<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: March 31, 1999
--------------
Commission File number: 1-9429
------
ROTONICS MANUFACTURING INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2467474
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17022 SOUTH FIGUEROA STREET, GARDENA, CALIFORNIA 90248
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 538-4932
--------------
(Registrant's telephone number, including area code)
N/A
-------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1999
----- -----------------------------
Common Shares 15,267,014 Shares
($.01 stated value)
Total Pages 18
<PAGE>
ROTONICS MANUFACTURING INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheets -
March 31, 1999 (Unaudited)
and June 30, 1998 (Audited) 3
Statements of Income and
Accumulated Deficit -
Three Months and Nine Months Ended March 31, 1999
and 1998 (Unaudited) 4
Statements of Cash Flows -
Nine Months Ended March 31, 1999
and 1998 (Unaudited) 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROTONICS MANUFACTURING INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
(Unaudited) (Audited)
----------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,100 $ 30,700
Accounts receivable, net of allowance for doubtful accounts
of $177,000 and $148,000, respectively (Notes 6 and 7) 6,708,500 6,973,800
Notes receivable 34,800 62,600
Inventories (Notes 3, 6 and 7) 6,968,900 7,081,900
Deferred income taxes, net (Note 12) 2,106,400 2,106,400
Prepaid expenses and other current assets 164,200 208,200
----------- -----------
Total current assets 15,986,900 16,463,600
Notes receivable, less current portion 455,000 455,000
Investment in Partnership 127,300 133,200
Property, plant and equipment, net (Notes 4, 6 and 7) 18,084,300 18,250,000
Intangible assets, net (Note 5) 4,859,700 5,131,800
Other assets 92,500 130,200
----------- -----------
$39,605,700 $40,563,800
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7) $ 2,138,100 $ 1,784,000
Current portion of long-term debt due related parties (Note 8) 2,000,000 -
Accounts payable 3,088,500 3,719,600
Accrued liabilities (Note 9) 797,200 949,200
------------ -----------
Total current liabilities 8,023,800 6,452,800
Bank line of credit (Note 6) 2,780,800 3,926,200
Long-term debt, less current portion (Note 7) 5,648,800 5,050,300
Long-term debt due related parties (Note 8) - 2,000,000
Deferred income taxes, net (Note 12) 2,201,800 1,726,600
----------- -----------
Total liabilities 18,655,200 19,155,900
------------ -----------
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 15,266,019 and 15,806,361 shares,
respectively, net of treasury shares (Note 11) 26,420,600 26,921,400
Accumulated deficit (5,470,100) (5,513,500)
---------- ----------
Total stockholders' equity 20,950,500 21,407,900
------------ ------------
$39,605,700 $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 Nine Months Ended
March 31, March 31,
------------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $10,370,500 $ 8,099,600 $33,539,800 $25,260,500
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 7,649,600 6,399,400 24,954,600 19,882,700
Selling, general and
and administrative expenses 1,986,400 1,530,400 6,317,400 4,656,300
Plant consolidation expense (Note 2) 224,600 - 394,400 -
----------- ----------- ----------- -----------
Total costs and expenses 9,860,600 7,929,800 31,666,400 24,539,000
----------- ----------- ----------- -----------
Income from operations 509,900 169,800 1,873,400 721,500
----------- ----------- ----------- -----------
Other (expense)/income:
Interest expense (227,400) (179,600) (750,800) (522,100)
Other income, net 25,000 31,700 95,200 101,000
------------ ------------ ------------ ------------
Total other expenses (202,400) (147,900) (655,600) (421,100)
------------ ------------ ------------ ------------
