<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 quarterly period ended: SEPTEMBER 30, 1998
Commission File number: 1-9429
------
ROTONICS MANUFACTURING INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2467474
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17022 SOUTH FIGUEROA STREET, GARDENA, CALIFORNIA 90248
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 538-4932
--------------
(Registrant's telephone number, including area code)
N/A
--------------
(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
-- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 30, 1998
----- ---------------------------------
Common Shares 15,527,071 Shares
($.01 stated value)
Total Pages 17
Exhibit Index at Page 16
<PAGE>
ROTONICS MANUFACTURING INC.
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets -
September 30, 1998 (Unaudited)
and June 30, 1998 (Audited) 3
Statements of Income and
Accumulated Deficit -
Three Months Ended September 30, 1998
and 1997 (Unaudited) 4
Statements of Cash Flows -
Three Months Ended September 30, 1998
and 1997 (Unaudited) 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROTONICS MANUFACTURING INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ---------
(Unaudited) (Audited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ 56,000 $ 30,700
Accounts receivable, net of allowance for doubtful accounts
of $175,900 and $148,000, respectively (Notes 6 and 7) 6,872,900 6,973,800
Notes receivable 46,300 62,600
Inventories (Notes 3, 6 and 7) 6,989,600 7,081,900
Deferred income taxes, net (Note 12) 2,106,400 2,106,400
Prepaid expenses and other current assets 178,200 208,200
----------- ----------
Total current assets 16,249,400 16,463,600
Notes receivable, less current portion 455,000 455,000
Investment in partnership 133,200 133,200
Property, plant and equipment, net (Notes 4, 6 and 7) 18,338,200 18,250,000
Intangible assets, net (Note 5) 5,049,000 5,131,800
Other assets 122,700 130,200
----------- ----------
$40,347,500 $40,563,800
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7) $ 2,000,500 $ 1,784,000
Current portion of long-term debt due related parties (Note 8) 2,000,000 -
Accounts payable 3,651,100 3,719,600
Accrued liabilities (Note 9) 1,057,100 949,200
----------- -----------
Total current liabilities 8,708,700 6,452,800
Bank line of credit (Note 6) 1,755,600 3,926,200
Long-term debt, less current portion (Note 7) 6,337,800 5,050,300
Long-term debt due related parties (Note 8) - 2,000,000
Deferred income taxes, net (Note 12) 2,028,200 1,726,600
----------- -----------
Total liabilities 18,830,300 19,155,900
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 15,525,361 and 15,806,361 shares,
respectively,
net of treasury shares (Note 11) 26,668,600 26,921,400
Accumulated deficit (5,151,400) (5,513,500)
----------- -----------
Total stockholders' equity 21,517,200 21,407,900
----------- -----------
$40,347,500 $40,563,800
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
SEPTEMBER 30,
-----------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales $11,873,800 $ 8,597,000
----------- -----------
Costs and expenses:
Cost of goods sold 8,662,400 6,793,300
Selling, general and administrative expenses 2,252,500 1,566,800
----------- -----------
Total costs and expenses 10,914,900 8,360,100
----------- -----------
Income from operations 958,900 236,900
----------- -----------
Other (expense)/income:
Interest expense (260,600) (159,700)
Other income, net 29,500 38,000
----------- -----------
Total other expense (231,100) (121,700)
----------- -----------
Income before income taxes 727,800 115,200
Income tax provision (Note 12) (365,700) (16,900)
----------- -----------
Net income 362,100 98,300
Accumulated deficit, beginning of period (5,513,500) (5,377,900)
----------- -----------
Accumulated deficit, end of period $(5,151,400) $(5,279,600)
----------- -----------
----------- -----------
Income per common share (Note 13):
Net income:
Basic $ .02 $ .01
---------- ----------
---------- ----------
Diluted $ .02 $ .01
---------- ----------
---------- ----------
Weighted average number of common and common equivalent shares
outstanding:
Basic 15,648,464 14,032,818
---------- ----------
Diluted 15,649,184 14,032,818
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> Three Months Ended
SEPTEMBER 30,
------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 362,100 $ 98,300
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 665,700 440,900
Gain on sales of equipment - (400)
Deferred income tax provision 301,600 11,200
Provision for doubtful accounts 33,100 24,000
Changes in assets and liabilities:
Decrease in accounts receivable 67,800 413,700
Decrease in inventories 92,300 90,600
Decrease/(increase) in prepaid expenses and other
current assets 30,000 (17,200)
Decrease/(increase) in other assets 4,900 (5,600)
Decrease in accounts payable (63,800) (216,400)
