<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, 1999
Commission file number 1-9429
ROTONICS MANUFACTURING INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2467474
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17022 South Figueroa Street
Gardena, California 90248
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(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
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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 17, 1999, was $6,134,200 (1).
The number of shares of common stock outstanding at September 17, 1999 was
15,085,811.
(1) Excludes 8,951,569 shares held by directors, officers and stockholders
whose ownership exceeded 5% of the outstanding shares at September 17, 1999.
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.
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DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------
Document Form 10-K
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Definitive Proxy Statement to be used in connection with
the Annual Meeting of Stockholders to be held on December 3, 1999 III
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
- ------ ----
<S> <C>
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
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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
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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
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Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 16
SIGNATURES 17
</TABLE>
3
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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. Three of 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 to two tenants on a
month-to-month term basis at $6,000 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
Nutron/AMP, Rotocast of Tennessee, Rotocast of Texas and RMI-Nevada. Prior to
the merger the operations in Bossier City, Louisiana were substantially
discontinued. Rotocast was a privately held Florida corporation owned by GSC
Industries, Inc. ("GSC"). The Company leases the remaining Rotocast
facilities from GSC, and other affiliated parties, 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.
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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 has enhanced the operations of the Company's remaining facilities,
reduced its overall manufacturing overhead costs, and has allowed the Company
to take greater advantage of its marketing and distribution channels since
the completion of the Rotocast merger. The consolidation of the facilities
was completed in fiscal 1999. Also in fiscal 1999, the Company consolidated
its Miami operations into the remaining operating facilities. The Company
will continue to work on streamlining the operations effected by these
consolidations in the ensuing year.
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, recreation, 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, kayaks, outdoor
lamp posts, furniture, planters, and other molded items.
The Company purchases resin from eight major suppliers in the U.S. and
Canada. 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 generally been
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 their 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 which is determined by customer demand within that region, a
constraint inherent to the industry. Due to its nationwide presence, the
Company has substantially alleviated this constraint. 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 $4,017,800 and $4,252,800 as of June 30, 1999
and 1998, respectively. All of the backlog orders as of June 30, 1999 are
expected to be filled during fiscal 2000.
The Company's products are marketed through the in-house sales and
engineering staff, various distributors and outside commission-based sales
representatives. The Company continues to build a strong, broad and diverse
customer base which covers a 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.
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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, 1999, the Company employed a total of 550 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 3,600 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 38,200 174,600 $ 121,600 September 2004
Miami, Florida (3) 50,000 86,000 $ 150,400 March 2013
Gainesville, Texas (4) - 108,900 $ 1,000 April 2001
Brownwood, Texas 42,800 136,120 $ 67,800 March 2013
Las Vegas, Nevada 30,000 90,000 $ 124,100 March 2013
Knoxville, Tennessee 44,000 174,240 $ 137,500 March 2013
</TABLE>
(1) The Company has an option to purchase these facilities.
(2) Does not give effect to any renewal options.
(3) The Company is currently listing the Rotocast-Miami building (20,000 sq ft)
for lease.
(4) 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 $1.9 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 two
unrelated lessees for $6,000 per month.
6
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ITEM 3. LEGAL PROCEEDINGS
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 $350,000 in September 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock ($.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 4,000 at September 17, 1999.
PRICE RANGE OF COMMON STOCK
The following table sets forth the quarterly price ranges of the Company's
Common Stock in Fiscal 1999 and 1998, as reported on the composite transactions
reporting system for AMEX listed stocks.
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH LOW
- ------------- ---- ---
<S> <C> <C>
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
Fiscal 1999
First Quarter Ended September 30, 1998 $ 1-3/16 $ 11/16
Second Quarter Ended December 31, 1998 1-1/16 9/16
Third Quarter Ended March 31, 1999 1-3/16 3/4
Fourth Quarter Ended June 30, 1999 1-1/8 7/8
</TABLE>
In fiscal years 1996-1999, 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
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<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30,
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1999 1998(B) 1997 1996 1995(C)
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $ 45,499,700 $ 38,058,900 $ 39,385,100 $ 35,703,600 $ 35,887,600
Cost of goods sold 33,335,300 29,268,400 29,292,100 26,443,700 26,298,900
Gross margin 12,164,400 8,790,500 10,093,000 9,259,900 9,588,700
Selling, general and
administrative expenses (D) 8,841,600 7,327,300 6,239,600 6,313,100 5,767,900
Interest expense 987,700 793,700 556,500 696,500 766,500
Net income (E) $ 1,326,000 $ 417,200 $ 1,441,800 $ 1,472,700 $ 3,287,600
Basic/diluted income
per common share $ 0.09 $ 0.03 $ 0.10 $ 0.10 $ 0.24
Average common shares
outstanding (A) 15,379,400 14,445,200 14,134,600 13,848,500 12,595,200
OTHER FINANCIAL DATA
Net income as a percent of sales 2.9% 1.1% 3.7% 4.1% 9.2%
</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) In fiscal 1999 and 1998, includes $394,400 and $280,300 respectively, in
plant consolidation expenses.
(E) Fiscal year 1997 includes $1,010,800 in costs relating to a lawsuit
settlement
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<TABLE>
<CAPTION> At June 30,
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1999 1998(B) 1997 1996 1995(C)
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets $ 15,701,500 $ 16,463,600 $ 12,814,000 $ 13,023,000 $ 11,903,200
Current liabilities 5,965,900 6,452,800 5,099,700 4,864,500 4,766,000
Working capital surplus 9,735,600 10,010,800 7,714,300 8,158,500 7,137,200
Total assets 39,300,300 40,563,800 30,634,400 29,055,700 30,359,400
Long-term debt 9,470,600 10,976,500 6,486,100 5,864,100 7,707,700
Total liabilities 17,866,000 19,155,900 11,589,800 10,732,600 12,477,700
Preferred stock - - - - 3,000,000
Current ratio 2.6 to 1 2.6 to 1 2.5 to 1 2.7 to 1 2.5 to 1
Net book value per
common share (A) $1.42 $1.35 $1.35 $1.29 $ 1.15
</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.
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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 increased 19.6% to $45,499,700 in fiscal 1999 compared to $38,058,900
in fiscal 1998. Approximately 81% of the increase is attributable to the product
lines acquired with the Rotocast merger with the remaining 19% attributed to
increased sales volumes pertaining to the Company's pre-merger operations.
