<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended June 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 No.)
17022 South Figueroa Street
Gardena, California 90248
------------------------------- ------------------
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code: (310) 538-4932
Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 stated value) American Stock Exchange
-------------------------------- -----------------------
Titles of each class Name of each Exchange
on which registered
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) for 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 has been subject to such
filing requirements for the past 90 days. Yes /X/ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ /X/ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of September 15, 1998, was $6,222,100 (1).
The number of shares of common stock outstanding at September 15, 1998 was
15,532,661.
(1) Excludes 8,421,696 shares held by directors, officers and stockholders
whose ownership exceeded 5% of the outstanding shares at September 15, 1998.
Exclusion of such shares should not be construed to indicate that the holders
thereof possess the power, direct or indirect, to direct the management or
policies of registrant, or that such persons are controlled by or under
common control with the registrant.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document Form 10-K
- -------- ---------
Part
----
<S> <C>
Definitive Proxy Statement to be used in connection
with the Annual Meeting of Stockholders to be held on
December 8, 1998 III
</TABLE>
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I
Item 1 Business 4
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8 Financial Statements and Supplementary Data 14
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial Owners
and Management 15
Item 13 Certain Relationships and Related Transactions 15
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
SIGNATURES 17
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
INTRODUCTION
Rotonics Manufacturing Inc. (the "Company") was founded as an Illinois
Corporation, and was reincorporated in Delaware in December 1986. Effective
July 1, 1991, the Company merged with Rotonics Molding, Inc.-Chicago
("Rotonics"), with the Company being the surviving entity. In accordance with
the 1991 merger agreement, the Company issued 2,666,666 (after giving effect
to a 1-for-3 reverse stock split) shares of its common stock and 4,999,997
shares of a newly issued non-voting preferred stock in exchange for all the
outstanding voting stock of Rotonics. The preferred stock, which has
subsequently been redeemed, was entitled to cumulative dividends of $.09 per
share per annum and had a liquidation value of $1.00 per share, plus accrued
unpaid dividends in preference to any payment on the common stock.
Rotonics had operations in Itasca, Illinois; Deerfield, Wisconsin; Denver,
Colorado; and Bartow, Florida. These operations currently conduct business as
divisions of the Company using the trade names RMI-C, RMI-D, and RMI-F,
respectively. Rotonics was a privately held California Corporation which was
52% owned by Mr. Sherman McKinniss. Mr. McKinniss became president and chief
executive officer of the Company on August 12, 1991.
In September 1991, the Company's wholly owned subsidiary, Rotational Molding,
Inc. ("RMI"), was merged into the Company and now operates as two divisions
using the trade names RMI-G and RMI-I with manufacturing operations in
Gardena, California and Caldwell, Idaho, respectively.
Effective January 1, 1992, the Company acquired Plastech Holdings, Inc.
("Plastech"), and its wholly owned subsidiary, Plastech International, Inc.,
for $1,777,070 in cash. Plastech was headquartered in Warminster,
Pennsylvania with an additional operation in Gainesville, Texas. In July
1992, Plastech was merged with the Company and now operates as a division of
the Company using the trade name RMI-T.
Effective April 1, 1995, the Company purchased certain assets and assumed
certain liabilities of Custom Rotational Molding, Inc. ("CRM") for 300,000
shares of the Company's common stock. The Company assumed CRM's operations in
Arleta, California.
In September 1994, the Company purchased a larger manufacturing facility in
Bensenville, Illinois and subsequently relocated its Itasca, Illinois
operations into this new facility. In December 1995, the Company discontinued
its operations at its Deerfield, Wisconsin location and combined these
operations into its newly purchased Bensenville, Illinois operation. The
Wisconsin facility is currently being leased on a month-to-month term basis
at $6,250 per month.
In February 1997, the Company purchased a 9.73 acre facility consisting of
63,000 square feet of manufacturing and office building space in Commerce
City, Colorado. The Company has since expended significant resources to
refurbish the facility to house its Colorado operations. In addition to the
new facility the Company added two state of the art roto-molding machines and
a CNC router to increase and enhance existing manufacturing capacity. Also,
the facility is located within an enterprise zone which should provide
additional benefits.
Effective April 1, 1998, the Company merged with Rotocast International, Inc.
and its wholly owned subsidiaries ("Rotocast"), with the Company being the
surviving entity. In accordance with the Merger Agreement, the Company issued
2,072,539 shared of its common stock and a $2,000,000 note payable secured by
a stand-by letter of credit in exchange for all the outstanding voting stock
of Rotocast.
Rotocast had operations in Miami, Florida; Knoxville, Tennessee; Brownwood,
Texas; Las Vegas, Nevada; and Bossier City, Louisiana. These operations
currently conduct business as divisions of the Company using the trade names
Rotocast of Miami, Nutron/AMP, Rotocast of Tennessee, Rotocast of Texas and
Rotocast of Nevada. Prior to the merger the operations in Bossier City,
Louisiana were substantially discontinued. As of September 1998, the Company
completed the discontinuance process and has returned the facility to the
landlord. Rotocast was a privately held Florida corporation owned by GSC
Industries, Inc. ("GSC"). The Company leases the remaining Rotocast
facilities from GSC under long-term lease arrangements. Effective April 1998,
and pursuant to the Merger Agreement, Mr. Robert Grossman, a shareholder of
GSC and former President of Rotocast, was named to the Company's Board of
Directors.
4
<PAGE>
In conjunction with the Rotocast merger the Company initiated the
consolidation of its Warminster, Pennsylvania and Arleta, California
facilities into its remaining operations. The consolidation of these
facilities will greatly enhance the operations of the Company's remaining
facilities, reduce its overall manufacturing overhead costs, and take greater
advantage of its marketing and distribution channels since the completion of
the Rotocast merger. The consolidation of the facilities was substantially
completed as of June 30, 1998. During fiscal 1999, the Company will continue
to work on streamlining the operations effected by the consolidation as well
as supplement these operations with additional roto-molding machines and CNC
routers.
Following the closure of the Company's Warminster, Pennsylvania facility the
Company opened a sales office in this region. The Company utilizes this
office to continue its marketing and sales efforts in conjunction with the
Plastech line of products.
The Corporate office of the Company is located at the same site as the RMI-G
(Gardena, California) facility.
DESCRIPTION OF BUSINESS
The Company currently has ten manufacturing locations and was again listed by
a plastics industry periodical as one of the top ten Rotational Molders in
North America. These operating divisions manufacture a variety of plastic
products for commercial, agricultural, pharmaceutical, point of purchase
display, medical waste, refuse, retail, marine, healthcare and residential
use, as well as a vast number of custom plastic products for a variety of
industries, utilizing the roto-molding process and, on a smaller scale;
injection molding and dip molding processes. In April 1998, the injection
molding process was added to the Company's manufacturing operations as part
of the Rotocast merger. Utilizing this process the Company markets a variety
of parts for commercial, promotional and residential uses under the trade
names Nutron and AMP. Roto-molding is a process for molding plastic resin by
rotating a mold in a heated environment while the plastic resin powder placed
inside the mold melts and evenly coats the inner wall of the mold. The
injection molding process varies in that the plastic resin is first heated to
a molten state and then injected under pressure into a mold. The roto-molding
process has been used for many years and continues to be recognized as a
growth industry in recent years as a result of numerous ongoing business
consolidations and the development of new resins. These new resins allow
roto-molded items to compete with more traditional materials such as carbon
and stainless steel, especially in the fabrication of large, lightweight,
one-piece molded items such as storage tanks. Roto-molding is a particularly
advantageous process for users of molded plastic products who may want to
test different prototypes, or who do not require sufficient numbers of such
products to justify a more expensive manufacturing process. The Company's
products include various types of storage tanks, bin lids, refuse containers
for automated removal, medical waste containers, point-of-purchase displays,
agricultural / livestock products and containers and other molded items.
The Company purchases resin from eight major suppliers in the U.S. and
Canada. There are six additional suppliers of minor significance. As the
majority of the resin used in the manufacturing process is a polyethylene
derived from natural gas, resin price is not directly related to the price
for petrochemicals and until recent years has not been generally subject to
volatile fluctuations which are often experienced by the petroleum industry.
The Company also incorporates the use of post-consumer plastic products
blended with virgin materials in the manufacturing of products that call for
its use.
The Company holds several patents on storage containers used for
pharmaceutical, commercial and residential applications. The patents expire
through the year 2010. Although the Company has been able to capture its
share of these niche markets and expects to see continued growth, no one
patent or groups of patents is considered material to the business as a whole.
Competition for the Company's products is governed by geography and region
since large capacity tanks and bulky hollow products are expensive to ship
long distances and, as such, any prospective competitor is constrained by
shipping costs. There are numerous single-location as well as a growing trend
to structure multi-location roto-molding businesses throughout the United
States. However, each of these businesses still competes in a geographic
region as determined by customer demand within that region, a constraint
inherent to the industry. Due to its nationwide presence, the Company has
substantially alleviated such constraint as the Company's operations are
located within approximately 500 miles of all potential customers in the
continental United States. The Company's sales are usually not subject to
large seasonal fluctuations as the business typically operates on significant
backlogs with a diverse product mix. Peak season is usually experienced in
the period from April through June. Historically the quarter from January
through March is the slowest production period of the year. The Company's
backlog was $4,252,800 and $4,313,400 as of June 30, 1998 and 1997,
respectively. All of the backlog orders of June 30, 1998 are expected to be
filled during fiscal 1999.
The products are marketed through the Company's in-house sales and
engineering staff, various distributors and outside commission-based sales
representatives. The Company continues to build a strong, broad customer base
which covers a
5
<PAGE>
multitude of industries. As such, since fiscal 1991, no sales to any one
single customer represented a material part of the Company's business.
Research and development expenditures for the Company were insignificant for
the last three fiscal years.
REGULATION
The Company believes that it is in compliance with all applicable federal,
state and local laws relating to the protection of the environment and does
not anticipate that any such laws will have any material effect on its
financial position, capital expenditures, or competitive position.
EMPLOYEES
As of June 30, 1998, the Company employed a total of 600 individuals. The
Company maintains, for its respective employees who are eligible, a medical
insurance plan (some of which is contributory), a group life insurance plan,
an annual bonus plan and a semi-annual attendance bonus plan.
ITEM 2. PROPERTIES
The Company's corporate office occupies a separate building comprising
approximately 3,100 square feet of the facilities of RMI-G in Gardena,
California.
The operating divisions lease warehouse, production and office space as
follows:
<TABLE>
<CAPTION>
Building Total Facility Annual
Property Square Square Base Expiration
Location Footage Footage Rent Date (2)
- -------- ------- ------- ---- ------------
<S> <C> <C> <C> <C>
Gardena, California (1) 42,800 183,300 $ 259,300 October 2001
Caldwell, Idaho 21,250 71,200 $ 73,900 September 2000
Bartow, Florida 34,000 150,600 $ 106,900 September 2004
Miami, Florida 48,000 86,000 $ 148,600 March 2013
Gainesville, Texas (3) - 108,900 $ 1,000 April 2001
Brownwood, Texas 42,800 136,120 $ 67,000 March 2013
Las Vegas, Nevada 30,000 90,000 $ 122,600 March 2013
Knoxville, Tennessee 44,000 174,240 $ 135,900 March 2013
</TABLE>
(1) The Company has an option to purchase these facilities.
(2) Does not give effect to any renewal options.
(3) Represents a 2.5 acre ground lease adjacent to Texas facility.
The Company owns 2.1 acres (including 38,000 square feet of warehouse,
production and office space) in Gainesville, Texas. In September, 1994 the
Company purchased 3.1 acres (including 63,300 square feet of warehouse,
production and office space) in Bensenville, Illinois for the Company's Illinois
manufacturing operations. The Texas and Illinois facilities are currently
encumbered by a combined $2 million mortgage. In February 1997 the Company
purchased for cash 9.73 acres (including 63,000 square feet of warehouse,
production and office space) in Commerce City, Colorado for the Company's
Colorado manufacturing operations. The Company also owns approximately 1.59
unencumbered acres (including 35,100 square feet of warehouse, production and
office space) in Deerfield, Wisconsin which was vacated in December 1995 by the
Company and its operations incorporated into the Illinois facility. The
Wisconsin facility is currently leased to an unrelated lessee for $6,250 per
month.
ITEM 3. LEGAL PROCEEDINGS
6
<PAGE>
In the normal course of business, the Company encounters certain litigation
matters, which in the opinion of management, will not have a significant
adverse effect on the financial position or the results of operations of the
Company.
