UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended: October 31, 1997
Commission File Number: 0-26508
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3376449
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
65 Railroad Avenue, Ridgefield, New Jersey 07657
(Address of principal executive offices)
Registrant's telephone number, including area code: (201)941-6550
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
The number of shares of common stock of the Registrant outstanding as
of December 12, 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.
PLASTIC SPECIALTIES & TECHNOLOGIES, INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
C O N T E N T S
Page
Part I FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of 3
October 31, 1997 and July 31, 1997
Consolidated Statements of Operations 4
for the three month periods ended
October 31, 1997 and 1996
Consolidated Statements of Cash Flows 5
for the three month periods ended
October 31, 1997 and 1996
Notes to Consolidated Financial 6-9
Statements
Item 2. Management's Discussion and Analysis 10-13
of Financial Condition and Results of
Operations
Part II OTHER INFORMATION:
Item 1 to Item 6. 14
Signatures 15
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
October 31, July 31,
1997 1997
--------- ---------
CURRENT ASSETS:
ASSETS
Cash and cash equivalents $ 4,447 $ 6,460
Accounts receivable, less allowance of $1,398 and $1,454 as of
October 31, 1997 and July 31, 1997, respectively 34,205 49,384
Inventories 61,497 47,848
Prepaid expenses and other current assets 6,217 3,653
Deferred income taxes 1,379 1,394
--------- ---------
TOTAL CURRENT ASSETS 107,745 108,739
PROPERTY, PLANT AND EQUIPMENT, net 60,598 57,820
GOODWILL, net 40,218 40,558
DUE FROM PARENT, net 5,595 4,581
OTHER ASSETS, net 7,164 6,444
NOTES AND INTEREST RECEIVABLE FROM OFFICERS 408 403
--------- ---------
TOTAL ASSETS $ 221,728 $ 218,545
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short term borrowings $ 38,181 $ 36,772
Accounts payable 23,949 21,370
Accrued expenses 10,990 14,946
Accrued interest 6,203 2,789
Current portion of long-term debt 1,374 1,249
--------- ---------
TOTAL CURRENT LIABILITIES 80,697 77,126
--------- ---------
OTHER LONG-TERM LIABILITIES 3,469 4,175
PENSION LIABILITIES 567 567
DEFERRED INCOME TAXES 4,868 4,777
LONG-TERM DEBT 134,255 134,196
--------- ---------
TOTAL LIABILITIES 223,856 220,841
COMMITMENTS AND CONTINGENCIES (See Note 3)
STOCKHOLDERS' DEFICIT:
Common stock, par value $.01; 10,000,000 shares authorized; 8,319,833
shares issued and outstanding, at October 31, 1997 and
July 31, 1997 83 83
Additional paid-in capital 16,488 16,438
Accumulated deficit (13,366) (12,748)
Receivable from majority stockholder-Ozite Corporation (2,892) (2,892)
Receivable from officer, including accrued interest (717) (717)
Cumulative foreign currency translation adjustment (1,724) (2,460)
--------- ---------
NET STOCKHOLDERS' DEFICIT (2,128) (2,296)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 221,728 $ 218,545
========= =========
See notes to consolidated financial statements
3
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended
October 31,
------------------------
1997 1996
---------- ----------
NET SALES $ 53,853 $ 50,037
---------- ----------
COSTS AND EXPENSES:
Cost of goods sold 40,701 39,031
Selling, general and administrative 8,296 7,120
Research and development 143 160
Amortization of intangible assets 343 329
---------- ----------
49,483 46,640
---------- ----------
INCOME FROM OPERATIONS 4,370 3,397
---------- ----------
OTHER EXPENSE (INCOME) :
Interest expense 4,112 4,075
Debt issuance cost and discount amortization 203 222
Foreign exchange loss 93 6
Other, net 50 (20)
---------- ----------
4,458 4,283
---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (88) (886)
Provision for income taxes 294 247
---------- ----------
LOSS FROM CONTINUING OPERATIONS (382) (1,133)
---------- ----------
DISCONTINUED OPERATIONS:
Loss from disposal of discontinued operations (236) --
Loss from discontinued operations -- --
---------- ----------
(236) --
---------- ----------
NET LOSS $ (618) $ (1,133)
========== ==========
LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.05) $ (0.14)
Loss from discontinued operations (0.03) --
---------- ----------
Loss per common share $ (0.08) $ (0.14)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,319,833 8,319,833
========== ==========
See notes to consolidated financial statements
4
PLASTIC SPECIALTIES AND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
