SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended: DECEMBER 31, 2000
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Commission File number: 1-9429
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ROTONICS MANUFACTURING INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-2467474
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17022 SOUTH FIGUEROA STREET, GARDENA, CALIFORNIA 90248
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(Address of principal executive offices) (Zip Code)
(310) 538-4932
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(Registrant's telephone number, including area code)
N/A
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(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 DECEMBER 31, 2000
----- --------------------------------
Common Shares 12,817,387 Shares
($.01 stated value)
Total Pages 16
ROTONICS MANUFACTURING INC.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets -
December 31, 2000 (Unaudited)
and June 30, 2000 (Audited) 3
Consolidated Statements of Operations, Comprehensive Income/(Loss)
and Accumulated Deficit -
Three Months and Six Months Ended December 31, 2000
and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -
Six Months Ended December 31, 2000
and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROTONICS MANUFACTURING INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 24,800 $ 20,800
Accounts receivable, net of allowance for doubtful accounts
of $136,200 and $142,000, respectively (Notes 5 and 6) 4,858,500 6,151,500
Notes receivable - 17,700
Inventories (Notes 2, 5 and 6) 7,501,300 7,361,600
Deferred income taxes, net (Note 10) 1,016,600 1,092,200
Prepaid expenses and other current assets 572,300 222,300
------------ ------------
Total current assets 13,973,500 14,866,100
Notes receivable, less current portion 342,100 418,000
Investment in Partnership 117,100 120,300
Property, plant and equipment, net (Notes 3, 5 and 6) 16,587,600 17,132,100
Intangible assets, net (Note 4) 4,305,400 4,470,400
Other assets 55,200 58,300
------------ ------------
$ 35,380,900 $ 37,065,200
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 6) $ 948,300 $ 1,961,700
Accounts payable 2,298,900 2,497,600
Accrued liabilities (Note 7) 765,800 949,000
------------ ------------
Total current liabilities 4,013,000 5,408,300
Bank line of credit (Note 5) 1,887,300 2,315,100
Long-term debt, less current portion (Note 6) 6,768,300 6,254,700
Deferred income taxes, net (Note 10) 2,453,200 2,600,100
------------ ------------
Total liabilities 15,121,800 16,578,200
------------ ------------
Stockholders' equity:
Common stock, stated value $.01: authorized 20,000,000 shares;
issued and outstanding 12,814,121 and 12,905,721 shares, respectively,
net of treasury shares (Note 9) 23,249,000 23,331,500
Accumulated other comprehensive loss (35,800) -
Accumulated deficit (2,954,100) (2,844,500)
------------ ------------
Total stockholders' equity 20,259,100 20,487,000
------------ ------------
$ 35,380,900 $ 37,065,200
============ ============
The accompanying notes are an integral part of these financial statements.
3
ROTONICS MANUFACTURING INC.
CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME/(LOSS) AND
ACCUMULATED DEFICIT
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net sales $ 9,159,000 $ 10,262,600 $ 19,341,300 $ 22,333,500
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold 7,211,400 7,377,500 15,023,700 15,831,800
Selling, general and
and administrative expenses 2,068,000 1,999,000 4,061,700 4,175,000
------------ ------------ ------------ ------------
Total costs and expenses 9,279,400 9,376,500 19,085,400 20,006,800
------------ ------------ ------------ ------------
(Loss)/income from operations (120,400) 886,100 255,900 2,326,700
------------ ------------ ------------ ------------
Other (expense)/income:
Interest expense (192,500) (211,000) (407,300) (448,100)
Other income/(expense), net 15,900 26,400 (3,000) 93,300
------------ ------------ ------------ ------------
Total other expenses (176,600) (184,600) (410,300) (354,800)
------------ ------------ ------------ ------------
(Loss)/income before income taxes (297,000) 701,500 (154,400) 1,971,900
Income tax benefit/(provision) (Note 10) 120,400 (300,300) 44,800 (870,700)
------------ ------------ ------------ ------------
Net (loss)/income (176,600) 401,200 (109,600) 1,101,200
------------ ------------ ------------ ------------
Other comprehensive loss, before tax:
Cumulative effect of adoption of SFAS 133 - - 109,400 -
Unrealized holding loss arising during the period (96,500) - (157,900) -
Less: Reclassification adjustments for gains
included in net income/(loss) (5,300) - (11,200) -
------------ ------------ ------------ ------------
Total other comprehensive loss before tax (101,800) - (59,700) -
Income tax benefit related to items of other
comprehensive loss 40,700 - 23,900 -
------------ ------------ ------------ ------------
Total other comprehensive loss, net of tax (61,100) - (35,800) -
------------ ------------ ------------ ------------
Comprehensive (loss)/income $ (237,700) $ 401,200 $ (145,400) $ 1,101,200
============ ============ ============ ============
Accumulated deficit, beginning of period $ (2,777,500) $ (4,098,200) $ (2,844,500) $ (4,798,200)
Net (loss)/income (176,600) 401,200 (109,600) 1,101,200
------------ ------------ ------------ ------------
Accumulated deficit, end of period $ (2,954,100) $ (3,697,000) $ (2,954,100) $ (3,697,000)
============ ============ ============ ============
(Loss)/income per common share (Note 11):
Net (loss)/income:
Basic $ (.01) $ .02 $ (.01) $ .07
============ ============ ============ ============
Diluted $ (.01) $ .02 $ (.01) $ .07
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding:
Basic 12,864,322 14,977,754 12,885,931 14,989,119
============ ============ ============ ============
Diluted 12,864,322 15,022,481 12,885,931 15,033,846
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
ROTONICS MANUFACTURING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
2000 1999
----------- -----------
Cash flows from operating activities:
Net (loss)/income $ (109,600) $ 1,101,200
Adjustments to reconcile net income/(loss) to net cash provided
by operating activities:
Depreciation and amortization 1,344,700 1,333,600
Loss/(gain) on sale of equipment 4,100 (23,900)
Deferred income tax (benefit)/provision (71,300) 680,000
Provision for doubtful accounts 50,100 (2,600)
Changes in assets and liabilities:
Decrease in accounts receivable 1,242,900 530,000
Increase in inventories (139,700) (1,010,500)
Increase in prepaid expenses and other current assets (350,000) (98,300)
Decrease in other assets 3,100 7,800
Decrease in accounts payable (198,700) (334,200)
(Decrease)/increase in accrued liabilities (219,000) 15,500
Decrease in income taxes payable -- (43,000)
----------- -----------
Net cash provided by operating activities 1,556,600 2,155,600
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Cash flows from investing activities:
Repayments on notes receivable, net 93,600 37,900
Capital expenditures (642,200) (590,100)
Distribution from investment in partnership 3,200 2,300
Proceeds from sale of equipment 2,900 25,100
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Net cash used in investing activities (542,500) (524,800)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit 5,404,200 6,295,100
Repayments under line of credit (5,832,000) (6,755,800)
Proceeds from issuance of long-term debt 6,050,000 2,000,000
Repayment of long-term debt (6,549,800) (3,069,400)
Repurchases of common stock (84,600) (102,800)
Proceeds from issuance of common stock 2,100 2,000
----------- -----------
Net cash used in financing activities (1,010,100) (1,630,900)
----------- -----------
Net increase/(decrease) in cash 4,000 (100)
Cash at beginning of period 20,800 3,300
----------- -----------
Cash at end of period $ 24,800 $ 3,200
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 423,400 $ 465,500
=========== ===========
Income taxes $ 156,200 $ 115,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
ROTONICS MANUFACTURING INC.
