<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------
Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
_____ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period to
Commission File Number: 333-1992
RBX CORPORATION
(Exact name of Registrants as specified in their charters)
---------------------------------------------------------
Delaware 94-3231901
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5221 ValleyPark Drive
Roanoke, Virginia 24019
(Address of principal executive offices)
Registrant's telephone number, including area code: (540) 561-6000
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 RBX Corporation, $0.01 per share par
value, outstanding as of September 30, 1998 was 1,000.
<PAGE>
RBX CORPORATION
Index
-----
Page
----
PART I........................................................................1
ITEM 1. Financial Statements (unaudited)...............................1
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................9
PART II.......................................................................16
ITEM 6. Exhibits and Reports on Form 8-K...............................16
<PAGE>
PART I
ITEM 1. Financial Statements
RBX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Cash and cash equivalents................................................................ $ 166 $ 182
Accounts receivable, less allowance for doubtful accounts of
$1,505 and $1,550, respectively..................................................... 38,030 35,956
Inventories.............................................................................. 39,810 25,039
Prepaid and other current assets......................................................... 1,184 646
------------ -------------
Total current assets................................................................ 79,190 61,823
Property, plant and equipment, net....................................................... 97,374 74,187
Restricted cash.......................................................................... - 1,612
Intangibles and other assets, net........................................................ 99,357 6,610
------------ -------------
Total assets........................................................................ 275,921 144,232
============ =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable......................................................................... 17,215 16,538
Accrued liabilities...................................................................... 15,766 25,729
Current portion of postretirement benefit obligation..................................... 2,137 2,137
Current portion of long-term debt........................................................ 350 327
------------ -------------
Total current liabilities........................................................... 35,468 44,731
Long-term debt........................................................................... 205,687 204,828
Postretirement benefit obligation........................................................ 32,910 33,721
Pension benefit obligation............................................................... 9,416 9,165
Other liabilities........................................................................ 1,704 1,704
Contingencies............................................................................ - -
Stockholder's equity:
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding...... - -
Additional paid-in-capital.......................................................... 58,103 58,103
Accumulated deficit................................................................. (67,367) (208,020)
------------ -------------
Total stockholder's equity..................................................... (9,264) (149,917)
------------ -------------
Total liabilities and stockholder's equity..................................... $ 275,921 $ 144,232
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
RBX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
Net sales............................................................ $ 68,877 $ 63,962 $ 213,246 $ 203,193
Cost of goods sold................................................... 57,248 67,457 178,143 191,293
------------- ------------- ------------- -------------
Gross profit (loss).................................................. 11,629 (3,495) 35,103 11,900
Selling, general and administrative costs............................ 6,748 8,613 20,628 23,866
Management fees...................................................... 252 302 755 811
Loss on impairment of long-lived assets.............................. - 90,351 - 101,449
Amortization of goodwill and other intangibles....................... 842 744 2,502 2,410
Other expense (income)............................................... 64 238 95 (80)
------------- ------------- ------------- -------------
Operating income (loss).............................................. 3,723 (103,743) 11,123 (116,556)
Interest expense, including amortization of deferred financing fees.. 5,021 6,411 14,844 19,145
------------- ------------- ------------- -------------
Loss before income taxes............................................. (1,298) (110,154) (3,721) (135,701)
Income tax benefit................................................... (300) - (767) -
------------- ------------- ------------- -------------
Loss before cumulative effect adjustment............................. (998) (110,154) (2,954) (135,701)
Cumulative effect adjustment, write-off of start-up costs............ - 4,952 - 4,952
------------- ------------- ------------- -------------
Net loss............................................................. $ (998) $ (115,106) $ (2,954) $ (140,653)
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
RBX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Activities:
Net loss............................................................. $ (998) $ (115,106) $ (2,954) $ (140,653)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................................... 2,035 3,507 6,170 8,425
Amortization...................................................... 1,075 1,066 3,195 3,369
Provision for deferred income taxes............................... (300) - (823) -
Special charges................................................... - 108,789 - 119,887
Loss (gain) on disposal of property and equipment................. 64 238 95 (80)
Increase (decrease) in cash from changes in assets and liabilities
net of effect of business acquisition and special charges:
Accounts receivable............................................... 814 (573) (5,549) (1,010)
Inventories....................................................... (1,114) 2,671 (1,535) 5,007
Prepaid and other current assets.................................. (214) 304 309 457
Intangibles and other assets...................................... 50 (51) 50 (51)
Accounts Payable.................................................. 7,364 423 12,040 (173)
Accrued liabilities............................................... 1,679 (1,688) 2,286 4,759
Other liabilities................................................. 425 152 1,066 560
============= ============= ============= =============
Net cash provided by (used in) operating activities.................. 10,880 (268) 14,350 497
Investing activities:
Capital expenditures................................................. (3,280) (1,043) (13,633) (3,677)
Acquisitions, net of cash acquired................................... (58) - (1,019) -
Proceeds from disposals of property, plant and equipment............. 50 4,060 66 5,690
Increase in restricted cash.......................................... - (120) - (1,612)
============= ============= ============= =============
Net cash provided by (used in) investing activities.................. (3,288) 2,897 (14,586) 401
Financing activities:
Dividends............................................................ - - (291) -
Proceeds from borrowings............................................. 1,000 7,500 11,500 24,000
Principal payments on long-term debt................................. (8,592) (10,082) (14,266) (24,882)
============= ============= ============= =============
Net cash provided by financing activities............................ (7,592) (2,582) (3,057) (882)
Net increase (decrease) in cash and cash equivalents................. - 47 (3,293) 16
Cash and cash equivalents:
Beginning of period............................................. - 135 3,293 166
------------- ------------- ------------- -------------
End of period................................................... $ - $ 182 $ - $ 182
============= ============= ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
RBX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except as otherwise noted)
1. Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of RBX Corporation and its wholly owned subsidiaries (the "Company").