Income before income taxes 307,500 21,900 1,217,800 300,400
Income tax (provision)benefit (Note 12) (96,600) 26,500 (563,700) (46,100)
----------- ----------- ----------- -----------
Net income 210,900 48,400 654,100 254,300
Accumulated deficit, beginning of period (5,681,000) (5,724,800) (5,513,500) (5,377,900)
Common stock dividends - - (610,700) (552,800)
----------- ----------- ----------- -----------
Accumulated deficit, end of period $(5,470,100) $(5,676,400) $(5,470,100) $(5,676,400)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common share (Notes 1 and 13):
Net income:
Basic $ .01 $ .00 $ .04 $ .02
------- ------- ------- -------
------- ------- ------- -------
Diluted $ .01 $ .00 $ .04 $ .02
------- ------- ------- -------
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding:
Basic 15,268,501 13,802,979 15,447,415 13,939,654
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted 15,273,554 13,802,979 15,449,669 13,939,654
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROTONICS MANUFACTURING INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 654,100 $ 254,300
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,090,000 1,365,800
Gain on sale of equipment (1,800) (5,200)
Deferred income tax provision 475,200 43,400
Provision for doubtful accounts 34,100 5,200
Changes in assets and liabilities:
Decrease in accounts receivable 231,200 195,700
Decrease/(increase) in inventories 113,000 (448,400)
Decrease in prepaid expenses and other current assets 44,000 11,400
Decrease/(increase) in other assets 30,000 (30,400)
Decrease in accounts payable (610,700) (438,300)
Decrease in accrued liabilities (152,000) (215,400)
----------- -----------
Net cash provided by operating activities 2,907,100 738,100
----------- -----------
Cash flows from investing activities:
Aquisition of Rotocast, net of cash obtained - (39,900)
Repayments/(advances) on notes receivable, net 27,800 (17,100)
Capital expenditures (1,645,300) (1,504,900)
Distribution from investment in partnership 5,900 -
Proceeds from sale of equipment 2,600 12,000
----------- -----------
Net cash used in investing activities (1,609,000) (1,549,900)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit 9,278,500 8,838,700
Repayments under line of credit (10,423,900) (6,712,100)
Proceeds from issuance of long-term debt 3,505,900 700,000
Repayment of long-term debt (2,553,300) (962,500)
Payment of common stock dividends (631,100) (541,800)
Repurchases of common stock (500,800) (501,100)
----------- -----------
Net cash (used in)/provided by financing activities (1,324,700) 821,200
----------- -----------
Net (decrease)/increase in cash (26,600) 9,400
Cash at beginning of period 30,700 12,100
----------- -----------
Cash at end of period $ 4,100 $ 21,500
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 781,400 $ 514,600
----------- -----------
----------- -----------
Income taxes $ 106,600 $ 92,000
----------- -----------
----------- -----------
Noncash investing activity:
Aquisition of Rotocast by issuance of common stock $ - $ 2,990,300
----------- -----------
----------- -----------
Noncash financing activities:
Common dividends declared but not paid $ 3,400 $ 11,400
----------- -----------
----------- -----------
Aquisition of Rotocast by issuance of note payable $ - $ 2,000,000
----------- -----------
----------- -----------
Conversion of Rotocast bank debt to new note payable $ - $ 1,750,000
----------- -----------
----------- -----------
</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 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.
As part of the reorganization of Rotonics and Rotocast, the Company
consolidated its Miami, Florida rotomolding operation into its other
operating facilites. The relocation of this plant resulted in non-recurring
costs of approximately $394,400.
