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 March 31, 1999 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 Street
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 - 4,184,500 shares as of April 30, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Industrial Rubber Products, Inc.
Condensed Balance Sheets
March 31, 1999 and December 31, 1998
<CAPTION>
March 31 December 31
1999 1998
Unaudited Audited
--------- ----------
Assets
<S> <C> <C>
Current Assets
Cash and Cash equivalents $ 522,800 $ 2,715,966
Marketable debt securities 0 1,642,784
Trade receivables less allowance
of $280,000 2,218,473 947,364
Due from Related Parties 0 0
Income Tax Refund Receivable 254,200 254,200
Inventories 1,827,154 408,731
Prepaid expenses 222,506 57,996
Deferred Taxes 133,000 133,000
---------- ----------
Total Current Assets 5,178,133 6,160,041
Cash Value of Life Insurance 142,192 135,166
Loan origination fees 35,000 0
Equipment Deposit 64,582 0
Non-Compete covenant 150,000 0
Goodwill 438,634 0
Accumulated Amortization (14,819) 0
Prepaid expenses 246,481 0
Other 0 23,884
----------- -----------
1,062,070 159,050
Deferred Taxes 357,988 207,000
----------- -----------
Property Plant Equipment
Investment in Subsidiaries 0 0
Leasehold Improvements 11,000 0
Land 359,000 10,000
Buildings 2,098,864 572,907
Automotive Equipment 690,728 458,759
Machinery & Equipment 7,041,533 2,030,453
----------- ----------
10,201,125 3,072,119
Less Accumulated Depreciation 1,539,521 1,372,420
---------- ----------
8,661,604 1,699,699
Total Assets ---------- ----------
15,259,795 8,225,790
---------- ----------
Liabilities and Stockholder's Equity
Current Liabilities
Bank note payable $7,000,000 $ 0
Current maturities of
long-term debt 59,202 174,263
Accounts payable 959,065 485,493
Accrued expenses 371,997 547,034
----------- -----------
Total Current Liabilities 8,390,264 1,206,790
----------- -----------
Long-term Debt, less current
maturities 411,567 329,108
----------- -----------
Stockholder's Equity
Common stock, $.001 par value 4,194 4,194
Additional Paid In Capital 5,605,832 5,605,832
Retained Earnings 864,239 1,090,605
---------- ---------
6,474,265 6,700,631
Less cost of Common Stock
reacquired 16,301 10,739
---------- -----------
6,457,964 6,689,892
---------- -----------
Total Stockholder's Equity $ 15,259,795 $ 8,225,790
=========== ===========
</TABLE>
<TABLE>
Industrial Rubber Products, Inc.
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 1,631,671 $ 3,816,776
Cost of Sales 1,490,967 2,755,588
----------- -----------
Gross profit 140,704 1,061,188
Selling, general and
administrative
expenses 530,542 415,187
----------- -----------
Operating income(loss) (389,838) 646,001
----------- -----------
Nonoperating Income
Income/Expense
Interest income 23,214 1,186
Interest expense(loss) (10,730) (36,431)
----------- -----------
12,484 (35,245)
----------- -----------
Income(loss)before
income taxes $ (377,354) $ 610,756
----------- -----------
Income tax expense(credit) (150,988) 0
----------- -----------
Net Income (Loss) (226,366) 0
----------- -----------
Pro Forma Information
(see Note 4)
Income Before Taxes 0 610,756
Provision for income
taxes 0 238,195
----------- -----------
Net Income(Loss) $ 0 372,561
=========== ===========
Basic earnings(loss)
per share (.05) .12
=========== ===========
Weighted average
shares outstanding 4,185,200 3,087,600
</TABLE>
<PAGE>
<TABLE>
Industrial Rubber Products, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended
March 31,
-------------------------
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Income(Loss) $ (226,366) $ 610,756
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 167,101 75,870
Amorization 14,819
Deferred Taxes (150,988)
Changes in working capital components
Net of effects from purchase of businesses
(Increase)Decrease in:
Receivables 26,891 (1,449,220)
Inventories 166,968 144,334
Prepaid expenses (349,342) (29,157)
Increase(Decrease) in:
Accounts payable and accrued
expenses (9,465) 324,478
----------- ----------
Net cash provided by (used in)
operating activities (360,382) (322,939)
----------- ----------
Cash Flows from Investing Activities
Purchase of property & equipment (229,531) (82,104)
Increase in cash value of life insurance (7,026) 0
Proceeds from maturity of marketable
debt securities 1,642,784 0
Purchase of businesses (9,951,265) 0
Other investing activities (64,582) 0
----------- ----------
Net cash used in investing activities (8,609,620) (82,104)
----------- ----------
Cash Flows From Financing Activities
Net proceeds (repayments) on short-
