QUARTERLY REPORT FOR INDUSTRIAL RUBBER PRODUCTS, INC.
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 1998 or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period Ended
From to
----------------
Commission file number 333-46643
INDUSTRIAL RUBBER PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1550505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3804 E. 13th St.
Hibbing, MN 55746
(Address of principal executive offices) (Zip Code)
(218) 263-8831
(Registrant's telephone number, including area code)
Not applicable
(Former, name, former address and former fiscal year,
if changes since last report)
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 periods 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
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value - 4,194,000 shares as of July 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Industrial Rubber Products, Inc.
Condensed Balance Sheets
June 30, 1998 and December 31, 1997
<CAPTION>
June 30 December 31
1998 1997
Unaudited
--------- ----------
Assets
<S> <C> <C>
Current Assets
Cash and Cash equivalents $ 4,629,060 $ 132,344
Trade receivables 3,113,685 2,282,637
Income Tax Refund Receivable 145,453 n/a
Inventories 439,724 840,363
Prepaid expenses 29,130 53,367
----------- -----------
Total current assets 8,357,052 3,308,711
Cash Value of Life Insurance 124,280 122,780
Property and Equipment, at cost
Land 10,000 10,000
Buildings 543,517 518,741
Automotive equipment 445,028 339,481
Machinery and equipment 2,057,888 1,709,134
----------- -----------
3,056,433 2,577,356
Less Accumulated depreciation 1,217,657 1,059,263
----------- -----------
Net Property and Equipment 1,838,776 1,518,093
----------- -----------
$10,320,108 $ 4,949,584
=========== ===========
Liabilities and Stockholder's Equity
Current Liabilities
Bank note payable $ 834,000 $ 1,135,000
Current maturities of
long-term debt 264,260 218,861
Due to related party (Note 2) 0 106,825
Accounts payable 1,172,088 674,144
Accrued expenses 281,165 399,850
----------- -----------
Total current liabilities 2,551,513 2,534,680
----------- -----------
Long-term Debt, less current
maturities 368,076 171,095
----------- -----------
Stockholder's Equity (Note 3)
Common stock, $.001 par value;
authorized 25,000,000 shares;
issued 4,194,000 - 1998 and
2,934,000 - 1997 shares 4,194 2,934
Additional paid-in capital 5,615,925 143,816
Retained earnings 1,780,400 2,097,059
----------- -----------
Total Stockholder's Equity 7,400,519 2,243,809
----------- -----------
$10,320,108 $ 4,949,584
=========== ===========
</TABLE>
See notes to the condensed financial statements.
<PAGE>
<TABLE>
Industrial Rubber Products, Inc.
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- ------------------
1998 1997 1998 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net Sales $ 3,405,206 $ 4,259,896 $ 7,221,982 $ 8,381,656
Cost of Sales 2,706,870 2,850,849 5,462,458 5,553,544
----------- ----------- ----------- -----------
Gross profit 698,336 1,409,047 1,759,524 2,828,112
Selling, general and
administrative
expenses 483,237 342,424 898,424 686,188
----------- ----------- ----------- -----------
Operating income 215,099 1,066,623 861,100 2,141,924
----------- ----------- ----------- -----------
Nonoperating Income
Income/Expense
Interest income 122,518 42 123,704 2,106
Interest expense (58,306) (39,125) (94,737) (84,135)
----------- ----------- -----------
64,212 (39,083) 28,967 (82,029)
----------- ----------- ----------- -----------
Income before income
taxes $ 279,311 $ 1,027,540 890,067 2,059,895
----------- ----------- ----------- -----------
Income tax expense 111,726 n/a 111,726 n/a
----------- ----------- ----------- -----------
Net Income before
Pro Forma Taxes 167,585 1,027,540 778,341 2,059,895
----------- ----------- ----------- -----------
Provision for Pro
forma income taxes
(see Note 4) n/a 388,382 238,195 791,000
----------- ----------- ----------- -----------
Net Income $ 167,585 639,158 540,146 1,268,895
=========== =========== =========== ===========
Basic earnings per
share .04 .22 .16 .43
=========== =========== =========== ===========
Weighted average
shares outstanding 3,875,538 2,934,000 3,402,197 2,934,000
</TABLE>
See notes to the condensed financial statements.
