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 September 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 East 13th Ave.
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 October 31, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Industrial Rubber Products, Inc.
Condensed Balance Sheets
September 30, 1998 and December 31, 1997
<CAPTION>
September 30 December 31
1998 1997
Unaudited
--------- ----------
Assets
<S> <C> <C>
Current Assets
Cash and Cash equivalents $ 1,747,167 $ 132,344
Short term investments 2,433,016 n/a
Trade receivables 1,794,979 2,282,637
Income Tax Refund Receivable 212,765 n/a
Inventories 311,898 840,363
Prepaid expenses 17,197 53,367
----------- -----------
Total current assets 6,517,022 3,308,711
Cash Value of Life Insurance 131,887 122,780
Property and Equipment, at cost
Land 10,000 10,000
Buildings 545,192 518,741
Automotive equipment 458,758 339,481
Machinery and equipment 2,118,173 1,709,134
----------- -----------
3,132,123 2,577,356
Less Accumulated depreciation 1,323,683 1,059,263
----------- -----------
Net Property and Equipment 1,808,440 1,518,093
----------- -----------
$ 8,457,349 $ 4,949,584
=========== ===========
Liabilities and Stockholder's Equity
Current Liabilities
Bank note payable $ 0 $ 1,135,000
Current maturities of
long-term debt 298,028 218,861
Due to related party (Note 2) 0 106,825
Accounts payable 347,808 674,144
Accrued expenses 253,893 399,850
----------- -----------
Total current liabilities 899,729 2,534,680
----------- -----------
Long-term Debt, less current
maturities 270,705 171,095
----------- -----------
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 5,603,289 143,816
Retained earnings 1,679,432 2,097,059
----------- -----------
Total Stockholder's Equity 7,286,915 2,243,809
----------- -----------
$ 8,457,349 $ 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 Nine months ended
September 30, September 30,
--------------------- ------------------
1998 1997 1998 1997
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net Sales $ 1,691,024 $ 3,402,985 $ 8,913,006 $11,784,641
Cost of Sales 1,369,366 2,389,889 6,831,824 7,943,433
----------- ----------- ----------- -----------
Gross profit 321,658 1,013,096 2,081,182 3,841,208
Selling, general and
administrative
expenses 523,973 283,861 1,422,397 970,049
----------- ----------- ----------- -----------
Operating income (202,315) 729,235 658,785 2,871,159
----------- ----------- ----------- -----------
Nonoperating Income
Income/Expense
Interest income 61,323 118 185,027 2,224
Interest expense (27,288) (21,376) (122,025) (105,511)
----------- ----------- ----------- -----------
34,035 (21,258) 63,002 (103,287)
----------- ----------- ----------- -----------
Income before income
taxes $ (168,280) $ 707,977 721,787 2,767,872
----------- ----------- ----------- -----------
Income tax expense (67,312) n/a 44,414 n/a
----------- ----------- ----------- -----------
Net Income before
Pro Forma Taxes (100,968) 707,977 677,373 2,767,872
----------- ----------- ----------- -----------
Provision for Pro
forma income taxes
(see Note 4) 0 270,206 238,195 1,061,206
----------- ----------- ----------- -----------
Net Income $ (100,968) 437,771 439,178 1,706,666
=========== =========== =========== ===========
Basic earnings per
share (.02) .15 .12 .58
=========== =========== =========== ===========
Weighted average
shares outstanding 4,194,000 2,934,000 3,672,462 2,934,000
</TABLE>
See notes to the condensed financial statements.
