds received by PST from
the sale of the Senior Secured Notes, (iii) certain tax-sharing payments for
actual tax liabilities, and (iv) $300,000 per fiscal year to the extent required
to pay certain fees and expenses.
In connection with the Merger, on July 13, 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 3,040.23 shares of BCA 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.
10
Item 6. Selected Financial Data
(Dollars in thousands, except per share data)
The following table presents selected consolidated financial data of
the Company and its subsidiaries as of and for the years ended July 31, 1997,
1996, 1995, 1994 and 1993 and is derived from the Company's audited consolidated
financial statements. The Income Statement data for 1997 and 1996 has been
restated to include the recycling operations which was acquired in the current
year. Periods prior to 1996 have not been restated, as PST and the recycling
operations were not entities under common control during those periods. All
information contained herein should be read in conjunction with "Item 7.
Management's Discussion and Analysis of financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included in
Item 8 to this Form 10-K.
Year Ended July 31,
------------------------------------------------------------------
Income Statement Data (for the
fiscal year ended): 1997 1996 (6) 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Net Sales................................... $269,611 $286,220 $221,190 $190,524 $169,521
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
accounting change........................ 4,133 3,920 1,196 4,513 (6,950)
Discontinued operations, net of
income taxes(1).......................... (1,627) (2,126) (1,294) 92 (734)
Extraordinary item(2)....................... --- --- --- (4,275) ---
Cumulative effect of accounting
change(3)................................ --- --- --- 1,110 ---
---------- ---------- ---------- ---------- ----------
Net income(loss)............................ $ 2,506 $ 1,794 $ (98) $ 1,440 $ (7,684)
========== ========== ========== ========== ==========
Earnings per share data (4):
Income (loss) from continuing
operations............................... $ .50 $ .48 $ .14 $ .59 $ (1.00)
========== ========== ========== ========== ==========
Discontinued operations $ (.20) $ (.26) $ (.15) $ .01 $ (.11)
========== ========== ========== ========== ==========
Net income(loss)............................ $ .30 $ .22 $ (.01) $ .19 $ (1.11)
========== ========== ========== ========== ==========
Balance Sheet Data (as of end of
period):
Total assets................................ $218,545 $178,664 $182,292 $160,550 $141,531
Working capital............................. 31,613 35,327 26,567 26,981 8,326
Long-term debt (5).......................... 134,196 127,642 125,741 126,739 93,907
Cash dividends declared per
common share............................... $ --- $ --- $ --- $ 1.37 $ ---
- ----------------------------
(1) The discontinued operations relate primarily to Ozite Manufacturing and
Circuit Chemistry (See Note 15 to the Consolidated Financial
Statements included in Item 8 to this Form 10-K).
(2) Extraordinary item, net of income taxes, represents a loss from the
early extinguishment of long-term debt.
(3) The cumulative effect of accounting change is a $1,110 gain on the
adoption of the Statement of Financial Accounting Standards No. 109
("SFAS No. 109") "Accounting for Income Taxes", which was adopted by
the Company effective August 1, 1993.
11
(4) Income (loss) per common and common equivalent share is computed based
upon the weighted average number of common shares and common share
equivalents outstanding during the period. The calculation does not
give effect to the conversion of warrants to purchase common stock when
such securities have an antidilutive effect. All outstanding warrants
were converted into common stock or expired in the year ended July 31,
1994. The weighted average number of common shares and common
equivalent shares used in the calculation was 8,319,833 for the years
ended July 31, 1997, 1996 and 1995; 7,612,857 for the year ended July
31, 1994; and 6,918,784 for the year ended July 31, 1993.
(5) Excludes current maturities of long-term debt of $1,249, $1,360,
$1,271, $1,098, and $3,487 as of July 31, 1997, 1996, 1995, 1994, and
1993, respectively.
(6) Restated to reflect recycling operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands, except per share data)
Results of Operations
The following table sets forth the percentages of net sales of the
Company represented by the components of income and expense for the fiscal years
ended July 31, 1997, 1996 and 1995:
Year Ended July 31,
------------------------------------------
1997 1996 1995
Net sales.............................................. 100% 100% 100%
Cost of goods sold..................................... (76.5) (77.8) (77.3)
Gross profit........................................... 23.5 22.2 22.7
Selling, general and administrative expenses........... (12.4) (11.5) (12.2)
Research and development............................... (0.2) (0.2) (0.4)
Write off of goodwill and obsolete facilities.......... -- -- --
Amortization of intangibles............................ (0.5) (0.5) (0.6)
----- ----- -----
Income from Operations................................. 10.4 10.0 9.5
Interest expense....................................... (6.4) (6.2) (7.7)
Debt issuance cost and discount amortization........... (0.4) (0.3) (0.3)
Foreign exchange gain.................................. 0.1 -- (0.1)
Other, net............................................. (0.2) (0.2) (0.1)
----- ----- -----
Income from continuing operations
before income taxes 3.5 3.3 1.3
Provision for income taxes............................. (2.0) (1.9) (0.8)
----- ----- -----
Income from continuing operations...................... 1.5 1.4 (0.5)
Discontinued operations................................ (0.6) (0.8) (0.5)
----- ----- -----
Net income............................................. 0.9% 0.6% (0.0)%
===== ===== ======
Fiscal year ended July 31, 1997 vs. fiscal year ended July 31, 1996.
Net sales for the year ended July 31, 1997 ("fiscal 1997") were
$269,611, a decrease of $16,609 or 5.8% compared to the year ended July 31, 1996
("fiscal 1996"). Domestic plastic products sales decreased $3,269 or 2.1% from
$152,352 to $149,083 in 1997. This decrease represents volume shortfalls for
garden hose partially offset by increased volume of gaskets and medical and dip
tubing. Foreign plastic product's sales of $35,300 increased $1,142, or 3.3%.
This increase represents volume growth in both medical tubing and rubber and
plastic gaskets. Plastic materials had sales of $108,357, an increase of $6,670
or 6.6%. This increase represents volume growth in medical-grade compound, as
well as increased volume used internally by the plastic products segment.
Recycling sales were $18,665 which represents a decrease of $14,194 or 43%. This
decrease is a result of price decreases for recycled PET, which
12
in recent years has been quite volatile.
Gross profit for fiscal 1997 was $63,268, a decrease of $400 (0.6%)
compared to $63,668 for fiscal 1996. Gross profit as a percentage of net sales
was 23.5% and 22.2% for 1997 and 1996, respectively. Domestic plastic products
has gross margins of $38,061 for fiscal 1997 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%
compared to 1996. This is a result of increased volume and reduced operating
costs. Plastic materials has a gross margin of $12,210 which represents a
decrease of $431 or 3.4%. This decrease represents start-up costs associated
with Colorite Europe Limited, partially offset by volume growth in medical-grade
compounds. Recycling's gross margin of $1,528 represents a decrease of $206 or
12% compared to 1996. This is a direct result of price decreases for recycled
PET.
Selling, general and administrative expenses for fiscal 1997 were
$33,272, a $181 (3.5%) increase compared to fiscal 1996. As a percentage of net
sales, these expenses increased to 12.4% in fiscal 1997 from 11.5% 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 $27,989 (10.4% of net
sales) and $28,524 (10.0% of net sales), respectively. Domestic plastic products
had operating income of $21,822 for fiscal 1997 which represents a $359 increase
or 1.7%. This increase is a result of increased volume of gaskets and medical
and dip tubing partially offset by reduced volume for garden hose. Foreign
plastic products had operating income of $8,276 for fiscal 1997 which is an
increase of $1,179 or 17% as compared to fiscal 1996. This increase is a result
of improved volume in both medical tubing and rubber and plastic gaskets.
Plastic material products had operating income of $4,350 for fiscal 1997, a
decrease of $1,806 or 29% compared to 1996. The decrease is a result of start-up
costs at Colorite Europe Limited partially offset by volume growth in
medical-grade compounds. Recycling's operating loss of $73 represents an
improvement of $805 from the fiscal 1996 loss of $878. This improvement is due
to the decrease in costs and the stability of PET prices during the second half
of fiscal 1997.
Interest expense for fiscal 1997 and 1996 was $17,152 and $17,739
respectively, which represents a $587 (3.3%) decrease. This decrease is a result
of more favorable borrowing rates obtained from the Company's primary lender.