6
<PAGE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma condensed statement of combined operations for
the three months and nine months ended March 31, 1998 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1998
------------------ -------------------
<S> <C> <C>
Net sales $10,720,200 $32,948,400
Total costs and expenses (10,961,100) (33,407,300)
------------ ------------
Loss before provision for income taxes (240,900) (458,900)
Provision for income taxes - -
------------ ------------
Net loss $ (240,900) $ (458,900)
------------ ------------
------------ ------------
Loss per common share $ (.02) $ (.03)
------------ ------------
------------ ------------
</TABLE>
NOTE 3 - INVENTORIES:
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $ 3,073,400 $ 4,002,400
Finished goods 3,895,500 3,079,500
------------ ------------
$ 6,968,900 $ 7,081,900
------------ ------------
------------ ------------
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Land $ 1,039,500 $ 1,039,500
Buildings and building improvements 4,265,700 4,021,000
Machinery, equipment, furniture and fixtures 22,977,400 21,534,500
Construction in progress 782,500 836,300
------------ ------------
29,065,100 27,431,300
Less - accumulated depreciation (10,980,800) (9,181,300)
------------ ------------
$ 18,084,300 $ 18,250,000
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
NOTE 5 - INTANGIBLE ASSETS:
Intangible assets consist of:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Patents, net of accumulated amortization of $105,500 and $100,900 $ 46,700 $ 51,300
Goodwill, net of accumulated amortization
of $2,644,400 and $2,377,000 4,813,000 5,080,500
------------ ------------
$ 4,859,700 $ 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 March 31, 1999 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 March 31, 1999, total borrowings under the Company's line of
credit was $2,780,800 of which $2,250,000 was borrowed under the LIBOR option
bearing a LIBOR interest rate of 6.4375% per annum and maturing April 15, 1999.
Proceeds from the loan were used for working capital purposes. At March 31,
1999, the Company had approximately $2,219,200 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>
MARCH 31, JUNE 30,
1999 1998
<S> <C> <C>
Note payable - Bank (A) $ 933,300 $ 1,533,300
Note payable - Bank (B) 216,600 291,700
Note payable - Bank (C) 313,600 389,800
Note payable - Bank (D) 650,000 800,000
Note payable - Bank (E) 1,100,000 700,000
Note payable - Bank (F) 2,600,000 2,000,000
Note payable - Bank (G) 1,946,700 1,080,600
Other 26,700 38,900
----------- -----------
7,786,900 6,834,300
Less current portion (2,138,100) (1,784,000)
----------- -----------
$ 5,648,800 $ 5,050,300
----------- -----------
----------- -----------
</TABLE>
(A) In May 1995, the Company restructured its credit agreement with Wells Fargo
Bank. The loan consists of a $4,000,000 sixty-month term loan. The note is
due in monthly principal installments of $66,700 plus interest at the
bank's prime rate (7.75% per annum at March 31, 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
March 31, 1999, the total outstanding principal balance was under the LIBOR
option at 6.4375% per annum maturing on April 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 March 31, 1999), or LIBOR interest rate option for periods up to
six months. At March 31, 1999, the total outstanding principal was under
the LIBOR option at 6.4375% per annum maturing April 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 March 31, 1999), or LIBOR interest rate option for periods up to
six months. At March 31, 1999, the total outstanding principal was under
the LIBOR option at 6.4375% per annum maturing April 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 March 31, 1999), or LIBOR interest rate option for periods up to
three months. At March 31, 1999, the total outstanding principal was under
the LIBOR option at 6.4375% per annum maturing April 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 March 31, 1999), or LIBOR interest
rate option for periods up to three months. At March 31, 1999, the total
outstanding principal was under the LIBOR option at 6.4375% per annum
maturing April 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 March 31,
1999), or LIBOR interest rate option. At March 31, 1999, the total
outstanding principal was under the LIBOR option at 6.4375% per annum
maturing April 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 March 31, 1999), or
LIBOR interest rate option on a twenty-five year amortization with the
outstanding principal due on July 1, 2008. At March 31, 1999, the total
outstanding principal was under the LIBOR option at 6.4375% per annum
maturing April 15, 1999.
NOTE 8 - RELATED PARTY DEBTS:
Related party debt consists of:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 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 which was paid on March 25, 1999 with 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>
MARCH 31, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
Salaries, wages, commissions and related payables $ 596,800 $ 607,900
Other 200,400 341,300
----------- -----------
$ 797,200 $ 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 March 31, 1999 are exercisable as
follows: 100,000 shares 100% exercisable, 7,500 shares exercisable September
1999 and 7,500 shares exercisable September 2000. At March 31, 1999, 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 March 31, 1999 115,000 $ 0.8668
-----------
-----------
</TABLE>
NOTE 11 - COMMON STOCK:
Treasury stock is recorded at cost. At March 31, 1999, treasury stock consisted
of 995 shares of common stock at a cost of $800 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 and retired 540,300 shares of common stock at a
total cost of $500,800. The Company is still actively purchasing additional
common shares under its buyback program.
