<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended May 31, 1995 Commission File Number 0-8740
------------------ ----------------
Rule Industries, Inc.
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2384630
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
70 Blanchard Road, Burlington, Massachusetts 01803
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 272-7400
--------------
None
------------------------------------------------------------
Former name, former address and former fiscal year,
if changed 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 period 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
------- -------
On July 13, 1995, there were 2,640,532 shares of the Registrant's common stock
outstanding.
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<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Part I - Financial Information
- ------------------------------
Consolidated Condensed Balance Sheets, May 31, 1995 and August 31, 1994.
Consolidated Condensed Statements of Income, Three Months and Nine Months
Ended May 31, 1995 and 1994.
Consolidated Condensed Statements of Cash Flow, Nine Months Ended May 31,
1995 and 1994.
Notes to Consolidated Condensed Financial Statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Part II - Other Information
- ---------------------------
Item 1: Legal Proceedings
See Note 10 to the Consolidated Condensed Financial Statements
(Part I).
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits
1. None
B. Reports on Form 8-K
1. On June 13, 1995, the Company filed a Report on Form 8-K as of
June 7, 1995 stating that the Company had terminated its
auditors, Deloitte and Touche LLP, and engaged KPMG Peat Marwick.
-2-
<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Part I - Financial Information
Consolidated Balance Sheets
(In Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
May 31, 1995 August 31, 1994
------------ ---------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,695 $ 56
Trade accounts receivable, net 11,267 11,866
Inventories:
Raw materials 10,135 8,788
Work-in-process 1,583 1,356
Finished goods 10,369 9,032
Prepaid expenses and other current assets 864 1,180
------- -------
Total Current Assets 35,913 32,278
------- -------
Property, Plant and equipment, net 13,433 12,530
------- -------
Other Assets:
Deferred charges, net 374 758
Goodwill, patents, licenses, formulas, trademarks,
and other intangibles, net 19,667 20,190
Other 885 887
------- -------
Total Other Assets 20,926 21,835
------- -------
$70,272 $66,643
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
(continued)
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<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Part I - Financial Information
Consolidated Balance Sheets
(In Thousands of Dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, 1995 August 31, 1994
------------- ----------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Current portion of debt (Note 8) $ 8,749 $ 7,551
Accounts payable 7,759 9,293
Accrued expenses 4,612 5,372
Amounts due to Disston and its Shareholder (excluding
Subordinated Debentures) 1,410 2,520
------- -------
Total Current Liabilities 22,530 24,736
------- -------
Long-Term Debt (Note 8) 32,101 27,188
------- -------
Deferred Income Taxes (Note 6) 1,687 1,389
------- -------
Redeemable Convertible Preferred Stock:
Series A and B, 8% cumulative. $100 par
value, authorized 100,000 shares,
issued and outstanding 36,100 shares
at August 31, 1994 (Note 9) 3,610
-------
Commitments and Contingencies (Note 10)
Common Stockholders' Equity:
Common stock, $.01 par value, authorized
5,000,000 shares, issued 3,316,173 and
2,895,044 shares, respectively 33 29
Additional paid-in capital 4,905 1,335
Retained earnings 12,129 11,432
Less: 675,641 and 672,784 shares, respectively,
held in treasury, at cost ( 3,113) ( 3,076)
------- -------
Total Common Stockholders' Equity 13,954 9,720
------- -------
$70,272 $66,643
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
(concluded)
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<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Income
(Unaudited)
(In Thousands of Dollars, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended May 31, Ended May 31,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 18,026 $ 20,540 $ 52,844 $ 42,979
--------- --------- --------- ---------
Cost of Expenses:
Cost of revenues 12,575 13,111 37,200 28,785
Selling, general and administrative expense 3,913 4,735 11,546 9,981
U.S. Anchor litigation credit (2,463)
--------- --------- --------- ---------
16,488 17,846 48,746 36,303
--------- --------- --------- ---------
Operating Income 1,538 2,694 4,098 6,676
--------- --------- --------- ---------
Other Expense (Income):