The income tax provision for the year ended 1997 is comprised of a
$1,462 current federal tax provision, a $777 deferred federal tax provision, a
$2,975 foreign tax provision and a $150 current state tax provision. The income
tax provision for the year ended July 31, 1996 is comprised of a $2,933 deferred
federal tax provision, a $2,349 foreign tax provision and a $300 current state
tax provision. The income tax provision in fiscal 1996 differs from the income
tax provision calculated at the statutory rate primarily due to the difference
between the U.S. statutory rate and foreign income tax rates, amortization of
goodwill and losses not currently deductible.
The Company generated net income from continuing operations of $4,133
for fiscal 1997 compared to $3,920 in fiscal 1996. The decrease is primarily
attributed to lower net sales, resultant lower gross margins and higher selling,
general and administrative costs as a result of the start-up at Colorite Europe
Limited.
The Company sold its Ozite Manufacturing division (a subsidiary of PST)
in March of 1996. The Company recognized a loss on the sale of its Ozite
Manufacturing operations in fiscal 1997 and 1996. This loss amounted to $414 and
$1,479( net of a $258 and $762 tax benefit, respectively). The loss on disposal
in 1997 was due to settlement of litigation which were higher than originally
anticipated. Losses from these operations amounted to $647 in fiscal 1996 net of
an applicable income tax benefit of $332. In addition, in July 1997 the Company
settled a legal settlement in regard to Circuit Chemistry, a previously reported
discontinued operation. This settlement of $1,213 (net of a tax benefit of $775)
was included within discontinued operations for fiscal 1997.
Fiscal year ended July 31, 1996 vs. fiscal year ended July 31, 1995.
Net sales for the year ended July 31, 1996 ("fiscal 1996") were
$286,220 an increase of $65,030 or 29.4% compared to the year ended July 31,
1995 ("fiscal 1995").
13
In the domestic plastic products segment, net sales for fiscal 1996
increased by $22,137 (17%) to $152,352 from $130,215 for fiscal 1995. The
majority of the increase was a result of increased sales volume in garden hose,
dip tubing and medical tubing, and certain price increases. Approximately 85% of
the increase in net sales for the domestic plastic product segment is
attributable to sales volume with the remainder due to price increases. The
domestic plastics segment accounted for 53% of the Company's gross sales for
fiscal 1996 compared to 52% for fiscal 1995.
In the European plastic products segment, net sales for fiscal 1996
increased by $2,163 (7%) to $34,158 from $31,995 for fiscal 1995. The increase
was the result of increased sales volume in gaskets and dip tubing and increased
sales volume in medical tubing and aggregate price increases of 2%. The effect
of currency fluctuations was negligible. The European plastic products segment
accounted for 12% of the Company's gross sales for fiscal 1996 compared to 13%
for fiscal 1995.
In the plastic materials segment, net sales for fiscal 1996 increased
by $13,022 (14%) to $101,687 from $88,665 for fiscal 1995. The majority of the
increase was a result of increased sales volume in PVC compound and certain
price increases. The increase in net external sales for the plastic material
segment is comprised of an increase in sales volume of approximately $5,000 and
price increases for the remainder. The plastic material segment accounted for
39% and 35% of the Company's gross sales for fiscal 1996 and 1995, respectively.
The plastic materials segment provides PVC compound to the domestic plastics
product segment. Transfers are made at raw material cost plus a value added
factor for labor and overhead. For fiscal year 1996, the plastic materials
segment transferred approximately $32,000. This was approximately 28% greater
than fiscal 1995 which was approximately $25,000. Recycling sales were $32,859
for 1996 which reflects the acquisition of the recycling operations in 1996 (See
Item 6).
Gross profit for fiscal 1996 was $63,668, an increase of $13,672 (27%)
compared to $49,996 for fiscal 1995. Gross profit as a percentage of net sales
decreased to 22.2% from 22.7% for the same periods. Timing differences in the
Company's ability to pass through higher raw material costs during fiscal 1995
positively affected gross profit in fiscal 1996 as raw material costs declined.
The Company's domestic operation were most positively affected by the raw
material price decreases in fiscal 1996.
Selling, general and administrative expenses for fiscal 1996 were
$33,091, a $6,418 (24.1%) increase compared to fiscal 1995. As a percentage of
net sales, these expenses remained constant at approximately 12% in fiscal 1996
and 1995. The increase in selling, general and administrative expenses was
primarily attributable to increased sales volume.
Operating income for fiscal 1996 and 1995 was $28,524 (10.0% of net
sales) and $21,082 (9.5% of net sales), respectively. This $7,442 (22%) increase
was primarily attributable to increased sales volume, lower raw material costs
and improved manufacturing efficiencies.
Operating income in the domestic plastic product segment increased
$6,417 (43%) for fiscal 1996 to $21,463 from $15,046 for fiscal 1995. Operating
income as a percentage of net sales within the domestic plastic product segment
increased to 14% for fiscal 1996 from 12% for fiscal 1995. The increase in
operating income was primarily attributable to increased sales volume, lower raw
material costs and improved manufacturing efficiencies.
Operating income in the European plastic product segment decreased
$1,276 (15%) for fiscal 1996 to $7,097 from $8,373 for fiscal 1995. The decrease
in operating income was primarily a result of decrease sales volume, and slight
increases in raw material costs, partially offset by an increase in prices.
Operating income in the domestic plastic material segment increased
$3,535 (135%) for fiscal 1996 to $6,156 from $2,621 for fiscal 1995. Operating
income as a percentage of net sales within the domestic plastic materials
segment increased to 6% for fiscal 1996 from 3% for fiscal 1995. The increase in
operating income was primarily attributable to increased sales volume and
increased manufacturing efficiencies partially offset by higher selling and
administration expenses. Recycling had an operating loss of $878 in fiscal 1996
reflecting the acquisition of the recycling operations in 1996 (See Item 6).
Interest expense for fiscal 1996 and 1995 was $17,739 and $17,033
respectively. This $706 (4.1%) increase was primarily attributable to increased
borrowing for European operations, partially offset by lower average short-term
borrowings.
14
The income tax provision for the year ended July 31, 1996 is comprised
of a $2,933 deferred federal tax provision, a $2,349 foreign tax provision and a
$300 current state tax provision. For the year ended July 31, 1995 the tax
provision is comprised of a domestic federal and state benefit of $900 and a
foreign current and deferred tax provision of $2,707. The income tax provision
in fiscal 1996 differs from the income tax provision calculated at the statutory
rate due to the use of net operating loss carryforwards, the difference between
the U.S. statutory rate and foreign income tax rates, state income taxes,
amortization of goodwill and other non-deductible benefits. The income tax
provision in fiscal 1995 differs from the income tax provision calculated at the
statutory rate due to amortization of goodwill and other non-deductible benefits
and the difference between the U. S. statutory rate and foreign income tax
rates.
The Company generated net income from continuing operations of $3,920
for fiscal 1996 compared to $1,196 in fiscal 1995. The increase is primarily
attributed to increased sales volume.
The Company recognized a loss on the sale of its Ozite Manufacturing
operations in fiscal 1996. This loss amounted to $1,479 net of a $762 tax
benefit. Losses generated from these operations amounted to $647 and $1,294 in
fiscal 1996 and 1995, respectively, net of applicable income tax benefit of $332
and $440, respectively.
Liquidity and Capital Resources
General
The Company's primary capital requirements are for working capital
(principally inventory and accounts receivable) and to a lesser extent, capital
expenditures. The Company's sources of liquidity and capital resources
historically have been net cash provided by operating activities, funds
available from banks or other institutional lenders and public offerings of debt
securities. The Company believes that, based on current levels of operations and
anticipated growth, its cash flow from operations (together with other available
sources of liquidity, including borrowings under the Revolving Credit Facility)
will be adequate over the next several years to fund working capital
requirements, to permit anticipated capital expenditures, and to make required
payments of principal and interest on its debt.
The market for the Company's garden hose is seasonal, with sales
peaking in the spring and summer seasons. The Company started fiscal 1997 with
high levels of accounts receivable and inventory. With increased sales volume in
garden hose during the fourth quarter of fiscal year 1997 and the general growth
in the Company's other markets accounts receivable increased $7,093 from $42,291
at July 31, 1996 to $49,384 at July 31, 1997 and inventory increased also,
$14,856, from $32,992 at July 31, 1996 to $47,848 at July 31, 1997.
