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, 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 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. X Yes 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 - 4,144,000 shares as of October 31, 1999.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Industrial Rubber Products, Inc.
Condensed Balance Sheets
September 30, 1999 and December 31, 1998
<CAPTION>
September 30 December 31
1999 1998
Unaudited
------------ ----------
Assets
<S> <C> <C>
Current Assets
Cash and Cash equivalents ................. $ 963,605 $ 2,715,966
Marketable debt securities ................ 0 1,642,784
Trade receivables, less allowance for
doubtful accounts of $308,090 in 1999
And $280,000 in 1998 ..................... 2,617,828 947,364
Income Tax Refund Receivable .............. 0 254,200
Inventories ............................... 1,357,233 408,731
Prepaid expenses .......................... 468,375 57,996
Deferred taxes ............................ 133,000 133,000
------------ ------------
Total current assets ...................... 5,540,041 6,160,041
Other Assets
Cash value of life insurance ............. 151,558 135,166
Loan origination fees .................... 35,000 0
Non-Compete covenant ..................... 150,000 0
Goodwill ................................. 666,983 0
Accumulated Amortization ................. (48,502) 0
Prepaid expenses ......................... 159,186 0
Other .................................... 0 23,884
------------ ------------
Total other assets ........................ 1,114,225 159,050
Deferred Taxes ............................ 521,192 207,000
Property Plant and Equipment
Leasehold Improvements .................... 11,000 0
Land ...................................... 532,761 10,000
Buildings ................................. 2,021,629 572,907
Automotive equipment ...................... 634,935 458,759
Machinery and equipment ................... 6,860,495 2,030,453
------------ ------------
10,060,820 3,072,119
Less Accumulated depreciation ............... 1,973,382 1,372,420
------------ ------------
Net Property and Equipment .................. 8,087,438 1,699,699
------------ ------------
$ 15,262,896 $ 8,225,790
============ ============
Liabilities and Stockholder's Equity
Current Liabilities
Bank note payable ......................... $ 7,000,000 $ 0
Current maturities of
long-term debt ..................... 54,538 174,263
Accounts payable .......................... 916,345 485,493
Accrued expenses .......................... 762,437 547,034
------------ ------------
Total current liabilities .......... 8,733,320 1,206,790
------------ ------------
Long-term Debt, less current
maturities ................................ 386,829 329,108
------------ ------------
Stockholder's Equity (Note 3)
Common stock, $.001 par value;
authorized 25,000,000 shares;
issued 4,194,000 shares .................. 4,194 4,194
Additional paid-in capital ................ 5,605,832 5,605,832
Cumulative Translation Adjustment
(Note 6) .............................. 8,348 0
Retained earnings ......................... 613,995 1,090,605
------------ ------------
6,232,369 6,700,631
Less cost of shares of common
Stock reacquired ........................ 89,622 10,739
Total Stockholder's Equity .................. 6,142,747 6,689,892
------------ ------------
$ 15,262,896 $ 8,225,790
============ ============
</TABLE>
See notes to the condensed financial statements.
<TABLE>
Industrial Rubber Products, Inc.
Condensed Statements of Income
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ------------------
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Net Sales $3,639,396 $ 1,691,024 $ 9,593,830 $ 8,913,006
Cost of Sales 3,067,080 1,369,366 7,648,873 6,831,824
----------- ----------- ----------- -----------
Gross profit 572,316 321,658 1,944,957 2,081,182
Selling, general and
administrative
expenses 930,406 523,973 2,460,185 1,422,397
----------- ----------- ----------- -----------
Operating income
(loss) (358,090) (202,315) (515,228) 658,785
----------- ----------- ----------- -----------
Nonoperating Income
Expense
Interest income 7,143 61,323 31,920 185,027
Interest expense (151,760) (27,288) (310,809) (122,025)
Loss on Disposal
of assets 0 0 (234) 0
----------- ----------- ---------- -----------
(144,617) 34,035 (279,123) 63,002
----------- ----------- ----------- -----------
Income (Loss) before
taxes (502,707) (168,280) (794,351) 721,787
----------- ----------- ----------- -----------
Income tax expense
(credit) (202,307) (67,312) (317,741) 44,414
----------- ----------- ----------- -----------
Net Income (Loss) before
Pro Forma Taxes (300,400) (100,968) (476,610) 677,373
----------- ----------- ----------- -----------
Provision for Pro
forma income taxes
(see Note 4) 0 0 0 238,195
----------- ----------- ----------- -----------
Net Income (Loss) (300,400) (100,968) (476,610) 439,178
======== ======= ========= ========
Basic earnings (loss)
per share
(See Note 5) (.07) (.02) (.11) .12
=========== =========== =========== ===========
Weighted average
shares outstanding 4,158,065 4,194,000 4,175,223 3,672,462
</TABLE>
See notes to the condensed financial statements.