Following last year's transition through the merger and consolidation process of
several of its facilities, the Company has emerged with a heightened sense of
direction and a strong operating base. Market conditions continue to be
favorable in spite of recent inflationary concerns. The Company noted the
largest gains in its custom molded (10%), material handling (64%), and marine
(24%), products compared to last year. Management is also very enthused with the
product lines acquired with the merger (buoys, kayaks, lamp posts, and planters)
as it continues to find new avenues to distribute and market these products. The
Company has also launched two new product lines in fiscal 1999. The first
through an acquisition of a line of residential planters marketed under the
trade name Terrabella. The second is a new line of linen and laundry carts. Both
lines are great additions to RMI's family of products and will enhance regional
sales as we strive to exceed our growth projections.
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 a 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 have caused the Company to
readily adapt itself to always take the utmost advantage of the current economic
and market conditions in which we operate. 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.
Cost of goods sold was $33,335,300 or 73.3% of net sales in fiscal 1999 compared
to $29,268,400 or 76.9% and $29,292,100 or 74.4% of net sales in fiscal 1998 and
1997, respectively. The Company is beginning to realize the positive impact the
recent plant consolidations have had on reducing overall fixed overhead costs
and thus improving gross margins. Gross margins also benefited from fairly
stable resin prices during most of the year and a favorable product mix with the
incorporation of acquired Rotocast product lines for the first complete year.
Although resin prices were favorable in most of fiscal 1999, the roto-molding
industry has experienced extreme volatility in plastic resin prices over the
last five years. 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 price increases. Again in the latter portion of
fiscal 1999, the Company experienced significant increases in plastic resin
costs. Over the years, the Company has been relatively successful in mitigating
these resin price increases by initiating customer price increases and various
raw material purchasing strategies. Management will continue to institute the
same practices in fiscal 2000 to combat the most recent material price hikes. A
similar situation occurred between fiscal 1997 and 1998. However, due to adverse
market conditions which resulted in a notable decline in custom product sales in
fiscal 1998, the Company was not able to maintain consistent operating results
and realized a 2.5% decrease in its gross margin. Management is optimistic about
its ability to mitigate these most recent resin price increases. However, it
would like to issue a word of caution that if market conditions change and/or
resin prices continue to rise, it could hamper the Company's goal to maintain
consistent future operating results.
Selling, general and administrative expenses were $8,447,200 or 18.6% of net
sales in fiscal 1999 compared to $7,047,000 or 18.5% of net sales in fiscal
1998. As a percentage of sales, selling, general and administrative costs
remained relatively consistent. However, total costs increased primarily due to
the additional operations acquired in connection with last year's merger. With
the consolidation of several plants since the merger, management anticipates
reducing overall selling, general,
11
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and administrative costs in the ensuing year. In addition, management's
efforts to realign and streamline its sales and administrative functions
continue to benefit the Company as it strives to keep these costs in line
with future sales projections.
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
were 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.
The Company incurred $394,400 and $280,300 in fiscal years 1999 and 1998,
respectively, in costs related to the consolidation of three of its plants. The
Company began and substantially completed the consolidation of its Arleta,
California and Warrminster, Pennsylvania plants in the fourth quarter of fiscal
1998 and then completed the process during the first quarter of fiscal 1999.
Shortly after the completion of these consolidations, it launched the
consolidation of the Miami, Florida Rotocast operation. This consolidation was
completed during the third quarter of fiscal 1999.
These consolidations have had a definite impact on the current, as well as
future, operating results of the Company. Although the Company had to incur the
initial costs associated with the consolidation process, the future benefits
obtainable are unsurpassed. The Company has improved manufacturing utilization
at its remaining sites and reduced manufacturing overhead. These are long-term
benefits the Company should realize without compromising the manufacturing,
marketing, or distribution of its products.
Income from operations was $3,322,800 or 7.3% of net sales in fiscal 1999
compared to $1,463,200 or 3.8% and $3,853,400 or 9.8% of net sales in fiscal
1998 and 1997, respectively. Current year operating profits rebounded from last
year's levels due to the increase in sales volumes and the cost savings and
efficiencies obtained from the plant consolidations. Again, this is a marked
improvement over last year's results. Overall market conditions have been
favorable and the Company continues to see the positive impact on sales volumes
due to its enhanced marketing and selling efforts. Management will continue to
redefine its sales and marketing techniques and considers this process one of
their top priorities in efforts to meet future growth projections.
Interest expense increased $194,000 to $987,700 in fiscal 1999 compared to
$793,700 in fiscal 1998. The increase is primarily attributed to the initial
increase in the Company's debt structure of approximately $3.8 million resulting
from last year's merger. However, the additional interest costs incurred have
been partially mitigated due to subsequent repayments of debt and a drop in the
bank's prime rate during fiscal 1999. Beginning in the second quarter of fiscal
2000, management anticipates a slight increase in interest costs once the
Rotocast merger note is repaid using the Company's line of credit.
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 amounted to approximately $3.8 million. In
addition, the Company incurred an increase in short-term borrowings due to a
decrease in cash flows from operations.
Net income increased 218% to $1,326,000 in fiscal 1999 compared with $417,200 in
fiscal 1998. Earnings per share also increased 200% to $0.09 per common share in
fiscal 1999 compared to $0.03 per common share in fiscal 1998. Management
attributed the improvement to the increase in sales volumes, the Company's
enhanced marketing efforts and cost reductions obtained from prior plant
consolidations. Management is very pleased with these results reflecting the
first full year's operations since the Rotocast merger. Now that the plant
consolidations are primarily behind us, management anticipates continued
improvements in operational results as we move forward.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $300,000 to $9.7 million at June 30, 1999 compared to
$10 million at June 30, 1998. The decrease is attributed to fluctuations in
accounts receivable, inventories, accounts payable, and deferred taxes
consistent with the Company's current operations. However, cash provided by
operations increased 138% to $4,615,700 for fiscal 1999
12
<PAGE>
compared with $1,937,300 for the same period last year. The increase is
related to the current year's 218% increase in net income coupled with
increases in non-cash amounts for depreciation, amortization, and deferred
income taxes.
The Company expended a total of $2,141,400 for property, plant, and equipment
during fiscal 1999 compared to $2,103,100 in fiscal 1998. The expenditures were
fairly consistent and reflected the Company's continued commitment to provide
the necessary equipment and upgrades to effectively dominate in the industry.
In July 1998, the Company was advanced an additional $1 million against its
machinery and equipment note No. 5 bringing the total outstanding on this note
to $3 million. This note was originally issued to retire Rotocast's debt
acquired as part of the merger and later refinanced based on the appraisal of
Rotocast's machinery and equipment. The note is due in monthly principal
installments of $50,000 plus interest and will mature July 1, 2003. Also, in
July 1998, the bank replaced the Company's existing real estate loan with a new
$2 million loan secured by the Company's Bensenville, Illinois and Gainesville,
Texas properties. The note is due in monthly principal installments of $6,700
plus interest on a twenty-five year amortization with the outstanding principal
due July 1, 2008.