The Company's subsidiaries, Rubatex Corporation, OleTex, Inc., Groendyk Mfg Co.,
Inc., Universal Polymer & Rubber, Inc., Midwest Rubber Custom Mixing Corp., and
Hoover-Hanes Rubber Custom Mixing Corp., operate manufacturing facilities which
are located in the southeastern United States, Ohio and Illinois.
The interim financial data as of and for the three months and nine months ended
September 30, 1998 are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
management's opinion, all adjustments (consisting of adjustments of a normal
recurring nature) necessary for a fair presentation have been included. The
year-end balance sheet information was derived from audited financial
statements, but excludes certain disclosures included in the Company's annual
report on Form 10-K.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto as well as the other
information included in the Company's annual report on Form 10-K for the year
ended December 31, 1997. The results of operations and cash flows for the
interim periods presented are not necessarily indicative of the results for the
full year or any other interim period.
2. Inventories
Components of inventory are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, September 30,
1997 1998
------------ -------------
Raw materials $ 15,593 $ 11,561
Work-in-process 4,154 4,116
Finished goods 20,063 9,362
------------ -------------
$ 39,810 $ 25,039
============ =============
</TABLE>
3. Restricted Cash
Restricted cash represents the proceeds from the sale of certain assets which
collateralized the Senior Secured Notes. Such proceeds must be used to fund
future capital expenditures.
4. Long-Term Debt
RBX Corporation is a holding company with no assets or operations other than its
investments in its subsidiaries. All of RBX Corporation's subsidiaries are
wholly owned and have guaranteed the Senior Secured Notes and the Senior
Subordinated Notes on a full, unconditional, and joint and several basis.
Indebtedness under the Company's revolving credit facility is guaranteed by RBX
Corporation and its existing and future subsidiaries and is collateralized by a
first-priority lien in all accounts receivable, inventory, and general
intangibles (to the extent related to accounts receivable and inventory).
Separate
4
<PAGE>
RBX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. Long-Term Debt (Continued)
financial statements of the guarantor subsidiaries have not been presented as
management has determined that such separate financial statements would not be
material to an investor.
The Company's indebtedness contains certain restrictions which, among other
things, limit its ability to incur additional indebtedness, issue preferred
stock, incur liens, pay dividends, make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with affiliates,
merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of its assets. In addition, the
Company's indebtedness contains certain financial covenants including
maintenance of a minimum level of earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the four consecutive quarters ending September
30, 1998 and December 31, 1998. The Company was in compliance with all terms of
its indebtedness as of September 30, 1998.
As of September 30, 1998, the Company had available unused borrowing capacity of
$17.6 million under the revolving credit facility.
5. Contingencies
The Company is highly leveraged. At September 30, 1998, the Company's
indebtedness was $205.2 million and its stockholder's equity was a deficit of
$149.9 million. The Company has experienced continued operating losses at
Rubatex's Conover, North Carolina plant, due to ongoing difficulties associated
with the relocation of Ensolite production from Mishawaka, Indiana. These
operating losses have had a negative impact on the Company's results of
operations and liquidity.
The Company has undertaken a number of actions to improve the results at Conover
including: (i) replacing the operations manager; (ii) reducing headcount at the
plant; and (iii) shifting production of certain products to other plants.
Although such efforts have yielded improvements in Conover's results during the
third quarter of 1998, further actions such as the elimination of production at
Conover may be necessary in connection with the overall restructuring of the
Company's operations.
Management is continually monitoring its use of working capital, taking cost
reduction measures where practical and carefully controlling the timing of
capital expenditures to ensure the availability of sufficient working capital to
meet its ongoing needs. The Company may be required to take additional measures
to ensure the availability of sufficient cash to sustain operations. Such
measures may include, among other things, reducing or delaying capital
expenditures, selling assets, restructuring its indebtedness, or seeking
additional equity capital. There is no assurance that any of these measures can
be effected on satisfactory terms, if at all.