term borrowings 7,000,000 1,109,227
Proceeds from long-term borrowings 0 300,000
Principal payments on long-term
borrowings (182,602) (113,672)
Disbursements for loan origination fees (35,000) 0
Disbursements for common stock reacquired (5,562) 0
Dividends paid on common stock (214,799)
Advances from (repayments to)
related party 0 133,000
----------- ----------
Net cash provided by (used in)
financing activities 6,776,836 1,213,756
----------- ----------
Net increase (decrease) in cash and
cash equivalents (2,193,166) 808,713
Cash and cash equivalents
Beginning 2,715,966 132,344
----------- ----------
Ending $ 522,800 $ 941,057
=========== ==========
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest $ 12,273 $ 36,431
----------- ----------
Cash payments for income taxes $ 0 $ 0
=========== ==========
Supplemental Schedule of Noncash
Investing and Financing Activities
Acquisition of business:
Cash purchase price 9,951,265
Accounts receivable 1,298,000
Inventories 1,585,391
Other current assets 61,649
Property and equipment 6,899,475
Excess if cost over net assets
of acquired companies 414,750
Accounts payable assumed (308,000)
-----------
9,951,265
===========
</TABLE>
Industrial Rubber Products, Inc.
Notes to Condensed Financial Statements
March 31,1999
(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 March 31, 1999 and March
31, 1998 (b) the financial position at March 31, 1999 and (c) the cash flows for
the three month periods ended March 31, 1999 and March 31, 1998. Operating
results for the three month period ended March 31, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. The balance sheet presented as of December 31, 1998 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 10-KSB filed March
29, 1999.
2. Related Company Transactions. As of March 31, 1999 the Company did not
have any payables owed to Nelson Roofing, Inc., a company owned by the majority
stockholder of the Company. The Company provides management and administrative
services to Nelson Roofing, Inc. and receives a management fee for such
services. Management fees invoiced to Nelson Roofing, Inc. amounted to $18,979
in the first quarter of 1999.
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
$8,460 in the first quarter of 1999.
3. Stockholder's Equity. As described in Note 4 below, the Company through
March 31, 1998 was taxed as an S Corporation. The Company made distributions in
1998 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.
<PAGE>
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 for the 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. The Company's net sales for the first quarter of 1999 of
$1,631,671 showed a decrease of $2,185,105 from the $3,816,776 of sales in the
same period in 1998. In the first quarter of 1998, the Company was making
deliveries under a major pipelining contract for the Royal Oak Kemess project in
the amount of approximately $1,720,000. The Company did not have any major
projects in the first quarter of 1999. The Company discontinued operations at
its Clearfield, Utah, production facility in December of 1998. The replacement
facility, TJ Products in West Jordan, Utah, was acquired on January 20, 1999.
The Company, therefore, experienced reduced sales from its Utah facilities in
January of 1999 compared to the same period the previous year.
The Company's order backlog on March 31, 1999, including ITW's Irathane
Systems Division which was purchased on March 31, 1999, was approximately
$2,675,000.
Cost of Sales. Cost of sales as a percentage of net sales was 91.4% in the
first quarter of 1999 compared with 72.2% in same quarter of 1998. The increase
was due to the low sales volume and the effect of fixed overhead costs. During
the first quarter of 1999 the Company continued to depreciate the assets from
the Clearfield facility. These assets which were temporarily stored at the TJ
Products facility are now being relocated to Case Grande, Arizona, where the
Company is opening a new production facility, expected to be operational in June
of 1999.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses increased from $415,187 in the first quarter of 1998, to
$530,542 in the same quarter of 1999. The increase was due to the acquisition of
TJ Products in January of 1999, which had first quarter selling, general and
administrative expenses of $138,184. Selling, general and administrative
expenses other than TJ Products decreased in the first quarter of 1999 compared
to the same period of 1998 due to salary reductions and elimination of certain
positions.