NOTES TO CONSOLIDATED 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,
2000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Rotocast Plastic Products of Tennessee, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," (collectively
SFAS 133). SFAS 133 requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. Under SFAS 133 an entity may designate a derivative
as a hedge of exposure to either changes in: (a) fair value of a recognized
asset or liability or firm commitment, (b) cash flows of a recognized or
forecasted transaction, or (c) foreign currencies of a net investment in foreign
operations, firm commitments, available-for-sale securities or a forecasted
transaction. Depending upon the effectiveness of the hedge and/or the
transaction being hedged, any changes in the fair value of the derivative
instrument is either recognized in earnings in the current year, deferred to
future periods, or recognized in other comprehensive income. Changes in the fair
value of all derivative instruments not recognized as hedge accounting are
recognized in current year earnings. SFAS 133 is required for all fiscal years
beginning after June 15, 2000. On July 1, 2000 the Company adopted SFAS 133. In
connection with the adoption of SFAS 133, the Company's interest rate swap was
designated as a hedge. On the initial adoption date of SFAS 133, the Company
recorded the fair value of its derivative on the balance sheet as an asset
valued at $109,400 with an offsetting entry to accumulated other comprehensive
income. The related unrealized loss of $157,900 during the six months ended
December 31, 2000 has been recognized in the comprehensive income component of
stockholders' equity.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. This
statement requires that all items that meet the definition of components of
comprehensive income be reported in the financial statements for the period in
which they are recognized. Components of comprehensive income include revenues,
expenses, gains and losses that under accounting principles generally accepted
in the United States are included in comprehensive income, but excluded from net
income. The Company's reconciliation of net income, as reported, to
comprehensive income, as defined, is included in the combined statements of
operations and comprehensive income/(loss).
On December 3, 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, to provide guidance on
the recognition, presentation and disclosure of revenue in financial statements.
While SAB No. 101 provides a framework by which to recognize revenue in the
financial statements, the Company believes that adherence to this SAB will not
have a material impact on the Company's financial statements.
NOTE 2 - INVENTORIES:
Inventories consist of:
DECEMBER 31, JUNE 30,
2000 2000
----------- -----------
Raw materials $ 2,482,200 $ 2,194,400
Finished goods 5,019,100 5,167,200
----------- -----------
$ 7,501,300 $ 7,361,600
=========== ===========
6
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
Land $ 1,039,500 $ 1,039,500
Buildings and building improvements 4,834,400 4,725,200
Machinery, equipment, furniture and fixtures 25,266,400 24,879,100
Construction in progress 178,300 48,500
------------ ------------
31,318,600 30,692,300
Less - accumulated depreciation (14,731,000) (13,560,200)
------------ ------------
$ 16,587,600 $ 17,132,100
============ ============
NOTE 4 - INTANGIBLE ASSETS:
Intangible assets consist of:
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
Patents, net of accumulated amortization of $115,100 and $112,600 $ 37,100 $ 39,600
Goodwill, net of accumulated amortization of $3,189,100 and $3,026,600 4,268,300 4,430,800
------------ ------------
$ 4,305,400 $ 4,470,400
============ ============
NOTE 5 - BANK LINE OF CREDIT:
The Company has a $7,000,000 revolving line of credit with Wells Fargo Bank. The
line matures October 1, 2002 and is secured by the Company's machinery and
equipment, accounts receivable and inventories. Interest is payable monthly at
the bank's prime rate minus .25%. The applicable bank's prime rate at December
31, 2000 was 9.25% per annum. The loan agreement allows the Company to convert
the outstanding principal balance in amounts no less than $250,000 to a
LIBOR-based loan for periods up to 90 days. At December 31, 2000, total
borrowings under the Company's line of credit was $1,887,300 of which $1,700,000
was borrowed under the LIBOR option bearing a LIBOR interest rate of 7.695% per
annum and maturing January 15, 2001. Proceeds from the loan were used for
working capital purposes. At December 31, 2000, the Company had approximately
$5,112,700 available for future borrowings under the revolving line of credit.