Increase/(decrease) in accrued liabilities 107,900 (7,700)
----------- -----------
Net cash provided by operating activities 1,601,600 831,400
----------- -----------
Cash flows from investing activities:
Repayments/(advances) on notes receivable, net 16,300 (6,500)
Capital expenditures (668,500) (659,700)
Proceeds from sales of equipment - 1,000
----------- -----------
Net cash used in investing activities (652,200) (665,200)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit 2,890,100 1,972,000
Repayments under line of credit (5,060,700) (1,704,400)
Proceeds from issuance of long-term debt 3,004,500 -
Repayment of long-term debt (1,500,500) (321,000)
Payment of common stock dividends (4,700) -
Repurchases of common stock (252,800) (112,800)
----------- -----------
Net cash used in financing activities (924,100) (166,200)
----------- -----------
Net increase in cash 25,300 -
Cash at beginning of period 30,700 12,100
----------- -----------
Cash at end of period $ 56,000 $ 12,100
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 242,200 $ 162,800
----------- -----------
----------- -----------
Income taxes $ 33,500 $ 75,400
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ROTONICS MANUFACTURING INC.
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE 1-INTERIM REPORTING:
- ------------------------
The interim financial information included herein is unaudited. This
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of operating results for the interim periods. This interim financial
information should be read in conjunction with the Rotonics Manufacturing Inc.
("the Company") Annual Report as filed on Form 10-K for the fiscal year ended
June 30, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
The carrying value of accounts receivable and trade payables approximates the
fair value due to their short-term maturities. The carrying value of the
Company's line of credit and notes payable is considered to approximate fair
market value because the interest rates of these instruments are based
predominately on variable reference rates.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
- ------------------------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS
with diluted EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding. Diluted EPS is computed the same way as
fully diluted EPS except that the calculation now uses the average share price
for the reporting period to compute dilution from options under the treasury
stock method. It also requires the restatement of EPS for prior periods. The
adoption of this pronouncement did not have an impact on the Company's earnings
per share.
Effective September 30, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 defines comprehensive income as a measure
of all changes in equity of an enterprise during a period that results from
transactions and other economic events of the period other than transactions
with owners. The adoption of this pronouncement did not have on impact on the
Company's results of operations.
Effective for fiscal year end June 30, 1999, the Company adopted SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information". SFAS No.
131 introduces management 's approach to defining operating segments. This
approach corresponds to the way management organizes units and internally
evaluates performance of its operations based on products, services, geography,
legal or management structure. Once operating segments are identified, they are
then grouped based on similar characteristics to determine reportable segments.
This approach is anticipated to improve segment reporting which will improve
analysis of companies involved in diverse business segments. The adoption of
this pronouncement did not significantly effect the way the Company reports its
operating segments.
NOTE 2 - ACQUISITIONS:
- ---------------------
Pursuant to an Agreement and Plan of Merger and Reorganization dated March 24,
1998 between the Company and GSC Industries, Inc. ("GSC"), the Company acquired
all of GSC's outstanding common stock holdings in Rotocast International, Inc.
("Rotocast") and Rotocast's wholly owned subsidiaries Rotocast Plastic Products,
Inc.; Wonder Products, Inc.; Nutron Plastic, Inc.; Rotocast Plastic Products of
Texas, Inc.; Rotocast Plastic Products of Nevada, Inc.; Rotocast Plastic
Products of Tennessee, Inc.; and Rotocast Management Corporation. In accordance
with the merger and reorganization Rotocast was merged into the Company and the
Company issued to GSC 2,072,539 shares of its own common stock and a $2,000,000
eighteen month promissory note bearing interest at 5.26% per annum. The
promissory note is secured by a $2,000,000 irrevocable standby letter of credit
issued by Wells Fargo Bank which can only be called upon if the principal
balance of the note is not paid within ten days of maturity. Pursuant to the
merger agreement the transaction was effective March 31, 1998.