On April 16, 1996, the Company was named as defendant in a complaint filed by
Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims for
breach of contract and promissory estoppel relating to an Agreement in
Principle entered into in connection with a proposed acquisition of the
Company by Bonar U.S., Inc. On April 3, 1996 the Company announced that it
had terminated the Agreement in Principle pursuant to its terms. The
complaint requested damages of $7,011,484. On May 17, 1996, the Company filed
a counterclaim against Bonar U.S., Inc. and Bonar Plastics, Inc. seeking
damages totaling $25,237,725 for breach of the Confidentiality Agreement with
the Company, misappropriation of trade secrets, intentional interference with
a prospective economic advantage which the Company obtained as a result of an
indication of interest from a third party and breach of a Royalty Agreement
between Bonar Plastics, Inc. and one of the Company's operating divisions
(formally known as Custom Rotational Molding, Inc.). In March 1997, the
Company reached an amicable out of court settlement with Bonar. The
settlement involved mutual general releases by the parties, dismissals of the
actions brought by the parties and payments to Bonar of $400,000 in March
1997 and $350,000 in September 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock ($.01 stated value) is traded on the American
Stock Exchange ("AMEX") under the symbol "RMI". The number of stockholders of
record of the Company's Common Stock was approximately 6,200 at September 15,
1998.
PRICE RANGE OF COMMON STOCK
The following table sets forth the quarterly price ranges of the Company's
Common Stock in Fiscal 1998 and 1997, as reported on the composite
transactions reporting system for AMEX listed stocks.
<TABLE>
<CAPTION>
High Low
--------- --------
<S> <C> <C>
Fiscal 1997
First Quarter Ended September 30, 1996 $ 1-1/2 $1-5/16
Second Quarter Ended December 31, 1996 1-3/4 1-1/4
Third Quarter Ended March 31, 1997 1-1/16 1-3/8
Fourth Quarter Ended June 30, 1997 1-1/2 1-1/4
Fiscal 1998
First Quarter Ended September 30, 1997 $1-5/16 $ 1-3/8
Second Quarter Ended December 31, 1997 1-3/4 1-3/8
Third Quarter Ended March 31, 1998 1-9/16 1-1/4
Fourth Quarter Ended June 30, 1998 1-3/8 15/16
</TABLE>
In fiscal 1998, 1997 and 1996, the Company paid a regular cash dividend of
$.04 per share on its Common Stock. Any future cash dividends or other
distributions of stock will be determined solely by the Board of Directors
and will be based on the Company's future financial ability to declare and
pay such dividends. Additionally, certain lending agreements restrict the
Company from declaring or paying dividends on its Common Stock. (See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations: Liquidity and Capital Resources.") According to the lending
agreement with its bank, the Company may not declare or pay any dividend or
distribution on any stock or redeem, retire, repurchase or otherwise acquire
any of such shares unless the Company can obtain prior bank authorization and
appropriate waivers.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------------------
1998 (B) 1997 1996 1995(C) 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $38,058,900 $39,385,100 $35,703,600 $35,887,600 $31,346,300
Cost of goods sold 29,268,400 29,292,100 26,443,700 26,298,900 23,312,300
Gross margin 8,790,500 10,093,000 9,259,900 9,588,700 8,034,000
Selling, general and
administrative expenses (F) 7,327,300 6,239,600 6,313,100 5,767,900 5,636,800
Interest expense 793,700 556,500 696,500 766,500 592,500
Income from continuing operations
before change in accounting principle
for income taxes (D) 417,200 1,441,800 1,472,700 3,287,600 1,873,000
Cumulative effect of change in account-
ting principle for income taxes (E) - - - - 4,013,000
Net income $ 417,200 $ 1,441,800 $ 1,472,700 $ 3,287,600 $ 5,886,000
Income/(loss) from continuing
operations per common share $ .03 $ .10 $ .10 $ .24 $ .13
Average common shares
outstanding (A) 14,445,200 14,134,600 13,848,500 12,595,200 11,942,200
OTHER FINANCIAL DATA
Income from continuing
operations as a percent of sales 1.1% 3.7% 4.1% 9.2% 6.0%
</TABLE>
(A) Computed on the basis of the weighted average number of common shares
outstanding during each year.
(B) Includes the results of operations of Rotocast since the effective date
of merger.
(C) Includes the results of operations of CRM since the effective date of
acquisition.
(D) Fiscal year 1997 includes $1,010,800 in costs relating to a lawsuit
settlement.
(E) Represents the recognition of a net deferred tax asset in conjunction
with the adoption of FAS 109, "Accounting for Income Taxes" (see Note 14
of Notes to Financial Statements).
(F) In 1998, includes $280,300 in plant consolidation expenses.
9
<PAGE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------
1998 (B) 1997 1996 1995(C) 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets $16,463,600 $12,814,000 $13,023,000 $11,903,200 $ 9,244,500
Current liabilities 6,452,800 5,099,700 4,864,500 4,766,000 7,256,300
Working capital surplus 10,010,800 7,714,300 8,158,500 7,137,200 1,988,200
Total assets 40,563,800 30,634,400 29,055,700 30,359,400 24,939,000
Long-term debt 10,976,500 6,486,100 5,864,100 7,707,700 2,834,400
Total liabilities 19,155,900 11,589,800 10,732,600 12,477,700 10,095,700
Preferred stock - - - 3,000,000 3,875,000
Current ratio 2.6 to 1 2.5 to 1 2.7 to 1 2.5 to 1 1.3 to 1
Net book value per
common share (A) $ 1.35 $ 1.35 $ 1.29 $ 1.15 $ .92
</TABLE>
(A) Computed on the basis of the actual number of common shares outstanding at
the end of the fiscal year.
(B) Includes the effect of the Rotocast merger.
(C) Includes the effect of the acquisition of CRM.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
To the extent that this 10-K Annual Report discusses matters which are not
historical, including statements regarding future financial results,
information or expectation about products or markets, or otherwise makes
statements about future events, such statements are forward-looking and are
subject to a number of risks and uncertainties that could cause actual
results to differ materially from the statements made. These include, among
others, fluctuations in costs of raw materials and other expenses, costs
associated with plant closures, downturns in the markets served by the
Company, the costs associated with new product introductions, as well as
other factors described under the heading Item 3, "Legal Proceedings", under
this Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and Footnote 1 to Financial Statements.
OPERATIONS
Net sales were $38,058,900 in fiscal 1998 which fell 3.4% below fiscal 1997
net sales of $39,385,100. Fiscal 1998 was transitional year for the Company
as it endured difficult market conditions while continuing its internal
efforts to increase manufacturing capabilities, promote efficient operations
and restructure and build its marketing functions. Following fiscal 1997's
stellar increase in custom molded sales, the Company reported a 17.6% drop in
this category. As such, during fiscal 1998 this reduction accounted for the
majority of the loss in sales volumes in the current period. The Company's
markets have been unpredictable over the last few years and has caused the
Company to readily adapt itself to always take the utmost advantage of the
current economic and market conditions we operate in. During the fourth
quarter of fiscal 1998, the Company began to see improvements in the
marketplace. This coupled with the Rotocast merger resulted in improved sales
volumes in the fourth quarter of fiscal 1998. Sales volumes increased
approximately 26.5% to $12,798,400 for the three months ended June 30, 1998
compared to the same period last year. Sales from the recently merged
Rotocast divisions accounted for 9% of the Company's net sales in fiscal 1998.
Net sales increased $3,681,500 or 10.3% to $39,385,100 in fiscal 1997
compared to $35,703,600 in fiscal 1996. The majority of the Company's product
lines sustained relatively level sales volumes as compared to fiscal 1996
with the increased volumes related directly to increases in marine, custom
molded products and customer tooling. Custom molded products reported an
impressive 40% increase over prior year volumes. Management attributes this
gain to its experienced sales/engineering staff's ability to expand the
Company's marketshare of these products. During the last several years the
Company has also capitalized on the roto-molding industry's overall expanding
marketplace for its products. In fiscal 1996, we experienced a lackluster
marketplace due to volatile resin prices and then what appeared to be a
return of consumer confidence in fiscal 1997. However, certain analysts in
the industry have indicated that the industry appears to have reached a
temporary plateau. Management continues to watch these trends to ascertain
what impact it will have on the Company's growth projections.
Cost of goods was $29,268,400 or 76.9% of net sales in fiscal 1998 compared
to $29,292,100 or 74.4% and $26,443,700 or 74.1% of net sales in fiscal 1997
and 1996. Since fiscal 1995, the roto-molding industry has experienced
extreme volatility in plastic resin prices. These price increases have
resulted in substantial increases in raw material prices per pound since the
beginning of this four year period. The price increases were enacted by the
various resin suppliers in response to domestic and foreign material demands
as well as various natural and internal disasters experienced by the resin
suppliers. The cost of plastic resin represents a significant portion of the
Company's manufacturing costs and has continually challenged the Company to
effectively mitigate these increases. Since fiscal 1995, the Company was
relatively successful in mitigating these resin price increases by initiating
customer price increases and various raw material purchasing strategies. In
fiscal 1997, the Company also benefited from increased volumes of custom
molded products. Pricing structures for custom molded products typically
follow market trends and allow the Company to obtain gross margin levels
consistent with Company objectives. However, due to fiscal 1998's adverse
market conditions which resulted in the reduction in fiscal 1998 sales
volumes coupled with high resin prices during the majority of the year, the
Company was unable to maintain consistent operating results. In the fourth
quarter of fiscal 1998, management began to see more favorable trends in
resin prices. As these trends continue into fiscal 1999, management is
optimistic about improved gross profit margins. Management will continue to
monitor these trends and their affect on the marketplace to maximize any
obtainable benefits. During the fourth quarter of fiscal 1998, management
also consolidated two of its manufacturing locations into its remaining ten
locations. These restructuring efforts should have a positive impact on gross
margins during future periods due to the elimination of the fixed overhead
costs associated with the closed facilities.
11
<PAGE>
Selling, general and administrative expenses were $7,047,000 or 18.5% of net
sales in fiscal 1998 compared to $6,239,600 or 15.8% of net sales in fiscal
1997. The increase relative to net sales is attributed to the decrease in
sales volumes during the first three quarters of fiscal 1998 plus the
additional expenses related to the Rotocast operations (approximately $1.2
million) which was incurred in the fourth quarter of fiscal 1998. Since the
Rotocast merger, management has focused its efforts on restructuring sales
and administrative functions at these facilities. These efforts coupled with
the plant consolidations mentioned above should result in necessary cost
reductions to bring SG&A costs in synch with future sales volumes and
management's objectives.
Selling, general and administrative expenses were $6,239,600 or 15.8% of net
sales in fiscal 1997 compared to $6,313,100 or 17.7% of net sales in fiscal
1996. The overall decrease is primarily attributable to the 10.3% increase in
1997 sales volumes and management's ability to keep these costs in synch with
the current sales volume levels. Management continued the restructuring of
its sales/engineering staff in fiscal 1997. The changes enacted have had a
positive impact on the Company's sales growth with a minimal impact to
increased selling costs. The Company continues to benefit from the operating
efficiencies realized since the completed consolidation of the Illinois and
Wisconsin facilities.
Income from operations was $1,463,200 or 3.8% of net sales in fiscal 1998
compared to $3,853,400 or 9.8% and $2,946,800 or 8.3% of net sales in fiscal
1997 and 1996. Again, current year operations were effected by sluggish sales
volumes, high resin prices and the additional SG&A costs related to the
Rotocast operations. Management perceives some indication within the industry
to move beyond its previous sales plateau. This potential improvement in
market conditions coupled with favorable resin costs and the cost savings
related to the recent plant consolidations should improve future operating
results. However, if resin prices do not remain stable and the marketplace
reacts adversely to current domestic and foreign economic conditions which
have recently arisen, these factors could adversely effect the Company's
ability to meet future operating objectives.
Interest expense increased $237,200 to $793,700 in fiscal 1998, compared to
$556,500 in fiscal 1997. The increase is primarily attributed to an increase
in the Company's debt structure when compared to the same period last year.
The increase in the Company's debt structure is attributed to the Colorado
facility purchase and its subsequent improvements in the later part of fiscal
1997 and during fiscal 1998 (approximately $1.4 million), $1.6 million in
capital expenditures at the other Company facilities in fiscal 1998, and 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. In addition, the Company has incurred an increase in short-term
borrowings due to a decrease in cash flows from operations.