On September 1, 2000 the bank reduced the Company's LIBOR borrowing rate from
LIBOR plus 2% to LIBOR plus 1.5%, and then on October 1, 2000 reduced the
interest rates applicable to the line of credit to the bank's prime rate minus
.25% or LIBOR interest rate plus 1%.
NOTE 6 - LONG-TERM DEBT:
Long-term debt consists of:
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
Note payable - Bank (A) $ 5,905,900 $ -
Note payable - Bank (B) 1,806,700 1,846,700
Note payable - Bank - 186,400
Note payable - Bank - 400,000
Note payable - Bank - 800,000
Note payable - Bank - 1,850,000
Note payable - Bank - 91,600
Note payable - Bank - 1,833,300
Note payable - Bank - 1,200,000
Other 4,000 8,400
----------- -----------
7,716,600 8,216,400
Less current portion (948,300) (1,961,700)
----------- -----------
$ 6,768,300 $ 6,254,700
=========== ===========
7
(A) On October 1, 2000, the Company restructured its Credit Agreement with
Wells Fargo Bank resulting in the consolidation of all of its outstanding
term debt except for the real estate loan. In replacement the bank issued a
$6,050,000 seven year note due in monthly principal installments of $72,000
plus interest at the bank's prime rate minus .25% (9.25% per annum at
December 31, 2000). 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 one year. In connection with the restructured Credit
Agreement, the Company also negotiated with the bank to reduce its interest
borrowing rates on all of its outstanding term debt from the bank's prime
or LIBOR plus 2% rates to the bank's prime minus .25% or LIBOR plus 1.25%.
At December 31, 2000, the total outstanding principal balance was under the
LIBOR option at 7.945% per annum maturing January 15, 2001. The note is
secured by the Company's machinery and equipment, accounts receivable and
inventories and matures October 15, 2007. This restructuring of the
Company's debt will result in annual cash flow savings of approximately
$1.1 million (principal and interest) for the period October 2000 through
September 2001.
Effective October 1, 2000 the Company has available a term-loan commitment
in the amount of $1,200,000 for future machinery and equipment purchases.
Advances under the line will be subject to monthly interest only payments
at the bank's prime or LIBOR interest rate options until October 1, 2001 at
which time amounts borrowed will convert to a sixty-month fully amortizable
loan.
(B) 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 minus .25% (9.25% per annum at December
31, 2000), or LIBOR interest rate option on a twenty-five year amortization
with the outstanding principal due on July 1, 2008. At December 31, 2000,
the total outstanding principal was under the LIBOR option at 7.945% per
annum maturing January 15, 2001.
Effective July 15, 1998, the Company initiated an interest rate swap
agreement with the bank. The agreement allows the Company to fix a portion
of its outstanding term and line of credit debt ($5 million as of December
31, 2000) from a variable floating LIBOR rate to a fixed LIBOR rate in
efforts to protect against future increases in the bank's LIBOR rate. The
agreement matures July 15, 2003.
NOTE 7 - ACCRUED LIABILITIES:
Accrued liabilities consists of:
DECEMBER 31, JUNE 30,
2000 2000
------------ ------------
Salaries, wages, commissions and related payables $ 488,200 $ 620,000
Other 277,600 329,000
------------ ------------
$ 765,800 $ 949,000
============ ============
NOTE 8 - 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 at 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 2001, the Company issued stock options to key
employees and directors to purchase an aggregate of 175,000 shares of the
Company's common stock. The options outstanding as of December 31, 2000 are
exercisable at prices ranging from $0.8125 - $1.1875 (fair market value at the
date of grant). The outstanding options are exercisable as follows: 292,500
shares 100% exercisable, 15,000 shares exercisable August 2001, and 15,000
shares exercisable August 2002. At December 31, 2000, the Company had 672,500
shares available for future grants.