[CAPTION]
Three Months Ended
October 31,
---------------------
1997 1996
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations (382) $ (1,133)
Adjustment for Recycling acquisition -- 857
-------- --------
Loss net of acquisition adjustment (382) (276)
Adjustment to reconcile net income to net cash used in
operating activities from continuing operations:
Amortization 546 562
Depreciation 1,563 1,424
Deferred income taxes 15 (80)
(Gain) loss on the sale of fixed assets -- (6)
Provision for losses on accounts receivable
and other reserves (59) (35)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 13,522 10,855
Accounts receivable factored 2,087 --
Inventories (13,376) (20,584)
Prepaid expenses and other current assets (2,558) (953)
Other assets (1,679) (350)
Notes and interest receivable from officers (15) (5)
Increase (decrease) in liabilities:
Accounts payable, other current liabilities, accrued interest,
current deferred taxes and current portion of long-term debt 479 3,260
Other long-term liabilities (1,024) (176)
NET CASH USED IN OPERATING ACTIVITIES -------- --------
FROM CONTINUING OPERATIONS (881) (6,364)
-------- --------
Loss from discontinued operations (236) --
NET CASH USED IN OPERATING ACTIVITIES -------- --------
FROM DISCONTINUED OPERATIONS (236) --
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,117) (6,364)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,632) (1,391)
Acquisition of Recycling operations -- (4,400)
Proceeds from sale of property and equipment -- 6
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,632) (5,785)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving credit
facility and short-term borrowing, net 1,409 7,649
Proceeds from long-term debt 146 --
Repayments from long-term debt -- --
(Repayment of) borrowings of term loans -- (128)
Repayment of capital leases -- (9)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,555 7,512
EFFECT OF EXCHANGE RATE CHANGES ON CASH 181 (139)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,013) (4,776)
CASH AND CASH EQUIVALENTS, beginning of the period 6,460 6,098
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,447 $ 1,322
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 698 $ 507
======== ========
Income taxes $ 2 $ 233
======== ========
Non-cash financing transaction:
Capital contributed by PureTec related to recycling acquisition $ -- $ 250
Assumption of recycling lease 1,391 --
See notes to consolidated financial statements
5
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. ORGANIZATION, DESCRIPTION OF BUSINESS AND ACQUISITIONS
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").
Ozite Corporation, a wholly owned subsidiary ("Ozite") is the majority
stockholder of Plastic Specialties and Technologies, Inc. ("PST"). On June 27,
1997, PureTec completed a private placement offer for most of the stock of PST
not already owned, in exchange for new unregistered shares of PureTec common
stock that were privately placed by PureTec. Prior to the completion of the
exchange offer, PureTec, through its ownership of Ozite, indirectly owned 82.7%
of the outstanding common stock of PST. In the exchange offer, PureTec, through
Ozite offered to exchange two new unregistered shares of PureTec common stock
for each share of PST common stock validly tendered . In total, 1,117,515
shares, or 13.4%, of the PST common stock outstanding were accepted for exchange
by Ozite in the private exchange offer. As of October 31, 1997, Ozite owned
approximately 96% of the outstanding common stock of PST.
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 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.
6
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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, PureTec 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 following the 60th day after any termination of the
Agreement into a number of shares of Common Stock sufficient to retire the
principal amount of the Note plus accrued interest or in any event at a base
conversion rate of one share of Common Stock per $2.72 of obligations owed under
the Note. The Company is required to file a registration statement with respect
to the Common Stock issuable upon conversion promptly following a termination of
the Merger Agreement. The Convertible Note matures on September 30, 1998. The
Convertible Note is subject to prepayment by PureTec in cash at any time, and
contains covenants and events of default customary for a debt instrument of this
type.