To provide recourse to the Company, five percent of the common shares issued to
GSC will be held in an escrow account to cover any claims by the Company in the
event of any breaches of representations, warranties or covenants by GSC as
outlined in the agreement. The Company has incurred approximately $80,000 of
fees and expenses in conjunction with the merger. In addition, the Company
obtained an appraisal on Rotocast's machinery and equipment which resulted in
the write-up of Rotocast's machinery and equipment to $7.2 million and the
recognition of goodwill amounting to $357,200. These amounts will be amortized
over their estimated useful life of fifteen years. The above transaction was
accounted for using the purchase accounting method and the results of the
transactions were in the Company's financial statements effective as of March
31, 1998.
6
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
- -------------------------------------------
The following unaudited pro forma condensed statement of combined operations for
the three months ended September 30, 1997 assumes the Rotocast merger occurred
at the beginning of the respective period after giving effect to certain
adjustments, including amortization of goodwill, increased interest expense on
acquisition debt, depreciation expense and related income tax effects. The pro
forma results have been prepared for comparative purposes only and do not
purport to indicate the results of operations which would actually have occurred
had the combination been in effect on the date indicated, or which may occur in
the future.
<TABLE>
<CAPTION>
Combined for the
three months ended
September 30,
1997
-----------
<S> <C>
Net sales $11,467,200
Total costs and expenses 11,464,900
-----------
Income before provision for income taxes 2,300
Provision for income taxes -
-----------
Net income $ 2,300
-----------
-----------
Income per common share $ .00
-----------
-----------
</TABLE>
NOTE 3 - INVENTORIES:
- --------------------
<TABLE>
<CAPTION>
Inventories consist of:
September 30, June 30,
1998 1998
---------- ---------
<S> <C> <C>
Raw materials $ 3,494,800 $ 4,002,400
Finished goods 3,494,800 3,079,500
----------- -----------
$ 6,989,600 $ 7,081,900
----------- -----------
----------- -----------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
<CAPTION>
September 30, June 30,
1998 1998
--------- ---------
<S> <C> <C>
Land $ 1,039,500 $ 1,039,500
Buildings and building improvements 4,079,600 4,021,000
Machinery, equipment, furniture and
fixtures 22,039,100 21,534,500
Construction in progress 941,600 836,300
------------ ------------
28,099,800 27,431,300
Less - accumulated depreciation (9,761,600) (9,181,300)
------------ ------------
$ 18,338,200 $18,250,000
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
NOTE 5 - INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
Intangible assets consist of: September 30, June 30,
1998 1998
--------- ---------
<S> <C> <C>
Patents, net of accumulated amortization
of $102,400 and $100,900 $ 49,700 $ 51,300
Goodwill, net of accumulated amortization
of $2,458,200 and $2,377,000 4,999,300 5,080,500
---------- ----------
$5,049,000 $5,131,800
---------- ----------
---------- ----------
</TABLE>
NOTE 6 - BANK LINE OF CREDIT:
The Company has a $7,000,000 revolving line of credit with Wells Fargo Bank.
The line matures October 1, 2000 and is secured by the Company's machinery and
equipment, accounts receivable and inventories. Interest is payable monthly at
the bank's prime rate. The bank's prime rate at September 30, 1998 was 8.25%
per annum. The loan agreement allows the Company to convert the outstanding
principal balance in increments of $250,000 to a LIBOR-based loan for periods up
to 90 days. At September 30, 1998, total borrowings under the Company's line of
credit was $1,755,600 of which $1,750,000 was borrowed under the LIBOR option
bearing a LIBOR interest rate of 7.83203% per annum and maturing October 15,
1998. Proceeds from the loan were used for working capital purposes. At
September 30, 1998 the Company had approximately $3,250,000 available for future
borrowings under the revolving line of credit. The remaining $2,000,000 open on
the line of credit is reserved for the letter of credit which was issued to
secure the GSC note payable.