The Company and its subsidiaries are involved in various suits and claims in the
normal course of business. In the opinion of management, after consultation with
counsel, the ultimate liabilities and losses, if any, that may result from such
suits and claims are not expected to have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
5
<PAGE>
RBX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. Contingencies (Continued)
The Company is subject to federal, state and local environmental laws which
regulate air and water emissions and discharges; the generation, storage,
treatment, transportation and disposal of solid and hazardous waste; and the
release of hazardous substances, pollutants and contaminants into the
environment. In addition, the Company is responsible for the environmental
clean-up of certain property for contamination which occurred prior to the
Company's ownership. The Company is involved in various environmental
remediation activities resulting from past operations, including designation as
a potentially responsible party, with others, at various EPA designated
Superfund sites. In developing its estimate of environmental remediation costs,
the Company considers, among other things, currently available technological
solutions, alternative cleanup methods, risk-based assessments of the
contamination, and estimates developed by independent environmental consultants.
The Company does not maintain insurance coverage for environmental matters.
Reserves have been recorded which, in management's estimate, will be sufficient
to satisfy anticipated costs of known remediation requirements. As a result of
factors such as the continuing evolution of environmental laws and regulatory
requirements, the availability and application of technology, and the
identification of presently unknown RBX remediation sites, estimated costs for
future environmental compliance and remediation are necessarily imprecise, and
it is not possible to predict the amount or timing of future costs of
environmental remediation requirements which may subsequently be determined.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's competitive or financial
position or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
7. Reorganization
Introduction
- ------------
On July 7, 1998, the Company announced the resignation of Frank H. Roland, Chief
Executive Officer and President and named Theodore C. Rogers, of American
Industrial Partners, as the new Chief Executive Officer and President.
Simultaneously, the Company announced that its senior management team had been
reorganized into The Office of the President, which is comprised of three Senior
Vice Presidents who will run the Company under Mr. Rogers' direction. Management
has begun the implementation of a reorganization plan designed to allow the
Company to better serve its customers, take advantage of market opportunities,
and reduce its operating costs.
The actions which have currently been taken include: (i) the reduction of the
workforce by approximately 300 employees; (ii) the closure and sale of certain
warehouse facilities to generate cash and reduce costs; (iii) the sale of the
business and substantially all assets excluding land and buildings of Universal
Polymer & Rubber, Inc. ("Universal") to generate cash and reduce operating
losses; (iv) the reduction of inventory levels and other working capital
requirements; (v) the merger of certain operations; and (vi) the reorganization
of the field sales force from a plant based to a market based structure.
6
<PAGE>
RBX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. Reorganization (Continued)
In connection with the reorganization of the Company's operations, the following
special charges were recorded.
<TABLE>
<CAPTION>
<S> <C> <C>
3 Months 9 Months
Ended Ended
September 30, September 30,
1998 1998
--------------- ---------------
Loss on impairment of long-lived assets $ 90,351 $ 101,449
--------------- ---------------
Charges included in cost of goods sold:
Inventory write downs 7,614 7,614
Severance and other personnel related charges 2,659 2,659
Other 244 244
--------------- ---------------
10,517 10,517
--------------- ---------------
Charges included in SG&A:
Severance and other personnel related charges 1,522 1,522
Accounts receivable write downs 857 857
Other 590 590
--------------- ---------------
2,969 2,969
--------------- ---------------
Write-off of start-up costs 4,952 4,952
--------------- ---------------
$ 108,789 $ 119,887
=============== ===============
</TABLE>
Loss on impairment of long-lived assets
- ---------------------------------------
Due to a variety of factors including decreased sales levels, the poor
performance of Rubatex's Conover plant and the resulting impact on the Company's
liquidity and financial position, the sale of the Universal business, as well as
management's reassessment of the Company's expected future cash flows, the
Company evaluated the carrying value of its long-lived assets and determined
that such assets were impaired. Accordingly, the Company recorded a loss on
impairment of long-lived assets totaling $101,449 which is comprised primarily
of the write off of intangibles of $89,429 and write down of property, plant and
equipment at Conover and Universal of $10,988.
On September 22, 1998, the Company completed the sale of the business and
substantially all of the assets (excluding land and buildings) of Universal, a
subsidiary that was engaged primarily in manufacturing solid molded rubber
products and certain small-profile rubber extrusions. Cash proceeds of $3.5
million were received in connection with the sale, with $2.9 million of such
proceeds used to reduce indebtedness under the Company's revolving credit
facility and the remaining $0.6 million representing restricted cash. The land
and buildings were leased to the purchaser under a renewable five-year lease.
The loss related to Universal, which has been included in the loss on impairment
of long-lived assets, totaled $11,726 with $11,098 of this amount recognized in
the second quarter of 1998 and the remainder recognized in the third
7
<PAGE>
RBX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. Reorganization (Continued)
quarter of 1998. The sale of this unprofitable subsidiary was the result of
management's efforts to focus the Company on its core business and the
determination that Universal's business was not a strategic fit with the
Company's other operations.
Based on Conover's continued poor performance and management's revised
expectations with respect to future cash flows from Conover's operations, the
Company reassessed the carrying values of the long-lived assets related to
Conover and determined that there was an impairment; accordingly, a loss on
impairment of $39,171 was recorded in the third quarter which is comprised of
the write off of allocated intangibles of $31,278 and the write down of
property, plant and equipment of $7,893.