Interest expense decreased $140,000 to $556,500 in fiscal 1997 compared to
$696,500 in fiscal 1996. The decrease is attributed to reductions in the
Company's overall debt structure during the first half of fiscal 1997 coupled
with stable interest rates during the majority of the year and the Company's
extensive use of optional bank LIBOR interest rates. During later part of
fiscal 1997, the Company made significant machinery and equipment purchases
and purchased a 9.73 acre facility in Commerce City, Colorado to expand and
relocate its Colorado operations. These expenditures set the stage for the
Company's future growth and were funded by operating cash flows and the
issuance of additional bank financing. The later has increased the Company's
overall debt structure by approximately $725,000 at fiscal year end and which
resulted in additional interest costs in fiscal 1998.
Net income was $417,200 or $.03 per common share in fiscal 1998 compared to
$1,441,800 or $.10 per common share in fiscal 1997. The decrease is directly
related to the reduction in sales volume levels which impeded the
preservation of the Company's gross margin goals coupled with the increases
in SG&A and interest expenses outlined above. As we look forward, management
is extremely pleased with the benefits which will result from the Rotocast
merger and the consolidation of two of its operating divisions in fiscal
1998. The Rotocast merger has provided the Company a unique opportunity to
capitalize on expanding its marketshare with the newly acquired product lines
and distribution channels as well as the cost savings obtainable by combining
various manufacturing, sales and administrative functions.
Net income remained relatively consistent at $1,441,800 or $.10 per common
share in fiscal 1997 compared to $1,472,700 or $.10 per common share in
fiscal 1996. Although consistent with prior year, the Company's 1997 results
included costs of $1,010,800 or $.07 per common share related to litigation
settlement expenses (see Note 15 of "Notes to Financial Statements). Total
litigation costs represent an out of court settlement of $750,000 plus
additional legal costs of $260,800.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $2,296,500 to $10,010,800 at June 30, 1998 compared
to $7,714,300 at June 30, 1997. The increase is primarily related to the
inclusion of Rotocast's net current assets as of June 30, 1998, net of normal
fluctuations in
12
<PAGE>
accounts receivables and accounts payables, an increase in inventories
related to raw material purchasing strategies and an increase in the current
portion of long-term debt related to additional machinery and equipment
financing.
Cash provided by operations was $1,937,300 for fiscal 1998 which reflected a
decrease of $1,841,600 in relation to prior period results. The reduction is
primarily attributed to the lower sales volume levels reported in the current
period which resulted in a decrease in net income of approximately $1
million, as well as a decrease in accounts payable and increases in accounts
receivable and inventories, as indicated above, which increased cash used by
operating activities by $769,000.
The Company expended a total of $2,103,100 for property, plant and equipment
during fiscal 1998 compared to $3,797,800 for fiscal 1997. The decrease over
prior year is directly related to the costs incurred to purchase the Commerce
City, Colorado facility. The Company continued to complete its internal
expansion project that it began in fiscal 1997. During the current period the
Company acquired two additional roto-molding machines for its Idaho facility,
CNC routers for its Chicago, Nevada and Idaho facilities, as well as resin
silo projects in Florida and Colorado. The Company has also substantially
completed its building improvement project at its new Commerce City, Colorado
facility. The Company will continue its internal expansion project in fiscal
1999 as it determines the additional requirements associated with the
Rotocast operations. This commitment has allowed the Company to stay in the
forefront of the industry and optimizes our position for future growth.
In January 1998, the Company 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 $875,000 in machinery and equipment purchases. The note is
due in monthly interest only payments through November 15, 1998, at which
time it will convert to a sixty month fully amortizable note.
In connection with the Rotocast merger, the Company issued a eighteen month
$2,000,000 note payable to the seller and also replaced Rotocast's existing
line of credit and term debt with a 90 day bank note in the amount of
$1,750,000. The note to the seller is payable with one interest only payment
due March 25, 1999 and second principal and interest payment due upon
maturity on September 25, 1999. The $2,000,000 note is secured by an
irrevocable standby letter of credit which can only be called upon if the
principal balance is not paid within 10 days of maturity.
In April 1998, the bank increased the Company's total loan facility to $16.5
million. This was done in conjunction with an appraisal of Rotocast's fixed
assets. The ninety day note which was issued to retire Rotocast's existing
debt was replaced with a $2,000,000 sixty month fully amortizable note
payable and then in July 1998, the note was increased to $3,000,000. The note
is payable in monthly principal payments of $50,000 plus interest and will
mature on July 1, 2003. Also, in July 1998, the bank replaced the Company's
existing real estate loan with a new $2,000,000 loan secured by the Company's
Bensenville, Illinois and Gainesville, Texas properties. The note will be due
in monthly principal payments of approximately $6,700 plus interest on a
twenty-five year amortization with the outstanding principal due on July 1,
2008. The other major change to the Company's total debt structure with the
bank was an increase to the total principal available on the Company's line
of credit from $5 million to $7 million which is also inclusive of a $2
million subfeature for the issuance of a standby letter of credit securing
the note payable due to the seller of Rotocast. The maturity date of the line
of credit was extended to October 1, 2000. In addition, the bank reduced the
LIBOR interest rate spread from 2.5% down to 2.25% and made this option
available on all bank borrowings.
Net borrowings under the line of credit increased $1.5 million to $3.9
million between June 30, 1997 and June 30, 1998. Current increases in the
line balance are related to a combination of the ongoing capital
expenditures, including the building improvements in Commerce City, Colorado,
payments made during the year in connection with the Bonar litigation
settlement, the fiscal 1998 common stock dividend payment and an increased
reliance on the line of credit due to the reduction in income from
operations. At June 30, 1998, the Company had approximately $1.1 million
available for future borrowings under the 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. With the advances on the
additional long-term debt in July 1998 the available borrowings under the
line of credit will increase by an additional $2 million.
Effective July 15, 1998, the Company initiated an interest rate swap
agreement with the bank. The agreement will allow the Company to fix a
portion of its outstanding term and line of credit debt from a variable
floating rate to a fixed interest rate in efforts to hedge against future
increases in the bank's prime rate. The agreement matures July 15, 2003.
Stockholder's equity increased $2,363,300 to $21,407,900 in fiscal 1998 and
since fiscal 1992 stockholder's equity has more than doubled. This increase
includes the effect of the Rotocast merger net of the Company's third annual
common stock dividend of $.04 per common share, or $552,800, which was
declared on December 9, 1997 and paid on January 28, 1998 to
13
<PAGE>
stockholders of record on January 8, 1998. In fiscal 1998, the Company
initiated and completed a common stock buy back program which resulted in the
repurchase and subsequent retirement of 332,200 shares of common stock at a
cost of $501,100.
On April 16, 1996, the Company was named as a defendant in a complaint filed
by Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims
for breach of contract and promissory estoppel relating to an Agreement in
Principle entered into in connection with a proposed acquisition of the
Company by Bonar U.S., Inc. On April 3, 1996, the Company announced that it
had terminated the Agreement of Principle pursuant to its terms. The
complaint requested damages of $7,011,484. On May 17, 1996, the Company filed
a counterclaim against Bonar U.S., Inc. and Bonar Plastic, Inc. seeking
damages totaling $25,237,725 for breach of the Confidentiality Agreement with
the Company, misappropriation of trade secrets, intentional interference with
a prospective economic advantage which the Company obtained as a result of an
indication of interest from a third party and breach of a Royalty Agreement
between Bonar Plastic, Inc. and one of the Company's operating divisions
(formally known as Custom Rotational Molding Inc.) In March 1997, the Company
reached an amicable out of court settlement with Bonar. The settlement
involved mutual general releases by the parties, dismissals of the actions
brought by the parties and payments to Bonar of $400,000 in March 1997 and
$350,000 in September 1997. The $350,000 payment had been previously accrued
for and was included in accounts payable in the accompanying June 30, 1997
balance sheet.
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 or 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 is 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement Schedules listed in Item
14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Company incorporates by reference the information set forth under the
caption "Election of Directors" in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission, and mailed to stockholders in
connection with the Company's Annual Meeting of the Stockholders to be held
on December 8, 1998 ("the Proxy Statement")
EXECUTIVE OFFICERS
As of September 15, 1998, the executive officers of the Company were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- ----- --------
<S> <C> <C>
Sherman McKinniss 62 President, Chief Executive Officer, Chairman of the Board
Robert E. Gawlik 50 Chief Operating Officer
E. Paul Tonkovich 60 Secretary, Director
Douglas W. Russell 37 Chief Financial Officer, Assistant Secretary/Treasurer
</TABLE>
SHERMAN MCKINNISS. Mr. McKinniss has served as President, Chief Executive
Officer and a Director of the Company since August 1991 and was appointed as
Chairman of the Board in December 1994. He was President and a Director of
Rotonics from 1987-1991. Previously, he owned and operated RMI, which he sold
to the Company in 1986 and was a partial owner of Rotational Molding,
Inc.-Florida which was merged into Rotonics in 1988.
ROBERT E. GAWLIK. Mr. Gawlik was appointed as Chief Operating Officer of the
Company in August 1998. Prior to this, he served as General Manager for
Bonar Plastic's Oregon facility from 1991-1998, and as Executive
Vice-President of Encore Industries from 1986-1989, and later as President of
Encore Group from 1989-1991.
E. PAUL TONKOVICH. Mr. Tonkovich has served as Secretary and a Director of
the Company since August 1991. He has been a practicing attorney since
January 1966. He was legal counsel to Rotonics and to Mr. McKinniss and is
now legal counsel for the Company.
DOUGLAS W. RUSSELL. Mr. Russell has served as Chief Financial Officer and
Assistant Secretary/Treasurer of the Company since 1991. Prior to that he
was a Senior Auditor for the accounting firm Hallstein & Warner from 1988
until 1991, and was Assistant Controller of RMI from September 1985 to
September 1987.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information set forth under the
captions "Compensation of Executive Officers", the "Summary Compensation
Table" and related disclosure information, "Certain Transactions", and
"Compensation of Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information set forth under the
caption "Security Ownership by Certain Beneficial Holders" in the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information set forth under the
headings "Information Concerning the Board of Directors" under the caption
"Election of Directors", "Executive Officers", and "Certain Transactions" in
the Proxy Statement.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page
------
<S> <C>
(1) Financial Statements:
Report of Independent Public Accountants F-1
Balance Sheet, June 30, 1998 and 1997 F-2
Statement of Income,
Years Ended June 30, 1998, 1997 and 1996 F-3
Statement of Changes in Stockholders' Equity,
Years Ended June 30, 1998, 1997, and 1996 F-4
Statement of Cash Flows,
Years Ended June 30, 1998, 1997, and 1996 F-5
Notes to Financial Statements F-6
(2) Financial Statement Schedules:
VIII Valuation and Qualifying Accounts,
Years Ended June 30, 1998, 1997, and 1996 F-17
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.
(b) Reports on Form 8-K.
During the fourth quarter of fiscal year ended June 30, 1998, the registrant filed
current reports on Form 8-K and 8-K/A for the following events:
1. March 25, 1998 (Date of earliest event reported), Item 2, "Acquisition or Disposition
of Assets". This report provided a description of the Rotocast International Inc. and
subsidiaries merger with the registrant.
2. March 25, 1998 (Date of earliest event reported), Item 7, "Financial Statements and
Exhibits". This report was an amendment to the original Form 8-K and provided financial
statements of Rotocast for the year ended December 31, 1997, and for the three months
ended March 31, 1998, proforma combined balance sheets of Rotocast and the registrant as
of March 31, 1998, and the proforma combined statement of operations for the year ended
June 30, 1997, and for the nine months ended March 31, 1998.
(c) The following exhibits are filed as part of this report:
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
10.1 Credit Agreement and related Promissory notes between registrant and Wells Fargo Bank dated June 15, 1998.
23(a) Consent of Independent Public Accountants - Arthur Andersen LLP
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ROTONICS MANUFACTURING INC.
By /s/ SHERMAN MCKINNISS
-----------------------------------
Sherman McKinniss
President, Chief Executive Officer
Date 09/25/1998
By /s/ DOUGLAS W. RUSSELL
-----------------------------------
Douglas W. Russell
Chief Financial Officer
Assistant Secretary/Treasurer
Date 09/25/1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ E. PAUL TONKOVICH Secretary, Director 09/25/1998
- ------------------------------
E. Paul Tonkovich
/s/ DAVID C. POLITE Director 09/25/1998
- ------------------------------
David C. Polite
/s/ LARRY DEDONATO Director 09/25/1998
- ------------------------------
Larry DeDonato
/s/ JAMES E. EVANS Director 09/25/1998
- ------------------------------
James E. Evans
/s/ LARRY L. SNYDER Director 09/25/1998
- ------------------------------
Larry L. Snyder
/s/ ROBERT GROSSMAN Director 09/25/1998
- ------------------------------
Robert Grossman
</TABLE>
17
<PAGE>
ROTONICS MANUFACTURING INC.