<PAGE>
<TABLE>
Industrial Rubber Products, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Six months ended
June 30,
-------------------------
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 778,341 $ 2,059,895
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 158,394 175,806
Changes in working capital components
(Increase)Decrease in:
Receivables (976,501) (1,003,667)
Inventories 400,639 (35,300)
Prepaid expenses 24,237 42,294
Increase(Decrease) in:
Accounts payable and accrued
expenses 379,259 256,797
----------- ----------
Net cash provided by (used in)
operating activities 764,369 1,495,825
----------- ----------
Cash Flows from Investing Activities
Purchase of property & equipment (479,077) (116,674)
Receipts from (advances to) related
party 0 (68,500)
(Increase) decrease in cash value
of life insurance (1,500) (24,439)
----------- -----------
Net Cash provided by (used in)
investing activities (480,577) (160,735)
----------- ----------
Cash Flows From Financing Activities
Net proceeds of Stock Offering 5,473,369 0
Net proceeds (repayments) on short-
term borrowings (301,000) (873,000)
Proceeds from long-term borrowings 320,000 0
Principal payments on long-term
borrowings (77,620) (82,361)
Increase in excess of outstanding
checks over bank balance 80,397
Dividends paid on common stock (See Note 3) (1,095,000) (49,938)
Advances from (repayments to)
related party (106,825)
----------- ----------
Net cash provided by (used in)
financing activities 4,212,924 (1,374,351)
Net increase (decrease) in cash and
cash equivalents 4,496,716 (39,261)
Cash and cash equivalents
Beginning 132,344 39,261
---------- ----------
Ending $ 4,629,060 $ 0
========== ==========
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest $ 94,737 $ 84,834
========== ==========
Cash payments for income taxes $ 257,179 $ n/a
========== ==========
</TABLE>
See notes to the condensed financial statements.
<PAGE>
Industrial Rubber Products, Inc.
Notes to Condensed Financial Statements
June 30, 1998
(Unaudited)
Note 1. Basis of Presentation. The accompanying interim financial
statements presented have been prepared by Industrial Rubber Products, Inc. (the
"Company") without audit, and in the opinion of the management, reflect all
adjustments of a normal recurring nature necessary for a fair statement of (a)
the results of operations for the three months ended June 30, 1998 and June 30,
1997 (b) the results of operations for the six months ended June 30, 1998 and
June 30, 1997 (c) the financial position at June 30, 1998 and (d) the cash flows
for the six month periods ended June 30, 1998 and June 30, 1997. Operating
results for the three and six month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The balance sheet presented as of December 31, 1997 has been
derived from the financial statements that have been audited by the Company's
independent public accountants. The financial statements and notes are condensed
as permitted by Form 10-QSB and do not contain certain information included in
the annual financial statements and notes of the Company. The consolidated
financial statements and notes included herein should be read in conjunction
with the financial statements and notes included in the Company's Form SB-2
filed February 20, 1998 as most recently amended on April 23, 1998.
Note 2. Related Company Transactions. As of June 30, 1998, the Company had
no outstanding payables to Nelson Roofing, Inc., a company owned by the majority
stockholder of the Company. The Company also provides management and
administrative services for Nelson Roofing, Inc. and receives a management fee
for such services. Management fees invoiced to Nelson Roofing, Inc. amounted to
$24,000 in the second quarter of 1998. Management fees for the six-month period
ending June 30, 1998, amounted to $48,000.
The Company rents a house in Utah owned by the majority stockholder on a
month to month basis. Total rent paid to the majority stockholder amounted to
$14,100 in the second quarter of 1998. Rent paid for the six-month period ending
June 30, 1998, amounted to $28,200.
Note 3. Stockholder's Equity. As described in Note 4 below, the Company
through March 31, 1998 was taxed as a S Corporation. The Company made
distributions during the second quarter totaling $880,202 to its majority
shareholder to enable him to pay income taxes on the Company's 1997 calendar
year and 1998 first quarter income.
Note 4. Income Taxes. The Company was an S corporation from January 1, 1989
until March 31, 1998. As an S corporation, the Company generally was not
responsible for income taxes; instead, the then sole stockholder of the Company
was taxed on the Company's taxable income.
On April 24, 1998, the Company completed an initial public offering for the
sale of common stock. In anticipation of that offering, the Company filed an
election to terminate its status as an S corporation effective March 31, 1998.
Accordingly, the Company became subject to federal and state income taxes from
and after April 1, 1998.
<PAGE>
The information for pro forma income taxes for the six-month and three
month periods ending June 30, 1997 represents the estimated income taxes that
would have been reported had the Company filed federal and state income tax
returns as a C Corporation for those periods. The information for pro forma
income taxes for the six month period ending June 30, 1998 represents the
estimated income taxes that would have been reported had the Company filed
federal and state income tax returns as a C Corporation for the three month
period ending March 31, 1998.
Note 5. Earnings per share. Earnings per share are computed based upon the
weighted average number of shares outstanding during the period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net Sales. Net sales for the second quarter of 1998 of $3,405,206 compares
with $4,259,896 in the same quarter of 1997. The decline in sales compared with
1997 relates to the Kennecott Utah Copper pipe-lining project, which accounted
for approximately $2,864,000 of the 1997 second quarter sales. In the second
quarter of 1998, the Company recorded sales under another major pipe lining
project for Batu-Hijau in Indonesia of approximately $2,170,000. The performance
of and the timing of shipments under these large pipe-lining contracts cause
fluctuations in the Company's quarterly operating results.