In November 1998, the Company advanced the remaining $500,000 available under
its machinery and equipment term-loan commitment. The proceeds were used to
repay amounts originally borrowed under the Company's revolving line of credit
to finance $625,000 in machinery and equipment purchases. This brought the total
principal outstanding to $1.2 million which is due in monthly principal
installments of $20,000 plus interest and matures on July 15, 2003.
In June 1999, the Company modified it credit agreement with the bank to extend
the maturity date on its working line of credit to October 1, 2001. In addition,
the bank issued a term loan commitment in the mount of $1.2 million to finance
future machinery and equipment acquisitions. Advances under the note will be
subject to monthly interest only payments at the bank's prime or LIBOR interest
rate until July 1, 2000 at which time it will convert to a sixty-month fully
amortizable note.
Net borrowings under the line of credit decreased $1.6 million to $2.3 million
between June 30, 1998 and June 30, 1999. The decrease is attributed to the
advances in long-term debt previously mentioned above, of which a portion went
to repay short-term borrowings under the line of credit. The Company has further
reduced the outstanding balance owed under the line of credit with excess
current operating cash flows. At June 30, 1999, the Company had approximately
$2.7 million available for future borrowings under the revolving line of credit.
The remaining $2 million open on the line is reserved for the letter of credit
which was issued to secure the GSC note payable. This amount will be advanced
upon repayment of the GSC note on or around September 25, 1999.
On December 8, 1998, the Board of Directors declared at its Annual Meeting of
Stockholders its fourth annual cash dividend on the Company's common stock. A
regular dividend of $.04 per common share was paid on January 29, 1999 to
stockholder's of record on January 19, 1999. The Board of Directors is confident
about the Company's continued success and believes our loyal shareholders should
continue to receive a return on their investments for their continued support.
In fiscal 1999, the Company continued its common stock buyback program. During
the fiscal year, the Company acquired 734,000 shares of common stock at a cost
of $688,900. During the last 3 years, the Company has repurchased a total of
1,166,200 shares of its common stock. Management expects to acquire an
additional 290,000-300,000 shares under the current program during fiscal 2000.
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.
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
13
<PAGE>
liability measured at its fair value. The Statement requires changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this pronouncement is not
expected to have a significant impact on the Company's financial statements.
YEAR 2000
Management has been fully apprised of the issues surrounding the year 2000
dilemma. In assessing the potential impact this issue had on the Company,
management reviewed both its manufacturing and accounting systems to ascertain
critical applications which would be affected. Due to the nature of the
Company's manufacturing process and the equipment utilized, it was determined
that even equipment which was operated by or 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, including its corporate headquarters, were fully Y2K
compliant as of June 30, 1999. The Company does not believe it will encounter
any additional problems associated with the year 2000 issue between now and the
millennium. The costs associated with becoming compliant did not have a material
effect on the Company's financial position.
To complete the Company's assessment of the year 2000 problem, the Company has
contacted its major suppliers in an effort 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. Based on their
responses, we feel confident that most of them are in compliance or will be
prior to December 31, 1999, and as such, should not impact our ability to
manufacture and supply products to our customers.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company is exposed to certain market risks relating to interest rate
volatility on its existing and future issuances of variable rate debt with the
bank. Primary exposures include movements in U.S. Treasury rates and LIBOR rates
which in turn effect the bank's prime and LIBOR option rates.
The Company had approximately $9.5 million of variable rate debt as of June 30,
1999. In efforts to reduce interest rate volatility and mitigate exposure on
variable rate debt, the Company entered into an interest rate swap effective
July 15, 1998. The swap has a notional amount of $7.5 million at July 15, 1999,
which reduces to $5.0 million at July 15, 2000 and remains at this amount until
its expiration on July 15, 2003. The swap fixes the bank's LIBOR option rate at
6.2%, plus 200 basis points, over the term of the contract. If average interest
rates increased by 1% during fiscal 2000 as compared to fiscal 1999, the Company
would not expect a significant increase in projected fiscal 2000 interest
expense.
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 3, 1999 ("the Proxy Statement")
EXECUTIVE OFFICERS
As of September 17, 1999, the executive officers of the Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Sherman McKinniss 63 President, Chief Executive Officer, Chairman of the Board
Robert E. Gawlik 51 Executive Vice-President, Chief Operating Officer
E. Paul Tonkovich 61 Secretary, Director
Douglas W. Russell 38 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, 1999 and 1998 F-2
Statement of Income,
Years Ended June 30, 1999, 1998 and 1997 F-3
Statement of Changes in Stockholders' Equity,
Years Ended June 30, 1999, 1998, and 1997 F-4
Statement of Cash Flows,
Years Ended June 30, 1999, 1998, and 1997 F-5
Notes to Financial Statements F-6
(2) Financial Statement Schedules:
VIII Valuation and Qualifying Accounts,
Years Ended June 30, 1999, 1998, and 1997 F-18
</TABLE>
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 - None.
(c) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
10.1 Credit Agreement between registrant and Wells Fargo Bank dated June 23,
1999.
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 09/28/1999
By /s/ DOUGLAS W. RUSSELL
------------------------------
Douglas W. Russell
Chief Financial Officer
Assistant Secretary/Treasurer
Date 09/28/1999
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 09/28/1999
- -------------------------
E. Paul Tonkovich
/s/ DAVID C. POLITE Director 09/28/1999
- -------------------------
David C. Polite
/s/ LARRY DEDONATO Director 09/28/1999
- -------------------------
Larry DeDonato
/s/ JAMES E. EVANS Director 09/28/1999
- -------------------------
James E. Evans
/s/ LARRY L. SNYDER Director 09/28/1999
- -------------------------
Larry L. Snyder
/s/ ROBERT GROSSMAN Director 09/28/1999
- -------------------------
Robert Grossman
</TABLE>
17
<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, 1999 and
1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in
the period ended June 30, 1999 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 25, 1999
F-1
<PAGE>
ROTONICS MANUFACTURING INC.