<TABLE>
Industrial Rubber Products, Inc.
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months ended
September 30,
-------------------------
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss) ...................... $ (476,610) $ 677,373
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation ....................... 600,962 264,420
Amortization ....................... 48,502 0
Deferred Taxes ..................... (314,192) 0
Changes in working capital components
(Increase)Decrease in:
Receivables ...................... (302,559) 274,893
Inventories ...................... 552,009 528,465
Prepaid expenses ................. (540,339) 36,170
Increase(Decrease) in:
Accounts payable and accrued
expenses ....................... (42,710) (472,293)
----------- -----------
Net cash provided by (used in)
operating activities .................... (474,937) 1,309,028
----------- -----------
Cash Flows from Investing Activities
Disbursements for short term investments 0 (2,433,016)
Purchase of property & equipment ....... (327,426) (554,767)
Proceeds from maturity of
marketable debt securities ........... 1,642,784 0
Purchase of businesses ................. (9,282,735) 0
Decrease in other assets ............... 23,884 0
(Increase) decrease in cash value
of life insurance .................... (16,392) (9,107)
----------- -----------
Net Cash provided by (used in)
investing activities .................... (7,959,885) (2,996,890)
----------- -----------
Cash Flows From Financing Activities
Net proceeds of Stock Offering ......... 0 5,460,733
Net proceeds (repayments) on short-
term borrowings ....................... 7,000,000 (1,135,000)
Proceeds from long-term borrowings ..... 0 320,000
Principal payments on long-term
borrowings ............................ (212,004) (141,223)
Disbursements for loan
origination fees ..................... (35,000) 0
Disbursements for common
stock reacquired ..................... (78,883) 0
Increase in excess of outstanding
checks over bank balance .............. 0 0
Dividends paid on common stock
(See Note 3) ..................... 0 (1,095,000)
Advances from (repayments to)
related party (See Note 2)............ 0 (106,825)
----------- -----------
Net cash provided by (used in)
financing activities .................... 6,674,113 3,302,685
(Increase) Decrease in Foreign
Currency Adjustment (Note 6) ......... 8,348 0
Net increase (decrease) in cash and
cash equivalents ....................... (1,752,361) 1,614,823
Cash and cash equivalents
Beginning .............................. 2,715,966 132,344
----------- -----------
Ending ................................. $ 963,605 $ 1,747,167
=========== ===========
Supplemental Disclosures of Cash Flow
Information
Cash payments for interest ............. $ 264,169 $ 122,025
=========== ===========
Cash payments for income taxes ......... $ 0 $ 257,179
=========== ===========
</TABLE>
See notes to the condensed financial statements.
Supplemental Schedule of Noncash Investing and Financing Activities
Acquisition of business
Cash purchase price $ 9,282,735
Accounts Receivable 1,113,705
Inventories 1,500,511
Other current assets 29,226
Property and Equipment 6,661,275
Excess of cost over net assets
of Acquired companies 666,983
Accounts payable and accrued
items assumed (688,965)
--------------
$ 9,282,735
Industrial Rubber Products, Inc.
Notes to Condensed Financial Statements
September 30, 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 September 30, 1999 and
September 30, 1998 (b) the results of operations for the nine months ended
September 30, 1999 and September 30, 1998 (c) the financial position at
September 30, 1999 and (d) the cash flows for the nine month periods ended
September 30, 1999 and September 30, 1998. Operating results for the three and
nine month periods ended September 30, 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.
Note 2. Related Company Transactions. As of September 30, 1999, 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
$36,561 in the third quarter of 1999. Management fees for the nine-month period
ending September 30, 1999, amounted to $92,011.