8
STOCK OPTION ACTIVITY:
OUTSTANDING WEIGHTED AVERAGE
SHARES PRICE PER SHARE
----------- ----------------
Balance outstanding at June 30, 2000 115,000 $0.8901
Granted 175,000 $1.1393
Exercised (2,500) $.08125
---------
Balance outstanding at December 31, 2000 322,500 $1.0247
=========
NOTE 9 - COMMON STOCK:
Treasury stock is recorded at cost. At December 31, 2000, treasury stock
consisted of 3,266 shares of common stock at a cost of $2,600 and at June 30,
2000, treasury stock consisted of 868 shares of common stock at a cost of $700.
The Company reinstated its buyback program in the latter part of September 2000.
Since this time the Company has acquired 94,100 shares of Common Stock at a
total cost of $84,600 under the buyback program. In December 2000, the Company
retired 91,700 of the shares acquired. The Company plans to continue to actively
pursue acquiring its common shares during Fiscal 2001.
NOTE 10 - INCOME TAXES:
The components of the income tax (benefit)/provision were:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Current:
Federal $ (4,500) $ 20,500 $ 500 $ 50,000
State 800 55,900 26,000 140,700
---------- ---------- ---------- ----------
(3,700) 76,400 26,500 190,700
---------- ---------- ---------- ----------
Deferred:
Federal (108,400) 231,800 (55,200) 695,700
State (8,300) (7,900) (16,100) (15,700)
---------- ---------- ---------- ----------
(116,700) 223,900 ( 71,300) 680,000
---------- ---------- ---------- ----------
$(120,400) $ 300,300 $ (44,800) $ 870,700
========== ========== ========== ==========
At December 31, 2000, the Company had net operating loss ("NOL") carryforwards
of approximately $1,469,000 and $7,109,000 for federal and state income tax
purposes respectively. 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 2004 and 2001 for federal and state purposes, respectively, if not utilized.
The federal and state NOL carryforwards expire as follows:
9
AMOUNT OF UNUSED OPERATING LOSS CARRYFORWARDS
--------------------------------------------- EXPIRATION DURING YEAR
FEDERAL STATE ENDED JUNE 30,
---------- ---------- ----------------------
$ - $ 405,000 2001
- 207,000 2002
- 452,000 2003
186,000 273,000 2004
588,000 444,000 2005
490,000 89,000 2006
- 645,000 2007
- 603,000 2008
205,000 1,054,000 2009
- 396,000 2010
- 555,000 2011
- 477,000 2012
- 396,000 2013
- 850,000 2014
- 264,000 2015
---------- ----------
$1,469,000 $7,109,000
========== ==========
At December 31, 2000, the Company had a federal alternative minimum tax credit
of approximately $409,100 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 11 - 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.
The tables below details the components of the basic and diluted earning per
share ("EPS") calculations:
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------------ --------------------------------------
EPS EPS
(LOSS)/INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ----------- ----------- ---------- ---------- --------
Basic EPS
Net (loss)/income $ (176,600) 12,864,322 $ (.01) $ 401,200 14,977,754 $ .02
Effect of dilutive stock options - - - - 44,727 -
------------ ----------- ----------- ---------- ---------- --------
Diluted EPS $ (176,600) 12,864,322 $ (.01) $ 401,200 15,022,481 $ .02
============ ========== =========== ========== ========== ========
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------------ --------------------------------------
EPS EPS
(LOSS)/INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ----------- ----------- ---------- ---------- --------
Basic EPS
Net (loss)/income $ (109,600) 12,885,631 $ (.01) $1,101,200 14,989,119 $ .07
Effect of dilutive stock options - - - - 44,727 -
------------ ----------- ----------- ---------- ---------- --------
Diluted EPS $ (109,600) 12,885,631 $ (.01) $1,101,200 15,033,846 $ .07
============ =========== =========== ========== ========== ========
10
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, 2000 AND 1999
Net sales for the three months ended December 31, 2000 decreased almost 11% to
$9,159,000 compared to $10,262,600 for the same period last year. During the
last three months the climate in the marketplace continued to soften for the
majority of the Company's product lines. The economic slowdown coupled with
increased competition within our tank industry, recent severe weather
conditions, an overall slowdown in the construction industry and unsuccessful
municipal refuse container bids have attributed to the diminished sales volumes
during the current period. Although a recent reduction in the federal discount
rates has renewed some confidence that the economy will improve, management does
not anticipate the remaining portion of Fiscal 2001 to be comparable to prior
year's sales volumes.