Net sales for the six month period ending June 30, 1998, of $7,221,892
compares with $8,381,656 in the same period in 1997 and included approximately
$5,624,000 in sales from the Kennecott project. Net sales, excluding major
projects, for the six month period were approximately $3,331,982 in 1998, which
represents an increase of 22.1% when compared to the adjusted 1997 sales for the
same period of $2,757,656.
The Company's order backlog on June 30, 1998, was approximately $1,500,000.
Cost of Sales. Cost of sales as a percentage of net sales was 79.5% in the
second quarter of 1998 compared with 66.9% in same quarter of 1997. The increase
was the result of below average costs in the Kennecott project in the 1997
period and above average costs on the Batu-Hijau project in the 1998 period.
Gross profit decreased from 33.1% of net sales in the second quarter of 1997 to
20.5% of net sales in the second quarter of 1998. In dollar terms, gross profit
decreased from $1,409,047 in the second quarter of 1997, to $698,336 in the
second quarter of 1998.
For the first six months of 1998 cost of sales was 75.6% of net sales
compared with 66.3% for the same period in 1997. Below average costs on the
Kennecott project in 1997 was the major reason for the difference. Gross profit
decreased from 33.7% of net sales, $2,828,112, for the first six months of 1997
to 24.4% of net sales, $1,759,524, for the same period in 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased from $342,424 (8.0% of net sales) in the
second quarter of 1997, to $483,237 (14.2% of net sales) in the same quarter of
1998. For the six month period ending June 30, these expenses increased from
$686,188 (8.2% of net sales) in 1997, to $898,424 (12.4% of net sales) in 1998.
These increases were due primarily to increased staffing required to produce
sales increases exclusive of large contracts and additions of administrative
personnel related to the Company's initial public offering.
<PAGE>
Nonoperating Income and Expense. The major nonoperating expense, interest
expense, increased from $39,125 in second quarter of 1997 to $58,306 in 1998.
This was due to higher borrowing during most of the 1998 second quarter
resulting from collection delays on certain trade receivables, which were
resolved just before the end of the quarter. Nonoperating interest income
increased from near zero in second quarter of 1997, to $122,518 in the same
quarter of 1998. This increase resulted from interest income earned on the
proceeds of the initial public offering and interest earned on the late
collections referenced above. The result was income of $64,212 from all
nonoperating activities for the second quarter of 1998 compared an expense from
all nonoperating activities of $39,083 in the same quarter in 1997.
For the first six months interest expense increased from $84,135 in 1997,
to $94,737 in 1998. Interest income increased from $2,106 in 1997 to $123,704 in
1998. The result was an income from all nonoperating activities of $28,967 in
1998 compared with an expense from all nonoperating activities of $82,029 in the
same period in 1997.
Net Income. Net income (before tax) for the second quarter of 1998 was
$279,311 (8.2% of net sales) and compares with $1,027,540 (24.1% of net sales)
for the same quarter in 1997. Although significantly less than the previous
year, the second quarter performance was very close to expectations. The
decrease from 1997 was due primarily to the profitability levels of previously
mentioned large contracts. Net income (before tax) for the six month period
ending June 30, 1998, of $890,067 (12.3% of net sales), compared with $2,059,895
(24.6% of net sales) for the same period in 1997.
Income Taxes. As discussed elsewhere in this Form 10-QSB, the Company was
an S corporation until March 31, 1998, and as such was generally not responsible
for income taxes. Instead, the then sole stockholder was taxed on the Company's
taxable income. If the Company had paid income taxes as a C Corporation, its
estimated income taxes during the second quarter of 1997 would have been
$388,382. In the second quarter of 1998, when the Company was a C corporation,
its estimated income taxes were $111,726.
It is estimated that income taxes for the six months ending June 30, 1997,
would have been $791,000 compared with $349,921 for the same period in 1998.
Cash Flows. The Company's cash flows from operating activities showed net
cash provided by operations of $764,369 in the first six months of 1998. This
represents positive performance, but is less than the $1,495,825 provided by
operations in the same period in 1997. The major difference was the contribution
of the Kennecott project to net income in 1997. This was partially offset by a
significant reduction in inventory in 1998. In both periods the Company had
large increases in receivables primarily as the result of the timing of payments
under large pipe-lining contracts.
<PAGE>
The Company showed net cash used in investing activities of $480,577 in the
first six months of 1998 compared with $160,735 in the same period of 1997. The
difference results from increased purchases of property and equipment.