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
---------------- ----------------
1999 1998
<S>
---------------- ----------------
ASSETS <C> <C>
Current assets:
Cash $ 3,300 $ 30,700
Accounts receivable, net of allowance for doubtful accounts
of $321,400 and $148,000, respectively (Notes 8 and 9) 6,570,200 6,973,800
Current portion of notes receivable (Note 3) 51,700 62,600
Inventories (Notes 4 , 8 and 9) 6,973,700 7,081,900
Deferred income taxes, net (Note 14) 1,885,900 2,106,400
Prepaid expenses and other current assets 216,700 208,200
------------ ------------
Total current assets 15,701,500 16,463,600
Notes receivable, less current portion (Note 3) 502,800 455,000
Investment in partnership (Note 5) 124,200 133,200
Property, plant and equipment, net (Notes 6, 8 and 9) 18,093,800 18,250,000
Intangible assets, net (Note 7) 4,800,800 5,131,800
Other assets 77,200 130,200
------------ ------------
$ 39,300,300 $ 40,563,800
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 9) $ 2,067,000 $ 1,784,000
Accounts payable 2,818,800 3,719,600
Accrued liabilities (Note 11) 1,037,100 949,200
Income taxes payable (Note 14) 43,000 -
------------ ------------
Total current liabilities 5,965,900 6,452,800
Bank line of credit (Note 8) 2,287,400 3,926,200
Long-term debt, less current portion (Note 9) 5,183,200 5,050,300
Long-term debt, due related parties (Note 10) 2,000,000 2,000,000
Deferred income taxes, net (Note 14) 2,429,500 1,726,600
------------ ------------
Total liabilities 17,866,000 19,155,900
------------ ------------
Commitments and contingencies (Note 15)
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 15,072,320 and 15,806,361 shares, respectively,
net of treasury shares (Note 13) 26,232,500 26,921,400
Accumulated deficit (4,798,200) (5,513,500)
------------ ------------
Total stockholders' equity 21,434,300 21,407,900
------------ ------------
$ 39,300,300 $ 40,563,800
------------ ------------
------------ ------------
</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,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 45,499,700 $ 38,058,900 $ 39,385,100
------------ ------------ ------------
Costs and expenses:
Cost of goods sold 33,335,300 29,268,400 29,292,100
Selling, general and administrative expenses 8,447,200 7,047,000 6,239,600
Plant consolidation expenses (Note 2) 394,400 280,300 -
------------ ------------ ------------
Total costs and expenses 42,176,900 36,595,700 35,531,700
------------ ------------ ------------
Income from operations 3,322,800 1,463,200 3,853,400
------------ ------------ ------------
Other (expense)/income:
Interest expense (987,700) (793,700) (556,500)
Lawsuit settlement (Note 15) - - (1,010,800)
Other income, net 138,400 96,200 98,500
------------ ------------ ------------
Total other expense (849,300) (697,500) (1,468,800)
------------ ------------ ------------
Income before income taxes 2,473,500 765,700 2,384,600
Income tax provision (Note 14) (1,147,500) (348,500) (942,800)
------------ ------------ ------------
Net income $ 1,326,000 $ 417,200 $ 1,441,800
------------ ------------ ------------
------------ ------------ ------------
Basic/diluted income per common share (Note 1) $ .09 $ .03 $ .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>
COMMON STOCK
---------------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
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
Repurchase of common stock (734,041) (688,900) - (688,900)
Common stock dividends - - (610,700) (610,700)
Net income - - 1,326,000 1,326,000
------------ ------------ ------------ ------------
Balances, June 30, 1999 15,072,320 $ 26,232,500 $ (4,798,200) $ 21,434,300
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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,
-------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,326,000 $ 417,200 $ 1,441,800
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,635,300 2,034,800 1,617,000
(Gain)/loss on sales of equipment (1,500) 67,500 21,800
Deferred income tax expense 923,400 323,000 786,200
Provision for doubtful accounts 179,300 39,300 63,900
Changes in assets and liabilities, net of effect from purchase of
business:
Decrease/(increase) in accounts receivable 160,400 (324,900) 392,400
Decrease/(increase) in inventories 108,200 (267,000) (663,300)
(Increase)/decrease in prepaid expenses and other current assets (8,500) 177,200 (23,600)
Decrease/(increase) in other assets 42,100 (72,400) 23,200
(Decrease)/increase in accounts payable (879,900) (177,100) 243,700
Increase/(decrease) in accrued liabilities 87,900 (280,300) (124,200)
Increase in income taxes payable 43,000 - -
------------ ------------ ------------
Net cash provided by operating activities 4,615,700 1,937,300 3,778,900
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of Rotocast, net of cash obtained - (74,100) -
Repayments/(advances) on notes receivable 27,000 (11,600) (1,200)
Capital expenditures (2,141,400) (2,103,100) (3,797,800)
Proceeds from sales of equipment 5,700 93,500 3,200
Distribution from investment in partnership 9,000 2,300 -
------------ ------------ ------------
Net cash used in investing activities (2,099,700) (2,093,000) (3,795,800)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under line of credit 11,670,500 11,638,800 9,700,000
Repayments under line of credit (13,309,300) (10,086,000) (9,310,100)
Proceeds from issuance of long-term debt 3,505,900 950,000 1,526,400
Repayments of long-term debt (3,090,000) (1,285,500) (1,189,700)
Payment of common stock dividends (631,600) (541,900) (554,300)
Proceeds from exercise of stock options and warrants - - 6,100
Repurchases of common stock (688,900) (501,100) (161,000)
------------ ------------ ------------
Net cash (used in)/provided by financing activities (2,543,400) 174,300 17,400
------------ ------------ ------------
Net (decrease)/increase in cash (27,400) 18,600 500
Cash at beginning of year 30,700 12,100 11,600
------------ ------------ ------------
Cash at end of year $ 3,300 $ 30,700 $ 12,100
------------ ------------ ------------
------------ ------------ ------------
</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, recreation, 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 1999, 1998, or 1997. In
fiscal 1999, the Company purchased in aggregate approximately 90% of its plastic
resin from three vendors. Plastic resin represents a significant portion of the
Company's manufacturing costs. As such, economic factors that 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.
The table below details the components of the basic and diluted earnings per
share ("EPS") calculations:
<TABLE>
<CAPTION>
Income Shares EPS Amount
------------- --------- ------------
<S> <C> <C> <C>
JUNE 30, 1999
Basic EPS
Net Income $1,326,000 15,379,400 $0.09
Effect of dilutive stock options - 4,700 -
---------- ---------- -----
Diluted EPS $1,326,000 15,384,100 $0.09
========== ========== =====
JUNE 30, 1998
Basic EPS
Net Income $ 417,200 14,445,200 $0.03
Effect of dilutive stock options - - -
---------- ---------- -----
Diluted EPS $ 417,200 14,445,200 $0.03
========== ========== =====
JUNE 30, 1997
Basic EPS
Net Income $1,441,800 14,134,600 $0.10
Effect of dilutive stock options - 600 -
---------- ---------- -----
Diluted EPS $1,441,800 14,135,200 $0.10
========== ========== =====
</TABLE>
F-7
<PAGE>
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 adopted SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 defines comprehensive income as a measure
of all changes in equity of an enterprise during a period that results from
transactions and other economic events of the period other than transactions
with owners. The adoption of this pronouncement did not have a significant
impact on the Company's results of operations.