Cost of goods sold increased 6.8% to 78.7% of net sales for the three months
ended December 31, 2000, compared to 71.9% for the same period last year. The
increase is primarily related to the 11% decrease in sales volumes during the
quarter which has hampered the Company's ability to effectively cover fixed
overhead costs and thus maintain optimal gross margins. Added to this, the
Company has also incurred increases in raw material production costs, natural
gas, labor and labor related insurance and fringe costs. Management is
particularly concerned with rising natural gas costs which have already resulted
in increased natural gas costs of $100,000 between the comparative periods.
During the ensuing months management anticipates natural gas costs to continue
to escalate resulting in additional monthly costs of at least $70,000. This
significant rise in natural gas costs could also have an adverse effect on
future raw material costs. Although management remains committed to produce
positive operating results, these factors will greatly hamper their objectives
during the balance of Fiscal 2001.
Selling, general and administrative expenses were $2,068,000, or 22.6% of net
sales, for the three months ended December 31, 2000 compared with $1,999,000, or
19.5% of net sales, for the same period last year. Again the comparative
percentage increase is attributed to the lower sales volumes as well as
inflationary costs related to labor and labor related insurance and fringe
costs. In addition, the Company has incurred increased legal costs related to
preserving the validity of one of the Company's patents. Management will
continue to monitor its SG&A costs to keep overall costs in line with current
operations.
Total interest expense decreased $18,500 to $192,500 for the three months ended
December 31, 2000 compared to $211,000 for the same period last year. Although
operating results have been lackluster, the Company continues to generate
sufficient cash flows which has decreased overall debt by approximately $400,000
in comparison to amounts outstanding as of December 31, 1999. In October 2000,
the Company also negotiated reductions in the interest rates related to its bank
debt. These factors, in addition to recent reductions in the federal discount
rate, will continue to have a positive effect on reducing future interest costs.
The Company reported an income tax benefit of $120,400 for the three months
ended December 31, 2000 compared to an income tax expense of $300,300 for the
same period last year. The decrease is in correlation with the current period
loss coupled with the reversal of deferred tax liabilities.
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Net income decreased $577,800 to a net loss of $176,600 or ($.01) per common
share, for the three months ended December 31, 2000 compared to net income of
$401,200 or $.02 per common share, for the same period last year. The decrease
is primarily related to the reduction in sales volume as outlined above, coupled
with increased raw material, natural gas and labor related costs. Even though
stagnant markets and escalating costs continue to challenge positive operating
results, management remains focused to build on its strengths to mitigate as
much as possible these adverse conditions. As such in December 2000, management
created and filled a new Vice-President of Marketing and Sales position. The
addition of this management position should help improve the Company's ability
to effectively market its products and as a result improve future operating
results.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
Net sales for the six months ended December 31, 2000 decreased 13.4% to
$19,341,300 compared to the $22,333,500 for the same period last year. The
decrease is two fold. First, the prior year results included an additional week
of operations due to the natural cut-offs which accounted for approximately
$750,000 in sales reductions in comparison to the current period. The remaining
$2.2 million in sales reduction is attributed to a lackluster marketplace
reacting to the current economic conditions in the country coupled with
increased competition within our tank industry, recent severe weather
conditions, an overall slowdown in the construction industry and unsuccessful
municipal refuse container bids. Although a recent reduction in the federal
discount rate has renewed some confidence that the economy will improve,
management does not anticipate the remaining portion of Fiscal 2001 to be
comparable to prior year's sales volumes.
