U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the quarterly period ended March 31, 1998, or
/ / Transition report under Section 13 or 15(d) of the Exchange Act, for the
transition period 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
(Registrants 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 / / No /X/
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 issuers classes of
common stock, as of the latest practical date:
Common Stock, $.001 Par Value - 4,194,000 shares as of May 15, 1998.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Industrial Rubber Products, Inc.
Condensed Balance Sheets
March 31, 1998 and December 31, 1997
March 31 December 31
1998 1997
(Unaudited)
ASSETS
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Current Assets
Cash and Cash Equivalents $ 941,057 $ 132,344
Trade receivables 3,731,857 2,282,637
Inventories 696,029 840,363
Prepaid expenses 82,524 53,367
Total current assets 5,451,467 3,308,711
Cash Value of Life Insurance 122,780 122,780
Property and Equipment, at cost
Land 10,000 10,000
Buildings 521,950 518,741
Automotive equipment 356,030 339,481
Machinery and equipment 1,771,480 1,709,134
2,659,460 2,577,356
Less accumulated depreciation 1,135,133 1,059,263
1,524,327 1,518,093
$7,098,574 $4,949,584
Liabilities and Stockholders Equity
Current Liabilities
<S> <C> <C>
Bank note payable $2,244,227 $1,135,000
Current maturities of
long-term debt 215,078 218,861
Due to related party (Note 2) 239,825 106,825
Accounts payable 1,130,105 674,144
Accrued expenses 268,367 399,850
Total current liabilities 4,097,692 2,534,680
Long-term Debt, less current
maturities 361,206 171,095
Stockholders Equity (Note 3)
Common Stock, $.001 par value;
authorized 25,000,000 shares;
issued 2,934,000 shares 2,934 2,934
Additional paid-in capital 143,816 143,816
Retained Earnings 2,493,016 2,097,059
2,639,766 2,243,809
$7,098,574 $4,949,584
The accompanying notes are an integral part of the condensed financial
statements.
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<CAPTION>
Industrial Rubber Products, Inc.
Condensed Statements of Income
(Unaudited)
Three months ended
March 31,
1998 1997
<S> <C> <C>
Net Sales $3,816,776 $4,121,760
Cost of Sales 2,755,588 2,702,695
Gross profit 1,061,188 1,419,065
Selling, general and administrative
expenses 415,187 343,764
Operating income 646,001 1,075,301
Nonoperating Income (Expense)
Interest income 1,186 2,064
Interest expense (36,431) (45,010)
(35,245) (42,946)
Net Income $ 610,756 $1,032,355
Pro Forma Information (Note 4)
Income before income taxes $ 610,756 n/a
Provision for income taxes 238,195 n/a
Net Income $ 372,561 n/a
Basic earnings per share $ .12 n/a
Weighted average shares outstanding 3,087,600 n/a
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<CAPTION>
Industrial Rubber Products, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 610,756 $1,032,355
Adjustments to reconcile net income
to net cash provided by (used in
operating activities:
Depreciation 75,870 87,903
Changes in working capital components
Increase in receivables (1,449,220) (730,388)
(Increase)decrease in inventories 144,334 (62,159)
(Increase)decrease in prepaid
expenses (29,157) 14,779
Increase(decrease) in accounts
payable and accrued expenses 324,478 249,535
Net cash provided by (used in)
operating activities (322,939) 592,025
Cash Flows from Investing Activities
Purchase of property & equipment (82,104) (87,551)
Receipts from related party 0 32,500
Net Cash used in investing
activities (82,104) (55,051)
Cash Flows From Financing Activities
Net proceeds (repayments) on short-
term borrowings 1,109,227 (483,100)
Proceeds from long-term borrowings 300,000 0
Principal payments on long-term
borrowings (113,672) (286,931)
Increase in excess of outstanding
checks over bank balance 0 24,942
Dividends paid on common stock (214,799) (21,686)
Advances from related party 133,000 190,000
Net cash provided by (used in)
financing activities 1,213,756 (576,235)
Net increase (decrease) in cash and
cash equivalents 808,713 (39,261)
Cash and cash equivalents
Beginning 132,344 39,261
Ending $ 941,057 $ 0
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest $ 36,431 $ 45,709
</TABLE>
<PAGE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Industrial Rubber Products, Inc.