Effective for fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information". SFAS No. 131
introduces management's approach to defining operating segments. This
approach corresponds to the way management organizes units and internally
evaluates performance of its operations based on products, services,
geography, legal or management structure. Once operating segments are
identified, they are then grouped based on similar characteristics to
determine reportable segments. Under the provisions of SFAS No. 131 the
Company's operations are conducted under one operating segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The adoption of this pronouncement is not
expected to have a significant impact on the Company's financial statements.
NOTE 2 - ACQUISITIONS:
Pursuant to an Agreement and Plan of Merger and Reorganization dated March
24, 1998 between the Company and GSC Industries, Inc. ("GSC"), the Company
acquired all of GSC's outstanding common stock holdings in Rotocast
International, Inc. ("Rotocast") and Rotocast's wholly owned subsidiaries
Rotocast Plastic Products, Inc.; Wonder Products, Inc.; Nutron Plastic, Inc.;
Rotocast Plastic Products of Texas, Inc.; Rotocast Plastic Products of
Nevada, Inc.; Rotocast Plastic Products of Tennessee, Inc.; and Rotocast
Management Corporation. In accordance with the merger and reorganization
Rotocast was merged into the Company and the Company issued to GSC 2,072,539
shares of its own common stock and a $2,000,000 eighteen-month promissory
note bearing interest at 5.26% per annum. The promissory note is secured by a
$2,000,000 irrevocable standby letter of credit issued by Wells Fargo Bank,
which can only be called upon if the principal balance of the note is not
paid within ten days of maturity. Pursuant to the merger agreement the
transaction was effective March 31, 1998.
To provide recourse to the Company, five percent of the common shares issued
to GSC will be held in an escrow account to cover any claims by the Company
in the event of any breaches of representations, warranties or covenants by
GSC as outlined in the agreement. The Company 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, Arleta, California, and Miami,
Florida into its other operating facilities. The relocation of these plants
resulted in non-recurring costs of approximately $394,400 and $280,300 in
fiscal years 1999 and 1998, respectively.
F-8
<PAGE>
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, 1999 and 1998, the
total balance of this note amounted to $490,700 and $517,600 including
accrued interest of $35,700 and $62,600, respectively. The Company intends to
hold this note until maturity.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
Inventories consist of: June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 2,728,000 $ 4,002,400
Finished goods 4,245,700 3,079,500
---------- ---------
$ 6,973,700 $ 7,081,900
============ ===========
</TABLE>
F-9
<PAGE>
NOTE 5 - INVESTMENT IN PARTNERSHIP:
The Company owns a 33-1/3% interest in a real estate venture that 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>
Property, plant and equipment consist of: June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 1,039,500 $ 1,039,500
Buildings and building improvements 4,291,300 4,021,000
Machinery, equipment, furniture and fixtures 23,603,300 21,534,500
Construction in progress 610,600 836,300
-------- -------
29,544,700 27,431,300
Less - accumulated depreciation (11,450,900) (9,181,300)
------------- ------------
$18,093,800 $18,250,000
============ ===========
</TABLE>
NOTE 7 - INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
Intangible assets consist of: June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Patents, net of accumulated amortization of $107,000 and $100,900 $ 45,200 $ 51,300
Goodwill, net of accumulated amortization
of $2,701,800 and $2,377,000 4,755,600 5,080,500
---------- ---------
$ 4,800,800 $ 5,131,800
============ ===========
</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.
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, 2001. 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,
1999 was 7.75% 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, 1999, total borrowings
under the Company's line of credit were $2,287,400 of which $2,250,000 was
borrowed under the LIBOR option bearing a LIBOR interest rate of 7.0% per
annum and maturing on July 15, 1999. Proceeds from the loan were used for
working capital purposes. At June 30, 1999, the Company had approximately
$2,712,600 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 1999.
F-10
<PAGE>
NOTE 9 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consists of: June 30,
----------------------------
1999 1998
---------- -----------
<S> <C> <C>
Note payable - Bank (A) $ 733,300 $1,533,300
Note payable - Bank (B) 191,700 291,700
Note payable - Bank (C) 288,100 389,800
Note payable - Bank (D) 600,000 800,000
Note payable - Bank (E) 1,040,000 700,000
Note payable - Bank (F) 2,450,000 2,000,000
Note payable - Bank (G) 1,926,700 1,080,600
Other 20,400 38,900
------------- -------------
7,250,200 6,834,300
Less-current portion (2,067,000) (1,784,000)
------------- -------------
$5,183,200 $5,050,300
============= =============
</TABLE>
(A) In May 1995 the Company restructured its credit agreement with Wells Fargo
Bank. The loan consists of a $4,000,000 sixty-month term loan. The note is
due in monthly principal installments of $66,700 plus interest at the
bank's prime rate (7.75% at June 30, 1999). In addition, the loan agreement
allows the Company to convert all or a portion of the outstanding principal
to a LIBOR-based loan for periods up to 180 days. At June 30, 1999, the
total outstanding principal balance was under the LIBOR option at 7.0% per
annum maturing on July 15, 1999. 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 (7.75% at June
30, 1999) or LIBOR interest rate option for periods up to six months. At
June 30, 1999, the total outstanding principal was under the LIBOR option
at 7.0% per annum maturing July 15, 1999. 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 (7.75% per
annum at June 30, 1999) or LIBOR interest rate option for periods up to six
months. At June 30, 1999, the total outstanding principal was under the
LIBOR option at 7.0% per annum maturing July 15, 1999. The note is secured
by the Company's machinery and equipment and matures on May 15, 2002.
(D) In June 1997, the Company was advanced $1,000,000 on its third machinery
and equipment term-loan commitment with Wells Fargo Bank. The proceeds were
used to repay amounts originally borrowed under the Company's revolving
line of credit to finance approximately $1,250,000 in machinery and
equipment purchases. The note is due in monthly principal installments of
approximately $16,700 plus interest at the bank's prime rate (7.75% per
annum at June 30, 1999) or LIBOR interest rate option for periods up to
three months. At June 30, 1999, the total outstanding principal was under
the LIBOR option at 7.0% per annum maturing July 15, 1999. The note is
secured by the Company's machinery and equipment and matures on June 27,
2002.