Cash and cash equivalents increased $362 for fiscal 1997, compared to a
$1,357 increase for fiscal 1996. The changes for these periods were attributable
to the factors discussed below.
For fiscal 1997, net cash used in operating activities was $9,090. The
Company funded its operating activities (including the buildup of inventory of
$15,609), disbursed $10,225 on capital expenditures and $4,400 for the plastic
recycling acquisition by borrowing $22,634 under its Revolving Credit Facility.
For fiscal 1996, net cash provided by operating activities was $18,311.
The Company used the $18,311 in cash generated from operating activities, along
with $1,337 in proceeds from the sale of equipment and $3,451 in proceeds from
new loans incurred by its foreign subsidiaries to (i) reduce its borrowing under
its Revolving Credit Facility by $12,356 (ii) reduce the aggregate foreign term
loan principal by $1,271 and (iii) incur $7,986 in capital expenditures.
Working capital was $31,613 as of July 31, 1997, a decrease of $3,714
as compared to $35,327 at July 31, 1996. This decrease was primarily the result
of a higher short term borrowings ($36,772 compared to $14,138) and other
current liabilities, offset by higher accounts receivable of $7,093 and higher
inventories ($47,848 as compared to $32,992).
Working capital was $35,327 as of July 31, 1996, an improvement of
$8,760 as compared to July 31, 1995. This increase was the result of higher
accounts receivable balance ($42,291 compared to $40,561), and lower outstanding
short term borrowings ($14,138 compared to $26,494), offset by lower inventory
balances ($32,992 compared to $41,026)
15
Short-Term Borrowings
On December 30, 1992 PST, entered into a $50,000 Senior Loan Agreement
(the "Agreement") with a commercial lending company ("CLC"). Proceeds were used
to repay the borrowings outstanding under a prior loan and security agreement
with a bank. The Agreement contains covenants, the most restrictive of which are
maintenance of certain financial ratios, prohibition of the occurrence of
additional indebtedness, the payment of dividends, certain related party
transactions and limitations on capital expenditures. Borrowings under the
Agreement are secured by substantially all the domestic current assets of PST.
Additionally, the CLC has a security interest in PST's intangible assets, and
this security interest ranks pari passu with the security interest of the Senior
Secured Notes (see below) in PST's intangible assets. Revolving credit advances
under the Agreement are based on eligible receivables and inventory.
Effective January 31, 1997, PST amended this Agreement with the CLC
("Amended Agreement"), representing the fourth amendment to the Agreement. The
Amended Agreement provides, among other things, for revolving credit advances of
up to $50,000 through July 31, 2000 and letters of credit of up to $1,000. The
Amended Agreement provides for certain pricing performance adjustments based on
defined Performance Ratios. The Company will pay interest at a defined Index
Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to 0.25%) or,
at the election of the Company, 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 the Company signed a Receivables
Agreement with the CLC that provides the Company with the ability to sell a 100%
ownership interest, without recourse, in certain Eligible Receivables generated
by PST. The aggregate invoice face amount of purchased receivables will not
exceed $12,000. 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.
Debt Offering and Redemption
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.
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 PureTec Common Stock
16
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. PureTec 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 PureTec 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
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. Capital expenditures for fiscal
1997, 1996 and 1995 were $10,225, $7,986, and $7,251 respectively. In September
1996, the Company acquired certain assets of PureTec's recycling business for
$4,400.
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 was formed, Colorite Europe Limited (a United Kingdom company). The
total capital costs for the Company in connection with this new Unichem plant
are approximately $6 million. The Company has received commitments for certain
grants, subsidies and other introducements 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 at Action Belgium N.V. and additional
borrowings from commercial banks. The plant is in the process of being qualified
by its vendors.
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 and
have been paid out of the Company's working capital as of October 31, 1997.
Inflation
Generally, the Company's operations have benefited from relatively
stable or declining prices for raw materials. In fiscal 1997, the Company
benefited domestically from declining raw material costs. 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.
Subsequent Events
In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry,
a discontinued operation (See Notes 15, 16 and 17(b) to the Consolidated
Financial Statements included in Item 8 to this Form 10-K).
On November 11, 1997, PureTec announced that ithad signed an Agreement
and Plan of Merger ("Agreement") with Tekni-Plex, Inc., (Tekni-Plex") a
privately -owned company, pursuant to which PureTec 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 PureTec would receive
$3.50 in cash for that share in the Merger. The Agreement and the Merger will be
submitted to the shareholders of PureTec for approval at PureTec's annual
shareholders' meeting expected to be held in January 1998. The Agreement and the
Merger have been unanimously approved, and recommended to PureTec shareholders
for adoption by PureTec's Board of Directors. Officers and directors of PureTec
17
owning approximately 10% of the outstanding common stock of PureTec 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 PureTec 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 PureTec 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 , PureTec, or either of them
under certain circumstances. In the event the Agreement is terminated because
PureTec'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
PureTec'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. PureTec expects the
Merger to be completed in February 1998, bur cannot assure that all of the
conditions to the Merger will be satisfied.
In connection with PureTec's acceptance of the Tekni-Plex Offer,
Tekni-Plex has also agreed to lend to PureTec Corporation $5,000, as discussed
above.
Item. 8 Financial Statements and Supplemental Data
Financial statements are included herein beginning with 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
18
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 PST.
Name Age Position
Fred W. Broling 62 Chairman of the Board and Chief Operating Officer
David C. Katz 57 President and Director
Peter R. Harvey 62 Director
John J. Harvey 66 Director
Robert A. Calabrese 61 Director
Leo Gans 71 Vice President
Joseph T. Bruno 62 Vice President - Human Resources
Thomas V. Gilboy 43 Vice President and Treasurer
Paul Litwinczuk 44 Secretary
Gerard R. Giordano 47 Assistant Secretary and Vice President
Murray Fox 74 Vice President
Mr. Broling has served as Chairman of the Board of PST since 1984.
Prior to such time, from 1981 to 1984, Mr. Broling served as the President of
the plastic specialty sector of Dart & Kraft.
Mr. Katz has served as President and Director of PST since August 1996.
Mr. Peter R. Harvey has served as Vice President of PST since 1987, a
Director of PST since June 1993. Mr. Harvey is the President, Chief Operating
Officer and a Director of Artra Group Incorporated ("Artra") (fashion jewelry,
flexible packaging and investments), since 1968; a Director of The Lori
Corporation (fashion jewelry and staffing business in telecommunications and
computers), since 1984. He has also served as Chief Executive Officer, from 1985
to 1993, President, from 1983 to 1985 and from 1988 to 1993, and chairman from
1895 to 1995 of SoftNet Systems, Inc. ("SoftNet").
Mr. John J. Harvey has served as a Director of PST since June 1993.
Chairman of the Board and Chief Executive Officer of Artra since 1968; and
Chairman of the Board of The Lori Corporation, since 1985. Peter R. Harvey and
John J. Harvey are brothers.
Mr. Calabrese has served as a Director of PST since June 1995. Mr.
Calabrese has been the President of R.C. Industries Inc. and Chief Executive
Officer of its Aetna Division (metal finishing) since 1970.
Mr. Gans has served as Vice President of PST since 1984 and was a
director of PST from 1989 until June 1993. He also served as President of the
Action Division since 1983, and, prior thereto, he was President of such
division when it was part of Dart & Kraft.
Mr. Bruno has served as Vice President - Human Resources of 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 and Treasurer of PST 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 PST since April, 1996.
Mr. Giordano has served as Assistant Secretary and Vice President of
Corporate Finance of PST since February 1997 and 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.
19
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.
Compensation Committee Interlocks and
Insider Participation; Additional Information
Compensation of executive officers is determined by a committee
comprised of directors of PST and PureTec. Messrs. Fred Broling, Peter R.
Harvey and Werner Hasse (who currently serves as a director of PureTec)
presently serve on the compensation committee. See "Item 13. Certain
Relationships and Related Transactions."