Interest expense 1,056 895 3,028 2,303
(Gain) Loss on sale of investment (Note 4) 126 (864) 182
--------- --------- --------- ---------
1,056 1,021 2,164 2,485
--------- --------- --------- ---------
Income before Income Taxes 482 1,673 1,934 4,191
Provision for Income Taxes 145 624 625 983
--------- --------- --------- ---------
Income Before Extraordinary Item 337 1,049 1,309 3,208
Extraordinary Item:
Costs related to early extinguishment of debt
(net of income tax credit of $316,000) (Note 8) 588
--------- --------- --------- ---------
Net Income 337 1,049 721 3,208
Less Dividends on Preferred Stock (Note 9) 72 24 216
--------- --------- --------- ---------
Income Applicable to Common Stockholders $ 337 $ 977 $ 697 $ 2,992
========= ========= ========= =========
Weighted Average Number of Common
Shares Outstanding:
Primary 2,708,076 2,216,389 2,671,845 2,211,941
========= ========= ========= =========
Fully Diluted 2,708,076 2,617,500 2,761,471 2,613,052
========= ========= ========= =========
Primary Earnings Per Common Share:
Before extraordinary item $ .12 $ .44 $ .48 $ 1.35
Extraordinary item (.22)
------ ------ ------ -------
Total Primary Earnings Per Common Share: $ .12 $ .44 $ .26 $ 1.35
====== ====== ====== =======
Fully Diluted Earnings Per Common Share:
Before extraordinary item $ .12 $ .40 $ .47 $ 1.23
Extraordinary item (.21)
------ ------ ------ -------
Total Fully Diluted Earnings Per Common Share $ .12 $ .40 $ .26 $ 1.23
====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flow
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended May 31,
--------------
1995 1994
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 721 $ 3,208
Depreciation 1,341 1,066
Amortization 1,483 1,072
Amortization of discount on debt 124
Write off of deferred financing costs 418 44
Deferred income taxes 298 569
Gain on sale of investment in marketable securities ( 864)
Other non-cash items 225
Accrual for estimated litigation costs
related to U.S. Anchor ( 2,663)
Working capital items ( 4,976) 6,637
--------- --------
Net Cash Provided by (Used in) Operating Activities ( 1,455) 10,158
--------- --------
Cash Flows from Investing Activities:
Acquisitions of property and equipment ( 2,244) ( 1,558)
Acquisition - net assets acquired ( 14,400)
Proceeds from sale of investment in
marketable securities 1397
Goodwill, patents, trademarks and other intangibles (857)
Decrease (increase) in non-current assets 5 ( 760)
Payments of amounts due Disston and its Shareholder ( 960)
--------- --------
Net Cash Used in Investing Activities ( 2,659) ( 16,718)
--------- --------
Cash Flows from Financing Activities:
Proceeds from short-term borrowings 21,554 50,319
Repayment of short-term borrowings (15,967) (42,665)
Proceeds from long-term borrowings 7,020 1,152
Repayment of long-term debt ( 6,636) ( 660)
Preferred dividends paid ( 24) ( 216)
Deferred finance charges ( 259) 47
Proceeds from issuance of stock options, net 49
Write off discount on debt 16
--------- --------
Net Cash Provided by Financing Activities 5,753 7,977
--------- --------
Net Increase in Cash 1639 1,417
Cash, beginning of period 56 57
--------- --------
Cash, end of period $ 1,695 $ 1,474
========= ========
Cash payments for interest and income taxes were as follows:
Interest $ 2,445 $ 1,896
========= ========
Income taxes $ 68 $ 268
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
1. BASIS OF PRESENTATION
---------------------
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its financial
position as of May 31, 1995 and the results of operations and cash flows for
the nine month periods ended May 31, 1995 and 1994. The accounting policies
followed by the Company are set forth in Note 2 to the Company's financial
statements in the Rule Industries, Inc. 1994 Annual Report.
2. RESULTS OF OPERATIONS
---------------------
Because of the seasonality of the Company's business segments, the results
of operations for the nine months ended May 31, 1995 and 1994 are not
indicative of the results to be expected for the full fiscal year.
3. EARNINGS PER SHARE
------------------
Primary earnings per share are computed using the weighted average number of
common and common equivalent shares (dilutive options and warrants)
outstanding. In addition, common and common equivalent shares include 401,129
shares of common stock issued upon the conversion of preferred stock in
November, 1994. Fully diluted earnings per share assume that the preferred
stock was converted into common stock as of the beginning of the fiscal year
and reflects the elimination of dividends, if such conversion is not
antidilutive.
4. SALE OF INVESTMENT
------------------
In September 1994, the Company sold its investment in 171,983 shares of
common stock of DataMarine International, Inc. (DataMarine) for $1,397,000.
