Plaintree nears close on Targa deal
Preferred shareholders last big sticking point
James Bagnall
The Ottawa Citizen
Barring a hitch in talks with its preferred shareholders, Plaintree Systems Inc.
looks set to fight another day.
The beleaguered Stittsville-based computer switch manufacturer yesterday told
shareholders at its annual general meeting that it hoped to complete negotiations
with all remaining creditors -- including Northern Telecom Ltd., a preferred
shareholder --within the next few weeks.
This, said acting chief executive Jay Richardson, would pave the way for a
special shareholders' meeting in November to give a final stamp of approval to a
monumental company restructuring.
Since early this year, when it became apparent the firm was running into cash
flow difficulties, Plaintree has jettisoned 110 employees, leaving 30. The
shareholders' meeting took place in a now-vacated facility, lending an unreal air
to the proceedings.
"We've taken Plaintree down to the bottom over the last eight months," said Mr.
Richardson, "but now we're going up the other side."
In August, the 11-year-old firm agreed to acquire Nepean-based Targa Group
Inc. It's an unusual arrangement, because it means Targa's chief executive,
David Watson, will take over as Plaintree's CEO. Not only that, but Plaintree will
become one of five divisions under the umbrella of the restructured firm. Targa
will be paid with enough Plaintree shares to own 49 per cent of the common
shares. Targa also will also receive the proceeds from a $2.8-million debenture.
The acquirer, Plaintree, gains access to a deep pool of tax loss carry forwards
and unused R&D credits it can use to eliminate taxes in future years. The fiscal
1999 provision for tax loss carry forwards alone was $10.2 million.
The offer of the debenture, and future tax credits, were the keys that produced a
deal.
Mr. Richardson said Plaintree will likely generate enough cash flow over the next
two years -- about $2 million annually -- to repay creditors and meet its
debenture obligations. After that, shareholders could expect to see the value of
their current holding reflected in the 51-per-cent stake of the restructured
company.
Mr. Watson outlined some of his experience to shareholders, noting that he and
his father created Targa six years ago by acquiring poorly focused firms and
turning them into winners.
Their first purchase, Targa Electronics Inc. of Ottawa and Charlotte, N.C., was
originally losing of $2 million a year. Within one year, the Watsons had turned it
into a profitable concern. Other acquisitions have followed a similar pattern.
For the 10-month period ended June 30, Targa reported earnings before interest,
depreciation and amortization of $1.2 million on sales of $8 million for all its units
--Òa healthy profit margin for electronics firms though well short of spectacular
in the computer or networking sectors in which Plaintree operates. Targa sales
were up about 25 per cent year-over-year.
A big question mark concerns synergy. None of Targa's existing units has much
in common with Plaintree, which has separate distribution channels, and a
different set of manufacturing and R&D practices.
"Plaintree is going to take a lot of our attention over the next six months to a
year," acknowledged Mr. Watson, who added that he would help the firm focus
its efforts more narrowly.
In the meantime, the firm is making do with a group of older products and
revenue from licensing deals and services contracts.
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