Messrs. Broling, Peter R. Harvey and Werner Hasse 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 committee considers 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.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
Name and All Other
Principal Fiscal Compensation (1)
Position Year Salary Bonus (2) (I) (ii)
-------- ---- ------ --------- --- ----
Fred W. Broling, 1997 $250,000 $250,000 $ 3,200 $ 1,992
Chairman and Chief 1996 259,216 125,000 3,018 1,992
Executive Officer 1995 263,446 250,000 9,240 1,992
David C. Katz, 1997 165,000 165,000 3,200 1,162
President and Director 1996 91,154 75,000 3,000 1,162
1995 -- 150,000 -- --
Thomas V. Gilboy 1997 176,000 176,000 3,200 1,992
Vice President, Treasurer 1996 31,067 40,000 -- --
1995 -- -- -- --
Leo Gans 1997 186,000 249,240 3,200 1,992
Vice President 1996 187,042 166,500 3,140 1,992
President - Action 1995 186,582 236,000 7,995 1,992
Technologies Division
Robert E. Brookman, Ph.D. 1997 197,000 73,100 3,200 1,992
President - Colorite Polymers 1996 191,582 49,454 3,000 1,992
Division 1995 190,703 99,000 3,000 1,992
(1) The amounts in this column represent (i) contributions made by the
Company to the Savings Plan for Employees of Plastic Specialties and
Technologies, Inc. and Affiliates and (ii) the amount of premiums paid
by the Company for life insurance policies for the benefit of the named
executive officers.
(2) Previously, bonus information was reported in the year paid. In the
current year, information has been changed to reflect amounts awarded
for the fiscal year.
20
Director's Compensation
Robert Calabrese receives a fee of $10,000 for serving as a director.
All other directors of the Company receive no compensation for serving as
directors.
Compensation Pursuant to PST Pension Plan
Pensions for salaried personnel of PST 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 18,750 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 PST 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; David C. Katz, 2 years; Leo Gans, 15 years; and Joseph T.
Bruno, 18 years.
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.
Stock Options
The Company, as a subsidiary of PureTec, participates in the stock
option plan of Puretec. PureTec has adopted a stock option plan (the "1995
Plan") covering 5,000,000 shares of PureTec 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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of July 31, 1997, Ozite, a wholly-owned subsidiary of PureTec, owned
approximately 96% of the outstanding common stock of PST. The remaining 4% of
the outstanding common stock was owned by non-affiliates.
No other person or group is known to be the beneficial owner of more
than five percent of any class of the registrant's voting securities.
21
Item 13. Certain Relationships and Related Transactions
Transaction with Related Companies
In September, 1996, the Company acquired the recycling operations of
PureTec, comprised of certain fixed assets, raw materials inventory and certain
other assets of PureTech Plastics, Inc. and subsidiaries ("PTP") for $4,400. The
acquisition was accounted for at historical cost in a manner similar to the
pooling-of-interests method of accounting as it is a transaction between
entities under common control. The $1,769 difference between PTP's carrying
value of such assets and the consideration paid was treated as a contribution of
capital to PST by PureTec. The consolidated statements of operations have been
restated to present the acquisition as if it had occurred at the beginning of
the earliest period presented. The 1996 balance sheet has not been restated as
the total assets of the recycling operations were only 3% of the total assets of
PST at the acquisition date.
PST 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 and other related items, 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. 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.
The Company acquired from 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 in Bagcraft for $10,000,000 in 1987. Bagcraft is a wholly-owned
subsidiary of 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.
Certain Other Indebtedness
PST is due $1,089,000 from Ozite relating to a tax sharing agreement.
The Company has fully reserved this receivable from Ozite due to Ozite's
inability to settle this obligation. See Note 5c to the Consolidated Financial
Statements included in Item 8 to this Form 10-K.
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 the Company 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
22
at the Company's request, respectively. As of October 31, 1997 such amounts were
outstanding.
During fiscal 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, 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 Ozite Preferred Stock.
The notes payable to Messrs. Broling and Harvey are non-interest bearing for the
first four years.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a)(1) Financial Statements - See Index to Financial Statements and Schedules on
page F-1.
(a)(2) Financial Statement Schedule - Schedule II - Valuation and Qualifying
Accounts
(a)(3) List of Exhibits
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 Restated Certificate of Incorporation of Plastic Specialties and
Technologies, Inc. ("PST") dated June 1, 1987, as amended;
incorporated by reference to Exhibit 3.1 to Amendment No. 1 to
Registration Statement on Form S-1 (No. 33-66338).
3.2 Certificate of Ownership and Merger of PST Holdings, Inc. into PST.
3.3 By-laws of PST; incorporated by reference to Exhibit 3.8 to
Registration Statement on Form S-1 (No. 33-11686).
4.1 Form of Specimen Senior Secured Note (including in page A-1 of
Exhibit 4.10 to Amendment No. 2 to Registration Statement on Form S-1
(No. 33-11686).
10.1 Lease, dated June 1989, between Richard C. Lauer and Roy I. Anderson,
as lessor, and PST, as lessee, re: 19555 East Arenth Avenue, City of
Industry, California, incorporated by reference to Exhibit 28.1 to
Form 10-Q of the Registrants for the fiscal quarter ended October
31, 1992.
10.2 Lease, dated September 23, 1991, between E.T. Hermann 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 to Exhibit 28.1 to Form 10-Q of the
Registrants for the fiscal quarter ended October 31, 1997.
10.3 Lease, dated January 1, 1993, between OHR Realty Corporation, as
lessor, and PST, as lessee, re: Piscataway, New Jersey; incorporated
by reference to Exhibit 28.1 to Form 10-Q of the Registrants for the
fiscal quarter ended October, 1992.
10.5 Lease, dated April 24, 1972, between Pacific Western Warehouse, Inc.
and Dart Industries, Inc. (assigned by Dart Industries, Inc. To PST);
incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 (No. 33-11686).
10.6 Lease, dated May 24, 1994 between LaSalle National Trust, N.A. as
Trustee under Trust Agreement dated May 16, 1994 and Known as Trust
Number 118722, as Lessor and American Gasket and Rubber Company (a
division of PST's Action Technology Subsidiary), as lessee, re:
Schaumburg, Illinois.
10.7 Plastic Specialties and Technologies, Inc. And Affiliates Pension
Plan, Amended and Restated Effective as of January 1, 1985;
incorporated by reference to Exhibit 10.18 to Registration Statement
on Form S-1 (No. 33-11686).
23
10.8 Senior Loan Agreement dated as of December 30, 1992 between PST, as
borrower, General Electric Capital Corporation, as agent and lender,
and certain participating lenders (the "GECC Senior Loan Agreement");
incorporated by reference to Exhibit 10.24 to Annual Report on Form
10-K of the Registrants for the fiscal year ended July 31, 1992.
10.9 Amendment No. 2 dated July 7, 1993 to the GECC Senior Loan Agreement;
incorporated by reference to Exhibit 10.9 to Registration Statement
on Form S-1 (No. 33-66338).
10.10 Amendment No. 3 dated October 8, 1993 to the GECC Senior Loan
Agreement; incorporated by reference to Exhibit 10.10 to Amendment
No. 1 to Registration Statement on Form S-1 (No. 33-66338).
10.11 Amendment No. 4 dated January 31, 1997 to the GECC Senior Loan
Agreement; incorporated by reference to Exhibit 10.11 to Amendment
No. 1 to Registration Statement on Form S-1 (No. 33-66338).
21 List of subsidiaries of PST
27 Financial Data Schedule
(b) None
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC.
By: /s/ Thomas V. Gilbey
------------------------------------
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.
/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/ Robert A. Calabrese
- -----------------------
Robert A. Calabrese Director November 13, 1997
/s/ John J. Harvey
- --------------------
John J. Harvey Director November 13, 1997
/s/ Peter R. Harvey
- ----------------------
Peter R. Harvey Director November 13, 1997
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of July 31, 1997 and 1996 F-3
Consolidated Statements of Operations
for the years ended July 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Deficit
for the years ended July 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the years ended July 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-23
Schedule II - Valuation and qualifying accounts F-24
F-1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders of
Plastic Specialties and Technologies, Inc.
Ridgefield, New Jersey
We have audited the accompanying consolidated balance sheets of Plastic
Specialties and Technologies, Inc. (the "Company") as of July 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' deficit,
and cash flows for each of the three years in the period ended July 31, 1997.