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 third quarter of 1999. Rent paid for the nine-month period ending
September 30, 1999, amounted to $25,380.
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.
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.
Note 6. Total comprehensive income. For the nine month period ended
September 30, 1999, total comprehensive income/loss was a loss of $471,601. For
the quarter ended September 30, 1999 total comprehensive loss was $298,622. The
difference between total comprehensive income and net income was due to foreign
currency transaction adjustment net of tax.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Net Sales. Net sales for the third quarter of 1999 of $3,639,396 compares
with $1,691,024 in the same quarter of 1998. The increase in sales compared with
1998 relates to the acquisition of certain of the assets of the Irathane Systems
Division of Illinois Tool Works, Inc., (Irathane Systems) which accounted for
approximately $2,000,000 in net sales during the quarter, and the acquisition of
certain of the assets of Sonwil Products, Inc., d/b/a TJ Products (TJ Products)
which accounted for approximately $750,000 in net sales. These increases were
partially offset by the absence of any major pipelining projects. The
performance of and the timing of shipments under these large pipelining
contracts cause fluctuations in the Company's quarterly operating results.
Net sales for the nine month period ending September 30, 1999, of
$9,593,830 compares with $8,913,006 in the same period in 1998. The 1999 period
includes net sales from the Irathane Systems acquisition of approximately
$4,648,000 and about $2,140,000 from the TJ Products acquisition. These
increases were offset by the absence of any major pipelining projects in 1999.
The Company's order backlog on September 30, 1999, was approximately
$1,411,000.
Cost of Sales. Cost of sales as a percentage of net sales was 84.3% in the
third quarter of 1999 compared with 81.0% in same quarter of 1998. The increase
was the result of low margins at TJ Products, which had cost of sales of 96.5%
for the quarter. Cost of sales without TJ Products was 81.0% for the quarter,
the same as the third quarter of 1998. Gross profit decreased from 19.0% of net
sales in the third quarter of 1998 to 15.7% of net sales in the same quarter of
1999. In dollar terms, gross profit increased from $321,658 in the third quarter
of 1998, to $572,316 in the third quarter of 1999.
For the first nine months of 1999 the cost of sales was 79.7% of net sales
compared with 76.7% for the same period in 1998. Again, the increase was the
result of TJ PRoducts, which had cost of sales of 91.6% for the nine-month
period. Excluding TJ Products, cost of sales for the nine month period was
76.3%, nearly the same as the nine month period of 1998. Gross profit decreased
from 23.3% of net sales, $2,081,182, for the first nine months of 1998 to 20.3%
of net sales, $1,944,957, for the same period in 1999.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased from 31.0% of net sales in the third quarter
of 1998, to 25.6% of net sales in the same quarter of 1999. In dollar terms, the
expenses increased from $523,973 in 1998, to $930,406 for the third quarter of
1999. For the nine month period ending September 30, these expenses increased
from $1,422,397 (16.0% of net sales) in 1998, to $2,460,185 (25.6% of net sales)
in 1999. These increases were due primarily to increased staffing related to the
Company's Initial Public Offering and from overhead associated with the TJ
Products and Irathane Systems acquisitions.
Nonoperating Income and Expense. The major nonoperating expense, interest
expense, increased from $27,288 in the third quarter of 1998 to $151,760 in the
same quarter of 1999. This increase was the result of the $7 million dollar bank
note entered into on March 30 1999, to finance the acquisition of Irathane
Systems. For the quarter, interest income decreased from $61,323 in 1998 to
$7,143 in 1999. The 1998 interest income reflects the investment of the initial
public offering proceeds, which were used primarily for acquisitions in the
first quarter of 1999.
For the nine months ended September 30, interest expense increased from
$122,025 in 1998, to $310,809 in 1999. Again the $7 million bank note was the
primary reason. Interest income decreased from $185,027 in 1998 to $31,920 in
1999. This decrease results from the initial public offering proceeds, which
were earning interest in 1998 prior to be used in the first quarter of 1999.
Net Income. The net loss (before tax) for the third quarter of 1999 was
$502,707 (13.8% of net sales) and compares with $168,280 (10% of net sales) for
the same quarter in 1998. The third quarter loss was due primarily to reduced
sales to major taconite mining customers during August and September because of
their production shutdowns. The net loss (before tax) for the nine-month period
ending September 30 of $794,351, compares to net income (before tax) of $721,787
in the same period in 1998.