2. INTERIM FINANCIAL INFORMATION
The consolidated balance sheet of the Company as of October 31, 1997, the
consolidated statements of operations for the three month periods ended October
31, 1997 and 1996 and the consolidated statements of cash flows for the three
months ended October 31, 1997 and 1996 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10- Q and Rule 10-01 of Regulation
S-X. In the opinion of management, all adjustments (which include only normal
recurring accruals) necessary to present fairly the financial position, results
of operations and cash flows have been included.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The July 31, 1997 balance sheet data
is derived from the audited consolidated financial statements. The attached
financial statements should be read in connection with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended July 31, 1997.
3. COMMITMENTS AND CONTINGENCIES
In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $2,114 (75,247,000 Belgian
Francs) for the disallowance of certain foreign tax credits and investment
losses claimed for the years ended July 31, 1990 and 1991. Additionally, in
January 1995, the subsidiary received an
7
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
income tax assessment of approximately $902 (32,083,000 Belgian Francs) for the
year ended July 31, 1992. Although the future outcome of these matters are
uncertain, the Company believes that its tax position was appropriate and that
the assessments are without merit. Therefore, the Company has appealed and has
not paid or accrued for the assessments. Based on the advice of legal counsel in
Belgium, the Company believes that the assessment appeals will be accepted by
the tax authorities in Belgium, although there can be no assurance whether or
when such appeals will be accepted.
In May 1992, PST and all of its directors as of 1988, as well as K&B
Liquidating Corp. (a former subsidiary of PST which is being liquidated) were
named in two lawsuits filed in the Minnesota state courts. The plaintiffs are
Douglass Hutchinson (since deceased) and James Czaja, both of whom were former
employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp.
("Circuit Chemistry"). The suits alleged several causes of action, all of which
center upon a claim that PST and/or other defendants did not adequately disclose
sufficient information to the plaintiffs in connection with the acquisition from
the plaintiffs by PST of their 20% equity interest in Circuit Chemistry, and the
termination of their employment agreements. The cases brought by Czaja and
Hutchinson have been settled by PST. Previously, management had expected these
cases to be litigated, and management had expected that PST would win these
cases. Total settlement payments to the plaintiffs in connection with this
settlement were $1,725 and have been paid out of the Company's working capital
as of October 31, 1997.
During fiscal 1997, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled.
Additionally, the Company is party to certain other litigations and
environmental proceedings in the ordinary course of business, none of which it
believes are likely to have a material adverse effect on its financial position
or results of operations.
4. INVENTORIES
October 31, July 31,
1997 1997
------- -------
(Unaudited)
Raw materials $20,166 $20,498
Recycled material 647 771
Work-in-process 1,712 1,288
Finished goods 25,291 38,972
------- -------
$61,497 $47,848
======= =======
5. INVESTMENTS IN AFFILIATES AND CERTAIN RELATED TRANSACTIONS
a. Dividends
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.
8
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
b. Investments
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 December 1993, PST received from Bagcraft 3,000 shares of BCA
preferred stock as payment in full for unpaid interest due from Bagcraft.
c. 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.
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.
6. INCOME TAXES
The Company's tax provision for the periods ended October 31, 1997 and
1996 are primarily due to the Company's foreign operations. The tax provision
does not reflect the expected 34% benefit based on existing federal tax rates
due to the sizable operating losses experienced in its domestic operations. The
Company has not anticipated the tax benefits of such losses as it is more likely
than not that such deferred tax asset would not be realizable at this time.
Information with respect to net operating losses is as reported in Note 12 of
the Company's Form 10-K for the year ended July 31, 1997.