(E) In 1998, the Company was advanced $1,200,000 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 $1,500,000 in machinery and
equipment purchases. The note was due in monthly interest only payments at
the bank's prime rate or LIBOR interest rate options until November 15,
1998. At this time the note converted to a sixty month fully amortizable
loan due in monthly principal installments of $20,000 plus interest at the
bank's prime rate, (7.75% per annum at June 30, 1999), or LIBOR interest
rate option for periods up to three months. At June 30, 1999, the total
outstanding principal was under the LIBOR option at 7.0% per annum maturing
July 15, 1999. The note is secured by the Company's machinery and equipment
and matures on July 15, 2003.
F-11
<PAGE>
At June 30, 1999, the Company had available a term-loan commitment in the
amount of $1,200,000 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 July 1, 2000 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 (7.75% per annum at June 30, 1999) or LIBOR interest rate option for
periods up to three months until August 15, 1998. At such time the note
converted to a sixty-month fully amortizable loan due in monthly
installments of $50,000. At June 30, 1999, the total outstanding principal
was under the LIBOR option at 7.0% per annum maturing July 15, 1999. The
note is secured by the Company's machinery and equipment and matures on
July 1, 2003.
(G) In July 1998, a $2,000,000 real estate loan secured by the Company's
Bensenville, Illinois and Gainesville, Texas properties was issued to Wells
Fargo Bank. This note replaced the 1994 real estate loan issued in
connection with the purchase of the Bensenville, Illinois property. The
note is due in monthly principal installments of approximately $6,700 plus
interest at the bank's prime rate, (7.75% per annum at June 30, 1999), or
LIBOR interest rate option on a twenty-five year amortization with the
outstanding principal due on July 1, 2008. At June 30, 1999, the total
outstanding principal was under the LIBOR option at 7.0% per annum maturing
July 15, 1999.
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 ($7.5 million as of
July 15, 1999) from a variable floating rate to a fixed interest rate in
efforts to protect 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>
2000 $2,067,000
2001 1,321,700
2002 1,204,800
2003 920,000
2004 210,000
Thereafter 1,526,700
-----------
$7,250,200
-----------
-----------
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS:
<TABLE>
<CAPTION>
Related party debt consists of: June 30,
----------------------------
1999 1998
---------- -----------
<S> <C> <C>
Note payable - (A) $2,000,000 $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 which was paid on March 25, 1999 and a second principal and
interest payment due upon maturity of the note on September 25, 1999. The
Company intends to fund payment for this note from the current availability
under its revolving line of current.
The note is secured by a $2,000,000 irrevocable standby letter of credit
that may be called upon if the principal balance of the note is not paid
within ten days of maturity.
F-12
<PAGE>
ADDITIONAL RELATED PARTY TRANSACTIONS:
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 $461,000, $392,400 and $412,300 in fiscal years 1999,
1998 and 1997, respectively. Amounts due on sales to this company were
$89,400 and $171,800 at June 30, 1999 and 1998, respectively, and are
included in accounts receivable in the accompanying balance sheet.
In fiscal years 1999, 1998 and 1997, the Company incurred legal fees and
costs amounting to $44,500, $83,400 and $103,400, 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 through August 1998, are leased on a long-term basis
through March 2013 and are subject to annual CPI adjustments. In fiscal 1999
and 1998, the Company paid rent on these facilities amounting to $491,300 and
$135,000, respectively.
NOTE 11 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
Accrued liabilities consist of: June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Salaries, wages, commissions and related payables $ 712,800 $ 607,900
Other 324,300 341,300
-------- --------
$1,037,100 $ 949,200
========== ==========
</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.
STOCK OPTION ACTIVITY
<TABLE>
<CAPTION>
Outstanding Exercisable Weighted Average
Shares Shares Price Per Share
----------- ----------- ----------------
<S> <C> <C> <C>
Balance outstanding at June 30, 1996 12,500 12,500 $0.8125
===========
Exercised (7,500) $0.8125
Cancelled (5,000) $0.8125
-----------
Balance outstanding at June 30, 1997 -
Granted 115,000 $0.8669
-----------
Balance outstanding at June 30, 1999 115,000 100,000 $0.8750
=========== ===========
</TABLE>
In fiscal 1998, there was no activity in the plan. In August and September
1998, the Company issued stock options to key employees to purchase an
aggregate of 115,000 shares of common stock at fair market value at the date
of grant. At June 30, 1999, the Company had 885,000 shares available for
future grants.
F-13
<PAGE>
In August 1999, a key employee was issued stock options to purchase 40,000
shares of common stock at fair market value at the date of grant.
The Company accounts for stock options under Accounting Principles Board
Opinion 25 ("APB25"), "Accounting for Stock Issued to Employees", which is
permitted under SFAS No. 123. "Accounting for Stock Based Compensation",
issued in 1995. Had compensation cost for the plan been determined instead in
accordance with rules set out in SFAS 123, the Company's net income and
income per common share data would not be significantly different.
NOTE 13 - COMMON STOCK:
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).
On December 8, 1998, 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, 1999 to stockholders of record on January 19, 1999.
This marks the fourth consecutive annual payment of dividends on the
Company's common stock.
In fiscal year 1999 and 1998, the Company acquired 734,000 and 332,200 shares
of its own common stock which it had purchased in connection with the
Company's Buy Back Program at a total cost of $688,900 and $501,100,
respectively.
Treasury stock is recorded at cost. At June 30, 1999 and 1998, the treasury
stock consisted of 13,491 and 1,775 shares of common stock at a cost of
$13,800 and $1,500, respectively.