<PAGE>
Nonoperating Income and Expense. The major nonoperating expense, interest
expense, decreased from $36,431 in the first quarter of 1998 to $10,730 during
the same period of 1999. This was primarily due to lower short-term borrowing.
Interest income increased from $1,186 in the first quarter of 1998 to $23,214
during the same period of 1999. This was due to the investment of the remaining
proceeds of the Initial Public Offering.
Net Income Before Taxes. Net income before tax for the period ended March
31, 1998, was $610.756, compared to a loss of $377,354 for the same period of
1999. The decrease was due to the lower sale volume and higher expenses
explained above.
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 1998 would have been
$238,195, resulting in net income of $372,561. During the first quarter of 1999
the Company had an income tax credit of $150,988, resulting in a net loss of
$226,366.
Cash Flows. The Company's cash flows from operating activities showed cash
used of $360,382, in the first quarter of 1999 compared with cash used of
$322,939 in the same period of 1998. The first quarter of 1999 included a net
loss of $226,366 and an increase in prepaids (from the TJ Products acquisition)
of $349,342. These were partially offset by depreciation and an inventory
reduction. The Company's cash flows from investing activities in the first
quarter of 1999 included the use of $9,951,265 for the purchase of TJ Products
on January 20, 1999 and ITW's Itathane Systems Division on March 31, 1999. This
was partially offset by proceeds from the maturity of marketable securities,
resulting in net cash used of $8,609,620. During the same period of 1998,
$82,104 was used for the purchase of equipment. Net cash provided by financing
activities in the first quarter of 1999 of $6,776,836 consists of a $7,000,000
bank loan to finance the purchase of the two businesses mentioned above reduced
by principal payments on long term debt, loan orgination fees, and common stock
repurchases. The net cash increase in the same quarter of 1998 consisted
primarily of a $1,109,227 borrowing increase on the line of credit.
<PAGE>
Liquidity and Sources of Capital. On March 31, 1999, the Company had net
working capital of $3,787,869, excluding a $7,000,000 six-month term loan from
U.S. Bank National Association. The term loan was included in the Credit
Agreement entered into by the Company and U.S. Bank on March 30, 1999. The
Credit Agreement also included a $2,000,000 revolving loan, which had no
outstanding balance as of March 31, 1999. Under the terms of the agreement, both
equipment and real estate appraisals will be conducted and it is anticipated
that the term loan will be converted to long-term debt prior to September 30,
1999. The proceeds of the loan, in addition to proceeds from the Initial Public
Offering, were used to purchase the assets of TJ Products, on January 20, 1999,
and Irathane Systems on March 31, 1999.
Management believes that the availability of future borrowings under the
Credit Agreement described above, along with cash flow from operations will be
sufficient to fund operations and expansion plans of the Company for at least 12
months. In order to meet its need beyond 12 months, the Company may be required
to raise additional capital.
Impact of the Year 2000 issue. The Company has established a team to assess
and address the possible exposures related to the Year 2000 (Y2K) issue and is
in the initial assessment phase. It will be using both in-house personnel and
outside resources to accomplish this task. The areas under investigation include
business computer systems, production equipment, vendor readiness and
contingency plans. The Company does not use internally developed computer
software and is therefore not anticipating major reprogramming efforts. The
Company's primary financial computing system has been assessed and is certified
Y2K compliant. There are several ancillary applications that may not currently
be Y2K compliant. The Company expects them to be compliant by mid-calendar 1999.
The majority of the Company's personal computers are currently Y2K compliant.
Those computers that may not currently be Y2K compliant are planned to be
upgraded or replaced in the ordinary course of business. None of these
replacements have been accelerated and the cost of replacements is not
anticipated to have a material effect on the Company's financial statements.