9
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
PART I
FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
Item 1. FINANCIAL STATEMENTS
See pages 3 through 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
The following table sets forth the percentage of net sales of the
Company represented by the components of income and expense for the three month
periods ended October 31, 1997 and 1996:
1997 1996
---- ----
Net sales 100.0% 100.0%
Cost of goods sold (75.6) (78.0)
----- -----
Gross profit 24.4 22.0
Selling, general and administrative expenses (15.4) (14.2)
Amortization of intangible assets (0.6) (0.7)
Research and development (0.3) (0.3)
----- -----
Income from operations 8.1 6.8
Interest expense (7.6) (8.2)
Debt issuance cost and discount amortization (0.4) (0.4)
Foreign exchange (gain) loss (0.2) 0.0
Other, net (0.1) (0.0)
----- -----
Loss from continuing operations
before income taxes (0.2) (1.8)
Provision for income taxes (0.5) (0.5)
----- -----
Loss from continuing operations before
discontinued operations (0.7) (2.3)
Discontinued operations (0.4) --
----- -----
Net loss (1.1)% (2.3)%
===== =====
Three months ended October 31, 1997 vs. Three months ended October 31, 1996:
Net sales from continuing operations in the three month period ended
October 31, 1997 were $53,853 compared to $50,037 in the three month period
ended October 31, 1996. The increase is mainly attributable to increases in
sales volume for garden hose and recycled plastics.
10
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Gross profit for the three months ended October 31, 1997 was $13,782, an
increase of $2,776, (25.2 %) compared to a gross profit of $11,006 for the three
months ended October 31, 1996. Gross profit as a percentage of sales increased
to 24.4% from 22.0% for the same period. Gross profit was favorably affected
primarily as a result of the increased sales volume as mentioned abve as well as
improved manufacturing efficiencies.
Selling, general and administrative expenses for the three months ended
October 31, 1997 were $8,296, a $1,176 (16.5%) increase compared to $7,120 for
the three months ended October 31, 1996. As a percentage of net sales, these
expenses increased to 15.4% from 14.2%. The increase is primarily a result of
the reversal of certain previously accrued expenses in the first quarter of 1996
including management compensation.
Operating income for the three months ended October 31, 1997 and 1996
was $4,370 and $3,397, respectively. The $973 increase in operating income is
primarily attributable to increased sales volumes, partly offset by higher cost
of goods sold and higher selling, general and administrative expenses.
Additionally, this increase in operating income was partially offset by startup
expenses at the Company's new plant in Northern Ireland.
Interest expense for the three month period ended October 31, 1997 was
$4,112, a $37 increase compared to the three months ended October 31, 1996,
respectively.
The income tax provision for the three months ended October 31, 1997 is
comprised of foreign tax provisions of $726 and a domestic tax benefit of $432.
The tax provision for the three months ended October 31, 1996 is comprised of a
foreign tax provision of $547 partially offset by a federal income tax benefit
of $300.
The Company had a loss from continuing operations for the three month
period ended October 31, 1997 and 1996 of $382 and $1,133, respectively.
For the three months ended October 31, 1997 the Company recorded a loss
of $236 within discontinued operations related to the Circuit Chemistry lawsuit
settlement (See Note 3).
Liquidity and Capital Resources
In the past, the Company has expanded its operations through the
expansion of existing activities, acquisitions of new facilities and various
business combinations. Historically, the Company's sources of liquidity and
capital resources have been net cash provided by operations, bank financing,
private placements of the Company's securities and other private and public
financial sources.
While the management of the Company believes that the Company will be
able to operate on a positive cash flow basis with respect to continuing
operations during the fiscal year ending July 31, 1998, the ability of the
Company to continue to expand its operations may require additional funding.
Cash and cash equivalents decreased $2,013 for the three months ended
October 31, 1997 compared to a $4,776 decrease for the three months ended
October 31, 1996. The changes for these periods were attributable to the factors
discussed below.
The Company had working capital of approximately $27,048 at October 31,
1997 compared to working capital of approximately $31,613 at July 31, 1997. The
decrease in working capital is attributable to an increase in short term
borrowings of $1,409, an increase in accrued interest of $3,414, a decrease in
accounts receivable of $15,179, partially offset by increases in inventory
($13,649) and lower accrued expenses of $3,956.
