<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended: December 31, 1998
------------------
Commission File number: 1-9429
-------
ROTONICS MANUFACTURING INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2467474
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17022 SOUTH FIGUEROA STREET, GARDENA, CALIFORNIA 90248
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 538-4932
--------------
(Registrant's telephone number, including area code)
N/A
------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at December 31, 1998
----- --------------------------------
<S> <C>
Common Shares 15,308,415 Shares
($.01 stated value)
Total Pages 19
Exhibit Index at Page 18
</TABLE>
<PAGE>
ROTONICS MANUFACTURING INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets -
December 31, 1998 (Unaudited)
and June 30, 1998 (Audited) 3
Statements of Income and
Accumulated Deficit -
Three Months and Six Months Ended December 31, 1998
and 1997 (Unaudited) 4
Statements of Cash Flows -
Six Months Ended December 31, 1998
and 1997 (Unaudited) 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROTONICS MANUFACTURING INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
--------------- ---------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Current assets:
Cash $ 16,200 $ 30,700
Accounts receivable, net of allowance for doubtful accounts
of $150,000 and $148,000, respectively (Notes 6 and 7) 6,283,900 6,973,800
Notes receivable 36,800 62,600
Inventories (Notes 3, 6 and 7) 6,721,800 7,081,900
Deferred income taxes, net (Note 12) 2,106,400 2,106,400
Prepaid expenses and other current assets 246,700 208,200
--------------- ---------------
Total current assets 15,411,800 16,463,600
Notes receivable, less current portion 455,000 455,000
Investment in Partnership 129,000 133,200
Property, plant and equipment, net (Notes 4, 6 and 7) 18,334,500 18,250,000
Intangible assets, net (Note 5) 4,954,400 5,131,800
Other assets 102,700 130,200
--------------- ---------------
$39,387,400 $40,563,800
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7) $ 2,141,900 $ 1,784,000
Current portion of long-term debt due related parties (Note 8) 2,000,000 -
Accounts payable 2,753,800 3,719,600
Accrued liabilities (Note 9) 931,000 949,200
Dividends payable (Note 11) 636,200 -
--------------- ---------------
Total current liabilities 8,462,900 6,452,800
Bank line of credit (Note 6) 1,856,800 3,926,200
Long-term debt, less current portion (Note 7) 6,180,100 5,050,300
Long-term debt due related parties (Note 8) - 2,000,000
Deferred income taxes, net (Note 12) 2,103,300 1,726,600
--------------- ---------------
Total liabilities 18,603,100 19,155,900
--------------- ---------------
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 15,307,428 and 15,806,361 shares, respectively,
net of treasury shares (Note 11) 26,465,300 26,921,400
Accumulated deficit (5,681,000) (5,513,500)
--------------- ---------------
Total stockholders' equity 20,784,300 21,407,900
--------------- ---------------
$39,387,400 $40,563,800
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 11,295,500 $ 8,563,900 $ 23,169,300 $ 17,160,900
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 8,701,200 6,690,000 17,363,600 13,483,300
Selling, general and
administrative expenses 2,189,700 1,559,100 4,442,200 3,125,900
------------ ------------ ------------ ------------
Total costs and expenses 10,890,900 8,249,100 21,805,800 16,609,200
------------ ------------ ------------ ------------
Income from operations 404,600 314,800 1,363,500 551,700
------------ ------------ ------------ ------------
Other (expense)/income:
Interest expense (262,800) (182,800) (523,400) (342,500)
Other income, net 40,700 31,300 70,200 69,300
------------ ------------ ------------ ------------
Total other expenses (222,100) (151,500) (453,200) (273,200)
------------ ------------ ------------ ------------
Income before income taxes 182,500 163,300 910,300 278,500
Income tax provision (Note 12) (101,400) (55,700) (467,100) (72,600)
------------ ------------ ------------ ------------
Net income 81,100 107,600 443,200 205,900
Accumulated deficit, beginning of period (5,151,400) (5,279,600) (5,513,500) (5,377,900)
Common stock dividends (610,700) (553,700) (610,700) (553,700)
------------ ------------ ------------ ------------
Accumulated deficit, end of period $ (5,681,000) $ (5,725,700) $ (5,681,000) $ (5,725,700)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income per common share (Note 13):
Net income:
Basic $ .01 $ .01 $ .03 $ .02
----- ----- ----- -----
----- ----- ----- -----
Diluted $ .01 $ .01 $ .03 $ .02
----- ----- ----- -----
----- ----- ----- -----
Weighted average number of common and
common equivalent shares outstanding:
Basic 15,535,289 14,006,516 15,535,289 14,006,516
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 15,536,144 14,006,516 15,536,577 14,006,516
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 443,200 $ 205,900
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,376,700 896,400
(Gain)/loss sale of equipment (500) 400
Deferred income tax provision 376,700 54,500
Provision for doubtful accounts 7,100 (15,000)
Changes in assets and liabilities:
Decrease in accounts receivable 682,800 973,300
Decrease/(increase) in inventories 360,100 (648,700)