FINANCIAL STATEMENTS
* * * * *
JUNE 30, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Rotonics Manufacturing Inc.:
We have audited the accompanying balance sheets of ROTONICS MANUFACTURING
INC. (a Delaware corporation) as of June 30, 1998 and 1997, and the related
statements of income, changes in stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rotonics Manufacturing Inc.
as of June 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index
appearing under Item 14(a)(2) is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California
August 27, 1998
F-1
<PAGE>
ROTONICS MANUFACTURING INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 30,700 $ 12,100
Accounts receivable, net of allowance for doubtful accounts
of $148,000 and $90,000, respectively (Notes 8 and 9) 6,973,800 5,334,400
Current portion of notes receivable (Note 3) 62,600 48,100
Inventories (Notes 4 , 8 and 9) 7,081,900 5,602,700
Deferred income taxes, net (Note 14) 2,106,400 1,574,600
Prepaid expenses and other current assets 208,200 242,100
----------- -----------
Total current assets 16,463,600 12,814,000
Notes receivable, less current portion (Note 3) 455,000 455,000
Investment in partnership (Note 5) 133,200 -
Deferred income taxes, net (Note 14) - 1,441,400
Property, plant and equipment, net (Notes 6, 8 and 9) 18,250,000 10,799,500
Intangible assets, net (Note 7) 5,131,800 5,065,500
Other assets 130,200 59,000
----------- -----------
$40,563,800 $30,634,400
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 9) $ 1,784,000 $ 1,281,300
Accounts payable 3,719,600 2,953,100
Accrued liabilities (Note 11) 949,200 865,300
----------- -----------
Total current liabilities 6,452,800 5,099,700
Bank line of credit (Note 8) 3,926,200 2,373,400
Long-term debt, less current portion (Note 9) 5,050,300 4,112,700
Long-term debt due related parties (Note 10) 2,000,000 -
Deferred income taxes, net (Note 14) 1,726,600 -
Other liabilities - 4,000
----------- -----------
Total liabilities 19,155,900 11,589,800
----------- -----------
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 15,806,361 and 14,065,995 shares,
respectively, net of treasury shares (Notes 10 and 13) 26,921,400 24,422,500
Accumulated deficit (5,513,500) (5,377,900)
----------- -----------
Total stockholders' equity 21,407,900 19,044,600
----------- -----------
$40,563,800 $30,634,400
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the year ended June 30,
------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 38,058,900 $ 39,385,100 $ 35,703,600
------------ ------------ ------------
Costs and expenses:
Cost of goods sold 29,268,400 29,292,100 26,443,700
Selling, general and administrative expenses 7,047,000 6,239,600 6,313,100
Plant consolidation expenses (Note 2) 280,300 - -
------------ ------------ ------------
Total costs and expenses 36,595,700 35,531,700 32,756,800
------------ ------------ ------------
Income from operations 1,463,200 3,853,400 2,946,800
------------ ------------ ------------
Other (expense)/income:
Interest expense (793,700) (556,500) (696,500)
Lawsuit settlement (Note 15) - (1,010,800) -
Other income, net 96,200 98,500 156,900
------------ ------------ ------------
Total other expense (697,500) (1,468,800) (539,600)
------------ ------------ ------------
Income before income taxes 765,700 2,384,600 2,407,200
Income tax provision (Note 14) (348,500) (942,800) (934,500)
------------ ------------ ------------
Net income 417,200 1,441,800 1,472,700
Preferred stock dividends - - (62,000)
------------ ------------ ------------
Net income applicable to common shares 417,200 1,441,800 1,410,700
------------ ------------ ------------
------------ ------------ ------------
Basic/diluted income per common share (Note 1) $ .03 $ .10 $ .10
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Deficit Total
-------------------------- --------------------------- ------------ ------------
Shares Amount Shares Amount
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995 3,000,000 $ 3,000,000 $12,903,752 $21,980,500 $(7,098,800) $17,881,700
Redemptions of preferred stock (2,749,800) (2,749,800) 1,374,884 2,749,800 - -
Stock issued in connection with
exercise of outstanding options - - 5,333 4,200 - 4,200
Repurchase of preferred shares (250,200) (250,200) - - - (250,200)
Repurchase of common stock - - (125,452) (157,100) - (157,100)
Preferred stock dividends - - - - (62,000) (62,000)
Common stock dividends - - - - (566,200) (566,200)
Net income - - - - 1,472,700 1,472,700
----------- ----------- ----------- ------------ ------------ -----------
Balances, June 30, 1996 - - 14,158,517 24,577,400 (6,254,300) 18,323,100
Stock issued in connection with
exercise of outstanding options - - 7,500 6,100 - 6,100
Repurchase of common stock - - (100,022) (161,000) - (161,000)
Common stock dividends - - - - (565,400) (565,400)
Net income - - - - 1,441,800 1,441,800
----------- ----------- ----------- ------------ ------------ -----------
Balances, June 30, 1997 - - 14,065,995 24,422,500 (5,377,900) 19,044,600
Stock issued in connection with
Rotocast International Inc. merger - - 2,072,539 3,000,000 - 3,000,000
Repurchase of common stock - - (332,173) (501,100) - (501,100)
Common stock dividends - - - - (552,800) (552,800)
Net income - - - - 417,200 417,200
----------- ----------- ----------- ------------ ------------ -----------
Balances, June 30, 1998 - $ - 15,806,361 $ 26,921,400 $(5,513,500) $21,407,900
----------- ----------- ----------- ------------ ------------ -----------
----------- ----------- ----------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended June 30,
------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 417,200 $ 1,441,800 $ 1,472,700
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,034,800 1,617,000 1,588,100
Loss on sales of equipment 67,500 21,800 -
Deferred income tax expense 323,000 786,200 743,100
Provision for doubtful accounts 39,300 63,900 58,800
Changes in assets and liabilities, net of
effect from purchase of business:
(Increase)/decrease in accounts receivable (324,900) 392,400 (508,000)
(Increase)/decrease in inventories (267,000) (663,300) 412,700
Decrease/(increase) in prepaid expenses and
other current assets 177,200 (23,600) (103,700)
(Increase)/decrease in other assets (72,400) 23,200 2,900
(Decrease)/increase in accounts payable (177,100) 243,700 329,000
Decrease in accrued liabilities (280,300) (124,200) (198,100)
Decrease in income taxes payable - - (23,400)
------------ ------------ -------------
Net cash provided by operating activities 1,937,300 3,778,900 3,774,100
------------ ------------ -------------
Cash flows from investing activities:
Acquisition of Rotocast, net of cash obtained (74,100) - -
(Advances)/repayments on notes receivable (11,600) (1,200) 5,800
Capital expenditures (2,103,100) (3,797,800) (981,100)
Proceeds from sales of equipment 93,500 3,200 -
Distribution from investment in partnership 2,300 - -
------------ ------------ -------------
Net cash used in investing activities (2,093,000) (3,795,800) (975,300)
------------ ------------ -------------
Cash flows from financing activities:
Borrowings under line of credit 11,638,800 9,700,000 7,758,800
Repayments under line of credit (10,086,000) (9,310,100) (8,835,600)
Proceeds from issuance of long-term debt 950,000 1,526,400 500,000
Repayments of long-term debt (1,285,500) (1,189,700) (1,264,600)
Redemption of preferred stock - - (250,200)
Payment of preferred stock dividends - - (85,400)
Payment of common stock dividends (541,900) (554,300) (554,000)
Proceeds from exercise of stock options and warrants - 6,100 4,200
Repurchases of common stock (501,100) (161,000) (157,100)
------------ ------------ -------------
Net cash provided by/(used in) financing activities 174,300 17,400 (2,883,900)
------------ ------------ -------------
Net increase/(decrease) in cash 18,600 500 (85,100)
Cash at beginning of year 12,100 11,600 96,700
------------ ------------ -------------
Cash at end of year $ 30,700 $ 12,100 $ 11,600
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ROTONICS MANUFACTURING INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND OPERATIONS
Rotonics Manufacturing Inc. (the "Company"), a Delaware corporation
manufactures and markets plastic products for commercial, agricultural,
refuse, pharmaceutical, marine, healthcare, retail, and residential use, as
well as an array of custom molded plastic products to customers in a variety
of industries located in diverse geographic markets. No single customer
accounted for more than 10% of the Company's net sales in fiscal 1998, 1997,
or 1996. In fiscal 1998, the Company purchased in aggregate approximately 89%
of its plastic resin from four vendors. Plastic resin represents a
significant portion of the Company's manufacturing costs. As such, economic
factors which affect the Company's plastic resin vendors will have a
potential impact on the Company's future operations.
The Company's significant accounting policies are as follows:
REVENUE RECOGNITION
Revenues are recognized upon shipment to the customer or when title passes to
the customer based on the terms of the sales, and are recorded net of sales
discounts, returns and allowances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed using the straight-line method and the estimated
useful lives of the assets range from three to thirty-nine years. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in income for the period. The cost of maintenance and repairs is
charged to income as incurred; costs relating to significant renewals and
betterments are capitalized.
INTANGIBLE ASSETS
The excess of the aggregate purchase price over the fair value of the net
assets of businesses acquired is amortized on the straight-line basis over
periods ranging from fifteen to forty years. Patents are amortized on the
straight-line basis over their useful lives of seventeen years, or at their
remaining useful life from date of acquisition.
F-6
<PAGE>
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
SFAS 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Company's financial statements or
tax returns. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than enactments of changes in tax
laws or rates.
EARNINGS PER SHARE
Earnings per share are calculated under guidelines of SFAS No. 128 "Earnings
per Share" which was adopted by the Company as of December 31, 1997. 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 the calculation now uses the average share price for the reporting
period to compute dilution from potential dilutive securities under the
treasury stock method. Potential dilutive securities for the Company include
outstanding stock options, which had no impact on EPS for all periods
presented. The weighted average number of shares used in determining basic
EPS was 14,445,200, 14,134,600 and 13,848,500 in fiscal 1998, 1997 and 1996,
respectively. The adoption of this pronouncement had no impact to the
Company's results of operations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed of" and SFAS No. 123, "Accounting
for Stock-Based Compensation." Under SFAS No. 123, the Company has elected to
disclose pro forma net income and earnings per share as if the fair value
based accounting method of SFAS No. 123 had been used for stock based
compensation. The adoption of these pronouncements had no impact to the
Company's financial position or results of operations.
Effective September 30, 1998, the Company will be required to adopt 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 is not
expected to have a significant impact on the Company's results of operations.
Effective for fiscal year end June 30, 1999, the Company will be required to
adopt 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 is not expected to 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.
F-7
<PAGE>
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 transaction were included in the Company's financial
statements effective as of March 31, 1998.
As part of the reorganization of Rotonics and Rotocast, the Company relocated
its operations in Warminster, Pennsylvania and Arleta, California into its
other operating facilities. The relocation of these plants resulted in
non-recurring costs of approximately $280,300.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statement of combined operations
for the years ended June 30, 1998 and 1997 assumes the Rotocast merger
occurred at the beginning of the respective periods 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 years ended June 30,
------------------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Net sales $ 45,746,800 $ 49,152,100
Total costs and expenses (45,765,700) (47,422,300)
------------ ------------
Income/(loss) before provision for income taxes (18,900) 1,729,800
Provision for income taxes - (691,900)
------------ ------------
Net income/(loss) $ (18,900) $ 1,037,900
------------ ------------
------------ ------------
Income per common share $ .00 $ .06
------- -------
------- -------
</TABLE>
NOTE 3 - NOTES RECEIVABLE:
On March 31, 1995, the Company and a customer entered into an agreement under
which the Company acquired from this customer certain assets, including molds
and trade accounts receivable, at their total estimated fair value of
$357,800, which was applied against the principal of a 1993 Promissory Note
owed by this customer to the Company. The remaining unpaid principal,
together with accrued interest and open trade receivable from this customer
as of March 31, 1995, were exchanged for a new note with a principal balance
of $455,000, bearing interest at 8% per annum and maturing on March 31, 2005.