11
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Net cash used in operating activities was approximately $1,117 for the
three months ended October 31, 1997. The change was due principally to an
increase in inventory of 13,376 and an increase in prepaid expenses of $2,558,
partly offset by an decrease in accounts receivable of $13,522. Net cash used in
investing activities was approximately $2,632 and $5,785 for the three months
ended October 31, 1997 and 1996, respectively. Net cash used in investing
activities for the three months ended October 31, 1996 included $4,400 for the
plastic recycling acquisition. Cash flows from financing activities were
approximately $1,555 for the three months ended October 31, 1997, which included
a $1,409 increase in short term borrowings. For the three months ended October
31, 1996, net cash provided from financing activities was approximately $7,512
which included a $7,649 increase in short-term borrowings.
The Company's businesses are relatively stable and mature and do not
generally require significant ongoing additions to plant and equipment. Capital
expenditures for the three month period ended October 31, 1997 and 1996 were
$2,632 and $1,391, respectively.
Borrowings, Debt Offerings and Redemptions
On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement
(the "Agreement") with a commercial lending company ("CLC"). Proceeds were used
to repay the borrowings outstanding under a prior loan and security agreement
with a bank. The Agreement contains covenants, the most restrictive of which are
maintenance of certain financial ratios, prohibition of the occurrence of
additional indebtedness, the payment of dividends, certain related party
transactions and limitations on capital expenditures. Borrowings under the
Agreement are secured by substantially all the domestic current assets of PST.
Additionally, the CLC has a security interest in PST's intangible assets, and
this security interest ranks pari passu with the security interest of the Senior
Secured Notes (see below) in PST's intangible assets. Revolving credit advances
under the Agreement are based on eligible receivables and inventory.
Effective January 31, 1997, PST amended this Agreement with the CLC
("Amended Agreement"), representing the fourth amendment to the Agreement. The
Amended Agreement provides, among other things, for revolving credit advances of
up to $50,000 through July 31, 2000 and letters of credit of up to $1,000. The
Amended Agreement provides for certain pricing performance adjustments based on
defined Performance Ratios. The Company will pay interest at a defined Index
Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to 0.25%) or,
at the election of PST, the LIBOR Rate plus the Applicable LIBOR Margin (ranging
from 2.50% to 3.00%). The Amended Agreement also provides that outstanding
revolving credit advances shall not exceed $20,000 for 30 consecutive days
during the period from July 1 to September 30 for each year. Furthermore, the
Amended Agreement provides that domestic capital expenditures are limited to
$8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and 1999 (and each
fiscal year thereafter), respectively. The Company also has the right to cancel
the Agreement on 30 days' written notice and pay the CLC an early termination
fee of $175 if such cancellation occurs prior to January 31, 1998, and $100 if
cancellation occurs on or after January 31, 1998 and prior to September 30,
1998.
In addition, on January 31, 1997 PST signed a Receivables Agreement with
the CLC that provides PST with the ability to sell a 100% ownership interest,
without recourse, in certain Eligible Receivables generated by PST. The CLC's
commitment to purchase said receivables from PST are restricted to the period
beginning each February 1 and ending on each May 31. The aggregate invoice face
amount of purchased receivables will not exceed $12,000.
PST is obligated to service the Eligible Receivables that it sells to the CLC.
At October 31, 1997 and July 31, 1997, short-term borrowings include
revolving credit advances of $37,338 and $36,772, respectively, under the
Amended Agreement and $2,087 of factored receivables at July 31,
12
PLASTIC SPECIALTIES & TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1997. There were no factored receivables outstanding as of October 31, 1997.
On November 8, 1993, PST issued $125,000 principal amount of 11-1/4%
Senior Secured Notes due in 2003. The Senior Secured Notes are senior secured
obligations of PST, ranking pari passu in right of payment with all existing and
future senior indebtedness of PST and senior to all subordinated indebtedness of
PST, if any. The Senior Secured Notes are secured by substantially all real
property, machinery, equipment, general intangibles and other intellectual
property now owned or hereafter acquired by PST and by a pledge of all
outstanding capital stock of Plastic Specialties and Technologies Investments,
Inc., a wholly-owned subsidiary of PST. The indenture for the Senior Secured
Notes contains covenants which restrict, among other matters, the ability of PST
and its subsidiaries to incur additional indebtedness, pay dividends, (except as
defined in the indenture) redeem capital stock, prepay subordinated
indebtedness, create liens, dispose of certain assets, engage in sale and merger
transactions, make contributions, loans or advances and enter into transactions
with affiliates.