Increase in prepaid expenses and other current assets (38,500) (7,500)
Decrease/(increase) in other assets 22,400 (20,100)
Decrease in accounts payable (931,600) (723,800)
Decrease in accrued liabilities (18,200) (91,700)
---------- ----------
Net cash provided by operating activities 2,280,200 623,700
---------- ----------
Cash flows from investing activities:
Repayments/(advances) on notes receivable, net 25,800 (9,200)
Capital expenditures (1,278,700) (1,205,800)
Distribution from investment in partnership 4,200 -
Proceeds from sale of equipment 500 1,000
---------- ----------
Net cash used in investing activities (1,248,200) (1,214,000)
---------- ----------
Cash flows from financing activities:
Borrowings under line of credit 5,952,500 5,760,100
Repayments under line of credit (8,021,900) (4,189,400)
Proceeds from issuance of long-term debt 3,504,500 -
Repayment of long-term debt (2,016,800) (642,600)
Payment of common stock dividends (8,700) (100)
Repurchases of common stock (456,100) (337,800)
---------- ----------
Net cash (used in)/provided by financing activities (1,046,500) 590,200
---------- ----------
Net decrease in cash (14,500) (100)
Cash at beginning of period 30,700 12,100
---------- ----------
Cash at end of period $ 16,200 $ 12,000
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 463,700 $ 325,800
---------- ----------
---------- ----------
Income taxes $ 92,500 $ 89,000
---------- ----------
---------- ----------
Supplemental schedule of noncash financing activities:
Common dividends declared but not paid $ 610,700 $ 553,700
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
ROTONICS MANUFACTURING INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-INTERIM REPORTING:
The interim financial information included herein is unaudited. This
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of operating results for the interim periods. This interim
financial information should be read in conjunction with the Rotonics
Manufacturing Inc. ("the Company") Annual Report as filed on Form 10-K for
the fiscal year ended June 30, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of accounts receivable and trade payables approximates the
fair value due to their short-term maturities. The carrying value of the
Company's line of credit and notes payable is considered to approximate fair
market value because the interest rates of these instruments are based
predominately on variable reference rates.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share". SFAS No. 128 replaces primary EPS with basic EPS and fully diluted
EPS with diluted EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding. Diluted EPS is computed the same way as
fully diluted EPS except that the calculation now uses the average share
price for the reporting period to compute dilution from options under the
treasury stock method. It also requires the restatement of EPS for prior
periods. The adoption of this pronouncement did not have an impact on the
Company's earnings per share.
Effective September 30, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". SFAS No. 130 defines comprehensive income as a measure
of all changes in equity of an enterprise during a period that results from
transactions and other economic events of the period other than transactions
with owners. The adoption of this pronouncement did not have an impact on the
Company's results of operations.
Effective for fiscal year end June 30, 1999, the Company adopted SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information". SFAS
No. 131 introduces management`s approach to defining operating segments.
This approach corresponds to the way management organizes units and
internally evaluates performance of its operations based on products,
services, geography, legal or management structure. Once operating segments
are identified, they are then grouped based on similar characteristics to
determine reportable segments. This approach is anticipated to improve
segment reporting which will improve analysis of companies involved in
diverse business segments. The adoption of this pronouncement did not
significantly effect the way the Company reports its operating segments.
NOTE 2 - ACQUISITIONS:
Pursuant to an Agreement and Plan of Merger and Reorganization dated March
24, 1998 between the Company and GSC Industries, Inc. ("GSC"), the Company
acquired all of GSC's outstanding common stock holdings in Rotocast
International, Inc. ("Rotocast") and Rotocast's wholly owned subsidiaries
Rotocast Plastic Products, Inc.; Wonder Products, Inc.; Nutron Plastic, Inc.;
Rotocast Plastic Products of Texas, Inc.; Rotocast Plastic Products of
Nevada, Inc.; Rotocast Plastic Products of Tennessee, Inc.; and Rotocast
Management Corporation. In accordance with the merger and reorganization
Rotocast was merged into the Company and the Company issued to GSC 2,072,539
shares of its own common stock and a $2,000,000 eighteen month promissory
note bearing interest at 5.26% per annum. The promissory note is secured by a
$2,000,000 irrevocable standby letter of credit issued by Wells Fargo Bank
which can only be called upon if the principal balance of the note is not
paid within ten days of maturity. Pursuant to the merger agreement the
transaction was effective March 31, 1998.