Effective March 31, 1995, the Company sold products manufactured using these
molds directly to end users. The Company shall pay to this former customer
royalties at the initial rate of 10% of the Company's net sales of these
products. Half of the royalty payments shall be applied to reduce principal
and interest until the former customer has received a total of $300,000 in
royalty payments or March 31, 1998, whichever is earlier. Subsequently, all
royalty payments shall be applied to principal and interest until such
principal and interest are paid in full, at which time the royalty rate will
be reduced to 5% through March 31, 2005. As of June 30, 1998 and 1997, the
total balance of this note amounted to $517,600 and $503,100 including
accrued interest of $62,600 and $48,100, respectively. The Company intends to
hold this note until maturity.
F-8
<PAGE>
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Inventories consist of:
Raw materials $ 4,002,400 $ 3,160,000
Finished goods 3,079,500 2,442,700
------------ ------------
$ 7,081,900 $ 5,602,700
------------ ------------
------------ ------------
</TABLE>
NOTE 5 - INVESTMENT IN PARTNERSHIP
The Company owns a 33-1/3% interest in a real estate venture which was
acquired in 1998 and is accounted for using the equity method. The investment
consists principally of a note receivable which is payable in monthly
installments, including interest at 7%, to 2004, with annual principal
reductions as provided.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Property, plant and equipment consist of:
Land $ 1,039,500 $ 1,039,500
Buildings and building improvements 4,021,000 3,274,500
Machinery, equipment, furniture and fixtures 21,534,500 13,762,700
Construction in progress 836,300 359,900
----------- ------------
27,431,300 18,436,600
Less - accumulated depreciation (9,181,300) (7,637,100)
----------- ------------
$18,250,000 $10,799,500
----------- ------------
----------- ------------
</TABLE>
NOTE 7 - INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Intangible assets consist of:
Patents, net of accumulated amortization of $100,900 and $95,200 $ 51,300 $ 35,200
Goodwill, net of accumulated amortization
of $2,377,000 and $2,070,000 5,080,500 5,030,300
------------ -----------
$ 5,131,800 $ 5,065,500
------------ -----------
------------ -----------
</TABLE>
The carrying values of long-lived assets are reviewed if the facts and
circumstances suggest that an item may be impaired. If this review indicates
that a long-lived asset will not be recoverable, as determined based on the
future undiscounted cash flows of the asset, the Company's carrying value of
the long-lived asset is reduced to fair value.
F-9
<PAGE>
NOTE 8 - BANK LINE OF CREDIT:
The Company has a $7,000,000 revolving line of credit with Wells Fargo Bank,
which matures on October 1, 2000. The line 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 June 30,
1998 was 8.5% per annum. In addition, the loan agreement allows the Company
to convert the outstanding principal balance in increments of $250,000 to a
LIBOR-based loan for up to 90-day periods. At June 30, 1998, total borrowings
under the Company's line of credit were $3,926,200 of which $3,750,000 was
borrowed under the LIBOR option. The LIBOR borrowings consist of two
borrowings of $1,500,000 and $2,250,000 bearing a LIBOR interest rates of
8.15625% and 7.91797% per annum and maturing on July 5, 1998 and July 15,
1998, respectively. Proceeds from the loan were used for working capital
purposes. At June 30, 1998, the Company had approximately $1,075,000
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 The loan agreement
contains various covenants pertaining to tangible net worth, net income and
liquidity ratios, capital expenditures, payments of dividends, payment of
subordinated debt as well as various other restrictions. The Company was in
compliance with these covenants for fiscal 1998.
NOTE 9 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Long-term debt consists of:
Note payable - Bank (A) $ 1,533,300 $ 2,333,300
Note payable - Bank (B) 291,700 391,700
Note payable - Bank (C) 389,800 491,500
Note payable - Bank (D) 800,000 1,000,000
Note payable - Bank (E) 700,000 -
Note payable - Bank (F) 2,000,000 -
Note payable - Bank (G) 1,080,600 1,147,100
Other 38,900 30,400
----------- -----------
6,834,300 5,394,000
Less-current portion (1,784,000) (1,281,300)
----------- -----------
$ 5,050,300 $ 4,112,700
----------- -----------
----------- -----------
</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 (8.5% at June 30, 1998). In addition, the loan
agreement allows the Company to convert all or a portion of the
outstanding principal in increments of $250,000 to a LIBOR-based loan
for periods up to 180 days. At June 30, 1998 the Company had $1,500,000
of the outstanding principal balance under the LIBOR option at 7.91797%
per annum maturing on July 15, 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 (8.5% at
June 30, 1998) or LIBOR interest rate option for periods up to six
months. At June 30, 1998, the total outstanding principal was under the
LIBOR option at 7.91797% per annum maturing July 15, 1998. The note is
secured by the Company's machinery and equipment and matures on May 15,
2001.
(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 purchased. The note is due in monthly principal
installments of approximately $8,500 plus interest at the bank's prime
rate (8.5% per annum at June 30, 1998) or LIBOR interest rate option for
periods up to six months. At June 30, 1998, the total outstanding
principal was under the LIBOR option at 7.91797% per annum maturing July
15, 1998. The note is secured by the Company's machinery and equipment
and matures on May 15, 2002.
F-10
<PAGE>
(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 (8.5% per annum at June 30, 1998) or LIBOR interest rate option for
periods up to three months. At June 30, 1998, the total outstanding
principal was under the LIBOR option at 8.15625% per annum maturing July
6, 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 (8.5% per annum at June 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 June 30, 1998, the total outstanding
principal was under the LIBOR option at 8.15625% per annum maturing July
6, 1998. The note is secured by the Company's machinery and equipment
and matures on July 15, 2003.
At June 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 rates 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 is due in monthly interest only
payments at the bank's prime rate (8.5% per annum at June 30, 1998) or
LIBOR interest rate option for periods up to three months until August
15, 1998. At such time the note will convert to a sixty month fully
amortizable loan. At June 30, 1998, the total outstanding principal was
under the LIBOR option at 8.15625% per annum maturing July 6, 1998. The
note is secured by the Company's machinery and equipment and matures on
July 1, 2003.
(G) This note was issued to Wells Fargo Bank on September 15, 1994 in
connection with the purchase of real property in Bensenville, Illinois.
The note is due in monthly principal installments of approximately
$5,500 plus interest at the bank's prime rate (8.5% per annum at June
30, 1998) on a twenty-year amortization with the outstanding principal
due in five years. The note is secured by a first trust deed on the real
property and matures on September 15, 1999. In July 1998, this note was
replaced with a new $2,000,000 real estate loan secured by the Company's
Bensenville, Illinois and Gainesville, Texas properties. The note will
be due in monthly principal installments of approximately $6,700 plus
interest at the bank's prime rate or LIBOR interest rate option on a
twenty-five year amortization with the outstanding principal due on July
1, 2008.
Effective July 15, 1998, the Company initiated an interest rate swap
agreement with the bank. The agreement will allow the Company to fix a
portion of its outstanding term and line of credit debt from a variable
floating rate to a fixed interest rate in efforts to hedge against
future increases in the bank's prime rate. The agreement matures July
15, 2003.
Aggregate annual maturities of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1999 $1,784,000
2000 2,699,400
2001 939,400
2002 824,800
2003 540,000
Thereafter 46,700
----------
$6,834,300
----------
----------
</TABLE>
F-11
<PAGE>
NOTE 10 - RELATED PARTY DEBTS:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
---------- ---------
<S> <C> <C>
Related party debt consists of:
Note payable - (A) $2,000,000 $ -
---------- ---------
---------- ---------
</TABLE>
(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.
ADDITIONAL RELATED PARTY TRANSACTIONS:
In September 1995, in accordance with unanimous approval of the Board of
Directors, an officer/director of the Company converted his remaining
2,158,950 outstanding shares of Series A Preferred Stock to 1,079,475 shares
of the Company's common stock. The shares were converted on the basis of one
share of common stock issued for every two shares of preferred outstanding.
The Company sells plastic resin and molded plastic products to a company in
which an officer/director of the Company has a minority interest. Sales to
the Company amounted to $392,400, $412,300 and $319,900 in fiscal years 1998,
1997 and 1996, respectively. Amounts due on sales to this company were
$171,800 and $151,500 at June 30, 1998 and 1997, respectively, and are
included in accounts receivable in the accompanying balance sheet.
In fiscal years 1998, 1997 and 1996, the Company incurred legal fees and
costs amounting to $83,400, $103,400 and $83,000, respectively, for services
by E. Paul Tonkovich Professional Corporation, of which an officer/director
of the Company is an employee.
The Company leases its facilities in Miami, Florida; Knoxville, Tennessee;
Brownwood, Texas; Bossier City, Louisiana, and Las Vegas, Nevada from GSC
Industries, Inc. of which a director of the Company has a 54% ownership
interest. The facilities, except Bossier City which was leased on a
month-to-month basis, are leased on a long-term basis through March 2013 and
are subject to annual CPI adjustments. In fiscal 1998, the Company paid rent
on these facilities amounting to $135,000.
NOTE 11 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
---------- ---------
<S> <C> <C>
Accrued liabilities consist of:
Salaries, wages, commissions and related payables $ 607,900 $ 640,500
Other 341,300 224,800
---------- ---------
$ 949,200 $ 865,300
---------- ---------
---------- ---------
</TABLE>
NOTE 12 - STOCK OPTION PLAN:
In December 1994, at the Annual Meeting of Stockholders of the Company, the
stockholders voted by majority decision to ratify and approve a new stock option
plan as adopted by the Board of Directors in June 1994. The plan 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 plan expires June 12, 2004.
F-12
<PAGE>
STOCK OPTION ACTIVITY
<TABLE>
<CAPTION>
Outstanding Exercisable Weighted Average
Shares Shares Price Per Share
----------- ----------- ----------------
<S> <C> <C> <C>
Balance outstanding at June 30, 1995 17,800 17,800 $0.8043
-----------
-----------
Exercised (5,300) $0.7852
-----------
Balance outstanding at June 30, 1996 12,500 12,500 $0.8125
-----------
-----------
Exercised (7,500) $0.8125
Canceled (5,000) $0.8125
-----------
Balance outstanding at June 30, 1997 - -
----------- -----------
----------- -----------
</TABLE>
In fiscal 1998, there was no activity on the plan. At June 30, 1998,
1,000,000 shares were available for future grants. In July 1998, the Company
issued to an employee options to purchase 100,000 shares of common stock at
fair market value.
NOTE 13 - PREFERRED STOCK AND COMMON STOCK:
In September 1995, the Company redeemed 250,232 shares of its preferred stock
at the stated redeemed value of one dollar. Subsequent to the redemptions, in
accordance with unanimous approval of the Board of Directors, the Company
converted the remaining 2,749,768 shares of the outstanding Series A
Preferred Stock to 1,374,884 shares of the Company's common stock. The shares
were converted on the basis of one share of common stock for every two shares
of preferred stock outstanding. On February 11, 1997, the Company amended its
Articles of Incorporation to eliminate the authorization of the Company's
Series A Preferred Stock.
On December 9, 1997, at the Company's Annual Meeting of Stockholders, the
Board of Directors declared a common stock dividend of $.04 per common share
payable on January 28, 1998 to stockholders of record on January 8, 1998.
This marks the third consecutive annual payment of dividends on the Company's
common stock.
In fiscal year 1998 and 1997, the Company retired 332,200 and 100,000 shares
of its own common stock which it had purchased in connection with the
Company's Buy Back Program at a total cost of $501,100 and $161,000,
respectively.
In March 1998, the Company issued 2,072,539 shares of the Company's common
stock in connection with the Rotocast merger (see Note 2).
Treasury stock is recorded at cost. At June 30, 1998 and 1997, the treasury
stock consisted of 1,755 and 1,776 shares of common stock at a cost of
$1,500, respectively.
NOTE 14 - INCOME TAXES:
The components of the income tax provision were:
<TABLE>
<CAPTION>
For the years ended June 30,
-------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ (6,400) $ (63,000) $ (62,000)
State (19,100) (93,600) (129,400)
---------- ------------ ------------
(25,500) (156,600) (191,400)
---------- ------------ ------------
Deferred:
Federal (301,500) (744,100) (642,000)
State (21,500) (42,100) (101,100)
---------- ------------ ------------
(323,000) (786,200) (743,100)
---------- ------------ ------------
$ (348,500) $ (942,800) $ (934,500)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
F-13
<PAGE>
At June 30, 1998, the Company has net operating loss (NOL) carryforwards of
approximately $8,400,000 and $6,669,000 for federal and state income tax
purposes, respectively. The NOL carryforwards, which are available to offset
future 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:
<TABLE>
<CAPTION>
Amount of unused operating loss carryforwards
--------------------------------------------- Expiration during year
Federal State ended June 30,
---------------- ------------ ----------------------
<S> <C> <C>
$ - $ 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
----------- -----------
----------- -----------
</TABLE>
At June 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.