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. Income taxes for the third quarter of 1999 loss resulted in a
credit of $202,307, compared with a credit of $67,312 for the same quarter of
1998.
It is estimated that income taxes for the nine months ending September 30,
1998, would have been $282,609 compared with a credit of $317,741 for the same
period in 1999.
Cash Flows. The Company's cash flows from operating activities showed net
cash used of $474,937 for the first nine months of 1999. This compares with
$1,309,028 provided by operations in the same period in 1998. The major
differences were the net loss of $476,610 in 1999 compared with net income of
$677,373 in 1998, and working capital requirements of $462,526 in 1999 compared
with $367,235 provided by working capital in 1998.
The Company showed net cash used in investing activities of $7,959,885 in
the first nine months of 1999, compared with $2,996,890 in the same period of
1998. This increase is the result of $9,282,735 for the purchase of TJ Products
and Irathane Systems, partially offset by proceeds from marketable securities of
$1,642,784.
The Company's cash flows from financing activities for the first nine
months of 1999 were $6,674,113, which includes $7,000,000 of bank borrowings on
March 30, 1999. This compares with $3,302,685 during the same period of 1998
which includes proceeds of the initial public stock offering of $5,460,733
partially offset by dividends of $1,095,000 and repayments on short-term
borrowings of $1,135,000.
Liquidity and Sources of Capital.
At September 30, 1999, the Company had working capital of $3,806,721,
excluding a $7,000,000 bank note which has been extended to March 31, 2000. As
disclosed elsewhere in this Form 10-QSB, the Company used the proceeds of this
borrowing to purchase the assets of ITW's Irathane System division on March 31,
1999. Management believes that the conversion of this note to long-term
borrowing, cash flow from operations, and other 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.
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. It has used both in-house
personnel and outside resources to accomplish this task. The areas reviewed
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 are not currently
Y2K compliant, but will be made compliant during the fourth quarter. These
include upgrades of office product software for several personal computers. The
majority of the Company's personal computers are Y2K compliant. Those that are
not are planned to have fourth quarter upgrades or replaced in the ordinary
course of business. None of these replacements have been accelerated and the
cost of replacement will not to have a material effect on the Company's
financial statements. Equipment used for production or quality control do 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 has mailed questionnaires to each of its significant suppliers
and customers to assess the extent to which the Company may be vulnerable to
those third parties' failure to remediate their own Y2K issues. The assessment
has been completed and the Company has determined that its exposure is minimal
and alternative arrangements are available if necessary. The Company has
therefore determined that a formal contingency plan will not be necessary.
The Company does not at this time expect a significant impact on its
financial position, results of operations and cash flows, however there can be
no assurance that the systems of other companies have been properly assessed and
reported and will not have a corresponding adverse effect on the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
None
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.
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 10, 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>
Nine Months Ended
September 30,
----------------
1999
----------
<S> <C>
Net income Per Share - basic:
Weighted average shares outstanding
during the period 4,175.223
----------
Net Income (Loss) $ (476,610)
----------
Net income (loss) per share - basic $ (.11)
==========
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, 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
September 30, 1999 and is qualified in its entirety by reference to such
consolidated statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 963,605
<SECURITIES> 0
<RECEIVABLES> 2,925,926
<ALLOWANCES> 308,098
<INVENTORY> 1,357,233
<CURRENT-ASSETS> 5,540,041
<PP&E> 10,060,820
<DEPRECIATION> 1,973,382
<TOTAL-ASSETS> 15,262,896
<CURRENT-LIABILITIES> 8,733,320
<BONDS> 386,829
0
0
<COMMON> 4,194
<OTHER-SE> 6,138,553
<TOTAL-LIABILITY-AND-EQUITY> 15,262,896
<SALES> 3,639,396
<TOTAL-REVENUES> 3,639,396
<CGS> 3,067,080
<TOTAL-COSTS> 3,997,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 308,098
<INTEREST-EXPENSE> 151,760
<INCOME-PRETAX> (502,707)
<INCOME-TAX> (202,307)
<INCOME-CONTINUING> (300,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (300,400)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