Equipment used for production or quality control does not use dates to control
operations. The costs of this examination to date have been expensed as incurred
and have not been material.
The Company mailed questionnaires to each of its significant vendors and
customers early in the second quarter of 1999 to determine the extent to which
the Company may be vulnerable to those third parties' failure to remediate their
own Y2K issues. It is anticipated that this assessment will be completed by the
end of the second quarter of 1999. The Company anticipates developing a
contingency plan once it has completed its assessment of significant vendor and
customer compliance. The Company anticipates the assessment will be completed by
the end of the third quarter of 1999. A contingency plan, if needed, will be
developed during the second half of 1999 to minimize the Company's exposure to
work slowdowns or business disruptions. In the event any vendors are not Y2K
compliant, the Company may seek new vendors to meet its production needs. Any
costs that may be incurred by the Company that are related to external Y2K
issues are unknown at this time (other than the immaterial costs of the
questionnaire itself). However, management expects that after reviewing and
evaluating the responses to the survey, it will be able to complete an
assessment of its Y2K exposure and estimate the costs associated with resolving
any Y2K issues.
Although the Company does not at this time expect a significant impact on
its financial position, results of operations and cash flows, the assessment has
not been completed and there can be no assurance that the systems of other
companies will be converted on a timely basis and will not have a corresponding
adverse effect on the Company.
<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 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 12,334
Registration Fee 2,375
Printing Expenses 23,645
Legal Fees and Expenses 100,841
Accounting Fees and Expenses 70,000
Blue Sky Fees and Expenses 14,849
Transfer Agent Fees and Expenses 3,152
Underwriter's Nonaccountable
Expense Allowance 126,000
Miscellaneous 9,723 (estimate)
$836,724 (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 (f)(4) (v):
$5,463,276
(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 of Water Jet Equipment $118,500
Acquisition of TJ Products $1,600,000
Acquisition of Irathane Systems $2,943,276
The Company was able to develop the capability of selling iron castings
through its representation of Ani Braken as described in the Company's Form
10-KSB filed March 29, 1999. The modest cost of obtaining this representation
permitted a portion of the Initial Public Offering proceeds to be used in the TJ
Products and Irathane Systems acquisitions. These acquisitions together provided
the Company with rubber mixing, molding and calendaring capability, enhanced its
product and process development and marketing capabilities and provided
satellite facilities and excess equipment to operate additional satellite
facilities. The acquisition of Irathane Systems also provided the Company with
the ability to supply a full range of urethane molded and lined products
consistent with its vertical expansion goals.
<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.
(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.
A report on Form 8-K was filed on February 4, 1999 regarding acquisition of
certain of the assets of Sonwil Products, Inc. d/b/a/ TJ Products.
<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: May ___, 1999 /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>
Three Months Ended
March 31,
----------------
1999
----------
<S> <C>
Primary and full diluted:
Weighted average shares outstanding
during the period 4,185,200
----------
Net Income $( 226,366)
----------
Net income per share - basic $ (.05)
==========
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. The Stock Options and Warrants discussed
in the Company's Form SB-2 were antidilutive for the period ending March 31,
1999.
<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
March 31, 1999 and is qualified in its entirety by reference to such
consolidated statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 522,800
<SECURITIES> 0
<RECEIVABLES> 2,752,673
<ALLOWANCES> 280,000
<INVENTORY> 1,827,154
<CURRENT-ASSETS> 5,178,133
<PP&E> 10,201,125
<DEPRECIATION> 1,539,521
<TOTAL-ASSETS> 15,259,795
<CURRENT-LIABILITIES> 8,390,264
<BONDS> 411,567
0
0
<COMMON> 4,194
<OTHER-SE> 6,453,770
<TOTAL-LIABILITY-AND-EQUITY> 15,259,795
<SALES> 1,631,671
<TOTAL-REVENUES> 1,631,671
<CGS> 1,490,967
<TOTAL-COSTS> 2,021,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 280,000
<INTEREST-EXPENSE> 10,730
<INCOME-PRETAX> (377,354)
<INCOME-TAX> (150,988)
<INCOME-CONTINUING> (226,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (266,366)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