To provide recourse to the Company, five percent of the common shares issued
to GSC will be held in an escrow account to cover any claims by the Company
in the event of any breaches of representations, warranties or covenants by
GSC as outlined in the agreement. The Company has incurred approximately
$80,000 of fees and expenses in conjunction with the merger. In addition, the
Company obtained an appraisal on Rotocast's machinery and equipment which
resulted in the write-up of Rotocast's machinery and equipment to $7.2
million and the recognition of goodwill amounting to $357,200. These amounts
will be amortized over their estimated useful life of fifteen years. The
above transaction was accounted for using the purchase accounting method and
the results of the transactions were in the Company's financial statements
effective as of March 31, 1998.
6
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statement of combined operations
for the three months and six months ended December 31, 1997 assumes the
Rotocast merger occurred at the beginning of the respective period after
giving effect to certain adjustments, including amortization of goodwill,
increased interest expense on acquisition debt, depreciation expense and
related income tax effects. The pro forma results have been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the combination been in
effect on the date indicated, or which may occur in the future.
<TABLE>
<CAPTION>
Combined for the, Combined for the,
three months ended six months ended
December 31, December 31,
1997 1997
------------------ ------------------
<S> <C> <C>
Net sales $10,674,600 $22,141,800
Total costs and expenses (10,895,000) (22,359,800)
------------ -----------
Loss before provision for income taxes (220,400) (218,000)
Provision for income taxes - -
------------ -----------
Net loss $ (220,400) $ (218,000)
------------ -----------
------------ -----------
Loss per common share $ (.01) $ (.01)
------- -------
------- -------
</TABLE>
NOTE 3 - INVENTORIES:
Inventories consist of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- ----------
<S> <C> <C>
Raw materials $3,026,400 $4,002,400
Finished goods 3,695,400 3,079,500
----------- ----------
$6,721,800 $7,081,900
----------- ----------
----------- ----------
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- ----------
<S> <C> <C>
Land $1,039,500 $1,039,500
Buildings and building improvements 4,171,700 4,021,000
Machinery, equipment, furniture and fixtures 22,696,700 21,534,500
Construction in progress 798,500 836,300
----------- ----------
28,706,400 27,431,300
Less - accumulated depreciation (10,371,900) (9,181,300)
----------- ----------
$18,334,500 $18,250,000
----------- ----------
----------- ----------
</TABLE>
7
<PAGE>
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- -----------
<S> <C> <C>
Patents, net of accumulated amortization of $104,000 and $100,900 $ 48,200 $ 51,300
Goodwill, net of accumulated amortization
of $2,551,300 and $2,377,000 4,906,200 5,080,500
----------- -----------
$4,954,400 $5,131,800
----------- -----------
----------- -----------
</TABLE>
NOTE 6 - BANK LINE OF CREDIT:
The Company has a $7,000,000 revolving line of credit with Wells Fargo Bank.
The line matures October 1, 2000 and is secured by the Company's machinery
and equipment, accounts receivable and inventories. Interest is payable
monthly at the bank's prime rate. The bank's prime rate at December 31, 1998
was 7.75% per annum. The loan agreement allows the Company to convert the
outstanding principal balance in increments of $250,000 to a LIBOR-based loan
for periods up to 90 days. At December 31, 1998, total borrowings under the
Company's line of credit was $1,856,800 of which $1,500,000 was borrowed
under the LIBOR option bearing a LIBOR interest rate of 7.30141% per annum
and maturing January 15, 1999. Proceeds from the loan were used for working
capital purposes. At December 31, 1998, the Company had approximately
$3,143,200 available for future borrowings under the revolving line of
credit. The remaining $2,000,000 open on the line of credit is reserved for
the letter of credit which was issued to secure the GSC note payable.