In conjunction with the adoption of FAS 109 in fiscal 1994, management
determined the future taxable income of the Company will more likely than not
be sufficient to realize the tax benefits of its NOL's. As such, an initial
deferred tax asset of $4,013,000, net of a valuation allowance of $2,662,000
was recorded.
Based on the operating results since the adoption of FAS 109 and management's
continuing assessment, management believes that the Company will continue to
utilize its NOL's in the normal course of business. As of fiscal 1997,
management has reduced the initial $2,662,000 valuation allowance to zero.
Since this time, the Company's deferred tax provision increased substantially
in unison with the depletion of the federal valuation allowance in fiscal
1996. As such, the Company's will continue to report a large deferred tax
provision until such time that the Company's NOL's and corresponding deferred
tax assets are fully utilized. In connection with the Rotocast merger, the
Company recorded a deferred tax asset of $394,400, net of a valuation
allowance of $192,400 as of June 30, 1998, for the future benefit related to
state NOL carryforwards. The current state valuation allowance represents the
estimated amount of NOL's which will expire prior to their utilization.
Again, realization of the future tax benefits of the NOL carryforwards is
dependent on the Company's ability to generate taxable income within the
carryforward period. Management will continue to assess the likelihood of
utilizing its federal and state NOL's by taking into consideration historical
results and current economic conditions in which the Company operates.
Management does not consider any non-routine transactions in assessing the
likelihood of realization of the recorded deferred tax asset. Any future
adjustments to the valuation allowance will be reflected as a component of
the current years tax provision. Management also notes that the deferred tax
provision does not result in current outlays of cash flows due to the
utilization of its NOL's. These cashflow savings are then available to
supplement funding of the Company's expansion projects, pay common stock
dividends and reduce outstanding debt.
F-14
The following reconciles the federal statutory income tax rate to the
effective rate of the provision for income taxes:
<TABLE>
<CAPTION>
For the year ended June 30,
--------------------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes (net of federal benefit) 1.7 2.6 3.6
Goodwill amortization 13.6 4.3 4.3
Effect of decrease in valuation allowance - - (7.7)
Other items, net (3.8) (1.4) 4.6
---------- --------- ----------
Effective income tax rate 45.5% 39.5% 38.8%
---------- --------- ----------
---------- --------- ----------
</TABLE>
Deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Federal NOL $2,852,500 $3,164,800
State NOL (net of federal benefit) 387,600 -
Tax credit carryforwards 253,100 208,100
Employment-related reserves 79,200 116,000
Allowance for doubtful accounts 57,700 35,100
Accruals not currently deductible - 136,500
---------- -----------
3,630,100 3,660,500
Deferred tax liabilities:
Depreciation and amortization (3,057,900) (644,500)
---------- -----------
Net deferred tax assets before valuation allowance 572,200 3,016,000
Deferred tax assets valuation allowance (192,400) -
---------- -----------
Net deferred tax assets $ 379,800 $3,016,000
---------- -----------
---------- -----------
</TABLE>
NOTE 15 - COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases various office and warehouse facilities, and equipment
under long-term operating leases expiring through March 2013. Certain of the
leases provide for five-year renewal options and rental increases based on
the Consumer Price Index. Operating lease expense for fiscal 1998, 1997, and
1996 amounted to $896,300, $830,500 and $834,400, respectively.
At June 30, 1998, the future minimum lease commitments, excluding insurance
and taxes, are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1999 $ 986,100
2000 949,500
2001 873,200
2002 646,800
2003 581,000
Thereafter 4,756,700
----------
$8,793,300
----------
----------
</TABLE>
CONTINGENCIES
In the normal course of business, the Company encounters certain litigation
matters, which in the opinion of management, will not have a significant
adverse effect on the financial position or the results of operations of the
Company.
F-15
<PAGE>
On April 16, 1996, the Company was named as a defendant in a complaint filed
by Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims
for breach of contract and promissory estoppel relating to an Agreement in
Principle entered into in connection with a proposed acquisition of the
Company by Bonar U.S., Inc. On April 3, 1996, the Company announced that it
had terminated the Agreement of Principle pursuant to its terms. The
complaint requested damages of $7,011,484. On May 17, 1996, the Company filed
a counterclaim against Bonar U.S., Inc. and Bonar Plastic, Inc. seeking
damages totaling $25,237,725 for breach of the Confidentiality Agreement with
the Company, misappropriation of trade secrets, intentional interference with
a prospective economic advantage which the Company obtained as a result of an
indication of interest from a third party and breach of a Royalty Agreement
between Bonar Plastics, Inc. and one of the Company's operating divisions
(formally known as Custom Rotational Molding, Inc.). In March 1997, the
Company reached an amicable out of court settlement with Bonar. The
settlement involved mutual general releases by the parties, dismissals of the
actions brought by the parties and payments to Bonar of $400,000 in March
1997 and $350,000 in September 1997. The $350,000 is included in accounts
payable in the accompanying balance sheet as of June 30, 1997. The total
settlement payment of $750,000 plus additional related legal costs of
$260,800 have been classified as lawsuit settlement in the accompanying
statement of income.
NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Supplemental disclosures of cash flows information are as follows:
<TABLE>
<CAPTION>
For the years ended June 30,
-----------------------------------------------
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 749,300 $555,900 $711,600
----------- -------- --------
----------- -------- --------
Income taxes $ 103,800 $188,500 $245,900
----------- -------- --------
----------- -------- --------
Non-cash investing activity:
Acquisition of Rotocast by issuance of common stock $ 3,000,000 $ - $ -
----------- -------- --------
----------- -------- --------
Non-cash financing activities:
Acquisition of Rotocast by issuance of note payable $ 2,000,000 $ - $ -
----------- -------- --------
----------- -------- --------
Conversion of Rotocast bank debt to new note payable $ 1,750,000 $ - $ -
----------- -------- --------
----------- -------- --------
Common dividends declared but not paid $ 11,400 $ 11,700 $ 12,200
----------- -------- --------
----------- -------- --------
</TABLE>
NOTE 17 - UNAUDITED QUARTERLY RESULTS:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
September December March June
-------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fiscal Year 1998:
Net sales $8,597,000 $8,563,900 $8,099,600 $12,798,400
Gross Profit 1,803,700 1,873,900 1,700,200 3,412,700
Net income 98,300 107,600 48,400 162,900
Per share:
Net income $ .01 $ .01 $ - $ .01
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Fiscal Year 1997:
Net sales $10,229,900 $9,478,200 $9,560,300 $10,116,700
Gross Profit 2,606,300 2,476,400 2,186,600 2,823,700
Net income/(loss) 517,200 434,400 (14,200) 504,400
Per share:
Net income $ .04 $ .03 $ - $ .03
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
F-16
<PAGE>
ROTONICS MANUFACTURING INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ -------------- ----------------------------------- --------------- -----------
Additions
Balance at ----------------------------------- Balance at
beginning Charged to end of
Description of period Costs & Expenses Other Deductions period
- ------------------------------------ ----------- ----------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
June 30, 1998:
Allowance for doubtful accounts $ 90,000 $ 34,600 $ 49,800(4) $ (26,400)(1) $ 148,000
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
Deferred tax asset valuation allowance $ - $ - $ 192,400(3) $ - 192,400
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
June 30, 1997:
Allowance for doubtful accounts $ 90,000 $ 63,900 $ - $ (63,900)(1) $ 90,000
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
Deferred tax asset valuation allowance $ 54,500 $ - $ - $ (54,500)(2) $ -
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
June 30, 1996:
Allowance for doubtful accounts $ 110,300 $ 58,800 $ - $ (79,100)(1) $ 90,000
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
Deferred tax asset valuation allowance $ 590,300 $ - $ 54,500 (3) $ (590,300)(2) $ 54,500
----------- ----------------- -------------- --------------- -----------
----------- ----------------- -------------- --------------- -----------
</TABLE>
(1) Doubtful accounts written off during the year.
(2) Decrease in valuation allowance based on current years' additional
utilization or expiration of net operating loss carryforwards.
(3) Represents valuation allowance for potential state NOL's which will
expire prior to utilization.
(4) Represents Rotocast balance at date of merger.
F-17
<PAGE>
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of June 15, 1998, by and between
ROTONICS MANUFACTURING INC., a Delaware corporation ("Borrower"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodations described
below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed
to provide the Credits to Borrower on the terms and conditions contained
herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank has agreed to make advances to Borrower from time to time up
to and including October 1, 2000, not to exceed at any time the aggregate
principal amount of Seven Million Dollars ($7,000,000.00) ("Line of Credit"),
the proceeds of which shall be used for Borrower's working capital
requirements. Borrower's obligation to repay advances under the Line of
Credit is evidenced by a promissory note substantially in the form of Exhibit
A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of
Credit, Bank has agreed from time to time during the term thereof to issue
standby letters of credit for the account of Borrower to finance a note
payable to seller of Rotocast (each, a "Letter of Credit" and collectively,
"Letters of Credit"); provided however, that the form and substance of each
Letter of Credit shall be subject to approval by Bank, in its sole
discretion; and provided further, that the aggregate undrawn amount of all
outstanding Letters of Credit shall not at any time exceed Two Million
Dollars ($2,000,000.00). Each Letter of Credit shall be issued for a term
not to exceed eighteen (18) months, as designated by Borrower; provided
however, that no Letter of Credit shall have an expiration date subsequent to
the maturity date of the Line of Credit. The undrawn amount of all Letters
of Credit shall be reserved under the Line of Credit and shall not be
available for borrowings thereunder. Each Letter of Credit shall be subject
to the additional terms and conditions of
-1-
<PAGE>
the Letter of Credit Agreement and related documents, if any, required by
Bank in connection with the issuance thereof (each, a "Letter of Credit
Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid
by Bank under a Letter of Credit shall be deemed an advance under the Line of
Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such advances; provided however,
that if advances under the Line of Credit are not available, for any reason,
at the time any draft is paid by Bank, then Borrower shall immediately pay to
Bank the full amount of such draft, together with interest thereon from the
date such amount is paid by Bank to the date such amount is fully repaid by
Borrower, at the rate of interest applicable to advances under the Line of
Credit. In such event Borrower agrees that Bank, in its sole discretion, may
debit any demand deposit account maintained by Borrower with Bank for the
amount of any such draft. Bank has issued a standby letter of credit for the
amount of Two Million Dollars ($2,000,000.00), which is outstanding as of the
date hereof and shall be deemed included within the definition of Letters of
Credit set forth herein.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at
any time exceed the maximum principal amount available thereunder, as set
forth above.
SECTION 1.2. TERM LOAN A.
(a) TERM LOAN A. Bank has made a loan to Borrower in the original
principal amount of One Million Dollars ($1,000,000.00) ("Term Loan A"), on
which the outstanding principal balance as of the date hereof is $799,999.96.
Borrower's obligation to repay Term Loan A is evidenced by a promissory note
in the form of Exhibit B attached hereto ("Term Note A"), all terms of which
are incorporated herein by this reference. Any reference in Term Note A to
any prior loan agreement between Bank and Borrower shall be deemed a
reference to this Agreement. Subject to the terms and conditions of this
Agreement, Bank hereby confirms that Term Loan A remains in full force and
effect.
(b) REPAYMENT. The principal amount of Term Loan A shall be repaid in
accordance with the provisions of Term Note A.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan A solely in
accordance with the provisions of Term Note A.
-2-
<PAGE>
SECTION 1.3. TERM LOAN B.
(a) TERM LOAN B. Bank has made a loan to Borrower in the original
principal amount of Four Million Dollars ($4,000,000.00) ("Term Loan B"), on
which the outstanding principal balance as of the date hereof is
$1,533,321.00. Borrower's obligation to repay Term Loan B is evidenced by a
promissory note in the form of Exhibit C attached hereto ("Term Note B"), all
terms of which are incorporated herein by this reference. Subject to the
terms and conditions of this Agreement, Bank hereby confirms that Term Loan B
remains in full force and effect. Any reference in Term Note B to any prior
loan agreement between Bank and Borrower shall be deemed a reference to this
Agreement.
(b) REPAYMENT. The principal amount of Term Loan B shall be repaid in
accordance with the provisions of Term Note B.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan B solely in
accordance with the provisions of Term Note B.
SECTION 1.5. TERM LOAN C.