NOTE 14 - INCOME TAXES:
The components of the income tax provision were:
<TABLE>
<CAPTION>
For the years ended June 30,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $(72,900) $(6,400) $(63,000)
State (151,200) (19,100) (93,600)
------------ ------------ ------------
(224,100) (25,500) (156,600)
------------ ------------ ------------
Deferred:
Federal (939,700) (301,500) (744,100)
State 16,300 (21,500) (42,100)
------------ ------------ ------------
(923,400) (323,000) (786,200)
------------ ------------ ------------
$ (1,147,500) $ (348,500) $ (942,800)
============ ============ ============
</TABLE>
F-14
<PAGE>
At June 30, 1999, the Company has net operating loss (NOL) carryforwards of
approximately $4,900,000 and $7,346,000 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 2000 for federal and state purposes,
respectively, if not utilized. The federal and state NOL carryforwards expire
as follows:
Amount of unused operating loss carryforwards Expiration during year
Federal State ended June 30,
---------- ---------- ----------------------
$ - $ 371,000 2000
- 405,000 2001
- 207,000 2002
200,000 451,000 2003
3,400,000 273,000 2004
600,000 444,000 2005
500,000 155,000 2006
- 708,000 2007
- 603,000 2008
200,000 1,054,000 2009
- 395,000 2010
- 555,000 2011
- 477,000 2012
- 406,000 2013
- 842,000 2014
---------- ----------
$4,900,000 $7,346,000
========== ==========
At June 30, 1999, the Company had a federal alternative minimum tax credit of
approximately $263,400 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 SFAS 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 SFAS 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-15
<PAGE>
The following reconciles the federal statutory income tax rate to the
effective rate of the provision for income taxes:
For the year ended June 30,
---------------------------
1999 1998 1997
---------------------------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes (net of federal benefit) 3.5 1.7 2.6
Goodwill amortization 4.5 13.6 4.3
Other items, net 4.4 (3.8) (1.4)
---- ---- ----
Effective income tax rate 46.4% 45.5% 39.5%
==== ==== ====
Deferred tax assets and liabilities are summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Federal NOL $ 1,680,900 $ 2,852,500
State NOL (net of federal benefit) 412,900 387,600
Tax credit carryforwards 263,400 253,100
Employment-related reserves 144,600 79,200
Allowance for doubtful accounts 126,200 57,700
----------- -----------
2,628,000 3,630,100
Deferred tax liabilities:
Depreciation and amortization (2,928,300) (3,057,900)
----------- -----------
Net deferred tax (liability)/assets before valuation allowance (300,300) 572,200
Deferred tax assets valuation allowance (243,300) (192,400)
----------- -----------
Net deferred tax (liability)/asset $ (543,600) $ 379,800
=========== ===========
</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 1999, 1998, and
1997 amounted to $991,100, $896,300 and $830,500, respectively.
At June 30, 1999, the future minimum lease commitments, excluding insurance
and taxes, are as follows:
Year Ending June 30,
--------------------
2000 $ 972,700
2001 896,300
2002 673,800
2003 608,200
2004 604,300
Thereafter 4,229,100
-----------
$ 7,984,400
===========
In October 1998, the Company purchased a line of planters which it markets
under the name Terrabella. The Company agreed to pay the seller a total
royalty of $175,000 for the use of the Terrabella name which is to be paid in
quarterly installments at the rate of 3% of sales generated from the planters
or $1,000, whichever is greater. The royalty is due in full by October 15,
2004.
F-16
<PAGE>
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.
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 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,
-------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 1,002,400 $ 749,300 $ 555,900
=========== ========== ==========
Income taxes $ 175,400 $ 103,800 $ 188,500
=========== ========== ==========
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 $ 3,300 $ 11,400 $ 11,700
=========== ========== ==========
</TABLE>
NOTE 17 - UNAUDITED QUARTERLY RESULTS:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
September December March June
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 1999:
Net sales $11,873,800 $11,295,500 $10,370,500 $11,959,900
Gross profit 3,211,400 2,594,300 2,720,900 3,637,800
Net income 362,100 81,100 210,900 671,900
Per share:
Net income $ .02 $ .01 $ .01 $ .05
==============================================================
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
==============================================================
</TABLE>
F-17
<PAGE>
ROTONICS MANUFACTURING INC.
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
Years Ended June 30, 1999, 1998 and 1997
<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, 1999:
Allowance for
doubtful accounts $ 148,000 $ 179,300 $ - $ (5,900) (1) $ 321,400
=============== ================ ========== ========== ===============
Deferred tax asset valuation allowance $ 192,400 $ - $ 50,800 (3) $ - $ 243,200
=============== ================ ========== ========== ===============
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) $ -
=============== ================ ========== ========== ===============
</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-18
<PAGE>
EXHIBIT 10.1 23 PAGES
------------
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of June 23, 1999, 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 hereby agrees to make advances to Borrower from time to time up
to and including October 1, 2001, 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 working capital requirements. Borrower's
obligation to repay advances under the Line of Credit shall be 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.
(a) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue standby
letters of credit for the account of Borrower to support a note payable to GSC
Industries, Inc., 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
<PAGE>
beyond October 8, 1999. 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 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.
(b) 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. Bank has made a loan to Borrower in the original
principal amount of Four Million Dollars ($4,000,000.00) ("Term Loan A"), on
which the outstanding principal balance as of the date hereof is Seven
Hundred Thirty-three Thousand Three Hundred Seventeen Dollars ($733,317.00).
Borrower's obligation to repay Term Loan A is evidenced by a promissory note
substantially 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.
2
<PAGE>
(c) PREPAYMENT. Borrower may prepay principal on Term Loan A solely
in accordance with the provisions of Term Note A.
SECTION 1.3. TERM LOAN B.
(a) TERM LOAN B. Bank has made a loan to Borrower in the original
principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term Loan
B"), on which the outstanding principal balance as of the date hereof is One
Hundred Ninety-one Thousand Six Hundred Forty-two Dollars ($191,642.00).
Borrower's obligation to repay Term Loan B is evidenced by a promissory note
substantially in the form of Exhibit C attached hereto ("Term Note B"), all
terms of which are incorporated herein by this reference. Any reference in
Term Note B 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 B remains in full force
and effect.
(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 1.4. TERM LOAN C.
(a) TERM LOAN C. Bank has made a loan to Borrower in the original
principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term Loan
C"), on which the outstanding principal balance as of the date hereof is Two
Hundred Eighty-eight Thousand One Hundred Thirty-five and 50/100 Dollars
($288,135.50). Borrower's obligation to repay Term Loan C is evidenced by a
promissory note substantially 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 solely
in accordance with the provisions of Term Note C.
SECTION 1.5. TERM LOAN D.
(a) TERM LOAN D. Bank has made a loan to Borrower in the original
principal amount of One Million Dollars ($1,000,000.00)
3
<PAGE>
("Term Loan D"), on which the outstanding principal balance as of the date
hereof is Five Hundred Ninety-nine Thousand Nine Hundred Ninety-nine and
92/100 Dollars ($599,999.92). Borrower's obligation to repay Term Loan D is
evidenced by a promissory note substantially 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 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 1.6. TERM LOAN E.