NOTE 7 - LONG-TERM DEBT:
Long-term debt consists of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- ----------
<S> <C> <C>
Note payable - Bank (A) $1,133,300 $1,533,300
Note payable - Bank (B) 241,600 291,700
Note payable - Bank (C) 339,000 389,800
Note payable - Bank (D) 700,000 800,000
Note payable - Bank (E) 1,160,000 700,000
Note payable - Bank (F) 2,750,000 2,000,000
Note payable - Bank (G) 1,966,700 1,080,600
Other 31,400 38,900
----------- ----------
8,322,000 6,834,300
Less current portion (2,141,900) (1,784,000)
----------- ----------
$6,180,100 $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% per annum at December 31, 1998). In addition, the
loan agreement allows the Company to convert all or a portion of the
outstanding principal to a LIBOR-based loan for periods up to 180 days. At
December 31, 1998, the total outstanding principal balance was under the
LIBOR option at 7.04047% per annum maturing on February 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% per
annum at December 31, 1998), or LIBOR interest rate option for periods up
to six months. At December 31, 1998, the total outstanding principal was
under the LIBOR option at 7.04047% per annum maturing February 15, 1999.
The note is secured by the Company's machinery and equipment and matures
on May 15, 2001.
8
<PAGE>
(C) In March 1997, the Company was advanced $500,000 on its second machinery
and equipment term-loan commitment with Wells Fargo Bank. The proceeds were
used to repay amounts originally borrowed under the Company's revolving
line of credit to finance approximately $625,000 in machinery and equipment
purchases. The note is due in monthly principal installments of
approximately $8,500 plus interest at the bank's prime rate, (7.75% per
annum at December 31, 1998), or LIBOR interest rate option for periods up
to six months. At December 31, 1998, the total outstanding principal was
under the LIBOR option at 7.04047% per annum maturing February 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 December 31, 1998), or LIBOR interest rate option for periods up
to three months. At December 31, 1998, the total outstanding principal was
under the LIBOR option at 7.04047% per annum maturing February 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 December 31, 1998), or LIBOR
interest rate option for periods up to three months. At December 31, 1998,
the total outstanding principal was under the LIBOR option at 7.04047% per
annum maturing February 15, 1999. The note is secured by the Company's
machinery and equipment and matures on July 15, 2003.
(F) In connection with the Rotocast acquisition, the Company retired Rotocast's
existing line of credit and long-term debt with a 90 day note issued by
Wells Fargo Bank in the amount of $1,750,000. In April 1998, pursuant to an
appraisal of Rotocast's machinery and equipment, this note was replaced
with a $2,000,000 sixty month fully amortizable note. In July 1998, the
note again was replaced with a $3,000,000 sixty month fully amortizable
loan. The note was due in monthly interest only payments at the bank's
prime rate or LIBOR interest rate option for periods up to three months
until August 15, 1998. At this time the note converted to a sixty month
fully amortizable loan due in monthly principal installments of $50,000
plus interest at the bank's prime rate, (7.75% per annum at December 31,
1998), or LIBOR interest rate option. At December 31, 1998, the total
outstanding principal was under the LIBOR option at 7.04047% per annum
maturing February 15, 1999. The note is secured by the Company's machinery
and equipment and matures July 1, 2003.
(G) In July 1998, a $2,000,000 real estate loan secured by the Company's
Bensenville, Illinois and Gainesville, Texas properties was issued to Wells
Fargo Bank. This note replaced the 1994 real estate loan issued in
connection with the purchase of the Bensenville, Illinois property. The
note is due in monthly principal installments of approximately $6,700 plus
interest at the bank's prime rate, (7.75% per annum at December 31, 1998),
or LIBOR interest rate option on a twenty-five year amortization with the
outstanding principal due on July 1, 2008. At December 31, 1998, the total
outstanding principal was under the LIBOR option at 7.04047% per annum
maturing February 15, 1999.
NOTE 8 - RELATED PARTY DEBTS:
Related party debt consists of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ -----------
<S> <C> <C>
Note payable - (A) $ 2,000,000 $ 2,000,000
Less current portion (2,000,000) -
------------ -----------
$ - $ 2,000,000
------------ -----------
------------ -----------
</TABLE>
(A) This note was issued to GSC Industries, Inc., which a director of the
Company has a 54% interest, in connection with the acquisition of Rotocast.
The note bears interest at 5.26% per annum and is payable with one interest
only payment due on March 25, 1999 and a second principal and interest
payment due upon maturity of the note on September 25, 1999.
The note is secured by a $2,000,000 irrevocable standby letter of credit
which may be called upon if the principal balance of the note is not paid
within ten days of maturity.
