-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TuCkjcl/msWPKCJp+D64LyAO8DBj6Js/SV/E17et2TTbs6nuDz9zyP/68Nx9fbKs 2fUynks/eOCpWF8Iflberg== 0001047469-98-035447.txt : 19980928 0001047469-98-035447.hdr.sgml : 19980928 ACCESSION NUMBER: 0001047469-98-035447 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROTONICS MANUFACTURING INC/DE CENTRAL INDEX KEY: 0000801873 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 362467474 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09429 FILM NUMBER: 98714577 BUSINESS ADDRESS: STREET 1: 17022 S FIGUEROA ST CITY: GARDENA STATE: CA ZIP: 90248 BUSINESS PHONE: 3105384932 MAIL ADDRESS: STREET 1: 17022 S FIGUEROA ST CITY: GARDENA STATE: CA ZIP: 90248 FORMER COMPANY: FORMER CONFORMED NAME: KOALA TECHNOLOGIES CORP /DE/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PENTRON CORP DATE OF NAME CHANGE: 19890515 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1998 Commission file number 1-9429 ROTONICS MANUFACTURING INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-2467474 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17022 South Figueroa Street Gardena, California 90248 ------------------------------- ------------------ (Address of principal offices) (Zip Code) Registrant's telephone number, including area code: (310) 538-4932 Securities registered pursuant to Section 12(b) of the Act: Common Stock ($.01 stated value) American Stock Exchange -------------------------------- ----------------------- Titles of each class Name of each Exchange on which registered Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) for the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days. Yes /X/ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ /X/ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, as of September 15, 1998, was $6,222,100 (1). The number of shares of common stock outstanding at September 15, 1998 was 15,532,661. (1) Excludes 8,421,696 shares held by directors, officers and stockholders whose ownership exceeded 5% of the outstanding shares at September 15, 1998. Exclusion of such shares should not be construed to indicate that the holders thereof possess the power, direct or indirect, to direct the management or policies of registrant, or that such persons are controlled by or under common control with the registrant. DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K - -------- --------- Part ---- Definitive Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on December 8, 1998 III
2 TABLE OF CONTENTS
Page ------ PART I Item 1 Business 4 Item 2 Properties 6 Item 3 Legal Proceedings 7 Item 4 Submission of Matters to a Vote of Security Holders 7 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder Matters 8 Item 6 Selected Financial Data 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8 Financial Statements and Supplementary Data 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10 Directors and Executive Officers of the Registrant 15 Item 11 Executive Compensation 15 Item 12 Security Ownership of Certain Beneficial Owners and Management 15 Item 13 Certain Relationships and Related Transactions 15 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16 SIGNATURES 17
3 PART I ITEM 1. BUSINESS INTRODUCTION Rotonics Manufacturing Inc. (the "Company") was founded as an Illinois Corporation, and was reincorporated in Delaware in December 1986. Effective July 1, 1991, the Company merged with Rotonics Molding, Inc.-Chicago ("Rotonics"), with the Company being the surviving entity. In accordance with the 1991 merger agreement, the Company issued 2,666,666 (after giving effect to a 1-for-3 reverse stock split) shares of its common stock and 4,999,997 shares of a newly issued non-voting preferred stock in exchange for all the outstanding voting stock of Rotonics. The preferred stock, which has subsequently been redeemed, was entitled to cumulative dividends of $.09 per share per annum and had a liquidation value of $1.00 per share, plus accrued unpaid dividends in preference to any payment on the common stock. Rotonics had operations in Itasca, Illinois; Deerfield, Wisconsin; Denver, Colorado; and Bartow, Florida. These operations currently conduct business as divisions of the Company using the trade names RMI-C, RMI-D, and RMI-F, respectively. Rotonics was a privately held California Corporation which was 52% owned by Mr. Sherman McKinniss. Mr. McKinniss became president and chief executive officer of the Company on August 12, 1991. In September 1991, the Company's wholly owned subsidiary, Rotational Molding, Inc. ("RMI"), was merged into the Company and now operates as two divisions using the trade names RMI-G and RMI-I with manufacturing operations in Gardena, California and Caldwell, Idaho, respectively. Effective January 1, 1992, the Company acquired Plastech Holdings, Inc. ("Plastech"), and its wholly owned subsidiary, Plastech International, Inc., for $1,777,070 in cash. Plastech was headquartered in Warminster, Pennsylvania with an additional operation in Gainesville, Texas. In July 1992, Plastech was merged with the Company and now operates as a division of the Company using the trade name RMI-T. Effective April 1, 1995, the Company purchased certain assets and assumed certain liabilities of Custom Rotational