The Company has continually evaluated whether events and circumstances have
occurred that would indicate that the remaining balance of goodwill and other
intangible assets may not be recoverable. Due to the Company's poor operating
performance and the resulting reorganization actions undertaken by management,
the Company recently performed an in-depth evaluation of the carrying value of
its intangible assets.
In connection with this evaluation, the Company elected to change its method of
measuring impairment under APB Opinion No. 17 "Intangible Assets," from an
undiscounted cash flow approach to a fair value approach based on discounted
cash flows effective September 30, 1998. The Company believes that a fair value
approach is preferable in that such method more closely approximates the fair
value of its intangible assets and the related measurement of impairment. Using
this method, the Company will estimate enterprise value using a discounted cash
flow approach, whenever events or circumstances have occurred that indicate
impairment. When the aggregate carrying value of the Company's goodwill and
other intangible assets exceeds their fair value, measured by reference to
enterprise value, the difference is charged to operations.
In connection with this change in method, the Company recorded a loss on
impairment of intangible assets of $50,552, representing the recorded carrying
amount of the Company's remaining goodwill and other intangible assets as of
September 30, 1998.
Inventory Write Downs
- ---------------------
Under the direction of the Company's new senior management team a reassessment
of the Company's obsolescence reserves was completed during the third quarter of
1998 and an inventory write down of $7,614 was recorded. The reassessment was
influenced by decreased sales levels, revised expectations with respect to
future demand for certain products, and substantial reductions to overall
inventory levels.
Severance and Other Personnel Related Costs
- -------------------------------------------
The charges of $2,659 for severance and other personnel related costs were
incurred primarily in connection with a reduction in the workforce of
approximately 300 employees, which represents a 16% decrease in headcount.
Write-off of Start-Up Costs
- ---------------------------
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5 (the
"SOP"), "Reporting on the Costs of Start-Up Activities" which requires that the
costs of start-up activities be expensed as incurred. The Company has elected
early implementation of the provisions of the SOP and, accordingly, has recorded
a cumulative effect adjustment of $4,952. The adjustment is comprised of $5,438
of costs capitalized in connection with the start up of the Ensolite business in
Conover, North Carolina, net of accumulated depreciation of $486.
8
<PAGE>
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The following discussion and analysis provides information which management
believes is relevant to an understanding of the operations and financial
condition of RBX Corporation and subsidiaries (the "Company"). This discussion
and analysis should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in this Form 10-Q as well as the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Reorganization
On July 7, 1998, the Company announced the resignation of Frank H. Roland, Chief
Executive Officer and President and named Theodore C. Rogers, of American
Industrial Partners, as the new Chief Executive Officer and President.
Simultaneously, the Company announced that its senior management team had been
reorganized into The Office of the President, which is comprised of three Senior
Vice Presidents who will run the Company under Mr. Rogers' direction. Management
has begun the implementation of a restructuring plan designed to allow the
Company to better serve its customers, take advantage of market opportunities,
and reduce its operating costs.
The actions which have currently been taken include: (i) the reduction of the
workforce by approximately 300 employees; (ii) the closure and sale of certain
warehouse facilities to generate cash and reduce costs; (iii) the sale of the
business and substantially all assets excluding land and buildings of Universal
to generate cash and reduce operating losses; (iv) the reduction of inventory
levels and other working capital requirements; (v) the merger of certain
operations; and (vi) the reorganization of the field sales force from a plant
based to a market based structure.
As discussed below and disclosed in the notes to the condensed consolidated
financial statements included in this Form 10-Q, the Company has recorded
charges totaling $119.9 million in connection with the reorganization of its
operations.
Basis of Presentation
The following tables set forth, for the periods shown, net sales, gross profit,
selling, general and administrative costs ("SG&A"), operating income (loss) and
net income (loss) in millions of dollars and as a percentage of net sales. The
first table sets forth this information including special charges and the second
table sets forth the information excluding special charges.
<TABLE>
<CAPTION>
Including special charges:
- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------------- -------------------------------------
1997 1998 1997 1998
---------------- ------------------ ----------------- ------------------
Net sales................... $ 68.9 100.0% $ 64.0 100.0% $213.2 100.0% $203.2 100.0%
Gross profit................ 11.6 16.8 (3.5) (5.5) 35.1 16.5 11.9 5.9
SG&A........................ 6.7 9.7 8.6 13.4 20.6 9.7 23.9 11.8
Operating income (loss)..... 3.7 5.4 (103.7) (162.0) 11.1 5.2 (116.6) (57.4)
Net loss.................... (1.0) (1.5) (115.1) (179.8) (3.0) (1.4) (140.7) (69.2)
</TABLE>
9
<PAGE>
Excluding special charges:
- --------------------------
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------- -----------------------------------
1997 1998 1997 1998
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $68.9 100.0% $64.0 100.0% $213.2 100.0% $203.2 100.0%
Gross profit.............. 11.6 16.8 7.0 10.9 35.1 16.5 22.4 11.0
SG&A...................... 6.7 9.7 5.6 8.8 20.6 9.7 20.9 10.3
Operating income (loss)... 3.7 5.4 0.1 0.2 11.1 5.2 (1.7) (0.8)
Net loss.................. (1.0) (1.5) (6.3) (9.8) (3.0) (1.4) (20.8) (10.2)
</TABLE>
Results of Operations:
Net Sales
- ---------
Net sales decreased to $64.0 million for the three months ended September 30,
1998 compared to $68.9 million for the same period in 1997, a decrease of $4.9
million or 7.1%. Net sales decreased to $203.2 million for the nine months ended
September 30, 1998 from $213.2 million for the comparable period in 1997, a
decrease of $10.0 million or 4.7%.