<PAGE>
<TABLE>
Industrial Rubber Products, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30,
-------------------------
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 677,373 $ 2,767,872
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 264,420 263,709
Changes in working capital components
(Increase)Decrease in:
Receivables 274,893 (281,239)
Inventories 528,465 9,912
Prepaid expenses 36,170 32,124
Increase(Decrease) in:
Accounts payable and accrued
expenses (472,293) 166,788
----------- ----------
Net cash provided by (used in)
operating activities 1,309,028 2,959,166
----------- ----------
Cash Flows from Investing Activities
Disbursements for short term investments (2,433,016) 0
Purchase of property & equipment (554,767) (355,132)
Receipts from (advances to) related
party 0 32,500
(Increase) decrease in cash value
of life insurance (9,107) 19,237
----------- -----------
Net Cash provided by (used in)
investing activities (2,996,890) (303,395)
----------- ----------
Cash Flows From Financing Activities
Net proceeds of Stock Offering 5,460,733 0
Net proceeds (repayments) on short-
term borrowings (1,135,000) (890,000)
Proceeds from long-term borrowings 320,000 0
Principal payments on long-term
borrowings (141,223) (780,300)
Increase in excess of outstanding
checks over bank balance 0
Dividends paid on common stock (See Note 3) (1,095,000) (644,577)
Advances from (repayments to)
related party (106,825)
----------- ----------
Net cash provided by (used in)
financing activities 3,302,685 (2,314,877)
----------- ----------
Net increase (decrease) in cash and
cash equivalents 1,614,823 340,894
Cash and cash equivalents
Beginning 132,344 39,261
---------- ----------
Ending $ 1,747,167 $ 380,155
========== ==========
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest $ 122,025 $ 106,210
========== ==========
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
September 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 September 30, 1998 and
September 30, 1997 (b) the results of operations for the nine months ended
September 30, 1998 and September 30, 1997 (c) the financial position at
September 30, 1998 and (d) the cash flows for the nine month periods ended
September 30, 1998 and September 30, 1997. Operating results for the three and
nine month periods ended September 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 September 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
$24,513 in the third quarter of 1998. Management fees for the nine-month period
ending September 30, 1998, amounted to $72,513.
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 third quarter of 1998. Rent paid for the nine-month period ending
September 30, 1998, amounted to $42,300.
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 through the third quarter totaling $1,095,000 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 nine-month and three
month periods ending September 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 nine month period ending September 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 third quarter of 1998 of $1,691,024 compares
with $3,402,985 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 $2,202,000 of the 1997 third quarter sales. In the third
quarter of 1998, the Company did not record any sales for major pipe lining
projects. 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 nine month period ending September 30, 1998, of
$8,913,006 compares with $11,784,641 in the same period in 1997. The 1997 nine
month period included approximately $7,826,000 in sales from the Kennecott
project. Net sales, excluding major projects, for the nine month period were
approximately $4,926,854 in 1998, which represents an increase of 24.5% when
compared to the adjusted 1997 sales for the same period of $3,958,641.
The Company's order backlog on September 30, 1998, was approximately
$790,000.
Cost of Sales. Cost of sales as a percentage of net sales was 81.0% in the
third quarter of 1998 compared with 70.2% 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 in the 1998 period. Gross profit decreased from
29.8% of net sales in the third quarter of 1997 to 19.0% of net sales in the
third quarter of 1998. In dollar terms, gross profit decreased from $1,013,096
in the third quarter of 1997, to $321,658 in the third quarter of 1998.
For the first nine months of 1998 cost of sales was 76.7% of net sales
compared with 67.4% 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 32.6% of net sales, $3,841,208, for the first nine months of 1997
to 23.3% of net sales, $2,081,182, for the same period in 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased from $283,861 (8.3% of net sales) in the third
quarter of 1997, to $523,973 (31.0% of net sales) in the same quarter of 1998.
For the nine month period ending September 30, these expenses increased from
$970,049 (8.2% of net sales) in 1997, to $1,422,397 (16.0% 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 and
anticipated acquisitions.
<PAGE>
Nonoperating Income and Expense. The major nonoperating expense, interest
expense, increased from $21,376 in the third quarter of 1997 to $27,288 in 1998.
This was due to higher borrowing during most of the 1998 third 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 third quarter of 1997, to $61,323 in the same quarter of 1998. This
increase resulted from interest income earned on the proceeds of the initial
public offering. The result was income of $34,035 from all nonoperating
activities for the third quarter of 1998 compared an expense from all
nonoperating activities of $21,258 in the same quarter in 1997.
For the first nine months interest expense increased from $105,511 in 1997,
to $122,025 in 1998. Interest income increased from $2,224 in 1997 to $185,027
in 1998. The result was an income from all nonoperating activities of $63,002 in
1998 compared with an expense from all nonoperating activities of $103,287 in
the same period in 1997.
Net Income. Net loss (before tax) for the third quarter of 1998 was
$168,280 ((9.9%) of net sales) and compares with income of $707,977 (20.8% of
net sales) for the same quarter in 1997. Although significantly less than the
previous year, the third quarter performance was slightly below expectations.