Molding, Inc. ("CRM") for 300,000 shares of the Company's common stock. The Company assumed CRM's operations in Arleta, California. In September 1994, the Company purchased a larger manufacturing facility in Bensenville, Illinois and subsequently relocated its Itasca, Illinois operations into this new facility. In December 1995, the Company discontinued its operations at its Deerfield, Wisconsin location and combined these operations into its newly purchased Bensenville, Illinois operation. The Wisconsin facility is currently being leased on a month-to-month term basis at $6,250 per month. In February 1997, the Company purchased a 9.73 acre facility consisting of 63,000 square feet of manufacturing and office building space in Commerce City, Colorado. The Company has since expended significant resources to refurbish the facility to house its Colorado operations. In addition to the new facility the Company added two state of the art roto-molding machines and a CNC router to increase and enhance existing manufacturing capacity. Also, the facility is located within an enterprise zone which should provide additional benefits. Effective April 1, 1998, the Company merged with Rotocast International, Inc. and its wholly owned subsidiaries ("Rotocast"), with the Company being the surviving entity. In accordance with the Merger Agreement, the Company issued 2,072,539 shared of its common stock and a $2,000,000 note payable secured by a stand-by letter of credit in exchange for all the outstanding voting stock of Rotocast. Rotocast had operations in Miami, Florida; Knoxville, Tennessee; Brownwood, Texas; Las Vegas, Nevada; and Bossier City, Louisiana. These operations currently conduct business as divisions of the Company using the trade names Rotocast of Miami, Nutron/AMP, Rotocast of Tennessee, Rotocast of Texas and Rotocast of Nevada. Prior to the merger the operations in Bossier City, Louisiana were substantially discontinued. As of September 1998, the Company completed the discontinuance process and has returned the facility to the landlord. Rotocast was a privately held Florida corporation owned by GSC Industries, Inc. ("GSC"). The Company leases the remaining Rotocast facilities from GSC under long-term lease arrangements. Effective April 1998, and pursuant to the Merger Agreement, Mr. Robert Grossman, a shareholder of GSC and former President of Rotocast, was named to the Company's Board of Directors. 4 In conjunction with the Rotocast merger the Company initiated the consolidation of its Warminster, Pennsylvania and Arleta, California facilities into its remaining operations. The consolidation of these facilities will greatly enhance the operations of the Company's remaining facilities, reduce its overall manufacturing overhead costs, and take greater advantage of its marketing and distribution channels since the completion of the Rotocast merger. The consolidation of the facilities was substantially completed as of June 30, 1998. During fiscal 1999, the Company will continue to work on streamlining the operations effected by the consolidation as well as supplement these operations with additional roto-molding machines and CNC routers. Following the closure of the Company's Warminster, Pennsylvania facility the Company opened a sales office in this region. The Company utilizes this office to continue its marketing and sales efforts in conjunction with the Plastech line of products. The Corporate office of the Company is located at the same site as the RMI-G (Gardena, California) facility. DESCRIPTION OF BUSINESS The Company currently has ten manufacturing locations and was again listed by a plastics industry periodical as one of the top ten Rotational Molders in North America. These operating divisions manufacture a variety of plastic products for commercial, agricultural, pharmaceutical, point of purchase display, medical waste, refuse, retail, marine, healthcare and residential use, as well as a vast number of custom plastic products for a variety of industries, utilizing the roto-molding process and, on a smaller scale; injection molding and dip molding processes. In April 1998, the injection molding process was added to the Company's manufacturing operations as part of the Rotocast merger. Utilizing this process the Company markets a variety of parts for commercial, promotional and residential uses under the trade names Nutron and AMP. Roto-molding is a process for molding plastic resin by rotating a mold in a heated environment while the plastic resin powder placed inside the mold melts and evenly coats the inner wall of the mold. The injection molding process varies in that the plastic resin is first heated to a molten state and then injected under pressure into a mold. The roto-molding process has been used for many years and continues to be recognized as a growth industry in recent years as a result of numerous ongoing business consolidations and the development of new resins. These new resins allow roto-molded items to compete with more traditional materials such as carbon and stainless steel, especially in the fabrication of large, lightweight, one-piece molded items such as storage tanks. Roto-molding is a particularly advantageous process for users of molded plastic products who may want to test different