9
<PAGE>
NOTE 9 - ACCRUED LIABILITIES:
Accrued liabilities consist of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------- ---------
<S> <C> <C>
Salaries, wages, commissions and related payables $646,000 $607,900
Other 285,000 341,300
----------- ---------
$931,000 $949,200
----------- ---------
----------- ---------
</TABLE>
NOTE 10 - STOCK OPTION PLAN:
The Company has a stock option plan which allows, at the discretion of the
Board of Directors, for the granting of options to key employees, officers,
directors, and consultants of the Company to purchase 1,000,000 shares of the
Company's common stock. Under the terms and conditions set forth in the plan,
the exercise price of the stock options will be a least 85% of the fair
market value of the Company's common stock on the grant date. The maximum
term for options granted under the plan is five years. The plan expires June
12, 2004.
In the first quarter of fiscal 1999, the Company issued to certain key
employees options to purchase 115,000 shares of the Company's common stock.
The options are exercisable at prices ranging from $0.8125 - $0.875 (fair
market value at the date of grant). The options outstanding at December 31,
1998 are exercisable as follows: 100,000 shares 100% exercisable, 7,500
shares exercisable September 1999 and 7,500 shares exercisable September
2000. At December 31, 1998, the Company had 885,000 shares available for
future grants.
STOCK OPTION ACTIVITY:
<TABLE>
<CAPTION>
Outstanding Weighted Average
Shares Price Per Share
----------- ---------------
<S> <C> <C>
Balance outstanding at June 30, 1998 -
Granted 115,000 $ 0.8668
-----------
Balance outstanding at December 31, 1998 115,000 $ 0.8668
-----------
-----------
</TABLE>
NOTE 11 - COMMON STOCK:
Treasury stock is recorded at cost. At December 31, 1998, treasury stock
consisted of 108,583 shares of common stock at a cost of $110,300 and at June
30, 1998, treasury stock consisted of 1,755 shares of common stock at a cost
of $1,500. In fiscal 1999, the Company has purchased 498,900 shares of common
stock at a total cost of $456,100 and to date has retired 394,500 of these
common shares.
On December 8, 1998, the Board of Directors declared at its Annual Meeting of
Stockholders a common stock dividend of $.04 per common share payable on
January 29, 1999 to stockholders of record on January 19, 1999.
10
<PAGE>
NOTE 12 - INCOME TAXES:
The components of the income tax provision were:
<TABLE>
<CAPTION>
For the three months eneded For the six months ended
December 31, December 31,
----------------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current:
Federal $ 8,700 $ 3,700 $ 29,700 $ 4,200
State 17,600 8,700 60,700 13,900
---------- ---------- ---------- ----------
26,300 12,400 90,400 18,100
---------- ---------- ---------- ----------
Deferred:
Federal 77,800 46,000 371,500 61,200
State (2,700) (2,700) 5,200 (6,700)
---------- ---------- ---------- ----------
75,100 43,300 376,700 54,500
---------- ---------- ---------- ----------
$ 101,400 $ 55,700 $ 467,100 $ 72,600
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
At December 31, 1998, the Company had net operating loss (NOL) carryforwards
of approximately $8,400,000 and $6,669,000 for federal and state income tax
purposes. The NOL carryforwards, which are available to offset taxable income
of the Company and are subject to limitations should a "change in ownership"
as defined in the Internal Revenue Code occur, will begin to expire in 2003
and 1999 for federal and state purposes, respectively, if not utilized. The
federal and state NOL carryforwards expire as follows:
<TABLE>
<CAPTION>
Amount of unused operating loss carryforwards
--------------------------------------------- Expiration during year
Federal State ended June 30,
----------- ------------- ----------------------
<S> <C> <C>
$ - $ 95,000 1999
- 371,000 2000
- 405,000 2001
- 207,000 2002
3,700,000 451,000 2003
3,400,000 273,000 2004
600,000 444,000 2005
500,000 235,000 2006
- 708,000 2007
- 603,000 2008
200,000 1,053,000 2009
- 395,000 2010
- 556,000 2011
- 477,000 2012
- 396,000 2013
----------- -------------
$8,400,000 $6,669,000
----------- -------------
----------- -------------
</TABLE>
At December 31, 1998, the Company had a federal alternative minimum tax
credit of approximately $253,000 which is available to offset future federal
income taxes once the Company is no longer subject to an alternative minimum
tax for federal income tax purposes.