Net sales for the Company's foam product operations (the "Foam Group") decreased
to $46.0 million for the quarter ended September 30, 1998 from $50.7 million for
the quarter ended September 30, 1997, a decrease of $4.7 million or 9.3%. The
Foam Group's net sales decreased to $149.9 million for the nine months ended
September 30, 1998 from $158.2 million for the nine months ended September 30,
1997, a decrease of $8.3 million or 5.2%. A decrease in sales at Universal of
$3.7 million accounts for a portion of the decrease in the Foam Group's net
sales for the nine months ended September 30, 1998. The decrease in net sales
attributable to Universal in the third quarter of 1998 amounted to $1.5 million.
On September 22, 1998, the Universal business was sold thereby eliminating
further losses from this unprofitable subsidiary. The remaining decline in the
Foam Group's sales is attributable to the loss of Ensolite customers due to poor
shipping performance, the loss of fabric laminate customers to Asian
competitors, the loss of fabricated parts customers to lower cost competitors,
and reduced shipments to General Motors Corporation and its suppliers as a
result of the strike at General Motors.
After the elimination of sales to the Foam Group, net sales at the Company's
custom rubber mixing operations (the "Mixing Group") increased to $18.0 million
in the third quarter of 1998 compared to $17.8 million in the third quarter of
1997, an increase of $0.2 million or 1.1%. The Mixing Group's net sales after
eliminations for the nine months ended September 30, 1998 decreased to $53.3
million compared to $54.7 million for the same period in 1997, a decrease of
$1.4 million or 2.6%.
Gross Profit
- ------------
Gross profit decreased to a gross loss of $3.5 million for the third quarter of
1998 from gross profit of $11.6 million for the third quarter of 1997, a
decrease of $15.1 million. For the nine months ended September 30, 1998, gross
profit decreased to $11.9 million from $35.1 million for the same period in
1997, a decrease of $23.2 million.
During the third quarter, the Company recorded special charges which
reduced gross profit by $10.5 million. These charges are comprised primarily of
$7.6 million of inventory write downs and $2.7 million of severance and other
personnel related costs.
Excluding special charges, gross profit decreased to $7.0 million for the third
quarter of 1998 from gross profit of $11.6 million for the third quarter of
1997, a decrease of $4.6 million. During the third quarter of 1997 the Company
recorded nonrecurring credits of $1.7 million related to an employee healthcare
cost rebate and certain royalties and capitalized Ensolite start-up costs of
$0.9 million. Excluding the effects of these
10
<PAGE>
benefits in the prior year, the third quarter decrease was $2.0 million which is
explained by the decrease in volume. Excluding the special charges, gross profit
decreased to $22.4 million for the nine months ended September 30, 1998 from
$35.1 million for the nine months ended, a decrease of $12.7 million.
Gross profit for the Foam Group excluding special charges decreased to $6.1
million in the third quarter of 1998 from $7.8 million in the third quarter of
1997, a decrease of $1.7 million. The third quarter decrease in gross profit was
primarily volume driven and was experienced at all of the Foam Group's
operations with the exception of OleTex.
For the nine months ended September 30, 1998, Conover accounted for $5.8 million
of the decline in gross profit; however, all of the Foam Group's operations
experienced decreased gross profit. These decreases were primarily driven by
decreased volume as well as reduced overhead absorption due to significant
inventory reductions.
The Company has undertaken a number of actions to improve the results at Conover
including: (i) replacing the operations manager; (ii) reducing headcount at the
plant; and (iii) shifting production of certain products to other plants.
Although such efforts yielded improvements in Conover's results during the third
quarter of 1998, further actions such as the elimination of production at
Conover may be necessary and are being considered in connection with the overall
restructuring of the Company's operations.
Mixing Group gross profit decreased to $2.4 million in the third quarter of 1998
from $2.8 million in the third quarter of 1997, a decrease of $0.4 million. The
decrease is due to a shift in the mix of demand toward tolling arrangements
which yield lower margins on the same volume of material produced. Mixing Group
gross profit decreased to $7.5 million for the nine months ended September 30,
1998 compared to $7.7 million for the same period in the prior year, a decrease
of $0.2 million.