prototypes, or who do not require sufficient numbers of such products to justify a more expensive manufacturing process. The Company's products include various types of storage tanks, bin lids, refuse containers for automated removal, medical waste containers, point-of-purchase displays, agricultural / livestock products and containers and other molded items. The Company purchases resin from eight major suppliers in the U.S. and Canada. There are six additional suppliers of minor significance. As the majority of the resin used in the manufacturing process is a polyethylene derived from natural gas, resin price is not directly related to the price for petrochemicals and until recent years has not been generally subject to volatile fluctuations which are often experienced by the petroleum industry. The Company also incorporates the use of post-consumer plastic products blended with virgin materials in the manufacturing of products that call for its use. The Company holds several patents on storage containers used for pharmaceutical, commercial and residential applications. The patents expire through the year 2010. Although the Company has been able to capture its share of these niche markets and expects to see continued growth, no one patent or groups of patents is considered material to the business as a whole. Competition for the Company's products is governed by geography and region since large capacity tanks and bulky hollow products are expensive to ship long distances and, as such, any prospective competitor is constrained by shipping costs. There are numerous single-location as well as a growing trend to structure multi-location roto-molding businesses throughout the United States. However, each of these businesses still competes in a geographic region as determined by customer demand within that region, a constraint inherent to the industry. Due to its nationwide presence, the Company has substantially alleviated such constraint as the Company's operations are located within approximately 500 miles of all potential customers in the continental United States. The Company's sales are usually not subject to large seasonal fluctuations as the business typically operates on significant backlogs with a diverse product mix. Peak season is usually experienced in the period from April through June. Historically the quarter from January through March is the slowest production period of the year. The Company's backlog was $4,252,800 and $4,313,400 as of June 30, 1998 and 1997, respectively. All of the backlog orders of June 30, 1998 are expected to be filled during fiscal 1999. The products are marketed through the Company's in-house sales and engineering staff, various distributors and outside commission-based sales representatives. The Company continues to build a strong, broad customer base which covers a 5 multitude of industries. As such, since fiscal 1991, no sales to any one single customer represented a material part of the Company's business. Research and development expenditures for the Company were insignificant for the last three fiscal years. REGULATION The Company believes that it is in compliance with all applicable federal, state and local laws relating to the protection of the environment and does not anticipate that any such laws will have any material effect on its financial position, capital expenditures, or competitive position. EMPLOYEES As of June 30, 1998, the Company employed a total of 600 individuals. The Company maintains, for its respective employees who are eligible, a medical insurance plan (some of which is contributory), a group life insurance plan, an annual bonus plan and a semi-annual attendance bonus plan. ITEM 2. PROPERTIES The Company's corporate office occupies a separate building comprising approximately 3,100 square feet of the facilities of RMI-G in Gardena, California. The operating divisions lease warehouse, production and office space as follows:
Building Total Facility Annual Property Square Square Base Expiration Location Footage Footage Rent Date (2) - -------- ------- ------- ---- ------------ Gardena, California (1) 42,800 183,300 $ 259,300 October 2001 Caldwell, Idaho 21,250 71,200 $ 73,900 September 2000 Bartow, Florida 34,000 150,600 $ 106,900 September 2004 Miami, Florida 48,000 86,000 $ 148,600 March 2013 Gainesville, Texas (3) - 108,900 $ 1,000 April 2001 Brownwood, Texas 42,800 136,120 $ 67,000 March 2013 Las Vegas, Nevada 30,000 90,000 $ 122,600 March 2013 Knoxville, Tennessee 44,000 174,240 $ 135,900 March 2013