Our audits also included the consolidated financial statement schedule listed in
the index to the consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
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, 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 consolidated 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
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
July 31, July 31,
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $6,460 $6,098
Accounts receivable, less allowance of $1,454 and $1,280
as of July 31, 1997 and 1996, respectively........... 49,384 42,291
Inventories ............................................. 47,848 32,992
Prepaid expenses and other current assets ............... 3,653 2,591
Deferred income taxes.................................... 1,394 544
-------- --------
TOTAL CURRENT ASSETS ........................................ 108,739 84,516
PROPERTY, PLANT AND EQUIPMENT, net .......................... 57,820 45,608
GOODWILL, net ............................................... 40,558 41,921
DUE FROM PARENT, net ........................................ 4,581 --
OTHER ASSETS, net ........................................... 6,444 6,231
NOTES AND INTEREST RECEIVABLE FROM OFFICERS ................. 403 388
-------- --------
TOTAL ASSETS ................................................ $218,545 $178,664
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short term borrowings .................................. $36,772 $14,138
Accounts payable ........................................ 21,370 20,432
Accrued expenses ....................................... 14,946 10,697
Accrued interest ........................................ 2,789 2,562
Current portion of long-term debt ...................... 1,249 1,360
-------- --------
TOTAL CURRENT LIABILITIES .................................. 77,126 49,189
-------- --------
OTHER LONG-TERM LIABILITIES ................................ 4,175 2,862
PENSION LIABILITIES.......................................... 567 571
DEFERRED INCOME TAXES ...................................... 4,777 3,663
LONG-TERM DEBT ............................................. 134,196 127,642
-------- --------
TOTAL LIABILITIES .......................................... 220,841 183,927
COMMITMENTS AND CONTINGENCIES (See Notes 7, 9, 16 and 17)
STOCKHOLDERS' DEFICIT:
Common stock, par value $.01; 10,000,000 shares authorized;
8,319,833 shares issued and outstanding, at July 31,
1997, 1996 and 1995.................................. 83 83
Additional paid-in capital .............................. 16,438 13,812
Accumulated deficit ..................................... (12,748) (15,254)
Receivable from majority stockholder-Ozite Corporation ... (2,892) (3,853)
Receivable from officer, including accrued interest ...... (717) (717)
Cumulative foreign currency translation adjustment ....... (2,460) 666
-------- --------
NET STOCKHOLDERS' DEFICIT ................................ (2,296) (5,263)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT .................. $218,545 $178,664
======== ========
See notes to consolidated financial statements
F-3
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended
July 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
NET SALES 269,611 $ 286,220 $ 221,190
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of goods sold 206,343 222,552 171,194
Selling, general and administrative 33,272 33,091 26,673
Research and development 635 642 872
Amortization of intangible assets 1,372 1,411 1,369
----------- ----------- -----------
241,622 257,696 200,108
----------- ----------- -----------
INCOME FROM OPERATIONS 27,989 28,524 21,082
----------- ----------- -----------
OTHER EXPENSE (INCOME):
Interest expense 17,152 17,739 17,033
Debt issuance cost and discount amortization 988 783 785
Foreign exchange (gain) loss (189) 59 116
Other, net 541 441 145
----------- ----------- -----------
18,492 19,022 18,079
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 9,497 9,502 3,003
Provision for income taxes 5,364 5,582 1,807
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 4,133 3,920 1,196
----------- ----------- -----------
DISCONTINUED OPERATIONS:
Loss from disposal of discontinued operations (net of
tax benefit of $1,033 and $762 in 1997 and 1996, respectively) (1,627) (1,479) --
Loss from discontinued operations (net of tax benefit
of $332 and $440 in 1996 and 1995, respectively) 0 (647) (1,294)
----------- ----------- -----------
(1,627) (2,126) (1,294)
----------- ----------- -----------
NET INCOME (LOSS) 2,506 $ 1,794 ($ 98)
=========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
Income from continuing operations $ 0.50 $ 0.48 $ 0.14
Loss from discontinued operations (0.20) (0.26) (0.15)
----------- ----------- -----------
Net income (loss) per common share $ 0.30 $ 0.22 ($ 0.01)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,319,833 8,319,833 8,319,833
=========== =========== ===========
See notes to consolidated financial statements
F-4
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in thousands)
Receivable
from Cumulative
Officer, Foreign
Additional Receivable Including Minimum Currency
Common Paid-In Accumulated from Majority Accrued Pension Translation
Stock Capital Deficit Stockholder Interest Liability Adjustment
-------------------------------------------------------------------------------------
BALANCE, JULY 31, 1994 $ 83 $ 12,107 $(16,950) $( 3,553) $( 717) $ -- $ 153
Net loss -- -- (98) -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- 781
Minimum pension liability -- -- -- -- -- (250) --
Increase in receivable from
majority stockholder -- -- -- (300) -- -- --
-------------------------------------------------------------------------------------
BALANCE, JULY 31, 1995 $ 83 $ 12,107 $(17,048) $( 3,853) $( 717) $( 250) $ 934
Loss from recycling operations -- 1,705 -- -- -- -- --
Net Income -- -- 1,794 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- (268)
Minimum pension liability -- -- -- -- -- 250 --
-------------------------------------------------------------------------------------
BALANCE, JULY 31, 1996 $ 83 $ 13,812 $(15,254) $( 3,853) $( 717) $ -- $ 666
Loss from recycling operations -- 857 -- -- -- -- --
Net Income -- -- 2,506 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- (3,126)
Current income tax payable -- -- -- 961 -- -- --
Contribution of capital to PST
by PureTec -- 1,769 -- -- -- -- --
-------------------------------------------------------------------------------------
BALANCE, JULY 31, 1997 $ 83 $ 16,438 $(12,748) $( 2,892) $( 717) $ -- $( 2,460)
======== ======== ======== ======== ======== ======== ========
See notes to financial statements
F-5
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended
July 31,
----------------------------------
1997 1996 1995
-------- ---------- -----------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations 4,133 $ 3,920 $ 1,196
Adjustment for Recycling acquisition 857 1,705 --
-------- -------- --------
Income net of acquisition adjustment 4,990 5,625 1,196
Adjustment to reconcile net income to net cash used in
operating activities from continuing operations:
Amortization 2,351 2,194 2,148
Depreciation 6,149 5,470 5,134
Deferred income taxes 558 1,919 455
(Gain) loss on the sale of fixed assets (17) 605 --
Provision for losses on accounts receivable
and other reserves 182 833 1,081
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (10,773) (2,783) (2,535)
Accounts receivable factored 2,087 -- --
Inventories (15,500) 7,860 (15,411)
Prepaid expenses and other current assets (1,082) (458) (801)
Other assets (6,051) (1,090) (25)
Notes and interest receivable from officers (15) (14) (15)
Increase (decrease) in liabilities:
Accounts payable, other current liabilities,
accrued interest, current deferred taxes and
current portion of long-term debt 7,163 (806) (37)
Other long-term liabilities 2,495 1,082 166
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
-------- -------- --------
FROM CONTINUING OPERATIONS (7,463) 20,437 (8,644)
-------- -------- --------
Loss from discontinued operations (1,627) (2,126) (1,294)
NET CASH USED IN OPERATING ACTIVITIES
-------- -------- --------
FROM DISCONTINUED OPERATIONS (1,627) (2,126) (1,294)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (9,090) 18,311 (9,938)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,225) (7,986) (7,251)
Acquisition of Recycling operations (4,400) -- --
Proceeds from sale of property and equipment 27 1,337 --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (14,598) (6,649) (7,251)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (repayments) under revolving credit
facility and short-term borrowing, net 22,634 (12,356) 19,478
Proceeds from long-term debt 4,141 -- --
Repayments from long-term debt (1,360) -- --
(Repayment of) borrowings of term loans -- 3,451 --
Proceeds of term loans -- (1,271) (1,185)
Advances to majority stockholders- Ozite Corporation -- -- (300)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,415 (10,176) 17,993
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,365) (129) (360)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 362 1,357 444
CASH AND CASH EQUIVALENTS, beginning of the period 6,098 4,741 4,297
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,460 $ 6,098 $ 4,741
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 16,925 $ 17,369 $ 17,068
======== ======== ========
Income taxes $ 4,543 $ 3,108 $ 1,442
======== ======== ========
Non-cash financing transaction:
Changes in minimum pension liability $ -- $ 250 $( 250)
Capital contributed by PureTec related to recycling acquisition 1,769 -- --
Capitalized lease Colorite Europe Limited premises 3,784 -- --
See notes to consolidated financial statements
F-6
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. ORGANIZATION
Plastic Specialties and Technologies Inc.'s ("PST" or the "Company")
principal businesses are the manufacturing of garden hose, specialty plastic
compounds and fabricated precision plastic components for niche consumer and
industrial markets, and the recycling of plastics. PST services its markets
through its network of 20 manufacturing facilities, located in key points
throughout the United States, with three locations in Europe and one in Canada.