The carrying value of this investment was $533,000 at August 31, 1994,
resulting in a pre-tax gain of $864,000.
5. ENGINEERING AND DEVELOPMENT EXPENSES
------------------------------------
Engineering and development costs are expensed when incurred. The portion
which relates to research and development is included in selling, general and
administrative expenses, and the portion relating to manufacturing
engineering is included in cost of revenues. The following summarizes the
amount of engineering and development expenses reflected in the financial
statements:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended May 31, Ended May 31,
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and administrative
expense $150 $114 $437 $402
Cost of revenues 177 169 513 472
---- ---- ---- ----
Total engineering and development
expense $327 $313 $950 $874
==== ==== ==== ====
</TABLE>
6. INCOME TAXES
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under SFAS No. 109, deferred tax assets and liabilities are established for
the temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities using enacted tax rates in the
years in which the differences are expected to reverse.
-7-
<PAGE>
At May 31, 1995 and August 31, 1994, the Company had a net operating loss
carryforward available for federal income tax purposes of approximately
$355,000 expiring through 2008. In addition, the Company had state and other
tax credit carryforwards of approximately $634,000 and an AMT carryforward of
$306,000, which may be used to offset future income taxes, if any.
The significant differences between statutory and effective income tax rates
are due to the non-taxable earnings of the FSC subsidiary and the reversal of
the U.S. Anchor litigation accrual in the quarter ended November 30, 1993, a
substantial portion of which was non-taxable.
7. ACQUISITION
-----------
In November 1993, the Company's subsidiary, Rule Manufacturing, Inc., entered
into an agreement to acquire certain assets of The Disston Company (Disston).
Under the terms of the agreement, the assets were acquired at various dates
beginning January 1994. On March 1, 1994, the Company began selling Disston
product and, accordingly, results of operations of Disston are included from
that date. On May 20, 1994, the Company completed the acquisition and
concluded the physical consolidation of Disston's operations prior to August
31, 1994.
The purchase was accounted for as a purchase with a final purchase price of
$35,915,000. Included in the purchase price was the assumption of accounts
payable and accrued liabilities of $4,699,000, and amounts payable to Disston
of $4,298,000 which includes an estimated amount for funding the completion
of an arbitration proceeding between Disston and its former owner, the
outcome of which is uncertain. Depending upon the outcome of such proceeding,
the Company may receive certain amounts from Disston before any other
distributions by Disston. Such contingent recovery has not been reflected in
the financial statements of the Company.
The following unaudited proforma information has been prepared as if the
operations of Disston had been combined at the beginning of the period
presented and are not indicative of the prospective results of operations had
Disston and Rule been a consolidated entity.
<TABLE>
<CAPTION>
(In Thousands of Dollars,
Except Per Share Data)
Nine Months Ended
May 31, 1994
-----------------
<S> <C>
Revenues $ 57,002
=========
Net Income $ 3,440
=========
Net Income Applicable to Common Stockholders $ 3,224
=========
Weighted Average Number of Common Shares Outstanding
Primary 2,211,941
=========
Fully Diluted 2,613,052
=========
Earnings Per Common Share:
Primary $ 1.56
=========
Fully Diluted $ 1.23
=========
</TABLE>
-8-
<PAGE>
8. DEBT
------
Debt consisted of the following at May 31, 1995 and August 31, 1994:
<TABLE>
<CAPTION>
May 31, 1995 August 31, 1994
------------ ---------------
<S> <C> <C>
Senior Indebtedness(a):
Term Loans $ 6,988,000 $ 3,075,000
Revolver Debt 17,400,000 11,813,000
Subordinated Notes:
12 1/2% Senior Subordinated Notes 11,090,000 11,039,000
RemGrit Notes(b) 2,000,000 3,399,000
10% Senior Subordinated Notes(c) 2,117,000
6 1/2% Subordinated Debentures(d) 3,372,000 3,296,000
----------- -----------
40,850,000 34,739,000
Less current portion 8,749,000 7,551,000
----------- -----------
$32,101,000 $27,188,000
=========== ===========
</TABLE>
(a) Term Loan and Revolver Debt
On September 23, 1994, the Company entered into a long-term credit
agreement with a new senior lender, the proceeds of which were used to
repay the existing revolving debt, certain term loans, and retire the
balance remaining on the Senior Subordinated Notes issued in June
1994. The new agreement provides for total borrowings of up to
$26,000,000, based upon eligible assets including inventories, trade
accounts receivable, and machinery and equipment. The facility
consists of a $17,500,000 three-year revolving loan, a $6,000,000 term
loan, and a $2,500,000 term loan available for new equipment
financing. Term borrowings under the agreement are to be repaid
quarterly over five years and bear interest at prime plus 3/4%.