NOTE 7 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consists of:
September 30, June 30,
1998 1998
--------- --------
<S> <C> <C>
Note payable - Bank (A) $1,333,300 $1,533,300
Note payable - Bank (B) 266,700 291,700
Note payable - Bank (C) 364,400 389,800
Note payable - Bank (D) 750,000 800,000
Note payable - Bank (E) 700,000 700,000
Note payable - Bank (F) 2,900,000 2,000,000
Note payable - Bank (G) 1,986,700 1,080,600
Other 37,200 38,900
---------- ----------
8,338,300 6,834,300
Less current portion (2,000,500) (1,784,000)
---------- ----------
$6,337,800 $5,050,300
---------- ----------
---------- ----------
</TABLE>
(A) In May 1995, the Company restructured its credit agreement with Wells Fargo
Bank. The loan consists of a $4,000,000 sixty-month term loan. The note is due
in monthly principal installments of $66,700 plus interest at the bank's prime
rate (8.25% per annum at September 30, 1998). In addition, the loan agreement
allows the Company to convert all or a portion of the outstanding principal to a
LIBOR-based loan for periods up to 180 days. At September 30, 1998, the total
outstanding principal balance was under the LIBOR option at 7.78125% per annum
maturing on November 16, 1998. The note is secured by the Company's machinery
and equipment, accounts receivable and inventories and matures on May 16, 2000.
(B) In fiscal 1996, the Company was advanced $500,000 on its machinery and
equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to
repay amounts originally borrowed under the Company's revolving line of credit
to finance approximately $700,000 in machinery and equipment purchases. The
note is due in monthly principal installments of approximately $8,300 plus
interest at the bank's prime rate, (8.25% per annum at September 30, 1998), or
LIBOR interest rate option for periods up to six months. At September 30, 1998,
the total outstanding principal was under the LIBOR option at 7.78125% per annum
maturing November 16, 1998. The note is secured by the Company's machinery
and equipment and matures on May 15, 2001.
8
<PAGE>
(C) In March 1997, the Company was advanced $500,000 on its second machinery
and equipment term-loan commitment with Wells Fargo Bank. The proceeds were
used to repay amounts originally borrowed under the Company's revolving line of
credit to finance approximately $625,000 in machinery and equipment purchases.
The note is due in monthly principal installments of approximately $8,500 plus
interest at the bank's prime rate, (8.25% per annum at September 30, 1998), or
LIBOR interest rate option for periods up to six months. At September 30, 1998,
the total outstanding principal was under the LIBOR option at 7.78125% per annum
maturing November 16, 1998. The note is secured by the Company's machinery and
equipment and matures on May 15, 2002.
(D) In June 1997, the Company was advanced $1,000,000 on its third machinery
and equipment term-loan commitment with Wells Fargo Bank. The proceeds were
used to repay amounts originally borrowed under the Company's revolving line of
credit to finance approximately $1,250,000 in machinery and equipment purchases.
The note is due in monthly principal installments of approximately $16,700 plus
interest at the bank's prime rate, (8.25% per annum at September 30, 1998), or
LIBOR interest rate option for periods up to three months. At September 30,
1998, the total outstanding principal was under the LIBOR option at 7.78125% per
annum maturing November 16, 1998. The note is secured by the Company's
machinery and equipment and matures on June 27, 2002.
(E) In January 1998, the Company was advanced $700,000 on its fourth machinery
and equipment term-loan commitment with Wells Fargo Bank. The proceeds were
used to repay amounts originally borrowed under the Company's revolving line of
credit to finance approximately $875,000 in machinery and equipment purchases.
The note is due in monthly interest only payments at the bank's prime rate,
(8.25% per annum at September 30, 1998), or LIBOR interest rate option for
periods up to three months until November 15, 1998. At such time the note will
convert to a sixty month fully amortizable loan. At September 30, 1998, the
total outstanding principal was under the LIBOR option at 7.78125% per annum
maturing November 16, 1998. The note is secured by the Company's machinery and
equipment and matures on July 15, 2003.