The Company was formed in 1984 by its senior management to acquire the
plastic specialty sector of Dart & Kraft through a leveraged buy out. PST
Holdings, Inc. ("Holdings") was incorporated in March 1987 as a wholly-owned
subsidiary of Sage Group, Inc. ("Sage") for the purpose of acquiring PST. On
August 24, 1990, Sage was merged with and into Ozite Corporation ("Ozite") with
Ozite being the surviving corporation. On October 29, 1993, Holdings was merged
with and into PST with PST surviving the merger (the "PST Merger"). Ozite merged
with PureTec Corporation ("PureTec"), formerly known as Pure Tech International,
Inc., at the close of business on July 31, 1995 (the "Merger").
In September 1996, the Company acquired the recycling operations of
PureTec, comprised of certain fixed assets, raw materials inventory and certain
other assets of PureTech Plastics, Inc. and subsidiaries ("PTP") for $4,400. The
acquisition was accounted for at historical cost in a manner similar to the
pooling-of-interests method of accounting as it is a transaction between
entities under common control. The $1,769 difference between PTP's carrying
value of such assets and the consideration paid was treated as a contribution of
capital to PST by PureTec. The consolidated statements of operations have been
restated to present the acquisition as if it had occurred at the beginning of
fiscal 1996, which is the first year PST and PTP were entities under common
control. The 1996 balance sheet has not been restated as the total assets of the
recycling operations were only 3% of the total assets of PST at the acquisition
date. Therefore, the net effect of this treatment is reflected as an adjustment
to additional paid-in capital.
As of July 31, 1997, PureTec, through its ownership of Ozite, owned
approximately 96% of the outstanding common stock of PST. This ownership
increased approximately 13% during 1997 as the result of a private placement
offer. The Company's corporate officers are also officers of Ozite, PureTec and
Pure Tech Plastics. The expenses incurred at the general corporate office which
are not directly attributable to one entity are allocated to the Company and
other affiliates. Approximately $5,687 was allocated to PST for fiscal 1997.
As discussed in Note 16 to the Company's Financial Statements, on
November 11, 1997 PureTec 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 PureTec will arrange, the Merger Agreement
contemplates Tekni-Plex (i) purchasing all of PureTec's outstanding Common Stock
for cash consideration of $3.50 per share, and (ii) assuming or refinancing all
of PureTec's debt. The Merger Agreement and the Acquisition have been
unanimously approved and recommended to PureTec shareholders for adoption by
PureTec'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 wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been 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.
F-7
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
c. Inventories
-----------
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
d. Goodwill
--------
Goodwill is being amortized on a straight-line basis over the periods
expected to be benefited, which is estimated to be 40 years. Goodwill resulted
from acquisitions which occurred prior to 1990.
The Company continually assesses the recoverability of its intangible
assets by determining whether the amortization of the goodwill 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 depreciated by the
straight-line method over the estimated useful lives of the related assets.
Repairs and maintenance are charged to expense as incurred. Depreciation is
computed on the straight-line method over the following estimated useful lives:
buildings and improvements, 20 years; furniture and fixtures, 10 years;
machinery and equipment, 10 years; and leasehold improvements, the lesser of the
term of the lease, including renewal options, or the useful life of the asset
(See Note 4). 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 during
the years ended July 31, 1997 and 1996, respectively.
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. Deferred Financing Costs
------------------------
The financing costs incurred in securing debt have been deferred and are
being amortized over the life of the related debt.
g. Income Taxes
------------
For fiscal year 1995 and prior, PST and Ozite were parties to a tax
sharing agreement and filed a consolidated federal income tax return. Beginning
with fiscal year 1996, the operations of PST were included in the PureTec
consolidated federal income tax return. The Company's foreign subsidiaries file
separate foreign income tax returns.
The Company files a consolidated federal 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.
h. 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.
F-8
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
i. Income (Loss) Per Common Share
------------------------------
Income (loss) per common and common equivalent share is computed based
upon the weighted-average number of shares outstanding during the period. Net
loss per common share is based upon the weighted-average number of shares
outstanding, as there are no common share equivalents outstanding. 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.
j . Other Recent Accounting Pronouncements
--------------------------------------
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
129"). SFAS 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 130"). SFAS 130
requires companies to display, with the same prominence as other financial
statements, the components of other comprehensive income. SFAS 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 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.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires that an enterprise disclose certain
information about operating segments. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997 (the Company's 1999
fiscal year).
The Company has not determined the impact, if any, on the financial
statements of adopting these pronouncements.
k. Receivable from Majority Stockholder - Ozite Corporation
--------------------------------------------------------
Due from majority stockholder is comprised of $3,253 of expenditures
paid by the Company on behalf of a predecessor of Ozite in connection with the
acquisition of PST in fiscal 1987 and $300 of cash advances in both fiscal 1995
and 1994. The outstanding balance is due on demand and is non-interest bearing.
F-9
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
l. 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.
m. 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 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.
n. 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.
o. 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.
p. Reclassifications
-----------------
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
3. INVENTORIES
July 31,
-----------------------
1997 1996
------- -------
Raw materials $ 20,498 $ 14,552
Work-in-process 1,288 1,549
Recycled material 771 --
Finished goods 25,291 16,891
------- -------
$ 47,848 $ 32,992
======== ========
F-10
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. PROPERTY, PLANT AND EQUIPMENT
July 31,
-----------------------
1997 1996
------- -------
Land and land improvements $ 10,217 $ 10,096
Buildings and leasehold improvements 22,289 17,198
Furniture and fixtures 3,534 3,117
Machinery and equipment 64,005 51,334
Construction in progress 3,441 3,890
------- -------
103,486 85,635
Accumulated depreciation (45,666) (40,027)
------- -------
$ 57,820 $ 45,608
======== =======
5. INVESTMENTS IN AFFILIATES AND CERTAIN RELATED PARTY TRANSACTIONS
The Company acquired from Bagcraft Corporation of America ("Bagcraft")
a $5,000 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 in Bagcraft for $10,000 in 1987. Bagcraft is a
wholly-owned subsidiary of BCA Holdings, Inc. ("BCA") and BCA is wholly-owned
subsidiary of Artra Group, Inc. ("Artra") an affiliated company. 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 July 1993, the Company recorded an impairment of its investment in
Bagcraft by establishing a valuation reserve to write-off the $10,000 carrying
value of such investment as the Company was unable to determine, with reasonable
certainty, whether or when it would realize its investment in Bagcraft. On
December 28, 1993, PST received from Bagcraft $5,000 in cash and 3,000 shares of
BCA preferred stock as payment in full for the $5,000 subordinated note and
unpaid interest due from Bagcraft totaling $3,094, respectively. In 1994, the
Company recorded a $5,000 gain for the recovery of its investment in the
Bagcraft subordinated note. The interest due from Bagcraft had been fully
reserved and interest income was not recorded for the receipt of the BCA
preferred stock as such stock is not freely transferable. The cash received was
used to pay a portion of the PST dividend declared.
PST held 772,000 Artra Common Shares, which were accounted for on the
equity method (see 5a. above). Through the Company's recording of its share of
the net losses of Artra and other related items, the carrying value of the
investment in the Artra Common Shares had been reduced to zero.
In connection with the Merger (see Note 1), on July 13, 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
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 the minority stockholders that existed at the date of
declaration.
PST is due $1,089 from Ozite relating to a tax sharing agreement. The
Company has fully reserved for this receivable from Ozite due to Ozite's current
inability to settle this obligation.
The notes and interest receivable from officers are due on demand and
bear interest at rates generally ranging from 75% of the prime rate to the prime
rate of interest. The notes receivable relate primarily to the purchase of
common and preferred stock of the predecessor of Ozite by several officers,
unreimbursed moving expenses and a personal loan.
F-11
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
6. OTHER ASSETS
Other assets consist primarily of deferred financing costs of
approximately $3,378 and $4,025, net of accumulated amortization of $3,590 and
$2,602 at July 31, 1997 and 1996, respectively.