Costs of goods sold increased 6.8% to 77.7% of net sales for the six months
ended December 31, 2000, compared to 70.9% for the same period last year. The
increase is primarily related to the 13.4% decrease in sales volumes during the
current period which has hampered the Company's ability to effectively cover
fixed overhead costs and thus maintain optimal gross margins. Added to this the
Company has also incurred increases in raw material production costs, natural
gas, labor and labor related insurance and fringe costs. Management is
particularly concerned with rising natural gas costs which have already resulted
in increased natural gas costs of $150,000 between the comparative periods.
During the ensuing months, management anticipates natural gas costs to continue
to escalate resulting in additional monthly costs of at least $70,000. The
significant rise in natural gas costs could also have an adverse effect on
future raw material costs. Although management remains committed to produce
positive operating results, these factors will greatly hamper their objectives
during the balance of Fiscal 2001.
Selling, general and administrative expenses were $4,061,700, or 21% of net
sales, for the six months ended December 31, 2000 compared with $4,175,000, or
18.7% of net sales, for the same period last year. Again, the comparative
percentage increase is attributed to the lower sales volumes as well as
additional legal costs the Company has incurred related to preserving the
validity of one of the Company's patents. However, overall SG&A costs are down
approximately $113,000 as a result of lower commission costs and dividends
received on prior year's worker compensation policies. Management will continue
to monitor its SG&A costs to keep overall costs in line with current operations.
Total interest expense decreased $40,800 to $407,300 for the six months ended
December 31, 2000 compared to $448,100 for the same period last year. Although
operating results have been lackluster, the Company continues to generate
sufficient cash flows which have decreased overall debt by approximately
$400,000 in comparison to amounts outstanding as of December 31, 1999. In
October 2000, the Company also negotiated reductions in the interest rates
related to its bank debt. These factors, in addition to recent reductions in the
federal discount rate, will continue to have a positive effect on reducing
future interest costs.
The Company reported an income tax benefit of $44,800 for the six months ended
December 31, 2000 compared to an income tax expense of $870,700 for the same
period last year. The decrease is in correlation with the current period loss
coupled with the reversal of deferred tax liabilities.
Net income decreased $1,210,800 to a net loss of $109,600, or ($.01) per common
share, for the six months ended December 31, 2000 compared to the net income of
$1,101,200, or $.07 per common share, for the same period last year. The
decrease is primarily related to the reduction in sales volumes as outlined
above coupled with increased raw material, natural gas and labor related costs.
Even though
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stagnant markets and escalating costs continue to challenge positive operating
results, management remains focused to build on its strengths to mitigate as
much as possible these adverse condition. As such, in December 2000, management
created and filled a new Vice-President of Marketing & Sales position. The
addition of this management position should help improve the Company's ability
to effectively market its products and as a result improve future operating
results.
FINANCIAL CONDITIONS
Working capital increased $502,700 to $9,960,500 at December 31, 2000 compared
to $9,457,800 at June 30, 2000. The increase is related to the reduction in the
current portion of long-term debt due to the restructuring of the Company's debt
with the bank net of decreases primarily in accounts receivable and accounts
payable consistent with current operations. Cash flows from operations remain
fairly strong but decreased by $599,000 to $1,556,600 for the six months ended
December 31, 2000 compared to $2,155,600 for the same period last year. The
decrease is primarily related to the $1,210,800 reduction in net income and the
$751,300 change in deferred taxes due to the non-utilization of the Company's
NOL's in comparison to the same period last year. Although operating results are
down, the overall cash flows generated from operations remain sufficient to
sustain normal cash flow requirements.
The Company expended $642,200 for the property, plant and equipment ("PP&E")
during the six months ended December 31, 2000. This is slightly above prior
year's expenditures, but is in sync with current year's PP&E budget. The primary
emphasis in Fiscal 2001 will be on new tooling and tooling modifications as well
as the additional CNC router for the Gardena Facility. The Company currently
anticipates expending $1.5 million on capital expenditures in Fiscal 2001.