(a) TERM LOAN C. Bank granted a term commitment to Borrower in the
original principal amount of Five Hundred Thousand Dollars ($500,000.00),
which has been fully disbursed ("Term Loan C"), and on which the outstanding
principal balance as of the date hereof is $389,830.46. Borrower's
obligation to repay Term Loan C is evidenced by a promissory note in the form
of Exhibit D attached hereto ("Term Note C"), all terms of which are
incorporated herein by this reference. Any reference in Term Note C to any
prior loan agreement between Bank and Borrower shall be deemed a reference to
this Agreement. Subject to the terms and conditions of this Agreement, Bank
hereby confirms that Term Loan C remains in full force and effect.
(b) REPAYMENT. The principal amount of Term Loan C shall be repaid in
accordance with the provisions of Term Note C.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan C at any
time, in any amount and without penalty. All prepayments of principal shall
be applied on the most remote principal installment or installments then
unpaid.
SECTION 1.6. TERM LOAN D.
(a) TERM LOAN D. Bank has made a loan to Borrower in the original
principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term Loan
D"), on which the outstanding principal balance as of the date hereof is
$291,650.00. Borrower's obligation to repay Term Loan D is evidenced by a
promissory note in the form of Exhibit E attached hereto ("Term Note D"), all
terms of which are incorporated herein by this reference. Any reference in
Term Note D to any prior loan agreement between Bank
-3-
<PAGE>
and Borrower shall be deemed a reference to this Agreement. Subject to the
terms and conditions of this Agreement, Bank hereby confirms that Term Loan D
remains in full force and effect.
(b) REPAYMENT. The principal amount of Term Loan D shall be repaid in
accordance with the provisions of Term Note D.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan D solely in
accordance with the provisions of Term Note D.
SECTION 1.7. TERM LOAN E.
(a) TERM LOAN E. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal
amount of Three Million Dollars ($3,000,000.00) ("Term Loan E"), the proceeds
of which shall be used to refinance an existing term loan originally used for
equipment purchases and for additional equipment purchases. Borrower's
obligation to repay Term Loan E shall be evidenced by a promissory note
substantially in the form of Exhibit F attached hereto ("Term Note E"), all
terms of which are incorporated herein by this reference. Bank's commitment
to grant Term Loan E shall terminate on July 15, 1998.
(b) REPAYMENT. The principal amount of Term Loan E shall be repaid in
accordance with the provisions of Term Note E.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan E solely in
accordance with the provisions of Term Note E.
SECTION 1.8. TERM LOAN F.
(a) TERM LOAN F. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make a loan to Borrower in the principal
amount of Two Million Dollars ($2,000,000.00) ("Term Loan F"), the proceeds
of which shall be used for financing real properties. Borrower's obligation
to repay Term Loan F shall be evidenced by a promissory note substantially in
the form of Exhibit G attached hereto ("Term Note F"), all terms of which are
incorporated herein by this reference. Bank's commitment to grant Term Loan
F shall terminate on July 15, 1998.
(b) REPAYMENT. The principal amount of Term Loan F shall be repaid in
accordance with the provisions of Term Note F.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan F solely in
accordance with the provisions of Term Note F.
-4-
<PAGE>
SECTION 1.9. TERM COMMITMENT
(a) TERM COMMITMENT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time
up to and including November 1, 1998, not to exceed the aggregate principal
amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) ("Term
Commitment"), on which the outstanding principal balance as of the date
hereof is $700,000.00, the proceeds of which shall be used to refinance an
existing Term Commitment used for equipment purchases and for additional
equipment purchases, and which shall be converted on November 1, 1998, to a
term loan, as described more fully below. Borrower's obligation to repay
advances under the Term Commitment shall be evidenced by a promissory note
substantially in the form of Exhibit H attached hereto ("Term Commitment
Note"), all terms of which are incorporated herein by this reference.
(b) LIMITATION ON BORROWINGS. Notwithstanding any other provision of
this Agreement, the aggregate amount of all outstanding borrowings under the
Term Commitment shall not at any time exceed a maximum of eighty percent
(80%) of the cost of each item of new equipment purchased with the proceeds
thereof or seventy-five percent (75%) of the cost of each item of used
equipment purchased with proceeds thereof, as evidenced by the seller's
invoice.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
period in which Bank will make advances under the Term Commitment borrow and
partially or wholly repay its outstanding borrowings, provided that amounts
repaid may not be reborrowed, subject to all the limitations, terms and
conditions contained herein; provided however, that the total outstanding
borrowings under the Term Commitment shall not exceed the maximum principal
amount available thereunder, as set forth above. The principal amount of the
Term Commitment shall be repaid in accordance with the provisions of the Term
Commitment Note.
(d) PREPAYMENT. Borrower may prepay principal on the Term Commitment
solely in accordance with the provisions of the Term Commitment Note.
SECTION 1.10. INTEREST/FEES.
(a) INTEREST. The outstanding principal balances of Line of Credit,
Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E, Term Loan F
and the Term Commitment shall bear interest at the rates of interest set
forth in the Line of Credit Note, Term Note A, Term Note B, Term Note C, Term
Note D, Term Note E, Term Note F and the Term Commitment Note (collectively,
the "Notes").
-5-
<PAGE>
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis
of a 360-day year, actual days elapsed. Interest shall be payable at the
times and place set forth in the Notes.
(c) COMMITMENT FEE. Borrower shall pay to Bank a non-refundable
commitment fee for the Line of Credit equal to one hundred twenty-five
hundredths percent (0.125%), which fee shall be due and payable in full on
the date of this Agreement.
(d) LETTER OF CREDIT FEES. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation by Bank of
each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation,
the transfer, amendment or cancellation of any Letter of Credit) determined
in accordance with Bank's standard fees and charges then in effect for such
activity.
SECTION 1.11. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal and interest due under each Credit by charging
Borrower's demand deposit account number 4624-074191 with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency
shall be immediately due and payable by Borrower.
SECTION 1.12. COLLATERAL.
As security for all indebtedness of Borrower to Bank under the Line of
Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E and
the Term Commitment, Borrower hereby grants to Bank security interests of
first priority in all Borrower's accounts receivable, other rights to payment
and general intangibles, inventory and equipment.
As security for all indebtedness of Borrower to Bank under the Line of
Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E and
the Term Commitment, Borrower shall cause Rotocast International, Inc.,
Rotocast Management Corp., Rotocast Plastic Products, Inc., Nutron Plastic
Products, Inc., Wonder Products, Inc., Rotocast Plastic Products of Nevada,
Inc., Rotocast Plastic Products of Tennessee, Inc. and Rotocast Plastic
Products of Texas, Inc. to grant to Bank security interests of first priority
in all their accounts receivable, other rights to payment and general
intangibles, inventory and equipment.
As security for all security for all indebtedness of Borrower to Bank
under Term Loan F, Borrower hereby grants to Bank a lien of not less than
first priority on real properties located at 736-738 and 740-746 Birginal
Drive, Bensenville, Illinois 60106 and Highway I-35 at FM 1306, Gainesville,
Texas 76240.
-6-
<PAGE>
All of the foregoing shall be evidenced by and subject to the terms of
such security agreements, financing statements, deeds of trust and other
documents as Bank shall reasonably require, all in form and substance
satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand
for all costs and expenses incurred by Bank in connection with any of the
foregoing security, including without limitation, filing and recording fees
and costs of appraisals, audits and title insurance.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and
final payment, and satisfaction and discharge, of all obligations of Borrower
to Bank subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the state of Delaware,
and is qualified or licensed to do business (and is in good standing as a
foreign corporation, if applicable) in all jurisdictions in which such
qualification or licensing is required or in which the failure to so qualify
or to be so licensed could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes,
and each other document, contract and instrument required hereby or at any
time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal,
valid and binding agreements and obligations of Borrower or the party which
executes the same, enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any
law or regulation, or contravene any provision of the Articles of
Incorporation or By-Laws of Borrower, or result in any breach of or default
under any contract, obligation, indenture or other instrument to which
Borrower is a party or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those
-7-
<PAGE>
disclosed by Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated March 31,1998, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b)
discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared in
accordance with generally accepted accounting principles consistently
applied. Since the date of such financial statement there has been no
material adverse change in the financial condition of Borrower, nor has
Borrower mortgaged, pledged, granted a security interest in or otherwise
encumbered any of its assets or properties except in favor of Bank or as
otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to
any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may
be bound that requires the subordination in right of payment of any of
Borrower's obligations subject to this Agreement to any other obligation of
Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all permits, consents, approvals, franchises and licenses
required and rights to all trademarks, trade names, patents, and fictitious
names, if any, necessary to enable it to conduct the business in which it is
now engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time ("ERISA");
Borrower has not violated any provision of any defined employee pension
benefit plan (as defined in ERISA) maintained or contributed to by Borrower
(each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is
continuing with respect to any Plan initiated by Borrower; Borrower has met
its minimum funding requirements under ERISA with respect to each Plan; and
each Plan will be able to fulfill its benefit obligations as they come due in
accordance with the Plan documents and under generally accepted accounting
principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money
-8-
<PAGE>
obligation or any other material lease, commitment, contract, instrument or
obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower
to Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's operations
and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as
any of the same may be amended, modified or supplemented from time to time.
None of the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by
Borrower to Bank in writing prior to the date hereof, with respect to any
real property collateral required hereby:
(a) All taxes, governmental assessments, insurance premiums, and water,
sewer and municipal charges, and rents (if any) which previously became due
and owing in respect thereof have been paid as of the date hereof.
(b) There are no mechanics' or similar liens or claims which have been
filed for work, labor or material (and no rights are outstanding that under
law could give rise to any such lien) which affect all or any interest in any
such real property and which are or may be prior to or equal to the lien
thereon in favor of Bank.
(c) None of the improvements which were included for purpose of
determining the appraised value of any such real property lies outside of the
boundaries and/or building restriction lines thereof, and no improvements on
adjoining properties materially encroach upon any such real property.
(d) There is no pending, or to the best of Borrower's knowledge
threatened, proceeding for the total or partial condemnation of all or any
portion of any such real property, and all such real property is in good
repair and free and clear of any damage that would materially and adversely
affect the value thereof as security and/or the intended use thereof.
-9-
<PAGE>
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to grant any of the Credits is subject to the fulfillment
to Bank's satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
granting of each of the Credits shall be satisfactory to Bank's counsel.
(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Corporate Borrowing Resolution.
(iii) Corporate Resolution: Third Party Collateral.
(iv) Certificate of Incumbency.
(v) Security Agreement: Equipment.
(vi) Continuing Security Agreement: Rights to Payment and Inventory.
(vii) Third Party Security Agreement: Equipment.
(viii) Third Party Security Agreement: Rights to Payment and Inventory.
(ix) UCC-1 Financing Statements.
(x) Mortgage and Assignment of Rents and Leases.
(xi) Amended and Restated Mortgage, and Assignment of Rents and Leases.
(xii) Deed of Trust and Assignment of Rents and Leases.
(xiii) Such other documents as Bank may require under any other Section of
this Agreement.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
(d) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where
required by Bank, with loss payable endorsements in favor of Bank, including
without limitation, policies of fire and extended coverage insurance covering
all real property collateral required hereby, with replacement cost and
mortgagee loss payable endorsements, and such policies of insurance against
specific hazards affecting any such real property as may be required by
governmental regulation or Bank.
-10-
<PAGE>
(e) APPRAISALS. Bank shall have obtained, at Borrower's cost, an
appraisal of all real property collateral required hereby, and all
improvements thereon, issued by an appraiser acceptable to Bank and in form,
substance and reflecting values satisfactory to Bank, in its discretion.
(f) TITLE INSURANCE. Bank shall have received an ALTA Policy of Title
Insurance, with such endorsements as Bank may require, issued by a company
and in form and substance satisfactory to Bank, in such amount as Bank shall
require, insuring Bank's lien on the real property collateral required hereby
to be of the priority set forth in Section 1.12 hereof, subject only to such
exceptions as Bank shall approve in its discretion, with all costs thereof to
be paid by Borrower.