Notes to Condensed Financial Statements
March 31, 1998
(Unaudited)
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 March 31, 1998, and March
31, 1997, (b) the financial position at March 31, 1998, and (c) the cash flows
for the three month periods ended March 31, 1998, and March 31, 1997.
Operating results for the three month period ended March 31, 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.
2. Related Company Transactions. As of March 31, 1998, the Company had a
payable of $239,825 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 first quarter of 1998.
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 first quarter of 1998.
3. Stockholders Equity. As described in Note 4 below, the Company through
March 31, 1998, was taxed as an S Corporation. As described in the Company's
Form SB-2, as most recently amended, the Company will make distributions
totaling approximately $800,000 to its majority shareholder to enable him to
pay income taxes on the Company's 1997 income. As of March 31, 1998,
approximately $585,000 of that distribution remained to be paid. In addition,
the Company will make distributions totaling approximately $275,000 to enable
the majority shareholder to pay income taxes on the first quarter income of
the Company.
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.
As of March 31, 1998, the Company had a pending 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 will be subject to federal and state
income taxes from and after April 1, 1998.
The pro forma information for income taxes as of March 31, 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.
5. Earnings Per Share. Earnings per share are computed based upon the
weighted average number of shares outstanding during the period, and assume
the issuance of sufficient shares at $5.00 per share to provide net proceeds,
after estimated aggregate offering expenses and underwriting discount, to
repay short-term bank debt incurred to make an S corporation distribution to
the existing shareholder. (See Note 3.)
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Net Sales. The Company's net sales for the first quarter of 1998 of
$3,816,776 showed a decrease of $304,984 from the $4,121,760 of sales in the
same period in 1997. However, all of the decline in sales is explained by one
factor. Approximately $2,760,000 of the sales in the first quarter of 1997
related to the Kennecott Utah Copper pipe lining project. In the first quarter
of 1998, the Company was also making deliveries under another major pipe
lining contract and approximately $1,720,000 of the sales in the first quarter
of 1998 were related to the Royal Oak Kemmes project. The performance of
and the timing of shipments under these large pipe lining contracts causes
fluctuations in the Company's quarterly operating results. Without the effect
of these two large pipe lining contracts, the Company's sales in the first
quarter of 1998 were approximately $2,096,776 which was almost a 54% increase
over its sales of approximately $1,361,760 in the first quarter of 1997
without the Kennecott Copper pipe lining agreement. The Company's order
backlog on March 31, 1998 was approximately $4,237,250.
Cost of Sales. Cost of sales as a percentage of net sales was 72.20% in
the first quarter of 1998 compared with 65.57% in first quarter of 1997. The
increase was mainly due to the lower level of profitability in the first
quarter of 1998 in comparison to the same quarter in 1997 when the Company
benefited from an above average level of profitability on the Kennecott
project and also benefited from the effect of increased sales volume on fixed
overhead costs. As a percentage of net sales, gross profit decreased from
34.43% of net sales in the first quarter of 1997 to 27.88% of net sales in the
first quarter of 1998. In dollar terms, gross profit decreased from $1,419,065
in the first quarter of 1997, to $1,061,188 in the first quarter of 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased from $343,764 (8.34% of net sales) in the
first quarter of 1997, to $415,187 (10.88% of net sales) in the same quarter
of 1998. The increase was due primarily to increased staffing expenses, which
were necessary to service increased sales other than large contracts. While
net sales were less than during the same period of 1997, the mix of sales,
which was not as dependent on a single large contract, required greater
selling and administrative effort. In addition, in the first quarter of
1998, certain key personnel of the Company spent a significant amount of time
preparing for the Company's initial public offering. These efforts also
required additional staffing.
Nonoperating Income and Expense. The major nonoperating expense,
interest expense, decreased from $45,010 in 1997 to $36,431 in 1998. This
was primarily due to lower borrowing during most of the quarter.
Nonoperating income was not a significant factor in the Company's
operating results in 1997 and 1998.
Net Income. Net income (before tax) for the period ended March 31, 1998,
was $610,756 compared to $1,032,355 for the same period ended March 31, 1997.