On December 8, 1998, the Board of Directors declared at its Annual Meeting of
Stockholders a common stock dividend of $.04 per common share which was paid 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Current:
Federal $ 11.900 $ (4,200) $ 41,600 $ --
State (13,800) (11,200) 46,900 2,700
--------- --------- --------- --------
(1,900) (15,400) 88,500 2,700
--------- --------- --------- --------
Deferred:
Federal 119,400 (5,700) 490,900 55,500
State (20,900) (5,400) (15,700) (12,100)
--------- --------- --------- --------
98,500 (11,100) 475,200 43,400
--------- --------- --------- --------
$ 96,600 $(26,500) $563,700 $46,100
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
At March 31, 1999, the Company had net operating loss (NOL) carryforwards of
approximately $8,500,000 and $6,753,000 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>
$ -- $ 120,000 1999
-- 371,000 2000
-- 405,000 2001
-- 207,000 2002
3,800,000 451,000 2003
3,400,000 273,000 2004
600,000 444,000 2005
500,000 283,000 2006
- 708,000 2007
- 603,000 2008
200,000 1,053,000 2009
- 395,000 2010
- 556,000 2011
- 477,000 2012
- 407,000 2013
---------- ----------
$8,500,000 $6,753,000
---------- ----------
---------- ----------
</TABLE>
At March 31, 1999, the Company had a federal alternative minimum tax credit of
approximately $263,500 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>
The tables below details the components of the basic and diluted earning per
share ("EPS") calculations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------------------- ---------------------------------------
EPS EPS
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $210,900 15,268,501 $.01 $48,400 13,802,979 $.00
Effect of dilutive stock options -- 5,053 -- -- -- --
--------- ---------- -------- -------- ---------- -------
Diluted EPS $210,900 15,273,554 $.01 $48,400 13,802,979 $.00
--------- ---------- -------- -------- ---------- -------
--------- ---------- -------- -------- ---------- -------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS EPS
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- ---------- -------- -------- ---------- -------
Basic EPS
Net income $654,100 15,447,415 $.04 $254,300 13,939,654 $.02
Effect of dilutive stock options -- 2,254 -- -- -- --
--------- ---------- -------- -------- ---------- -------
Diluted EPS $654,100 15,449,669 $.04 $254,300 13,939,654 $.02
--------- ---------- -------- -------- ---------- -------
--------- ---------- -------- -------- ---------- -------
</TABLE>
12
<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 MARCH 31, 1999 AND 1998
Net sales for the three months ended March 31, 1999, increased 28% to
$10,370,500 compared to $8,099,600 for the same period last year. Approximately
80% of the increase is attributed to operations acquired as part of the
Company's recent merger with the remaining 20% attributed to increased sales
volumes pertaining to the Company's pre-merger operations. Management is
confident that if market conditions continue to be favorable, that the Company's
growth projections will continue to benefit from the various marketing
strategies enacted during the year. The Company plans to capitalize on its
strength and unique position within the industry to expand its various niche
markets as well as launch its newest lawn and garden product line.
Cost of goods sold decreased 5.2% to 73.8% of net sales for the three months
ended March 31, 1999, compared to 79% for the same period last year. The
decrease is directly related to improved sales volumes which have enhanced the
Company's ability to cover its fixed overhead expenses. In addition, the Company
continues to benefit from the consolidation of two of its facilities during the
later part of fiscal 1998. These consolidations have been very effective in
maximizing plant utilization, reducing overall fixed costs and thus promoting
positive gross margin improvements at the remaining sites. In addition, the
Company completed its third plant consolidation during the last quarter.
Management is confident that it will obtain the same positive results in future
periods as a result of the latest consolidation.