SG&A
- ----
SG&A increased to $8.6 million in the third quarter of 1998 from $6.7 million in
the third quarter of 1997, an increase of $1.9 million or 28.4%. SG&A increased
to $23.9 million for the nine months ended September 30, 1998 from $20.6 million
for the nine months ended September 30, 1997, an increase of $3.3 million or
16.0%.
During the third quarter the Company recorded special charges which increased
SG&A by $3.0 million. These charges are comprised primarily of $1.5 million of
severance and other personnel related costs and $0.9 million in accounts
receivable write downs.
Excluding special charges, SG&A decreased to $5.6 million for the third quarter
of 1998 from $6.7 million for the third quarter of 1997, a decrease of $1.1
million. As a percentage of net sales exclusive of special charges, SG&A
decreased to 8.8% for the third quarter of 1998 from 9.7% for the third quarter
of 1997. Excluding the special charges, SG&A increased to $20.9 million for the
nine months ended September 30, 1998 from $20.6 million for the nine months
ended, an increase of $0.3 million.
Operating Income
- ----------------
Operating income decreased to a loss of $103.7 million for the third quarter of
1998 compared to income of $3.7 million for the third quarter of 1997. Operating
income decreased to a loss of $116.6 million for the nine months ended September
30, 1998 compared to income of $11.1 million for the nine months ended September
30, 1997.
In connection with the reorganization of its operations, the Company recorded
special charges which reduced operating income by $114.9 million for the nine
months ended September 30, 1998. In addition to the special charges discussed
under Gross Profit and SG&A, the Company recorded a loss on the impairment of
long-lived assets of $101.4 million for the nine months ended September 30,
1998, $90.3 million of which was recorded in the three months ended September
30, 1998. The loss on impairment of
11
<PAGE>
long-lived assets is comprised primarily of the write off of intangibles of
$89.4 million and write down of property, plant and equipment at Conover and
Universal of $11 million.
Excluding special charges, operating income decreased to $0.1 million for the
third quarter of 1998 from $3.7 million for the third quarter of 1997. Excluding
special charges, operating income decreased to an operating loss of $1.7 million
for the nine months ended September 30, 1998 from operating income of $11.1
million for the nine months ended September 30, 1997.
Net Loss
- --------
The third-quarter net loss increased to $115.1 million from $1.0 million in the
prior year. The net loss for the nine months ended September 30, 1998 increased
to $140.7 million from $3.0 million for the nine months ended September 30,
1997.
Excluding the special charges referred to above, the net loss increased to $6.3
million for the third quarter of 1998 from $1.0 million for the third quarter of
1997. Excluding the special charges, the net loss increased to $20.8 million for
the nine months ended September 30, 1998 from $3.0 million for the nine months
ended September 30, 1997. In addition to the aforementioned factors, the net
loss was impacted by an increase in interest expense of $4.3 million for the
nine months ended September 30, 1998, due to higher overall levels of
indebtedness and the higher carrying cost of the Senior Secured Notes.
Additionally, the 1997 net loss was reduced by a tax benefit of $0.3 million and
$0.8 million for the third quarter and nine months ended September 30, 1997,
respectively. There was no such credit recorded in 1998.
Liquidity and Capital Resources
The Company's primary source of liquidity is cash flow from operations and
borrowings under a revolving credit facility. Pursuant to its operating
strategy, the Company maintains minimal to no cash balances and is substantially
dependent upon, among other things, the availability of adequate working capital
financing to support inventories and accounts receivable. The Company's credit
agreement provides for a $25.0 million revolving credit facility, subject to a
borrowing base formula, $2.9 million of which is reserved for an irrevocable
standby letter of credit. As of September 30, 1998, borrowings on the line of
credit were $4.5 million and unused borrowing capacity under the Credit
Agreement was $17.6 million.
The Company is highly leveraged. At September 30, 1998, the Company's
indebtedness was $205.2 million and its stockholder's equity was a deficit of
$149.9 million. The problems at Conover (see "Results of Operations") have had a
negative impact on the Company's results of operations. The Company has
undertaken a number of actions to improve the results at Conover including: (i)
replacing the operations manager; (ii) reducing headcount at the plant; and
(iii) shifting production of certain products to other plants. Although such
efforts yielded improvements in Conover's results during the third quarter of
1998, further actions such as the elimination of production at Conover may be
necessary and are being considered in connection with the overall restructuring
of the Company's operations. If Conover's operating performance does not
continue to improve, the Company may be required to take additional measures to
ensure the availability of sufficient cash to sustain operations. Such measures
may include, among other things, reducing or delaying capital expenditures,
selling assets, restructuring its indebtedness, or seeking additional equity
capital. There is no assurance that any of these measures can be effected on
satisfactory terms, if at all.
The Company's indebtedness contains certain restrictions which, among other
things, limit its ability to incur additional indebtedness, issue preferred
stock, incur liens, pay dividends, make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with affiliates,
merge or consolidate with any other person or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of its assets. In addition, the
Company's indebtedness contains certain financial covenants including
maintenance of a minimum level of earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the four consecutive quarters ending September
30, 1998 and December 31, 1998. The Company was in compliance with all terms of
its indebtedness as of September 30, 1998.