(a) TERM LOAN E. Bank has made a loan to Borrower in the original
principal amount of Three Million Dollars ($3,000,000.00) ("Term Loan E"), on
which the outstanding principal balance as of the date hereof is Two Million
Four Hundred Fifty Thousand Dollars ($2,450,000.00). Borrower's obligation to
repay Term Loan E is 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. Any reference in Term Note E 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 E remains in full force and effect.
(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 1.7. TERM LOAN F.
(a) TERM LOAN F. Bank has made a loan to Borrower in the original
principal amount of One Million Two Hundred Thousand Dollars ($1,200,000.00)
("Term Loan F"), on which the outstanding principal balance as of the date
hereof is One Million Forty Thousand Dollars ($1,040,000.00). Borrower's
obligation to repay Term Loan F is 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. Any reference in
Term Note F to any prior loan agreement between Bank and Borrower shall be
deemed a reference to this Agreement.
4
<PAGE>
Subject to the terms and conditions of this Agreement, Bank hereby confirms
that Term Loan F remains in full force and effect.
(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.
SECTION 1.8. TERM LOAN G.
(a) TERM LOAN G. Bank has made a loan to Borrower in the original
principal amount of Two Million Dollars ($2,000,000.00) ("Term Loan G"), on
which the outstanding principal balance as of the date hereof is One Million
Nine Hundred Twenty-six Thousand Six Hundred Sixty-six and 63/100 Dollars
($1,926,666.63). Borrower's obligation to repay Term Loan G is evidenced by a
promissory note substantially in the form of Exhibit H attached hereto ("Term
Note G"), all terms of which are incorporated herein by this reference. Any
reference in Term Note G 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 G
remains in full force and effect.
(b) REPAYMENT. The principal amount of Term Loan G shall be repaid
in accordance with the provisions of Term Note G.
(c) PREPAYMENT. Borrower may prepay principal on Term Loan G solely
in accordance with the provisions of Term Note G.
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 July 1, 2000, not to exceed the aggregate principal
amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) ("Term
Commitment"), the proceeds of which shall be used to finance Borrower's
capital expenditures, and which shall be converted on August 1, 2000, 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 I 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
5
<PAGE>
item of new equipment purchased with the 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 outstanding principal
balance of the Term Commitment shall be due and payable in full on July 1,
2000; provided however, that so long as Borrower is in compliance on said
date with all terms and conditions contained herein and in any other
documents evidencing the Credits, Bank agrees to restructure repayment of
said outstanding principal balance so that principal shall be amortized over
five years and shall be repaid in sixty (60) monthly installments.
(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 the Line of
Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E, Term
Loan F, Term Loan G and 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, Term Note G and Term
Commitment Note (collectively, the "Notes").
(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 Eight Thousand Seven Hundred
Fifty Dollars ($8,750.00), 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.
6
<PAGE>
SECTION 1.11. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees 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,
Term Loan F and Term Commitment, Borrower hereby grants to Bank security
interests of first priority in all Borrower's accounts receivable, other
rights to payment, 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,
Term Loan F and Term Commitment, Borrower shall cause Rotocast Plastic
Products of Tennessee, Inc. to grant to Bank security interests of first
priority in all their accounts receivable, other rights to payment, general
intangibles, inventory and equipment.
As security for all indebtedness of Borrower to Bank under the Term
Loan G, 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.
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
7
<PAGE>
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 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, 1999, 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
8
<PAGE>
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 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
9
<PAGE>
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.
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:
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(i) This Agreement and the Notes.
(ii) Corporate Resolution: Borrowing.
(iii) Certificate of Incumbency.
(iv) Security Agreement: Equipment.
(v) Continuing Security Agreement: Rights to Payment and Inventory.
(vi) Third Party Security Agreement: Equipment.
(vii) Third Party Security Agreement: Rights to Payment and Inventory.
(viii) Corporate Resolution: Third Party Collateral.
(ix) UCC 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.
(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 first priority, subject only to such exceptions as
Bank shall approve in its discretion, with all costs thereof to be paid by
Borrower.
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(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.
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.
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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 an
independent certified public accountant acceptable to Bank, to include
balance sheet, income statement, all schedules, notes and narratives
reasonably included in Borrower's 10-K;
(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 balance sheet, income statement, all schedules, notes
and narratives reasonably included in Borrower's 10-Q; 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.
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
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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.
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 1.0, 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 1.0, 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.
(d) EBITDA Coverage Ratio, measured on a rolling four quarter basis,
not less than 1.5 to 1.0 up to and including December 31, 1999, not less than
1.75 to 1.0 from January 1, 2000, up to and including June 30, 2000, and not
less than 2.0 to 1.0 from July 1, 2000, and quarterly 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 (excluding principal payments to GSC Industries, Inc. in fiscal year
2000) 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
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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.
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.
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. 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.
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SECTION 5.4. 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 5.5. 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 5.6. 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.
SECTION 5.7. 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 5.8. 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.
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(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 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,
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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 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
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Gardena, CA 90248
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
South Bay Regional Commercial Banking Office
111 West 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 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.
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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.
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
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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. ss.91
or any similar applicable state law.
(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
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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 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
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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.
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/ Elise McKasson
--------------------- ------------------
Sherman McKinniss Elise McKasson
President/Chief 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
incorporation of our report included in this Form 10-K, into the
Company's previously filed Registration Statements on Form S-3 (Nos.
333-70569, 33-62721, and 33-70526) and in the Registration Statement on
Form S-8 (No. 33-88410).
ARTHUR ANDERSEN LLP
Orange County, California
September 24, 1999
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<PAGE>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,300
<SECURITIES> 0
<RECEIVABLES> 6,943,300
<ALLOWANCES> 321,400
<INVENTORY> 6,973,700
<CURRENT-ASSETS> 15,701,500
<PP&E> 29,544,700
<DEPRECIATION> 11,450,900
<TOTAL-ASSETS> 39,300,300
<CURRENT-LIABILITIES> 5,965,900
<BONDS> 0
0
0
<COMMON> 26,232,500
<OTHER-SE> (4,798,200)
<TOTAL-LIABILITY-AND-EQUITY> 39,300,300
<SALES> 45,499,700
<TOTAL-REVENUES> 45,499,700
<CGS> 33,335,300
<TOTAL-COSTS> 42,176,900
<OTHER-EXPENSES> (138,400)
<LOSS-PROVISION> 174,900
<INTEREST-EXPENSE> 987,700
<INCOME-PRETAX> 2,473,500
<INCOME-TAX> 1,147,500
<INCOME-CONTINUING> 1,326,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,326,000
<EPS-BASIC> .09
<EPS-DILUTED> .09
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