(g) TAX SERVICE CONTRACT. Borrower shall have procured and delivered
to Bank, at Borrower's cost, such tax service contract as Bank shall require
for any real property collateral required hereby, to remain in effect as long
as such real property secures any obligations of Borrower to Bank as required
hereby.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation
of Bank to make each extension of credit requested by Borrower hereunder
shall be subject to the fulfillment to Bank's satisfaction of each of the
following conditions:
(a) COMPLIANCE. The representations and warranties contained herein
and in each of the other Loan Documents shall be true on and as of the date
of the signing of this Agreement and on the date of each extension of credit
by Bank pursuant hereto, with the same effect as though such representations
and warranties had been made on and as of each such date, and on each such
date, no Event of Default as defined herein, and no condition, event or act
which with the giving of notice or the passage of time or both would
constitute such an Event of Default, shall have occurred and be continuing or
shall exist.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
-11-
<PAGE>
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise
consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of the Loan Documents at
the times and place and in the manner specified therein, and immediately upon
demand by Bank, the amount by which the outstanding principal balance of any
of the Credits at any time exceeds any limitation on borrowings applicable
thereto.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records
in accordance with generally accepted accounting principles consistently
applied, and permit any representative of Bank, at any reasonable time, to
inspect, audit and examine such books and records, to make copies of the
same, and to inspect the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal
year, a consolidated audited financial statement of Borrower, prepared by
certified public accountant acceptable to Bank, to include all schedules,
notes and narratives reasonably included in Borrower's 10K;
(b) not later than 45 days after and as of the end of each fiscal
quarter, a consolidated financial statement of Borrower, prepared by
Borrower, to include all schedules, notes and narratives reasonably included
in Borrower's 10Q; and
(c) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's
continued existence and with the requirements of all laws, rules, regulations
and orders of any governmental authority applicable to Borrower and/or its
business.
-12-
<PAGE>
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that
of Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth
all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due
any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation federal and state income taxes and
state and local property taxes and assessments, except such (a) as Borrower
may in good faith contest or as to which a bona fide dispute may arise, and
(b) for which Borrower has made provision, to Bank's satisfaction, for
eventual payment thereof in the event Borrower is obligated to make such
payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of
any litigation pending or threatened against Borrower with a claim in excess
of $100,000.00.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to
the extent modified by the definitions herein):
(a) Current Ratio not at any time less than 1.25 to 1.00, measured as
of each fiscal quarter end, with "Current Ratio" defined as total current
assets divided by total current liabilities.
(b) Tangible Net Worth not at any time less than $14,000,000.00,
measured as of each fiscal quarter end, with "Tangible Net Worth" defined as
the aggregate of total stockholders' equity plus subordinated debt less any
intangible assets.
(c) Total Liabilities divided by Tangible Net Worth not at any time
greater than 1.25 to 1.00, measured as of each fiscal quarter end, with
"Total Liabilities" defined as the aggregate of current liabilities and
non-current liabilities less subordinated debt, and with "Tangible Net Worth"
as defined above.
-13-
<PAGE>
(d) EBITDA Coverage Ratio not less than 1.5 to 1.0 as of each fiscal
quarter end measured on a rolling four-quarter basis; not less than 1.75 to
1.0, beginning at third fiscal quarter end of 1999; and not less than 2.0 to
1.0, beginning at first fiscal quarter end of 2000; and thereafter, with
"EBITDA" defined as net profit before tax plus interest expense (net of
capitalized interest expense), depreciation expense and amortization expense,
and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate
of total interest expense plus the prior period current maturity of long-term
debt and the prior period current maturity of subordinated debt.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or
the passage of time or both would constitute an Event of Default; (b) any
change in the name or the organizational structure of Borrower; (c) the
occurrence and nature of any Reportable Event or Prohibited Transaction, each
as defined in ERISA, or any funding deficiency with respect to any Plan; or
(d) any termination or cancellation of any insurance policy which Borrower is
required to maintain, or any uninsured or partially uninsured loss through
liability or property damage, or through fire, theft or any other cause
affecting Borrower's property in excess of an aggregate of $50,000.00.
SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably
necessary to ensure that (a) Borrower and any business in which Borrower
holds a substantial interest, and (b) all customers, suppliers and vendors
that are material to Borrower's business, become Year 2000 Compliant in a
timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all of Borrower's systems and adopting
a detailed plan, with itemized budget, for the remediation, monitoring and
testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment, goods
or systems utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive functions
before, during and after the year 2000. Borrower shall, immediately upon
request, provide to Bank such certifications or other evidence of Borrower's
compliance with the terms hereof as Bank may from time to time require.
-14-
<PAGE>
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct
or contingent, liquidated or unliquidated) of Borrower to Bank under any of
the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without Bank's
prior written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the
Credits except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $2,000,000.00.
SECTION 5.3. LEASE EXPENDITURES. Incur operating lease expense in any
fiscal year in excess of an aggregate of $200.000.00.
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to
Bank, and (b) any other liabilities of Borrower existing as of, and disclosed
to Bank prior to, the date hereof.
SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature
of Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease,
transfer or otherwise dispose of all or a substantial or material portion of
Borrower's assets except in the ordinary course of its business.
SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for
deposit or collection in the ordinary course of business), accommodation
endorser or otherwise for, nor pledge or hypothecate any assets of Borrower
as security for, any liabilities or obligations of any other person or
entity, except any of the foregoing in favor of Bank.
SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances
to or investments in any person or entity, except any of the foregoing
existing as of, and disclosed to Bank prior to, the date hereof.
-15-
<PAGE>
SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock
now or hereafter outstanding, nor redeem, retire, repurchase or otherwise
acquire any shares of any class of Borrower's stock now or hereafter
outstanding.
SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor
of Bank or which is existing as of, and disclosed to Bank in writing prior
to, the date hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute
an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any
other party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other
Loan Document (other than those referred to in subsections (a) and (b)
above), and with respect to any such default which by its nature can be
cured, such default shall continue for a period of twenty (20) days from its
occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has
incurred any debt or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against
the assets of Borrower; or the entry of a judgment against Borrower.
(f) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or
-16-
<PAGE>
shall generally fail to pay its debts as they become due, or shall make a
general assignment for the benefit of creditors; Borrower shall file a
voluntary petition in bankruptcy, or seeking reorganization, in order to
effect a plan or other arrangement with creditors or any other relief under
the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or
recodified from time to time ("Bankruptcy Code"), or under any state or
federal law granting relief to debtors, whether now or hereafter in effect;
or any involuntary petition or proceeding pursuant to the Bankruptcy Code or
any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered
against Borrower by any court of competent jurisdiction under the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the
prospect of payment or performance by Borrower of its obligations under any
of the Loan Documents.
(h) The death or incapacity of Borrower. The dissolution or
liquidation of Borrower; or Borrower, or any of its directors, stockholders
or members, shall take action seeking to effect the dissolution or
liquidation of Borrower.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock of
Borrower.
(j) The sale, transfer, hypothecation, assignment or encumbrance,
whether voluntary, involuntary or by operation of law, without Bank's prior
written consent, of all or any part of or interest in any real property
collateral required hereby.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default:
(a) all indebtedness of Borrower under each of the Loan Documents, any term
thereof to the contrary notwithstanding, shall at Bank's option and without
notice become immediately due and payable without presentment, demand,
protest or notice of dishonor, all of which are hereby expressly waived by
each Borrower; (b) the obligation, if any, of Bank to extend any further
credit under any of the Loan Documents shall immediately cease and terminate;
and (c) Bank shall have all rights, powers and remedies available under each
of the Loan Documents, or accorded by law, including without limitation the
right to resort to any or all security for any of the Credits and to exercise
any or all of the rights of a beneficiary or secured party pursuant
-17-
<PAGE>
to applicable law. All rights, powers and remedies of Bank may be exercised
at any time by Bank and from time to time after the occurrence of an Event of
Default, are cumulative and not exclusive, and shall be in addition to any
other rights, powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank
in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor shall
any single or partial exercise of any such right, power or remedy preclude,
waive or otherwise affect any other or further exercise thereof or the
exercise of any other right, power or remedy. Any waiver, permit, consent or
approval of any kind by Bank of any breach of or default under any of the
Loan Documents must be in writing and shall be effective only to the extent
set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any
provision of this Agreement must be in writing delivered to each party at the
following address:
BORROWER: ROTONICS MANUFACTURING INC.
17022 South Figueroa Street
Gardena, CA 90248
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
South Bay Regional Commercial Banking Office
111 W. Ocean Blvd., Suite 300
Long Beach, CA 90802
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit
in the U.S. mail, first class and postage prepaid; and (c) if sent by
telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay
to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel),
expended or incurred by Bank in connection with (a) the negotiation and
preparation of this Agreement and the other Loan Documents, Bank's continued
administration hereof and thereof, and the preparation of any amendments and
waivers hereto and
-18-
<PAGE>
thereto, (b) the enforcement of Bank's rights and/or the collection of any
amounts which become due to Bank under any of the Loan Documents, and (c) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without
Bank's prior written consent. Bank reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Bank's rights and benefits under each of the Loan Documents. In
connection therewith, Bank may disclose all documents and information which
Bank now has or may hereafter acquire relating to any of the Credits,
Borrower or its business, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement between Borrower and
Bank with respect to the Credits and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in writing signed by
each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or claim in connection with, this Agreement or any other of
the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision
of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
-19-
<PAGE>
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall
constitute one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) ARBITRATION. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or
tort, statutory or common law, legal or equitable, now existing or hereafter
arising under or in connection with, or in any way pertaining to, any of the
Loan Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of
a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred
by such other party in compelling arbitration of any Dispute.
(b) GOVERNING RULES. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as
the parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved
in accordance with the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
Loan Documents. The arbitration shall be conducted at a location in
California selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant
to the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided
however, that nothing contained herein shall be deemed to be a waiver by any
party that is a bank of the protections afforded to it under 12 U.S.C.
Section 91 or any similar applicable state law.
-20-
<PAGE>
(c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver, from a court of
competent jurisdiction before, after or during the pendency of any
arbitration or other proceeding. The exercise of any such remedy shall not
waive the right of any party to compel arbitration or reference hereunder.
(d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered
to resolve Disputes by summary rulings in response to motions filed prior to
the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may
grant any remedy or relief that a court of the state of California could
order or grant within the scope hereof and such ancillary relief as is
necessary to make effective any award, and (iii) shall have the power to
award recovery of all costs and fees, to impose sanctions and to take such
other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the California Rules of
Civil Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of greater than $5,000,000 (including damages,
costs, fees and expenses). By submission to a single arbitrator, each party
expressly waives any right or claim to recover more than $5,000,000. Any
Dispute in which the amount in controversy exceeds $5,000,000 shall be
decided by majority vote of a panel of three arbitrators; provided however,
that all three arbitrators must actively participate in all hearings and
deliberations.
(e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000,
the arbitrators shall be required to make specific, written findings of fact
and conclusions of law. In such arbitrations (i) the arbitrators shall not
have the power to make any award which is not supported by substantial
evidence or which is based on legal error, (ii) an award shall not be binding
upon the parties unless the findings of fact are supported by substantial
evidence and the conclusions of law are not erroneous under the substantive
law of the state of California, and (iii) the parties shall have in addition
to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether
the findings of fact rendered by the
-21-
<PAGE>
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is supported by substantial evidence and
not based on legal error under the substantive law of the state of California.
(f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration
if the Dispute concerns indebtedness secured directly or indirectly, in whole
or in part, by any real property unless (i) the holder of the mortgage, lien
or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or
benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations
of the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If
any such Dispute is not submitted to arbitration, the Dispute shall be
referred to a referee in accordance with California Code of Civil Procedure
Section 638 et seq., and this general reference agreement is intended to be
specifically enforceable in accordance with said Section 638. A referee with
the qualifications required herein for arbitrators shall be selected pursuant
to the AAA's selection procedures. Judgment upon the decision rendered by a
referee shall be entered in the court in which such proceeding was commenced
in accordance with California Code of Civil Procedure Sections 644 and 645.
(g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision
shall survive termination, amendment or expiration of any of the Loan
Documents or any relationship between the parties.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
ROTONICS MANUFACTURING INC. NATIONAL ASSOCIATION
By: /s/ SHERMAN MCKINNISS By: /s/ MICHAEL KURINIJ
--------------------- -----------------------
Sherman McKinniss Michael Kurinij
President/Chief Assistant Vice President
Executive Officer
By: /s/ DOUGLAS W. RUSSELL
----------------------
Douglas W. Russell
Chief Financial Officer/
Assistant Secretary/
Treasurer
-23-
<PAGE>
EXHIBIT 23a
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated August 27, 1998 on page F-1 of this Form 10-K which is
incorporated by reference in the Prospectus constituting part of the
Registration Statements on Form S-3 (Nos. 33-62721 and 33-70526) and in the
Registration Statement on Form S-8 (No. 33-88410).
ARTHUR ANDERSEN LLP
Orange County, California
September 25, 1998