Interest of $5.6 million is due in connection with the Senior Subordinated Notes
in October, 1998. After
12
<PAGE>
October, 1998, interest payments in connection with the Senior Secured Notes and
Senior Subordinated Notes are required during 1999 as follows: $6.0 million in
January; $5.6 million in April; $6.0 million in July; and $5.6 million in
October. The Senior Secured Notes and the Senior Subordinated Notes mature as
follows: $100 million in January 2003 and $100 million in October 2005.
The Company receives substantial ongoing financial and management services from
American Industrial Partners ("AIP"), an affiliate of the majority owners of the
Company's stockholder. AIP has deferred cash payments with respect to the
management fees it charges the Company; however, the accrual of such fees will
continue.
Cash Flow From Operating Activities
- -----------------------------------
Cash flow from operating activities for the third quarter of 1998 decreased to
cash used of $0.3 million from cash provided of $10.9 million for the third
quarter of 1997. Cash flow from operating activities decreased to cash provided
of $0.5 million for the nine months ended September 30, 1998 from cash provided
of $14.4 million for the same period in 1997. The increased net loss in the
third quarter of 1998 was the primary contributor to the decreased operating
cash flows of the same period; however, the cash effect of the increased net
loss was partially mitigated by cash provided through decreases in working
capital for both the three months and nine months ended September 30, 1998.
Cash Flow From Investing Activities
- -----------------------------------
Cash flow from investing activities was cash provided of $2.9 million for the
third quarter of 1998 compared to cash used of $3.3 million for the third
quarter of 1997. Cash provided by investing activities was $0.4 million for the
nine months ended September 30, 1998 compared to cash used of $14.6 million for
the nine months ended September 30, 1997. Proceeds from the disposal of
property, plant and equipment totaled $5.7 million for the nine months ended
September 30, 1998. Capital expenditures were $3.7 million for the nine months
ended September 30, 1998 compared to $13.6 million for the nine months ended
September 30, 1997.
On September 22, 1998, the Company completed the sale of the business and
substantially all of the assets (excluding land and buildings) of Universal, a
subsidiary that was engaged primarily in manufacturing solid molded rubber
products and certain small-profile rubber extrusions. Cash proceeds of $3.5
million were received in connection with the sale, with $2.9 million of such
proceeds used to reduce indebtedness under the Company's revolving credit
facility and the remaining $0.6 million representing restricted cash.
Cash Flow From Financing Activities
- -----------------------------------
Cash used in financing activities decreased to $2.6 million in the third quarter
of 1998 from $7.6 million in the third quarter of 1997. Cash flow from financing
activities decreased to cash used of $0.9 million for the first nine months of
1998 compared to cash used of $3.1 million for the first nine months of 1997.
For the nine months ended September 30, 1998, proceeds from borrowings under the
revolving credit facility were $24.0 million and principal repayments were $24.9
million.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
- ------------------------------------------------------------------------
Adjusted earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA"), decreased to $5.5 million for the third quarter of 1998,
from $7.3 million for the third quarter of 1997, a decrease of $1.8 million.
Adjusted EBITDA decreased to $11.2 million for the nine months ended September
30, 1998 from $21.3 million for the nine months ended September 30, 1998, a
decrease of $10.1 million.
Adjusted EBITDA increased to $5.4 million in the third quarter of 1998 from $2.4
million in the second quarter of 1998, an increase of $3.1 million.
On a trailing-twelve-months basis, adjusted EBITDA as of September 30, 1998 was
$12.3 million.
Management believes EBITDA is one indicator of a company's liquidity; however,
EBITDA, as presented above, may not be comparable to similarly titled measures
of other companies unless such measures are calculated in substantially the same
fashion. The Company believes that EBITDA, while providing useful information,
does not represent cash available to service debt and that it should not be
considered in
13
<PAGE>
isolation or as a substitute for the consolidated statement of operations
prepared in accordance with generally accepted accounting principles. For
example, EBITDA should not be considered an alternative to net income as an
indicator of operating performance or an alternative to the use of cash flows as
a measure of liquidity. Moreover, EBITDA does not reflect, as does cash flow
from operations, the cash needed to support changes in working capital.
Disclosure Regarding Forward-Looking Statements
The information herein may include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts included herein, regarding the Company's financial position,
business strategy and cost cutting plans may constitute forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. Actual results could differ
materially from the Company's expectations. Information on significant potential
risks and uncertainties not discussed herein may be found in the Company's
filings with the Securities and Exchange Commission.
Year 2000
Introduction
- ------------
The arrival of the Year 2000 poses a unique challenge to all enterprises which
use computers, computer software and other equipment utilizing microprocessors
in conducting their normal operations. As the Year 2000 approaches, such systems
may become unable to function properly or may even fail completely as a result
of programming which recognizes dates using only two digits rather than four.