NOTE 13 - COMPUTATION OF EARNINGS PER SHARE:
Basic and diluted earnings per share have been computed in accordance with
SFAS No. 128 "Earnings per Share", using the treasury stock method for
applicable common stock options when computing diluted earnings per share.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
To the extent that this 10-Q Quarterly 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 this Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and Footnote 1 to
Financial Statements.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net sales for the three months ended December 31, 1998, increased 31.9% to
$11,295,500 compared to $8,563,900 for the same period last year. The
increase is primarily attributed to the Company's recent merger, whose
operations also benefited from the consolidation of the Company's Arleta,
California and Warminster, Pennsylvania facilities. In addition, the Company
reported improved sales volumes in material handling, medical waste and
custom product lines when compared to the same period last year. This was
primarily due to general improvement in their respective markets as well as
benefits from the Company's enhanced sales and marketing efforts. Management
continues to be optimistic about the Company's growth projections for the
remainder of fiscal 1999. Management has enacted various new strategies to
expand existing markets for its proprietary products as well as formulate
distribution channels to launch its newest lawn and garden product line.
Cost of goods sold decreased 1.1% to 77% of net sales for the three months
ended December 31, 1998, compared to 78.1% for the same period last year. The
decrease is attributed to the overall improved sales volumes and improved
manufacturing efficiencies since the relocation of its Arleta, California and
Warminster, Pennsylvania facilities. However, these cost reductions have been
temporarily mitigated during the last quarter due to the relocation of the
Company's Miami, Florida rotomolding facility. This marks management's
continued efforts to maximize operating results and improve gross margins at
its remaining ten manufacturing facilities.
Selling, general and administrative expenses were $2,189,700 or 19.4% of net
sales for the three months ended December 31, 1998 compared to $1,559,100 or
18.2% for the same period last year. Selling, general and administrative
expenses have increased primarily due to the additional operations acquired
in connection with the recent merger. Since the merger, management has
focused heavily on realigning and streamlining its sales and administrative
functions. As such, it has effectively trimmed costs in this area to keep
respective selling, general and administrative costs in correlation with
future sales volume projections. As we look forward, management anticipates
it will incur an additional $100,000 to $150,000 in selling, general and
administrative costs as it completes the closure of its Miami, Florida
facility. As such, the full benefit obtainable from this plant closure will
begin to realized during the Company's fourth quarter.
Total interest expense increased $80,000 to $262,800 for the three months
ended December 31, 1998, compared to $182,800 for the same period last year.
The increase is directly related to an increase in the Company's debt
structure when compared to the same period last year. The primary increase in
the Company's debt structure pertains to the additional debt issued in
connection with the Rotocast merger ($2 million) as well as debt assumed in
the transaction which together amounted to approximately $3.8 million.
Income taxes were $101,400 for the three months ended December 31, 1998 compared
to $55,700 for the same period last year. The increase is attributed to the
increase in the Company's effective tax rate since the merger to approximately
51% when compared to the same period last year. As usual, a major portion of the
Company's tax provision is the deferred tax component which amounted to $75,100
for the three months ended December 31, 1998. This amount primarily relates to
the utilization of the Company's federal and state net operating loss
carryforwards and thus does not diminish current cashflows.
12
<PAGE>
Net income remained relatively consistent at $81,100 for the three months
ended December 31, 1998, compared to $107,600 for the same period last year.
Although management was pleased with its efforts to improve sales volumes
during the current period, these efforts were minimized by management efforts
to also maximize operational efficiencies, improve gross margins and reduce
selling, general and administrative overhead. As mentioned above, additional
costs associated with these efforts were attributed to the relocation of its
Miami, Florida rotomolding facility into its remaining operations. These
additional costs will be mitigated during the remaining portion of fiscal
1999 as the Company benefits from reductions in overall manufacturing and
administrative overhead.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
Net sales for the six months ended December 31, 1998, increased 35% to
$23,169,300 compared to $17,160,900 for the same period last year. The
increase is attributed to two factors. First, the additional sales volumes
obtained as a result of the resent merger and second, notable sales volume
increases in the Company's proprietary product lines when compared to the
same period last year. During the current period, the Company has reported
improved volumes in its material handling, medical waste, agricultural and
custom product lines. Management attributes these positive trends to
improvements in various market segments bolstered by a stable domestic
economy as well as benefits from the Company's enhanced sales and marketing
programs. Management continues to be optimistic about the Company's growth
projections for the remainder of fiscal 1999. Management has enacted various
new strategies to expand existing markets for its proprietary products as
well as formulate distribution channels to launch its newest lawn and garden
product line.