Revolver borrowings bear interest at prime plus 1/2% or LIBOR plus 2
1/2%. The revolving credit facility expires September 15, 1996 and is
renewable annually thereafter. The term loan with the senior lender
expires on the earlier of December 31, 1999 or the expiration of the
revolving credit facility.
Under the terms of the credit agreement, the Company, among other
things, is restricted from paying dividends and is required to meet
certain financial covenants and ratios.
As of May 31, 1995 the Company was not in compliance with certain
financial ratios under the above credit agreement, which were waived
by the Company's senior institutional lender.
(b) RemGrit Notes
In conjunction with the 1991 acquisition of its RemGrit product line,
the Company's RemGrit Abrasive Tools, Inc. subsidiary was indebted to
the seller in the amount of $3,399,000 at August 31, 1994, which was
scheduled to mature in December 1994. In November 1994, the Company
made a $1,149,000 payment to the seller and issued a new note for the
balance outstanding of $2,000,000. This note, which originally
matured on February 1, 1996, was subsequently replaced with a new note
payable on demand which bears interest payable quarterly at the annual
rate of prime plus 1 1/2%.
-9-
<PAGE>
(c) 10% Senior Subordinated Notes
In June 1994, the Company's wholly-owned subsidiary, Rule Cutting
Tools, Inc., issued $2,180,000 of Senior Subordinated Notes due May
31, 1995, with immediately exercisable warrants for the purchase of
54,500 shares of Rule common stock. The warrants are exercisable
until May 31, 1997 at a price of $10 per share. In September 1994,
the Company repaid these Notes in their entirety from the proceeds of
the sale of DataMarine common stock and the refinancing of senior
indebtedness.
(d) Amounts Due to Disston and its Shareholder
Consideration for the Disston acquisition (Note 7) included the issuance
of a 6 1/2% $2,000,000 subordinated debenture to Disston and a
$1,600,000 subordinated debenture to the principal shareholder of
Disston in connection with a non-competition agreement. Both debentures
bear interest at 6 1/2% per annum, and have been recorded at $3,296,000,
reflecting an interest rate of 10%, which management believes
represented the prevailing rate for similar instruments. The debentures
were originally scheduled to be repaid in five annual principal payments
of $720,000, beginning May 20, 1995. As a result of the Company not
making its first scheduled principal payment, the notes have been
modified to be payable on demand. Accordingly, the total amounts of
these debentures have been classified as current liabilities as of May
31, 1995. In addition, the paid interest rates on the debentures have
increased from 6 1/2% to 8 1/8%.
Debt maturities for the period from June 1, 1995 through August 31, 199
are as follows:
Three Months Ending August 31,
------------------------------
<TABLE>
<CAPTION>
<S> <C>
1995 $ 5,842,000
Year Ending August 31,
----------------------
1996 5,156,000
1997 26,270,000
1987 1,531,000
1999 1,531,000
</TABLE>
During the quarter ended November 30, 1994, the Company charged $904,000
($588,000, net of income taxes) as an extraordinary expense, consisting of
an early termination fee of $470,000 to the Company's previous senior
institutional lender and the write-off of unamortized deferred finance
costs related to refinancings.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
--------------------------------------
In December 1991, the shareholders of the Company approved the creation of
a new class of preferred stock, and the Company privately placed 31,100
shares of Series A 8% cumulative convertible redeemable stock, $100 par
value, for an aggregate price of $3,110,000 in cash. On December 24, 1992,
the Company privately placed an additional 5,000 shares of Series B 8%
cumulative convertible redeemable preferred stock of $100 par value for an
aggregate price of $500,000 in cash. In November 1994, the Company
exercised its conversion option and redeemed all preferred shares
outstanding at a conversion rate of $9 per share in exchange for the
issuance of 401,129 shares of the Company's common stock.