Selling, general and administrative expenses were $1,986,400 or 19.2% of net
sales for the three months ended March 31, 1999, compared to $1,530,400 or 18.9%
for the same period last year. Selling, general and administrative expenses have
increased primarily due to the additional operations acquired in connection with
the last year's merger. Since the merger, management has focused heavily on
realigning and streamlining its sales and administrative functions to keep these
costs in line with future sales volume projections. Through the third quarter of
fiscal 1999, these additional costs have been mitigated through the prior two
plant consolidations and will continue to improve in the fourth quarter with the
completion of the Company's latest plant consolidation.
The Company incurred $224,600 in costs during the three months ended March 31,
1999 in connection with the consolidation of its Miami, Florida facility. This
latest consolidation marks management's continued efforts to maximize plant
utilization and boost operating results at its remaining ten manufacturing
facilities. As such, the final benefit obtainable from this plant closure will
begin to be realized during the Company's fourth quarter.
Total interest expense increased $47,800 to $227,400 for the three months ended
March 31, 1999, compared to $179,600 for the same period last year. The increase
is attributed to the increase in the Company's debt structure due to last year's
merger which amounted to approximately $3.8 million. However, the additional
interest costs incurred have been partially mitigated due to a drop in the
bank's prime rate during the last six months.
13
<PAGE>
Income taxes were $96,600 for the three months ended March 31, 1999, compared to
a tax benefit of $26,500 for the same period last year. The increase is
attributed to a substantial increase in income coupled with an increase in the
Company's effective tax rate since the merger. As usual, a major portion of the
Company's tax provision is the deferred tax component which amounted to $98,500
for the current three month period. 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.
Net income increased by 335% to $210,900 for the three months ended March 31,
1999, compared to $48,400 for the same period last year. Management attributed
the improvement to the overall increase in sales volumes and the cost reductions
obtained from prior plant consolidations. Management was pleased with these
results in spite of incurring $224,600 in costs associated with its latest plant
consolidation. As previously mentioned, if market conditions remain stable, the
remaining portion of fiscal 1999 should continue to reflect improvements in
operating results.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales for the nine months ended March 31, 1999, increased 32.8% to
$33,539,800 compared to $25,260,500 for the same period last year. Approximately
76% of the increase is attributed to the operations acquired as part of the
Company's recent merger with the remaining 24% attributed to increased sales
volumes pertaining to the Company's pre-merger operations. During the current
period the Company reported improved volumes in its material handling, medical
waste and custom product lines. Management attributes these positive trends to
its various marketing strategies enacted during the year bolstered by a stable
domestic economy.
Cost of goods sold decreased 4.3% to 74.4% of net sales for the nine months
ended March 31, 1999, compared to 78.7% 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 completed its third plant consolidation. Although
the Company incurred additional costs and experienced some inefficiencies during
the latest consolidation, management is confident it will emerge financially
stronger in the ensuing months.
Selling, general and administrative expenses were $6,317,400 or 18.8% of net
sales for the nine months ended March 31, 1999, compared to $4,656,300 or 18.4%
for the same period last year. Selling, general and administrative expenses have
increased primarily due to the additional operations acquired in connection with
last year's merger. Since the merger, management has focused heavily on
realigning and streamlining its sales and administrative functions to keep these
costs in line with future sales volume projections. Through the third quarter of
fiscal 1999, these additional costs have been substantially mitigated through
the two previous plant consolidations and will continue to improve in the fourth
quarter with the completion of the Company's latest plant consolidation.
The Company incurred a total of $394,400 in costs during the current year in
connection with the consolidation of its Miami., Florida facility. Again, this
latest consolidation marks management's continued efforts to maximize plant
utilization and boost operating results at its remaining ten manufacturing
facilities. As such, the full benefit obtainable from this plant closure will
begin to be realized during the Company's fourth quarter.
Total interest expense increased $228,700 to $750,800 for the nine months ended
March 31, 1999, compared to $522,100 for the same period last year. The increase
is attributed to the increase in the Company's debt structure due to last year's
merger which amounted to approximately $3.8 million. However, the additional
costs incurred have been partially mitigated due to a drop in the bank's prime
rate during the last six months.