Net borrowings under the line of credit decreased $427,800 to $1,887,300 between
June 30, 2000 and December 31, 2000. The decrease is attributed to excess cash
flows generated from operations, and the cash flow savings related to the
Company's restructured Credit Agreement with the bank. At December 31, 2000, the
Company had $5,112,700 available for future borrowing under the line of credit.
On September 1, 2000, the bank reduced its LIBOR interest rate option on all of
the Company's outstanding debt from LIBOR plus 2% to LIBOR plus 1.5%. Then,
effective October 1, 2000, the Company renegotiated its interest rate options in
unison with the revolving line of credit renewal. As such, the maturity date for
the line of credit was extended to October 1, 2002 and the Company's interest
rates now reflect reductions from their prior levels to the bank's prime rate
minus .25%, LIBOR plus 1% for borrowings under the line of credit and LIBOR plus
1.25% for all other term debt. In addition, the Company consolidated all of its
outstanding term debt, except the real estate loan, with the bank into a new
$6,050,000 seven-year term loan. The note will be due in monthly principal
installments of approximately $72,000 plus interest at the bank's prime or LIBOR
interest rate options. The restructuring of the Company's bank debt will result
in cash flow savings of approximately $1.1 million during the period October
2000 to September 2001.
During fiscal 2001 the Company reinstated its common stock buyback program.
Through December 31, 2000, the Company has acquired 94,100 shares of common
stock at a total cost of $84,600. To date, 91,700 of these shares acquired have
been retired. The Company plans to continue to actively acquire its common
shares during Fiscal 2001 as long as the market value per share continues to be
under recognized by the stock market. As of December 31, 2000, the Company had
approximately 12.8 million shares of common stock outstanding.
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, common stock
repurchases and repayment of long-term debt for the foreseeable future.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities as amended in June, 1999 by SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June, 2000, by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," (collectively
SFAS No. 133). SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. Under SFAS No. 133 an entity may designate a
derivative as a hedge of exposure to either changes in: (a) fair value of
recognized asset or liability or firm commitment, (b) cash flows of a recognized
or forecasted transaction, or (c) foreign currencies of a net investment in
foreign operations, firm commitments, available-for-sale securities or a
forecasted transaction. Depending upon the effectiveness of the
13
hedge and/or the transaction being hedged, any changes in the fair value of the
derivative instrument is either recognized in earnings in the current year,
deferred to future periods, or recognized in other comprehensive income. Changes
in the fair value of all derivative instruments not recognized as hedge
accounting are recognized in current year earnings. SFAS No. 133 is required for
all Fiscal years beginning after June 15, 2000. On July 1, 2000, the Company
adopted SFAS No. 133. In connection with the adoption of SFAS No. 133, the
Company's interest rate swap was designated as a hedge. On the initial adoption
date of SFAS No. 133, the Company recorded the fair value of its derivative on
the balance sheet as an asset valued at $109,400 with an offsetting entry to
accumulated other comprehensive income. The related unrealized loss of $157,900
during the six months ended December 31, 2000 has been recognized in the
comprehensive income component of stockholders' equity.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. This
statement requires that all items that meet the definition of components of
comprehensive income be reported in the financial statements for the period in
which they are recognized. Components of comprehensive income include revenues,
expenses, gains and losses that under accounting principals generally accepted
in the United States are included in comprehensive income, but excluded from net
income. The Company's reconciliation of net income, as reported, to
comprehensive income, as defined, is included in the combined statements of
income and comprehensive income.
ITEM 2A. DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Information regarding the Company's market risk relating to interest rate
volatility was disclosed in the Company's Form 10-K for the fiscal year ended
June 30, 2000 and should be read in conjunction with this interim financial
information. Since June 30, 2000, there has been no significant change in the
Company's exposure to market risks.
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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.
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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 23, 2001 /s/ SHERMAN MCKINNISS
-----------------------------------------
Sherman McKinniss
President and
Chief Executive Officer
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