-10-
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
In November 1986, a suit was instituted against the Company alleging
illegal pricing and marketing practices in connection with the Company's
marine anchor products. In November 1993, the U.S. Court of Appeals for
the Eleventh Circuit reversed the previous jury verdict against the
Company, and entered judgement in favor of the Company on all federal
antitrust issues. During the quarter ended November 30, 1993, the Company
reversed its previously recorded liability for this matter and increased
pre-tax income by $2,463,000. Certain issues of Georgia state law, which
were originally decided in favor of the Company, have been pursued by the
plaintiff and are under consideration by the United States District Court
for the Northern District of Georgia. In addition, the court has lifted
the stay on the Company's claims against the plaintiff.
-11-
<PAGE>
RULE INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
Due primarily to the impact of the Disston consumer hardware business,
consolidated revenues for the nine months ended May 31, 1995 increased by 23%
over the prior year's comparable period. Sales for the third quarter of fiscal
1995, as compared with 1994, decreased by 12.2%, due primarly to capacity
constraints which resulted in a loss of consumer hardware business, coupled with
the loss of a major private label hardware customer. The growth of export
revenues slowed in the third fiscal quarter, but remains 17% ahead in the first
nine months of fiscal 1995.
In fiscal 1995 consolidated gross margins declined from the prior comparable
quarterly and nine month periods due to the continued effects of integrating the
Disston manufacturing operations into the Company's Deerfield facility and the
expansion of capacities. While the Company has made recent progress towards
improving manufacturing efficiencies and customer service levels, gross margins
for the quarter and nine months of fiscal 1995 have been adversely affected.
Selling, general and administrative expenses for the nine months ended May 31,
1995 declined to 22% of consolidated revenues reflecting higher current revenue
levels and certain benefits of the consolidation of Disston. Operating income
for the quarter decreased by 43% over the comparable quarter in fiscal 1994 to
8.5% of consolidated revenues.
Interest expense for 1995 increased due to higher institutional borrowings and
subordinated notes issued in connection with the acquisition of the Disston
consumer hardware business. Other income of $864,000 represents a gain on the
sale of the Company's investment in DataMarine International, Inc. in the first
quarter of fiscal 1995. The effective income tax rate of 33% for fiscal 1995 is
more representative of the Company's normal effective tax rate than the 14%
fiscal 1994 rate in fiscal 1994, which was favorably impacted by the reversal of
a litigation reserve which was mostly non-taxable.
During the first quarter of fiscal 1995, the Company refinanced its senior
institutional borrowings and repaid the senior subordinated notes issued on June
1, 1994, prior to their scheduled maturities. As a result, the Company incurred
non-recurring costs and expensed unamortized finance charges of $904,000 related
to the refinanced debt. This amount, net of related income taxes of $316,000
was recorded as an extraordinary item during the first quarter of fiscal 1995.
During the first quarter of fiscal 1995, the Company converted its preferred
stock into 401,129 common shares. Accordingly, there are no dividends on
preferred stock in the current fiscal quarter as compared to $72,000 in the
prior period, and the primary weighted shares outstanding increased to 2,708,076
in the third fiscal quarter of 1995.
Liquidity and Capital Resources
- -------------------------------
During the nine months ended May 31, 1995, the Company used $1,455,000 from
its operating activities to fund the expansion of working capital during the
period. The increase in working capital during the period of $4,976,000
resulted primarily from higher inventories relating to hardware business. The
expansion of working capital, in addition to future working capital and debt
service requirements, has created additional cash demands on the Company which
requires financing. This additional financing was partially addressed in March
when the Company's senior institutional lender increased its revolving credit
facility by $2,500,000 to $17,500,000. The Company has been pursuing various
alternatives to address its on-going capital funding requirements to finance
future growth and has recently received several proposals which are being
evaluated.
-12-
<PAGE>
The Company's expansion of production capacities at its Deerfield, Massachusetts
hardware facility has resulted in a substantial increase in capital expenditures
during fiscal 1995 in comparision to prior periods. The majority of this
expansion is being financed with the $2,500,000 credit facility provided by the
same institutional lender. The Company expects that the Deerfield expansion
will be completed in its fiscal fourth quarter.
-13-
<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.
Rule Industries, Inc.
---------------------
(Registrant)
July 18, 1995 /s/ Gary M. Sable
------------- ---------------------
Gary M. Sable
Vice President
July 18, 1995 /s/ Albert J. Sabbag
------------- ---------------------
Albert J. Sabbag
Corporate Controller
-14-