The decrease from 1997 was due primarily to the profitability levels of
previously mentioned large contracts. Net income (before tax) for the nine month
period ending September 30, 1998, of $721,787 (8.1% of net sales), compared with
$2,767,872 (23.5% 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 third quarter of 1997 would have been
$270,206. In the third quarter of 1998, when the Company was a C corporation,
its estimated income taxes were a negative $67,312.
It is estimated that income taxes for the nine months ending September 30,
1997, would have been $1,061,206 compared with $282,609 for the same period in
1998.
Cash Flows. The Company's cash flows from operating activities showed net
cash provided by operations of $1,309,028 in the first nine months of 1998. This
compares with the $2,959,166 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 and
receivables in 1998.
<PAGE>
The Company showed net cash used in investing activities of $2,996,890 in
the first nine months of 1998 compared with $303,395 in the same period of 1997.
The difference results from a large purchase of short term investments
(treasuries and commercial paper) with the proceeds of the initial public
offering.
The Company's cash flows from financing activities reflects the proceeds of
the initial public stock offering of $5,460,733. 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 nine months of 1998 compared with
$644,577 during the same period in 1997. The net proceeds of the stock offering
and $890,000 of repayments of short-term borrowings in 1997 account for the
$5,617,562 difference in cash provided by financing activities in the two
periods.
Liquidity and Sources of Capital.
At September 30, 1998, the Company had working capital of $5,617,293,
including $1,747,167 of cash and cash equivalents and $2,433,016 of short term
investments. The Company had income before income taxes of $721,787 for the
first nine months of 1998. As disclosed elsewhere in this Form 10-QSB, the
Company received the proceeds of its initial public offering of $5,460,733 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 terminated April 24, 1998.
(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: $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 89,165
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 43,982 (estimate)
$839,317 (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):
$5,460,683
(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.
On November 11, 1998, the Company signed a letter of intent to purchase the
operating assets of TJ Products, Inc., a privately-held manufacturing company
headquartered in West Jordan, Utah. TJ Products, Inc. produces rubber linings,
rubber moldings and urethane moldings for the mineral processing, electric
power, paper and U.S. military defense contract industries, and has annual sales
of approximately $4.0 million. Under the terms of the letter of intent,
Industrial Rubber Products will pay approximately $1.9 million for the
equipment, molds and intangible assets of TJ Products, Inc., and will also
purchase all useable inventories at the time of closing. The letter of intent
provides that TJ Products, Inc.'s President, Dean Wilson, will continue as
president of the acquired company and will join Industrial Rubber Products'
executive management team. The Company will finance the acquisition through a
combination of bank financing and proceeds from its initial public offering. The
Company will being the due diligence process immediately and expects to complete
a definitive purchase agreement by November 30, 1998. Final closing has been
scheduled for December 31, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 11 Statement Re: Computation of Earnings per Share.
Exhibit 27 Financial Data Schedule
(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: November 13, 1998 /s/ John M. Kokotovich
---------------------------------
John M. Kokotovich
Chief Financial Officer
Industrial Rubber Products, Inc.
Exhibit 11 - Statement Re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------
1998
----------
<S> <C>
Net income Per Share - basic:
Weighted average shares outstanding
during the period 3,672,462
----------
Net Income $ 439,178
----------
Net income per share - basic $ .12
==========
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 September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Industrial Rubber Products, Inc.'s Form 10-QSB for the quarterly period ended
September 30, 1998 and is qualified in its entirety by reference to such
consolidated statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,747,167
<SECURITIES> 2,433,016
<RECEIVABLES> 2,905,408
<ALLOWANCES> 87,644
<INVENTORY> 311,898
<CURRENT-ASSETS> 6,517,022
<PP&E> 3,132,123
<DEPRECIATION> 1,323,683
<TOTAL-ASSETS> 8,457,349
<CURRENT-LIABILITIES> 899,729
<BONDS> 298,028
0
0
<COMMON> 4,194
<OTHER-SE> 7,282,721
<TOTAL-LIABILITY-AND-EQUITY> 8,457,349
<SALES> 1,691,024
<TOTAL-REVENUES> 1,691,024
<CGS> 1,369,366
<TOTAL-COSTS> 1,893,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 87,664
<INTEREST-EXPENSE> 27,288
<INCOME-PRETAX> (168,280)
<INCOME-TAX> (67,312)
<INCOME-CONTINUING> (100,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100,968)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