The Company's cash flows from financing activities reflects the proceeds of
the initial public stock offering of $5,473,309. As described in the prospectus,
these proceeds were reduced for dividends (distributions) to the majority
shareholder for income tax payments related to 1997 and the first quarter of
1998. These distributions, which constitute almost all of the dividends paid on
common stock were $1,095,000 in the first six months of 1998 compared with
$49,938 during the same period in 1997. The net proceeds of the stock offering
and $873,000 of repayments of short-term borrowings in 1997 account for the
$5,587,275 difference in cash provided by financing activities in the two
periods.
Liquidity and Sources of Capital.
At June 30, 1998, the Company had working capital of $5,805,539, including
$4,629,060 of cash and cash equivalents. The Company had income before income
taxes of $890,067 for the first six months of 1998. As disclosed elsewhere in
this Form 10-QSB, the Company received the proceeds of its initial public
offering of $5,473,369 on April 29, 1998. During the second quarter of 1998, the
Company made distributions, as outlined in the prospectus, of $880,202 to its
majority shareholder to allow the shareholder to pay income taxes with respect
to the Company's earnings from 1997 and the first quarter of 1998. Management
believes that the net proceeds of the initial public offering, cash flow from
operations, interest to be earned on the proceeds of the offering until expended
and bank borrowings will be sufficient to fund operations and expansion plans of
the Company for at least 12 months. In order to meet its needs beyond 12 months,
the Company may be required to raise additional capital.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
(1) Effective date of the Securities Act registration statement for which the
use of proceeds information is being disclosed: April 23, 1998. Commission file
number assigned to the registration statement: 333-46643.
(2) Offering date: April 24, 1998.
(3) Offering did not terminate before any securities were sold.
(i) Offering has not terminated.
(ii) Name of managing underwriter: R.J. Steichen & Company.
(iii) Class of securities registered: Common stock.
(iv) Amount registered: 1,260,000 shares. Aggregate price of the offering
amount registered: $6,300,000. Amount sold: 1,260,000 shares. Aggregate offering
price of the amount sold to date $6,300,000.
(v) Amount of expenses incurred for the issuer's account in connection with
the issuance and distribution of the securities registered, for underwriting
discounts and commissions, finders' fees, expenses paid to or for underwriters,
other expenses and total expenses:
Underwriter's Discount $472,500
NASD Fee 1,305
NASDAQ SmallCap Market Fee 12,344
Registration Fee 2,375
Printing Expenses 23,645
Legal Fees and Expenses 84,337 (estimate)
Accounting Fees and Expenses 50,000
Blue Sky Fees and Expenses 14,849
Transfer Agent Fees and Expenses 3,152
Underwriter's Nonaccountable
Expense Allowance 126,000
Miscellaneous 38,184 (estimate)
$826,691 (estimated total)
<PAGE>
(A) Direct or indirect payments to directors, officers, general partners of
the issuer or their associates; to persons owning ten percent or more of any
class of equity securities of the issuer and to affiliates of the issuer: None.
(B) Direct or indirect payments to others: None.
(vi) Net offering proceeds to the issuer after deducting the total expenses
described in paragraph (3)(v):
$5,473,309
(vii) From the effective date of the Securities Act registration statement
to the ending date of the reporting period, the amount of net offering proceeds
to the issuer used for construction of plant, building and facilities; purchase
and installation of machinery and equipment; purchase of real estate;
acquisition of other business(es); repayment of indebtedness; working capital;
temporary investments (which should be specified); and any other purposes for
which at least five percent of the issuer's total offering proceeds or $100,000
(whichever is less) has been used:
Repayment of short-term bank loan on 5/05/98 $675,000
Addition to working capital on 5/06/98: $126,500
Purchase Water Jet Equipment $118,500
(A) Direct or indirect payments to directors, officers, general partners of
the issuer or their associates; to persons owning ten percent or more of any
class of equity securities of the issuer; and to affiliates of the issuer: None.
(B) Direct or indirect payments to others: None.
(viii) If the use of proceeds in paragraph (vii) represents a material
change in the use of proceeds described in the prospectus.
No material changes in the use of proceeds described in the prospectus.
Item 3. Defaults 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.
(a) Exhibits.
Exhibit 11 Statement Re: Computation of Earnings per Share.
(b) Reports on Forms 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDUSTRIAL RUBBER PRODUCTS, INC.
(Registrant)
Date: August 6, 1998 /s/ Daniel O. Burkes
---------------------------------
Daniel O. Burkes
Chief Executive Officer
Industrial Rubber Products, Inc.
Exhibit 11 - Statement Re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1998
----------
<S> <C>
Net income Per Share - basic:
Weighted average shares outstanding
during the period 3,402,197
----------
Net Income $ 540,146
----------
Net income per share - basic $ .16
==========
Net income per share - diluted: n/a
</TABLE>
Net income per share is computed based upon the weighted average number of
shares outstanding during the period. Stock options and warrants were
antidilutive for the period ending June 30, 1998.