Concurrently with execution of the Merger Agreement (as discussed in
Note 1), Tekni-Plex purchased a Convertible Note issued by PureTec in the amount
of $5 million. The loan will assist PureTec and PST in meeting expected cash
requirements in the period prior to completion of the Merger. The Convertible
Note bears interest at 13% and is convertible at any time following the 60th day
after any termination of the Agreement into a number of shares of Common Stock
sufficient to retire the principal amount of the Note plus accrued interest or
in any event at a base conversion rate of one share of Common Stock per $2.72 of
obligations owed under the Note. The Company is required to file a registration
statement with respect to the Common Stock issuable upon conversion promptly
following a termination of the Merger Agreement. The Convertible Note matures on
September 30, 1998. The Convertible Note is subject to prepayment by the Company
in cash at any time, and contains covenants and events of default customary for
a debt instrument of this type.
Future Capital Expenditure and Commitments
The Company's businesses are relatively mature and as a result do not
require significant ongoing additions to plant and equipment, except for the
expansion discussed below. The Company generally finances its ongoing capital
expenditure requirements from its cash flow provided from operations and
borrowings under its Revolving Credit Facility.
The Company is in the process of constructing a state-of-the-art
recycling facility in Huntington, West Virginia. The facility is expected to
open early in calendar 1998. The Company will invest approximately $8 million in
the facility, which will recycle PET containers, such as soft drink bottles and
food packaging. Management is still evaluating various financing alternatives
for this new facility.
In October 1997, the Company settled a lawsuit pertaining to Circuit
Chemistry, a discontinued operation. Total settlement payments were $1,725 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. During fiscal 1998, the Company
has benefited domestically from declining raw material costs. In the event
significant inflationary trends were to resume, management believes that the
Company will generally be able to offset the effects thereof through continuing
improvements in operating efficiencies and increasing prices, to the extent
permitted by competitive factors. However, there can be no assurance that all
such cost increases can be passed through to customers.
13
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In January 1993 and 1994, the Company's Belgian subsidiary received
income tax assessments aggregating approximately $2,114 (75,247,000 Belgian
Francs) for the disallowance of certain foreign tax credits and investment
losses claimed for the years ended July 31, 1990 and 1991. Additionally, in
January 1995, the subsidiary received an income tax assessment of approximately
$902 (32,083,000 Belgian Francs) for the year ended July 31, 1992. Although the
future outcome of these matters are uncertain, the Company believes that its tax
position was appropriate and that the assessments are without merit. Therefore,
the Company has appealed and has not paid or 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 former subsidiary of PST, Circuit Chemistry Manufacturing Corp.
("Circuit Chemistry"). The suits alleged several causes of action, all of which
center upon a claim that PST and/or other defendants did not adequately disclose
sufficient information to the plaintiffs in connection with the acquisition from
the plaintiffs by PST of their 20% equity interest in Circuit Chemistry, and the
termination of their employment agreements. The cases brought by Czaja and
Hutchinson have been settled by PST. Previously, management had expected these
cases to be litigated, and management had expected that PST would win these
cases. Total settlement payments to the plaintiffs in connection with this
settlement were $1,725, and have been paid out of the Company's working capital
as of October 31, 1997
During fiscal 1997, litigation relating to Ozite Mfg. with MDC
Wallcoverings and Ashley Alsip was settled.
Additionally, the Company is party to certain other litigations and
environmental proceedings in the ordinary course of business, none of which it
believes are likely to have a material adverse effect on its financial position
or results of operations.
Item 2. CHANGES IN SECURITIES: None
Item 3. DEFAULT UPON SENIOR SECURITIES: None
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS: None
Item 5. OTHER INFORMATION: None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
Exhibit 27. Financial Data Schedule
14
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. Gilboy
-----------------------------------
Thomas V. Gilboy
Chief Financial Officer and Vice President
Dated: December 12, 1997
15