At September 30, 1998, the Company had available a term-loan commitment in the
amount of $500,000 for future machinery and equipment purchases. Advances under
the line will be subject to monthly interest only payments at the bank's prime
or LIBOR interest rate options until November 15, 1998 at which time amounts
borrowed will convert to a sixty month fully amortizable loan.
(F) In connection with the Rotocast acquisition, the Company retired Rotocast's
existing line of credit and long-term debt with a 90 day note issued by Wells
Fargo Bank in the amount of $1,750,000. In April 1998, pursuant to an appraisal
of Rotocast's machinery and equipment, this note was replaced with a $2,000,000
sixty month fully amortizable note. In July 1998, the note again was replaced
with a $3,000,000 sixty month fully amortizable loan. The note was due in
monthly interest only payments at the bank's prime rate or LIBOR interest rate
option for periods up to three months until August 15, 1998. At this time the
note converted to a sixty month fully amortizable loan due in monthly principal
installments of $50,000 plus interest at the bank's prime rate, (8.25% per annum
at September 30, 1998), or LIBOR interest rate option. At September 30, 1998,
the total outstanding principal was under the LIBOR option at 7.78125% per annum
maturing November 16, 1998. The note is secured by the Company's machinery and
equipment and matures July 1, 2003.
(G) In July 1998, a $2,000,000 real estate loan secured by the Company's
Bensenville, Illinois and Gainesville, Texas properties was issued to Wells
Fargo Bank. This note replaced the 1994 real estate loan issued in connection
with the purchase of the Bensenville, Illinois property. The note is due in
monthly principal installments of approximately $6,700 plus interest at the
bank's prime rate, (8.25% per annum at September 30, 1998), or LIBOR interest
rate option on a twenty-five year amortization with the outstanding principal
due on July 1, 2008. At September 30, 1998, the total outstanding principal was
under the LIBOR option at 7.78125% per annum maturing November 16, 1998.
NOTE 8 - RELATED PARTY DEBTS:
- ----------------------------
<TABLE>
<CAPTION>
Related party debt consists of:
September 30, June 30,
1998 1998
----------- ----------
<S> <C> <C>
Note payable - (A) $2,000,000 $2,000,000
Less current portion (2,000,000) -
---------- ----------
$ - $2,000,000
---------- ----------
---------- ----------
</TABLE>
9
<PAGE>
(A) This note was issued to GSC Industries, Inc., which a director of the
Company has a 54% interest, in connection with the acquisition of Rotocast.
The note bears interest at 5.26% per annum and is payable with one interest
only payment due on March 25, 1999 and a second principal and interest
payment due upon maturity of the note on September 25, 1999.
The note is secured by a $2,000,000 irrevocable standby letter of credit
which may be called upon if the principal balance of the note is not paid within
ten days of maturity.
NOTE 9 - ACCRUED LIABILITIES:
Accrued liabilities consist of:
September 30, June 30,
1998 1998
------------- -------------
Salaries, wages, commissions and related
payables $ 746,900 $ 607,900
Other 310,200 341,300
---------- ---------
$1,057,100 $ 949,200
---------- ---------
---------- ---------
NOTE 10 - STOCK OPTION PLAN:
- ---------------------------
The Company has a stock option plan which allows, at the discretion of the Board
of Directors, for the granting of options to key employees, officers, directors,
and consultants of the Company to purchase 1,000,000 shares of the Company's
common stock. Under the terms and conditions set forth in the plan, the
exercise price of the stock options will be a least 85% of the fair market value
of the Company's common stock on the grant date. The maximum term for options
granted under the plan is five years. The plan expires June 12, 2004.
In the first quarter of fiscal 1999, the Company issued to certain key employees
options to purchase 115,000 shares of the Company's common stock. The options
are exercisable at prices ranging from $0.8125 - $0.875 (fair market value at
the date of grant). The options outstanding at September 30, 1998 are
exercisable as follows: 100,000 shares 100% exercisable, 7,500 shares
exercisable September 1999 and 7,500 shares exercisable September 2000. At
September 30, 1998, the Company had 885,000 shares available for future grants.