Cost of goods sold decreased 3.7% to 74.9% of net sales for the six months
ended December 31, 1998, compared to 78.6% for the same period last year. The
decrease is attributed not only to improved sales volumes during the current
period, but also the benefits realized from the consolidation of two of the
Company's facilities during the later part of fiscal 1998. These
consolidations have been very effective in maximizing plant utilization,
reducing overall fixed overhead cost and thus improving gross margins at the
remaining sites. During the last quarter , the Company initiated its third
plant consolidation. Although the Company incurred some additional costs that
are inherent during a consolidation process of this nature, the Company will
emerge financially stronger in the ensuing months.
Selling, general and administrative expenses were $4,442,200 or 19.2% of net
sales for the six months ended December 31, 1998 compared to $3,125,900 or
18.2% for the same period last year. Selling, general and administrative
expenses have increased primarily due to the additional operations acquired
in connection with the recent merger. Since the merger, management has
focused heavily on realigning and streamlining its sales and administrative
functions. As such, it has effectively trimmed costs in this area so as to
keep respective sales, general and administrative costs in correlation with
future sales volume projections. As we look forward, management anticipates
it will incur an additional $100,000 to $150,000 in selling, general and
administrative costs as it completes the final stages of its Miami, Florida
relocation process. Once this portion of the process is completed, management
believes it has effectively met its goals to realign its selling, general and
administrative costs and should start to realize the potential benefits
during the Company's fourth quarter.
Total interest expense increased $180,900 to $523,400 for the six months
ended December 31, 1998 compared to $342,500 for the same period last year.
The increase is directly related to the increase in the Company's debt
structure when compared to the same period last year. The increase in debt
structure pertains to the additional debt issued in connection with the
Rotocast merger ($2 million) as well as the debt assumed in the transaction,
which together amounted to approximately $3.8 million.
Income taxes were $467,100 for the six months ended December 31, 1998
compared to $72,600 for the same period last year. The increase relates to a
227% increase in income before income taxes coupled with an increase in the
Company's effective tax rate to 51% when compared to the same period last
year. Deferred taxes represent the largest component to the Company's tax
provision amounting to $376,700 for the six months ended December 31, 1998.
This deferred tax amount relates primarily to the utilization of the
Company's federal and state net operating loss carryforwards and thus does
not diminish current cashflows.
13
<PAGE>
Net income increased 115% to $443,200 for the six months ended December 31,
1998 compared to $205,900 for the same period last year. Earnings per share
increased 50% to $.03 per common share for the current period compared to
$.02 per common share for the same period last year. The increase relates to
increased sales volumes as outlined above and improved gross margins when
compared to the same period last year. Since the merger the Company has
consolidated three of its manufacturing facilities into its remaining
operations. The latest, the Miami, Florida facility was initiated during the
last quarter. This latest consolidation did dampen the Company's overall six
month performance, but will now provide a stronger base for further
performance improvements at the operational level. This coupled with future
reductions in selling, general and administrative overhead during the ensuing
months should boost earnings results. In addition, the Company has
repurchased approximately 500,000 common shares during fiscal 1999 which will
also have a positive effect on earnings per share data as we go forward.
FINANCIAL CONDITION
Working capital decreased $3.1 million to $6.9 million at December 31, 1998,
compared to $10 million at June 30, 1998. The decrease is attributed to an
increase in the current portion of long-term debt in relation to the Rotocast
merger debt as well as normal fluctuations in accounts receivable and
inventories. However, cash provided by operations increased 265% to
$2,280,200 for the six months ended December 31, 1998 compared to $623,700
for the same period last year. The increase is directly attributed to the
approximately 89% improvement in income from operations prior to depreciation
and amortization between the two periods. As such, cashflows continue to be
healthy.
The Company expended a total of $1,278,700 for property, plant and equipment
during the six months ended December 31, 1998 which was consistent with prior
years expenditures for the same time period. The Company currently
anticipates spending an additional $1.0 to $1.25 million on capital
expenditures during the remaining portion of fiscal 1999.
In July 1998, the Company was advanced an additional $1 million against its
machinery and equipment note No. 5 bringing the total outstanding on this
note to $3 million. This note was originally issued to retire Rotocast's debt
acquired as part of the merger and later refinanced based on the appraisal of
Rotocast's machinery and equipment. The note is due in monthly principal
installments of $50,000 plus interest and will mature July 1, 2003. Also, in
July 1998, the bank replaced the Company's existing real estate loan with a
new $2 million loan secured by the Company's Bensenville, Illinois and
Gainesville, Texas properties. The note is due in monthly principal
installments of $6,700 plus interest on a twenty-five year amortization with
the outstanding principal due July 1, 2008.