14
<PAGE>
Income taxes were $563,700 for the nine months ended March 31, 1999, compared to
$46,100 for the same period last year. The increase is attributed to a 305%
increase in income coupled with an increase in the Company's effective tax rate
since the merger. Deferred taxes represent the largest component of the
Company's tax provision amounting to $475,200 for the nine months ended March
31, 1999. This amount relates primarily to the utilization of the Company's
federal and state net operating loss carryforwards and thus does not diminish
current cashflows.
Net income increased 157% to $654,100 for the nine months ended March 31, 1999,
compared to $254,300 for the same period last year. Earnings per share increased
100% to $.04 per common share for the current period compared to $.02 per common
share for the same period last year. Management attributed the improvement to
the increased sales volumes and the cost reductions obtained from prior plant
consolidations. Management was pleased with these improved results in spite of
incurring $394,400 in costs associated with its latest plant consolidation.
FINANCIAL CONDITION
Working capital decreased approximately $2 million to $8 million at March 31,
1999, 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 payable. However, cash
provided by operations increased 293% to $2,907,100 for the nine months ended
March 31, 1999, compared to $738,100 for the same period last year. The increase
is directly attributed to the approximately 305% increase in income before
income taxes between the two periods. As such, cashflows continue to be healthy.
The Company expended a total of $1,645,300 for property, plant and equipment
during the nine months ended March 31, 1999, which was slightly ahead of prior
years expended costs for the same period. The Company currently anticipates
spending an additional $350,000 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 $1.1 million to $2.8 million
between June 30, 1998 and March 31, 1999. The decrease relates 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. At March 31, 1999, the Company
had approximately $2.2 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 was 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.
15
<PAGE>
During fiscal 1999, the Company initiated a common stock buyback program. As of
March 31, 1999, the Company has acquired and subsequently retired 540,300 shares
at a total cost of $500,800. This program is still currently active.
Cash flows from operations in conjunction with the Company's revolving line of
credit are expected to meet the Company's needs for working capital, capital
expenditures and repayment of long-term debt for the foreseeable future.
YEAR 2000
Management has been fully apprised of the issues surrounding the year 2000
dilemma. In assessing the potential impact this issue has on the Company,
management reviewed both its manufacturing and accounting systems to ascertain
critical applications which would be affected. Due to the nature of the
Company's manufacturing process and the equipment utilized, it was determined
that even equipment which was operated by or which incorporated computerized
controls or programs were not dependent on calendar functions to operate and
thus would not be impacted by the year 2000 problem.
As part of the year 2000 issue the Company also assessed compliance of its
network computing systems. To date the Company believes that the majority of its
operating divisions are 2000 compliant. The remaining sites, including the
Company's Corporate division, have resolved to make the necessary hardware and
software enhancements to become compliant 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.
16
<PAGE>
ROTONICS MANUFACTURING INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
17
<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: April 21, 1999 /s/ SHERMAN MCKINNISS
-----------------------
Sherman McKinniss
President and
Chief Executive Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,100
<SECURITIES> 0
<RECEIVABLES> 6,920,300
<ALLOWANCES> 177,000
<INVENTORY> 6,968,900
<CURRENT-ASSETS> 15,986,900
<PP&E> 29,065,100
<DEPRECIATION> 10,980,800
<TOTAL-ASSETS> 39,605,700
<CURRENT-LIABILITIES> 8,023,800
<BONDS> 0
0
0
<COMMON> 26,420,600
<OTHER-SE> (5,470,100)
<TOTAL-LIABILITY-AND-EQUITY> 39,605,700
<SALES> 33,539,800
<TOTAL-REVENUES> 33,539,800
<CGS> 24,954,600
<TOTAL-COSTS> 31,666,400
<OTHER-EXPENSES> (95,200)
<LOSS-PROVISION> 29,700
<INTEREST-EXPENSE> 750,800
<INCOME-PRETAX> 1,217,800
<INCOME-TAX> 563,700
<INCOME-CONTINUING> 654,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 654,100
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