STOCK OPTION ACTIVITY:
- ---------------------
<TABLE>
<CAPTION>
Outstanding Weighted Average
Shares Price Per Share
------------- -------------
<S> <C> <C>
Balance outstanding at June 30, 1998 -
Granted 115,000 $ 0.8668
-------
Balance outstanding at September 30, 1998 115,000 $ 0.8668
-------
-------
</TABLE>
NOTE 11 - COMMON STOCK:
- ----------------------
Treasury stock is recorded at cost. At September 30, 1998, treasury stock
consisted of 282,710 shares of common stock at a cost of $254,200 and at June
30, 1998, treasury stock consisted of 1,755 shares of common stock at a cost of
$1,500.
10
<PAGE>
NOTE 12 - INCOME TAXES:
- ----------------------
<TABLE>
<CAPTION>
The components of the income tax provision were:
For the three months ended
September 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Current:
Federal $ 21,000 $ 500
State 43,100 5,200
--------- --------
64,100 5,700
--------- --------
Deferred:
Federal 293,700 15,200
State 7,900 (4,000)
--------- --------
301,600 11,200
--------- --------
$ 365,700 $ 16,900
--------- --------
--------- --------
</TABLE>
At September 30, 1998, the Company had net operating loss (NOL) carryforwards of
approximately $8,400,000 and $6,669,000 for federal and state income tax
purposes. The NOL carryforwards, which are available to offset taxable income
of the Company and are subject to limitations should a "change in ownership" as
defined in the Internal Revenue Code occur, will begin to expire in 2003 and
1999 for federal and state purposes, respectively, if not utilized. The federal
and state NOL carryforwards expire as follows:
AMOUNT OF UNUSED OPERATING LOSS CARRYFORWARDS Expiration during year
--------------------------------------------- ----------------------
Federal State Ended June 30,
------- ----- -------------
$ - $ 95,000 1999
- 371,000 2000
- 405,000 2001
- 207,000 2002
3,700,000 451,000 2003
3,400,000 273,000 2004
600,000 444,000 2005
500,000 235,000 2006
- 708,000 2007
- 603,000 2008
200,000 1,053,000 2009
- 395,000 2010
- 556,000 2011
- 477,000 2012
- 396,000 2013
---------- ----------
$8,400,000 $6,669,000
---------- ----------
---------- ----------
At September 30, 1998, the Company had a federal alternative minimum tax credit
of approximately $253,000 which is available to offset future federal income
taxes once the Company is no longer subject to an alternative minimum tax for
federal income tax purposes.
NOTE 13 - COMPUTATION OF EARNINGS PER SHARE:
- -------------------------------------------
Basic and diluted earnings per share have been computed in accordance with SFAS
No. 128 "Earnings per Share", using the treasury stock method for applicable
common stock options when computing diluted earnings per share.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- ----------------------------------------------------------------------
Net sales for the three months ended September 30, 1998 increased $3,276,800
or 38.1% to $11,873,800 compared to $8,597,000 for the same period last year.
The increase is primarily attributed to the Company's recent merger, whose
operations also benefited from the consolidation of the Company's Arleta,
California and Warminster, Pennsylvania facilities. In addition, the Company
reported improved sales volumes in its material handling, agricultural,
medical waste and custom product lines due to general improvements in market
conditions when compared to the same period last year. Management is
optimistic about the Company's growth projections for fiscal 1999 as it
focuses heavily on its sales and marketing strategies to expand existing
markets for its proprietary products as well as venture into new distribution
channels to increase our exposure in the marketplace.
Cost of goods sold decrease 6% to 73% of net sales for the three months ended
September 30, 1998 compared to 79% for the same period last year. The decrease
is related to the increase in sales volumes which improved the Company's
operating facilities coverage of their respective fixed overhead costs,
reductions in raw material costs compared to the same period last year, and the
addition of proprietary product lines, (acquired in connection with the recent
merger), which yield higher gross margins. Management also attributes the
improvement to its gross margin to the initial savings the Company has obtained
from the consolidation of two of its operations in the later part of fiscal
1998. Management anticipates continued savings from the consolidations of these
facilities and plans to continue to scrutinize its remaining operations in
efforts to maximize its operating efficiencies. These efforts coupled with the
stabilization of plastic resin cost at their current levels should continue to
contribute to improve results.