Consequently, operations could be disrupted or temporarily halted if the
deficiencies in such systems are not corrected in a timely manner. Operations
could also be disrupted or temporarily halted if raw materials suppliers or
service providers are not prepared and as a result of Year 2000 become unable to
supply materials or provide services. Additionally, there could be a reduction
in demand if customers are not prepared for the Year 2000.
The Company's State of Readiness
- --------------------------------
The Company has undertaken a comprehensive assessment and corrective action
program designed to ensure that its essential information technology ("IT")
systems will appropriately recognize the Year 2000. Beginning in 1995, the
Company started a project to replace substantially all of its primary IT
systems. Management estimates that this project will be completed by the end of
the first quarter of 1999. Corrective action related to the Company's other
essential IT systems is also expected to be completed by the end of the first
quarter of 1999.
The Company is also performing an assessment of its non-IT systems. Non-IT
systems include systems utilizing embedded technology such as microcontrollers.
The manufacturing processes employed by the Company do not rely heavily on
embedded technology; however, the Company is working with its suppliers of
machinery and equipment to ensure that the manufacturing process is not halted
by such equipment as the Year 2000 approaches.
The Company is currently evaluating the Year 2000 readiness of its raw materials
suppliers and service providers to more fully assess the nature and magnitude of
the risk posed by its business partners. Management estimates that this
assessment will be completed by the end of the first quarter of 1999.
The Costs to Address the Company's Year 2000 Issues
- ---------------------------------------------------
The project to replace the Company's essential IT systems would have occurred
regardless of the existence of Year 2000 issues, however, the replacement
project is expected to provide Year 2000 readiness with
14
<PAGE>
respect to such systems. The Company estimates capital expenditures of
approximately $3.3 million in connection with updating its primary IT systems.
The Risks of the Company's Year 2000 Issues
- -------------------------------------------
The Company currently believes that its raw materials suppliers, service
providers and customers pose the greatest risk to operations as the Year 2000
approaches. The Company's manufacturing processes could be hampered or halted
altogether if raw materials are not available. Further, demand for the Company's
products could be adversely affected if the Company's customers are not prepared
for the advent of the Year 2000.
The Company's Contingency Plans
- -------------------------------
The Company has not completed the development of a formal contingency plan, but
expects to do so by the end of the first quarter of 1999. Any such plan would
likely include adjustment of production levels based on demand and the
availability of raw materials.
Conclusion
- ----------
The Company's assessment of the impact of Year 2000 issues and the related
timing associated with completion of efforts to resolve Year 2000 issues are
based on management's estimates, which were developed utilizing certain
assumptions with respect to future events. Based on these estimates and
assumptions, management believes it will achieve Year 2000 readiness in a timely
manner for essential IT systems. However, actual circumstances could differ from
those anticipated by management thereby altering the timetable for completion,
the effectiveness of implementation and the related costs of Year 2000
compliance programs.
15
<PAGE>
PART II
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C>
18.1 Independent Accountant's Preferability Letter, Change in Method of
Accounting for Determination of Goodwill Impairment.
27.1 Financial Data Schedule.
</TABLE>
- ------------------
(b) Reports on Form 8-K
On July 7, 1998 the Company issued a report on Form 8-K to announce that Frank
H. Roland resigned as a Director, President and Chief Executive Officer of the
Company and its wholly-owned subsidiaries.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the
Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RBX CORPORATION
---------------
(Registrant)
Date: November 13, 1998 /s/ John C. Cantlin
------------------------------ ---------------------------------
JOHN C. CANTLIN
SENIOR VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: November 13, 1998 /s/ Thomas W. Tomlinson
------------------------------ ---------------------------------
THOMAS W. TOMLINSON
CORPORATE CONTROLLER
17
<PAGE>
Exhibit No. 18.1
----------------
November 13, 1998
Mr. John C. Cantlin
Senior Vice President and Chief Financial Officer
RBX Corporation
5221 Valley Park Drive
Roanoke, Virginia 24019
Dear Sir:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
September 30, 1998, of the facts relating to a change in the method for
accounting for determining goodwill impairment from an undiscounted cash flow
approach to a fair value method based on discounted cash flows. We believe, on
the basis of the facts so set forth and other information furnished to us by
appropriate officials of the Company, that the accounting change described in
your Form 10-Q is to an alternative accounting principle that is preferable
under the circumstances.
We have not audited any consolidated financial statements of RBX Corporation and
its consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1997. Therefore, we are unable to express, and we do not express,
an opinion on the facts set forth in the above-mentioned Form 10-Q, on the
related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of RBX Corporation and
its consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1997.
Yours truly,
DELOITTE & TOUCHE LLP
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 182
<SECURITIES> 0
<RECEIVABLES> 37,506
<ALLOWANCES> 1,550
<INVENTORY> 25,039
<CURRENT-ASSETS> 61,823
<PP&E> 95,167
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<BONDS> 204,828
0
0
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<OTHER-SE> (149,899)
<TOTAL-LIABILITY-AND-EQUITY> 144,233
<SALES> 203,193
<TOTAL-REVENUES> 203,193
<CGS> 191,293
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