Net income as a percentage of net sales, decreased from 25.05% in 1997
to 16% in 1998. The decrease was due primarily to lower profitability
resulting from the mix of sales.
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 first quarter of 1997 would
have been $402,618, and in the first quarter of 1998 income taxes would have
been $238,195.
Cash Flows. The Company's cash flows from operating activities showed a
decrease from net cash provided of $592,025 in the first quarter of 1997 to
$322,939 of net cash used in operating activities in the first quarter of
1998. There were two factors accounting for this change. First, more cash
was provided by operations in the first quarter of 1997 ($1,032,355) than in
the same quarter of 1998 ($610,756). The second and more important factor was
the increase of accounts receivable. Approximately $1,430,000 of the
$1,449,220 increase in accounts receivable in the first quarter of 1998 was
the result of the Company extending payment terms to a single customer, Royal
Oak Kemmes, which account receivable is to be paid during the second quarter
of 1998. The Company's cash flows from financing activities also reflects
this increase in accounts receivable. The Company's borrowing activities
included the $300,000 bridge loan for remodeling discussed in the Liquidity
and Sources of Capital below, and an increase in its short term bank line of
credit of $1,109,227. That increase in the bank line of credit which funded
the cost of material and labor for the Royal Oak Kemmes project.
Liquidity and Sources of Capital.
At March 31, 1998, the Company had working capital of $1,353,775,
including $941,057 of cash and cash equivalents. The Company had earnings
before taxes of $610,756 for the first quarter of 1998. As disclosed
elsewhere in this Form 10-QSB, the Company will make a distribution to its
majority shareholder of approximately $275,000 during 1998 to allow the
shareholder to pay income taxes with respect to the Company's earnings from
January 1,1998 through March 31, 1998, which is the date of its termination
of its S Corporation election.
During the first quarter of 1998, the Company obtained a loan from
Norwest Bank Minnesota North in the amount of $300,000. The loan was a bridge
loan in anticipation of the Company receiving $320,000 of long term loans from
Norwest Bank and the Iron Range Resources and Rehabilitation Board ("IRRRB")
of the State of Minnesota. These loans were to fund the remodeling of the
Company's Hibbing, Minnesota corporate offices. The bridge loan was paid off
with the proceeds of these loans which closed on April 10, 1998.
On April 29, 1998, the Company closed the initial public offering of its
common stock. Management believes that the presently estimated net proceeds
of that offering $5,483,000, cash flow from operations, interest expected to
be earned on the proceeds of this 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.
None.
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 begin 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 9,344
Registration Fee 2,375
Printing Expenses 23,645
Legal Fees and Expenses 95,000 (estimate)
Accounting Fees and Expenses 50,000 (estimate)
Blue Sky Fees and Expenses 14,849
Transfer Agent Fees and Expenses 7,500 (estimate)
Underwriter's Nonaccountable
Expense Allowance 126,000
Miscellaneous 14,320 (estimate)
$816,838 (estimated total)
(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 (f)(4)(v):
$5,483,162
(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;
purchases 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
(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.
<PAGE>
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.
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: May ____, 1998 /s/ Daniel O. Burkes
Daniel O. Burkes
President and Treasurer
(Principal Executive Officer)
(Principal Financial Officer)
Industrial Rubber Products, Inc.
Exhibit 11 - Statement Re Computation of Earnings Per Share
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Three Months Ended
March 31,
1998
<S> <C>
Primary and fully diluted:
Weighted average shares outstanding
during the period 2,934,000
Effect of issuance of sufficient shares
to provide net proceeds sufficient to
make S Corporation distributions to the
majority shareholder 196,000
Total weighted average common shares 3,130,000
Pro Forma Net Income $372,561
Net income per share $.12
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Net income per share is computed based upon the weighted average number of
shares outstanding during the period, and assumes the issuance of sufficient
shares at $5.00 per share to provide net proceeds, after estimated aggregate
offering expenses and underwriting discount, to repay short-term bank debt to
make an S Corporation distribution to the majority shareholder. The Company
will be required to present dilutive earnings per share in the future as a
result of the option plan discussed in the Company's Form SB-2.