Selling, general and administrative expenses were $2,252,500, or 19% of net
sales for the three months ended September 30, 1998 compared with $1,566,800, or
18.2% for the same period last year. Selling, general and administrative
expenses increased slightly as a percentage to net sales primarily due to the
additional operations acquired as a result of the recent merger. However, these
additional costs were significantly mitigated by the savings obtained through
the consolidation of two of the Company's facilities subsequent to the merger.
Again, management is currently focusing heavily on its sales and marketing
strategies in efforts to maintain appropriate levels of selling, general and
administrative costs in correlation to future sales volume projections.
Total interest expense increased $100,900 to $260,600 for the three months ended
September 30, 1998 compared to $159,700 for the same period last year. The
increase is related to an increase in the Company's debt structure when compared
to the same period last year. The primary increase in the Company's debt
structure pertains to the additional debt issued in connection with the Rotocast
merger as well as the debt assumed in the transaction which together amount to
approximately $3.8 million. The balance of the increase is attributed to the
financing of the company's on going capital expenditure projects.
Income taxes were $365,700 for the three months ended September 30, 1998
compared to $16,900 for the same period last year. The increase relates to a
532% increase in income before income taxes coupled with a increase in the
Company's effective tax rate to 50% when compared to the same period last year.
The deferred tax component of the Company's tax provision for the three months
ended September 30, 1998 amounted to $301,600. This amount primarily relates to
the utilization of the Company's net operating loss carryforwards and thus does
not result in any current cash outlay.
Net income increased 268% to $362,100 for the three months ended September 30,
1998 compared to $98,300 for the same period last year. Earnings per share
increased 100% to $.02 per common share for the current period compared to $.01
for the same period last year. The increase relates to improved sales volumes
as mentioned above and an increase in the company's overall gross margin related
to the cost savings obtained through the consolidation of two of the Company's
facilities along with favorable resin prices during the quarter.
12
<PAGE>
Financial Condition
- -------------------
Working capital decreased $2.5 million to $7.5 million at September 30, 1998
compared to $10 million at June 30, 1998. The decrease was primarily related to
the increase in the current portion of long-term debt due in connection with the
Rotocast merger. Cash provided by operations increased 93% to $1,601,600 for
the three months ended September 30, 1998 compared to $831,400 for the same
period last year. The increase is directly attributed to the improvement in
income from operations. As such, cash generated from operations was sufficient
to fund the Company's capital expenditures and debt repayment requirements.
The Company expended a total of $668,500 for property, plant and equipment
during the three months ended September 30, 1998 which was consistent with prior
years expenditures for the same time period. The company currently anticipates
spending an additional $1.5 to $1.75 million on capital expenditures during the
remaining portion of fiscal 1999.
In July 1998, the Company was advanced an additional $1 million against its
machinery and equipment note No. 5 bringing the total outstanding on this note
to $3 million. This note was originally issued to retire Rotocast's debt
acquired as part of the merger and later refinanced based on the appraisal of
Rotocast's machinery and equipment. The note is due in monthly principal
installments of $50,000 plus interest and will mature July 1, 2003. Also, in
July 1998 the bank replaced the Company's existing real estate loan with a new
$2 million loan secured by the Company's Bensenville, Illinois and Gainesville,
Texas properties. The note is due in monthly principal installments of $6,700
plus interest on a twenty-five year amortization with the outstanding principal
due July 1, 2008.
Net borrowings under the line of credit decreased $2.2 million to $1.8 million
between June 30, 1998 and September 30, 1998. The decrease relates to the
advances in long-term debt previously mentioned and the substantial increase in
cashflows for operations which went to repay short-term borrowings under the
line of credit. At September 30, 1998, the Company had approximately $3.25
million available for future borrowings under the revolving line of credit. The
remaining $2 million open on the line of credit is reserved for the letter of
credit which was issued to secure the GSC note payable.