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.
Net borrowings under the line of credit decreased $2.1 million to $1.9
million between June 30, 1998 and December 31, 1998. The decrease relates to
the advances in long-term debt previously mentioned and the notable increase
in cashflows from operations which a portion went to repay short-term
borrowings under the line of credit. At December 31, 1998, the Company had
approximately $3.1 million available for future borrowings under the
revolving line of credit. The remaining $2 million open on the line of credit
is reserved for the letter of credit which was issued to secure the GSC note
payable.
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 will be paid on January 29, 1999 to
stockholder's of record on January 19, 1999. The Board of Directors is
confident with the Company's continued success and believes our loyal
shareholders should continue to receive a return on their investments for
their continued support.
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.
14
<PAGE>
YEAR 2000
Management has been fully apprised of the issues surrounding the year 2000
dilemma. In assessing the potential impact this issue has on the Company,
management reviewed both its manufacturing and accounting systems to
ascertain critical applications which would be affected. Due to the nature of
the Company's manufacturing process and the equipment utilized, it was
determined that even equipment which was operated by or which incorporated
computerized controls or programs were not dependent on calendar functions to
operate and thus would not be impacted by the year 2000 problem.
As part of the year 2000 issue the Company also assessed compliance of its
network computing systems. To date the Company believes that all of its
operating divisions except one are 2000 compliant. The remaining site along
with the Company's Corporate division has resolved to make the necessary
hardware and software enhancements to become compliant at this final site by
the end of fiscal 1999 (June 30, 1999). The Company does not believe it will
encounter any problems associated with the year 2000 issue between now and
such time that it completes the necessary upgrades to its computer systems.
The costs associated with becoming compliant will not have a material effect
to the Company's financial position.
To complete the Company's assessment of the year 2000 problem, the Company
will be contacting its major suppliers to ascertain their readiness and
ability to function beyond this critical date and what impact, if any, it
will have on the Company's ability to continue normal operations.
15
<PAGE>
ROTONICS MANUFACTURING INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
11. Statement Regarding Computation of Per Share Earnings.
(b) REPORTS ON FORM 8-K
-------------------
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
Rotonics Manufacturing Inc.
Registrant
Date: January 29, 1999 /s/ SHERMAN MCKINNISS
------------------------------
Sherman McKinniss
President and
Chief Executive Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
11 Statement Regarding Computation of Per Share Earnings 19
</TABLE>
18
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 81,100 $ 107,600 $ 443,200 $ 205,900
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Weighted average number of
common shares outstanding 15,535,289 14,006,516 15,535,289 14,006,516
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Basic earnings per common share $ .01 $ .01 $ .03 $ .02
------ ----- ----- -----
------ ----- ----- -----
DILUTED EPS
Net income $ 81,100 $ 107,600 $ 443,200 $ 205,900
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Weighted average number of
common shares outstanding 15,535,289 14,006,516 15,535,289 14,006,516
Add -common equivalent shares:
Shares issuable upon exercise of options to
purchase common stock 855 - 1,288 -
------------ ----------- ----------- -----------
Weighted average number of common shares
used in computation of diluted earnings per
common share 15,536,144 14,006,516 15,536,577 14,006,516
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Diluted earnings per common share $ .01 $ .01 $ .03 $ .02
------ ----- ----- -----
------ ----- ----- -----
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 16,200
<SECURITIES> 0
<RECEIVABLES> 6,470,700
<ALLOWANCES> 150,000
<INVENTORY> 6,721,800
<CURRENT-ASSETS> 15,411,800
<PP&E> 28,706,400
<DEPRECIATION> 10,371,900
<TOTAL-ASSETS> 39,387,400
<CURRENT-LIABILITIES> 8,462,900
<BONDS> 0
0
0
<COMMON> 26,465,300
<OTHER-SE> (5,681,000)
<TOTAL-LIABILITY-AND-EQUITY> 39,387,400
<SALES> 23,169,300
<TOTAL-REVENUES> 23,169,300
<CGS> 17,363,600
<TOTAL-COSTS> 21,805,800
<OTHER-EXPENSES> 70,200
<LOSS-PROVISION> 4,300
<INTEREST-EXPENSE> 523,400
<INCOME-PRETAX> 910,300
<INCOME-TAX> 467,100
<INCOME-CONTINUING> 443,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443,200
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