7. SHORT-TERM BORROWINGS
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 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 9)
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 maximum invoice face amount of purchased receivables will not exceed
$12,000. 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.
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.
F-12
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
8. ACCRUED EXPENSES
July 31,
-----------------------
1997 1996
------- -------
Payroll and compensation .......... $ 4,602 $ 4,024
Income taxes....................... 61 465
Other.............................. 10,283 6,208
------- -------
$14,946 $10,697
======= =======
9. LONG-TERM DEBT
July 31,
-----------------------
1997 1996
------- -------
11-1/4% Senior Secured Notes due
December 1, 2003 (a) $ 125,000 $ 125,000
7.10% Foreign Term Loan payable in Belgian
Francs, with quarterly interest payments,
eight semi-annual principal payments
of approximately $550 which commenced
January 31, 1993 and a balloon payment of $693
due on January 31, 1997. The loan was secured by
a pledge of working capital and a lien on certain
fixed assets of the Company's foreign operations --- 693
6.10 % Foreign Term Loan payable in Belgian
Francs, with quarterly interest payments, and twenty
semi-annual installments which commenced June 1996 822 1,263
3.75 % Foreign Term Loan payable in Belgian
Francs, with five equal yearly installments with
first payment commencing December 1997 791 ---
9.93% Foreign Term Loan payable in Italian Lira --- 956
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 ---
Mortgage payable, bearing interest at prime plus 1 1/2%
payable in monthly installments of $4, plus interest 329 ---
Foreign Term Loan Payable in British Pounds,
payable in 13 equal semi-annual installments of $151
commencing June 1998 with a final payment of $158
F-13
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
December, 2004 at interest rate of 1.75% plus LIBOR 2,302 ---
Capitalized Lease Obligation, 20 years commencing
February 1997 3,841 ---
------- --------
135,445 129,002
Current Portion 1,249 1,360
--------- ----------
$ 134,196 $ 127,642
========= ==========
a. The Senior Secured Notes, which require semi-annual interest
payments on June 1 and October 1, 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, under the covenant terms contained in the Agreement with the CLC
(See Note 7), the company is unable to pay dividends.
The aggregate amount of maturities of long-term debt as of July 31,
1997 is as follows:
Fiscal Year:
1998 $ 1,249
1999 1,426
2000 1,446
2001 1,308
2002 646
Thereafter 129,370
--------
$ 135,445
=========
10. STOCK BASED COMPENSATION
Certain of the Company's employees participate in the PureTec
Corporation Employee stock option plan. Generally, options outstanding under
PureTec's stock option plans: (i) are granted at prices equal to the fair market
value of the stock on the date of the grant, (ii) vest within a three year
period, and (iii) expire ten years subsequent to the award.
The Company uses the intrinsic value method to measure compensation
expense associated with grants of stock options to employees and shares of stock
purchased under the employee stock purchase plan. Had compensation cost been
determined based upon fair value at the grant date for awards under these plans,
reported compensation expense would have been higher and the corresponding net
income would have been lower by approximately $216 and $134 for the years ended
July 31, 1997 and 1996, respectively. Proforma earnings per share for the years
ended July 31, 1997 and 1996 would have been $0.28 and $0.20, respectively.
Management believes that the assumptions used and the model applied to
value the awards yields a reasonable estimate of the fair value of the grants
made under the circumstances. The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future amounts. SFAS 123 does not apply to
awards prior to 1996, and additional awards in future years are anticipated.
F-14
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
11. INCOME TAXES
The provision for income taxes from continuing operations consists of
the following:
Year Ended July 31,
----------------------------------------
1997 1996 1995
-------- -------- -----
Current Tax Provision (Benefit)
Federal $1,462 $ --- $ (900)
Foreign 2,798 2,269 2,252
State 150 300 ---
-------- -------- ---------
4,410 2,569 1,352
------- -------- ---------
Deferred Provision
Federal 777 2,933 ---
Foreign 177 80 455
-------- --------- --------
Total $5,364 $ 5,582 $1,807
======= ========= ========
The Company's tax provision has been determined as if it were filing on
a separate return basis. Any currently payable amounts due or benefits from
losses to the extent recoverable from prior earnings are included as due to or
from parent or used to offset previous amounts due from parent. The Company is
included in the consolidated returns of its parent (Ozite through 1995 and
PureTec commencing in 1996). The reported results, as if filing on a separate
return basis, may be affected for tax purposes by the operating results or the
use of operating loss carryforwards of other members of the consolidated group.
Such effects are reflected in the accounts of the Company's parent.
The following reconciles the provision for income taxes at the U.S.
statutory rate to the provision for income taxes from continuing operations:
Year Ended July 31,
----------------------------------------
1997 1996 1995
-------- -------- -----
Computed tax provision at statutory
rate $ 3,229 $ 3,810 $ 581
State taxes, net of federal tax benefit 272 198 ---
Difference in foreign income tax rates 625 416 397
Amortization of goodwill 464 464 464
Losses not currently deductible, foreign-1997,
domestic - 1995 486 --- 1,119
Other 271 678 ---
Reduction of previously provided taxes --- --- (900)
Other nondeductible expenses 16 16 146
------- --------- -------
$ 5,364 $ 5,582 $ 1,807
======= ========= =======
The Company has accounted for the acquisition of the recycling division
in a manner similar to a pooling of interests and has restated the 1996 income
statement to reflect the operations of the combined entity. The Company has not
restated the 1996 tax provision as the tax attributes of the recycling
operations remain with its parent, PureTec Corporation.
F-15
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Income (loss) from continuing operations before income taxes and
extraordinary items relating to foreign and domestic operations are as follows:
Year Ended July 31,
----------------------------------------
1997 1996 1995
-------- -------- -----
United States - prior to recycling restatement $4,015 $ 5,522 $ (3,791)
Europe 5,482 5,685 6,794
------- ------- -------
As reported 9,497 11,207 3,003
Recycling operations --- (1,705) ---
--------- ------- -------
Restated $9,497 $9,502 $3,003
======== ======= =======
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 loss and income tax credit carryforwards. The income tax effects of
significant items comprising the Company's net deferred tax liability as of July
31, 1997 and 1996 are as follows:
July 31, 1997 July 31, 1996
------------- -------------
Current Non - current Current Non-current
-------- ------------- ------- -----------
Assets
- ------
Net operating loss carry forward $ -- $ 572 $ -- $ 1,175
Expenses currently not deductible -
discontinued operations 690 -- -- --
Allowance for doubtful accounts 227 -- 200 --
Capitalization of inventory costs 477 -- 344 --
Liabilities
- -----------
Difference between book and tax
basis of property and equipment -- (4,777) -- (4,838)
---------- ------ --------- -------
Net deferred tax asset (liability) $ 1,394 $ (4,205) $ 544 $ (3,663)
Less: valuation allowance -- (572) -- --
---------- ----- -------- ------
Net deferred income taxes $ 1,394 $ (4,777) $ 544 $ (3,663)
======= ========= ======= =========
The Company has not recorded a valuation allowance on the net domestic
deferred tax assets as management believes that the benefits will be realized.
The Company has recorded a valuation allowance on the net operating loss carry
forward for 1997, as these current year losses relate to CEL, a company taxable
in Northern Ireland. The Company believes that it's more likely than not that
the deferred tax asset will not be realized. At July 31, 1997, the Company has
net operating loss carryforwards related to the operation in Ireland of $1,430
which have no expiration date.
The Company has not provided deferred income taxes on undistributed
foreign earnings of $25,833 as it has the ability and intent to permanently
reinvest such earnings.
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, PST believes that its tax
position was appropriate and that the assessments are without merit. Therefore,
PST has appealed and has not paid or accrued for the assessments. Based on the
advice of legal counsel in Belgium, PST believes that the assessment appeals
will be accepted by the tax authorities in Belgium, although there can be no
assurance whether or when such appeals will be accepted.
F-16
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
12. EMPLOYEE BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
which covers substantially all employees of PST not covered by a collective
bargaining agreement, who have completed one year of service and are not
participants in any other pension plan. The plan is also available to affiliates
of PST who bear their respective costs for their covered employees.
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 plans' assets are invested primarily in the Master Trust Fund of
PST in accordance with the investment agreements of the plan.