The Company initiated a common stock buy back program in fiscal 1999. Through
September 30, 1998, the Company has acquired 281,000 shares of common stock at a
cost of $252,800.
Cash flows from operations in conjunction with the Company's revolving line of
credit and machinery and equipment loan commitment are expected to meet the
Company's needs for working capital, capital expenditures and repayment of
long-term debt for the foreseeable future.
Year 2000
- ---------
Management has been fully apprised of the issues surrounding the year 2000
dilemma. In assessing the potential impact this issue has on the Company,
management reviewed both its manufacturing and accounting systems to ascertain
critical applications which would be affected. Due to the nature of the
Company's manufacturing process and the equipment utilized, it was determined
that even equipment which was operated by or which incorporated computerized
controls or programs were not dependent on calendar functions to operate and
thus would not be impacted by the year 2000 problem.
As part of the year 2000 issue the Company also assessed compliance of its
network computing systems. To date the Company believes that all of its
operating divisions except one are 2000 compliant. The remaining site along
with the Company's Corporate division has resolved to make the necessary
hardware and software enhancements to become compliant at this final site by the
end of fiscal 1999 (June 30, 1999). The Company does not believe it will
encounter any problems associated with the year 2000 issue between now and such
time that it completes the necessary upgrades to its computer systems. The
costs associated with becoming compliant will not have a material effect to the
Company's financial position.
To complete the Company's assessment of the year 2000 problem, the Company will
be contacting its major suppliers to ascertain their readiness and ability to
function beyond this critical date and what impact, if any, it will have on the
Company's ability to continue normal operations.
13
<PAGE>
ROTONICS MANUFACTURING INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11. Statement Regarding Computation of Per Share Earnings.
(b) REPORTS ON FORM 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on behalf by the undersigned
thereunto duly authorized.
Rotonics Manufacturing Inc.
Registrant
Date: October 29, 1998 /s/ SHERMAN MCKINNISS
-----------------------------
Sherman McKinniss
President and
Chief Executive Officer
15
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
- ------- -----------
PAGE
----
11 Statement Regarding Computation of Per Share Earnings 17
16
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------
EXHIBIT 11
----------
<TABLE>
<CAPTION>
Three Months Ended
SEPTEMBER 30,
------------------
1998 1997
BASIC EPS
- ---------
<S> <C> <C>
Net income $ 362,100 $ 98,300
---------- ---------
---------- ---------
Weighted average number of common shares outstanding 15,648,464 14,032,818
---------- ---------
---------- ---------
Basic earnings per common share $ .02$ .01
---------- ---------
---------- ---------
DILUTED EPS
- -----------
Net income $ 362,100 $ 98,300
---------- ---------
---------- ---------
Weighted average number of common shares outstanding 15,648,464 14,032,818
Add - common equivalent shares:
Shares issuable upon exercise of options to
purchase common stock 720 -
---------- ---------
Weighted average number of common shares used in
computation of diluted earnings
per common share 15,649,184 14,032,818
---------- ---------
---------- ---------
Diluted earnings per common share $ .02 $ .01
---------- ---------
---------- ---------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 56,000
<SECURITIES> 0
<RECEIVABLES> 7,095,100
<ALLOWANCES> 175,900
<INVENTORY> 6,989,600
<CURRENT-ASSETS> 16,249,400
<PP&E> 28,099,800
<DEPRECIATION> 9,761,600
<TOTAL-ASSETS> 40,347,500
<CURRENT-LIABILITIES> 8,708,7000
<BONDS> 0
0
0
<COMMON> 26,668,600
<OTHER-SE> (5,151,400)
<TOTAL-LIABILITY-AND-EQUITY> 40,347,500
<SALES> 11,873,800
<TOTAL-REVENUES> 11,873,800
<CGS> 8,662,400
<TOTAL-COSTS> 10,914,900
<OTHER-EXPENSES> (29,500)
<LOSS-PROVISION> 29,800
<INTEREST-EXPENSE> 260,600
<INCOME-PRETAX> 727,800
<INCOME-TAX> 365,700
<INCOME-CONTINUING> 362,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,100
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