Net pension costs consists of the following:
Year Ended July 31,
----------------------------------------
1997 1996 1995
-------- -------- -----
Service cost $ 576 $ 561 $486
Interest cost on projected benefit obligation 583 542 360
Actual return on plan assets (1,830) (557) (259)
Net amortization and deferrals 1,270 183 (131)
------- ------- ------
$ 599 $ 729 $456
======= ====== =====
The funded status of the plan and the amount recognized in the
accompanying consolidated balance sheets is as follows:
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)
Prior service cost not yet recognized
in net periodic pension cost 31 35
Unrecognized net (gain) loss (417) 1,150
Unrecognized net transition obligation 20 22
--------- --------
Accrued pension costs $ (567) $ ( 571)
=========== ========
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% for the years ended July
31, 1997, 1996 and 1995. In 1996, the projected unit credit method was adopted
to reflect the final pay terms of the plan, which caused the increase in the
projected benefit obligation.
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 plan is also made available to PST affiliates who bear
their respective costs. Such contribution amounted to approximately $492, $457
and $504 for the years ended July 31, 1997, 1996 and 1995, respectively.
The Company has made contributions to multi-employer pension plans in
the amount of approximately $41 and $62 for the years ended July 31, 1996, and
1995, respectively.
F-17
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash and cash equivalents, account
receivable, notes and interest receivable from officers, short-term borrowings,
accounts payable and long-term debt, excluding the Senior Secured Notes
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.
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 credit
standing of its largest customers and the diversity of the remaining customers,
sales to one major nationwide retailer accounted for approximately 14.8%, 22.3%
and 22.1 % of the Company's net sales for the years ended July 31, 1997, 1996
and 1995, respectively.
14. 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..
Year Ended July 31,
----------------------------------------
1997 1996 1995
-------- -------- -----
Net Sales:
Plastic Products:
Domestic $149,083 $152,352 $130,215
Europe 35,300 34,158 31,995
Plastic Materials 108,357 101,687 88,665
Recycling 18,665 32,859 --
Corporate & Eliminations (41,794) (34,836) (29,685)
-------- -------- --------
Total Net Sales $269,611 $286,220 $221,190
======== ======== ========
Operating Income:
Plastic Products:
Domestic $21,822 $ 21,463 $ 15,046
Europe 8,276 7,097 8,373
Plastic Materials 4,350 6,156 2,621
Recycling (73) (878) --
Corporate & Eliminations (6,386) (5,314) (4,958)
-------- -------- --------
Total Operating Income $27,989 $ 28,524 $ 21,082
======== ======== ========
F-18
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Depreciation & Amortization:
Plastic Products:
Domestic $ 4,013 $ 3,563 $ 3,534
Europe 1,301 1,131 875
Plastic Materials 1,454 1,825 1,676
Recycling 499 -- --
Corporate & Eliminations 1,233 1,145 1,197
------- --------- ---------
Total Depreciation & Amortization $ 8,500 $ 7,664 $ 7,282
======= ========= =========
Capital Expenditures:
Plastic Products:
Domestic $2.553 $ 2,440 $ 3,778
Europe 1,852 3,804 1,098
Plastic Materials 8,850 1,331 1,778
Recycling 301 -- --
Corporate & Eliminations 453 411 597
------- --------- --------
Total Capital Expenditures $14,009 $ 7,986 $ 7,251
======= ========= ========
Identifiable Assets:
Plastic Products:
Domestic $111,369 $ 102,076 $102,871
Europe 25,131 26,539 24,621
Plastic Materials 57,442 39,717 40,027
Recycling 8,029 -- --
Corporate & Eliminations 16,574 10,332 14,773
-------- --------- ---------
Total Identifiable Assets $218,545 $ 178,664 $ 182,292
======== ========= =========
Operating income represents net sales less cost of goods sold and
selling, general and administrative expenses of each segment before deductions
for general corporate expenses not directly related to an individual segment and
the elimination of intercompany profits principally due to Plastic Material
sales to Plastic Products. In continuing operating income, none of the following
items have been added or deducted: interest expense, income taxes, and loss from
discontinued operations. Identifiable assets are those used in the operations of
each segment, including an allocation 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.
15. DISCONTINUED OPERATIONS
On December 21, 1995, PST entered into an Asset Purchase Agreement (the
"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. The Company had been
exploring a relocation alternative until this unsolicited offer was accepted.
Under the terms of the 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
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
F-19
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
years ended July 31, 1996 and 1995.
During 1997, Ozite Mfg. settled certain litigation for $414 (net of tax
benefit of $258) in the aggregate. The settlement has been recorded in net loss
from discontinued operations for the year ended July 31, 1997.
During July 1997, the Company settled a lawsuit with regard to Circuit
Chemistry (a former subsidiary of the Company). This settlement and related
expenses of $1,213 (net of tax benefit of $775) was included within discontinued
operations for fiscal 1997.
16. SUBSEQUENT EVENT
In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry.
The impact of this settlement was accounted for in discontinued operations (see
Notes 15 and 17(b)).
On November 11, 1997, PureTec 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 PureTec 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 PureTec would receive
$3.50 in cash for that share in the Merger. The Agreement and the Merger will be
submitted to the shareholders of PureTec for approval at PureTec's annual
shareholders' meeting expected to be held in January 1998. The Agreement and the
Merger have been unanimously approved, and recommended to PureTec shareholders
for adoption by PureTec's Board of Directors. Officers and directors of PureTec
owning approximately 10% of the outstanding common stock of PureTec 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 PureTec 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 PureTec 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, PureTec, or either of them
under certain circumstances. In the event the Agreement is terminated because
PureTec'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
PureTec'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. PureTec 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
F-20
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
following the 60th day after any termination of the Agreement into a number of
shares of PureTec 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. PureTec 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 PureTec in cash at any time, and contains
covenants and events of default customary for a debt instrument of this type.
17. COMMITMENTS AND CONTINGENCIES
a. Leases
The Company rents various warehouse, office and manufacturing
facilities and certain equipment under lease agreement classified as operating
leases. Rent expense was approximately $4,256, $3,724, and $2,563 for the years
ended July 31, 1997, 1996 and 1995, respectively.
Future minimum rental payments under noncancelable operating leases as
of July 31, 1997 are as follows:
Year Ending
July 31,
-----------
1998 $ 4,550
1999 4,268
2000 4,086
2001 3,907
2002 3,300
Thereafter 3,735
--------
$ 23,846
========
As of July 31, 1997, the Company had available letters of credit of up
to $1,000 from the CLC (See Note 7), of which $353 was outstanding.
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 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 in Belgium, although
there can be no assurance whether or when such appeals will be accepted.
In May 1992, PST and all of its directors (as of 1988), as well as K&B
Liquidating Corp. (a former subsidiary of PST which is being liquidated) were
named in two lawsuits filed in the Minnesota state courts. The plaintiffs are
Douglass Hutchinson (since deceased) and James Czaja, both of whom were former
employees of a
F-22
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 for at July 31,
1997.
In the current year, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled for $660 in the aggregate. The
settlement of these cases is reflected in the Company's net loss from
discontinued operations for the year ended July 31, 1997.
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.
18. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of fiscal 1997, the Company recorded
certain adjustments aggregating $500. The Company recorded additional inventory
of approximately $1,100 based on the results of a book to physical
reconciliation. Additionally, the Company recorded a charge of approximately
$600 as a result of reconciling intercompany accounts. It cannot be specifically
determined to which quarters in the year these amounts relate.
Additionally, in the fourth quarter of 1997, the Company recorded the
Circuit Chemistry settlement in the amount of $1,213 (net of tax benefit of
$775), including legal fees.
During the fourth quarter of fiscal 1996, the Company recorded certain
adjustments aggregating approximately $570 in relation to the final exit of the
Ozite Manufacturing location.
* * * * * * * * * * * *
F-23
SCHEDULE II
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Additions/
(Reductions)
Balance at Charged to Accounts Balance at
Beginning Costs and Charged End of
of Period Expenses Off Period
----------- ------------ -------- -----------
Classification
- --------------
Year Ended July 31, 1995
Allowance for doubtful
receivables $ 2,880 $ (119) (211) $ 2,550
======= =========== =========== =======
Year Ended July 31, 1996
Allowance for doubtful
receivables $ 2,550 $ 832 $ (2,102) $ 1,280
======= =========== =========== =======
Year Ended July 31, 1997
Allowance for doubtful
receivables $ 1,280 $ 274 $ (100) $ 1,454
======= =========== =========== =======
F-24