(1) The Company has an option to purchase these facilities. (2) Does not give effect to any renewal options. (3) Represents a 2.5 acre ground lease adjacent to Texas facility. The Company owns 2.1 acres (including 38,000 square feet of warehouse, production and office space) in Gainesville, Texas. In September, 1994 the Company purchased 3.1 acres (including 63,300 square feet of warehouse, production and office space) in Bensenville, Illinois for the Company's Illinois manufacturing operations. The Texas and Illinois facilities are currently encumbered by a combined $2 million mortgage. In February 1997 the Company purchased for cash 9.73 acres (including 63,000 square feet of warehouse, production and office space) in Commerce City, Colorado for the Company's Colorado manufacturing operations. The Company also owns approximately 1.59 unencumbered acres (including 35,100 square feet of warehouse, production and office space) in Deerfield, Wisconsin which was vacated in December 1995 by the Company and its operations incorporated into the Illinois facility. The Wisconsin facility is currently leased to an unrelated lessee for $6,250 per month. ITEM 3. LEGAL PROCEEDINGS 6 In the normal course of business, the Company encounters certain litigation matters, which in the opinion of management, will not have a significant adverse effect on the financial position or the results of operations of the Company. On April 16, 1996, the Company was named as defendant in a complaint filed by Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims for breach of contract and promissory estoppel relating to an Agreement in Principle entered into in connection with a proposed acquisition of the Company by Bonar U.S., Inc. On April 3, 1996 the Company announced that it had terminated the Agreement in Principle pursuant to its terms. The complaint requested damages of $7,011,484. On May 17, 1996, the Company filed a counterclaim against Bonar U.S., Inc. and Bonar Plastics, Inc. seeking damages totaling $25,237,725 for breach of the Confidentiality Agreement with the Company, misappropriation of trade secrets, intentional interference with a prospective economic advantage which the Company obtained as a result of an indication of interest from a third party and breach of a Royalty Agreement between Bonar Plastics, Inc. and one of the Company's operating divisions (formally known as Custom Rotational Molding, Inc.). In March 1997, the Company reached an amicable out of court settlement with Bonar. The settlement involved mutual general releases by the parties, dismissals of the actions brought by the parties and payments to Bonar of $400,000 in March 1997 and $350,000 in September 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock ($.01 stated value) is traded on the American Stock Exchange ("AMEX") under the symbol "RMI". The number of stockholders of record of the Company's Common Stock was approximately 6,200 at September 15, 1998. PRICE RANGE OF COMMON STOCK The following table sets forth the quarterly price ranges of the Company's Common Stock in Fiscal 1998 and 1997, as reported on the composite transactions reporting system for AMEX listed stocks.
High Low --------- -------- Fiscal 1997 First Quarter Ended September 30, 1996 $ 1-1/2 $1-5/16 Second Quarter Ended December 31, 1996 1-3/4 1-1/4 Third Quarter Ended March 31, 1997 1-1/16 1-3/8 Fourth Quarter Ended June 30, 1997 1-1/2 1-1/4 Fiscal 1998 First Quarter Ended September 30, 1997 $1-5/16 $ 1-3/8 Second Quarter Ended December 31, 1997 1-3/4 1-3/8 Third Quarter Ended March 31, 1998 1-9/16 1-1/4 Fourth Quarter Ended June 30, 1998 1-3/8 15/16
In fiscal 1998, 1997 and 1996, the Company paid a regular cash dividend of $.04 per share on its Common Stock. Any future cash dividends or other distributions of stock will be determined solely by the Board of Directors and will be based on the Company's future financial ability to declare and pay such dividends. Additionally, certain lending agreements restrict the Company from declaring or paying dividends on its Common Stock. (See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources.") According to the lending agreement with its bank, the Company may not declare or pay any dividend or distribution on any stock or redeem, retire, repurchase or otherwise acquire any of such shares unless the Company can obtain prior bank authorization and appropriate waivers. 8 ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30, ------------------------------------------------------------------------------------ 1998 (B) 1997 1996 1995(C) 1994 ------------------------------------------------------------------------------------ INCOME STATEMENT DATA Net sales $38,058,900 $39,385,100 $35,703,600 $35,887,600 $31,346,300 Cost of goods sold 29,268,400 29,292,100 26,443,700 26,298,900 23,312,300 Gross margin 8,790,500 10,093,000 9,259,900 9,588,700 8,034,000 Selling, general and administrative expenses (F) 7,327,300 6,239,600 6,313,100 5,767,900 5,636,800 Interest expense 793,700 556,500 696,500 766,500 592,500 Income from continuing operations before change in accounting principle for income taxes (D) 417,200 1,441,800 1,472,700 3,287,600 1,873,000 Cumulative effect of change in account- ting principle for income taxes (E) - - - - 4,013,000 Net income $ 417,200 $ 1,441,800 $ 1,472,700 $ 3,287,600 $ 5,886,000 Income/(loss) from continuing operations per common share $ .03 $ .10 $ .10 $ .24 $ .13 Average common shares outstanding (A) 14,445,200 14,134,600 13,848,500 12,595,200 11,942,200 OTHER FINANCIAL DATA Income from continuing operations as a percent of sales 1.1% 3.7% 4.1% 9.2% 6.0%
(A) Computed on the basis of the weighted average number of common shares outstanding during each year. (B) Includes the results of operations of Rotocast since the effective date of merger. (C) Includes the results of operations of CRM since the effective date of acquisition. (D) Fiscal year 1997 includes $1,010,800 in costs relating to a lawsuit settlement. (E) Represents the recognition of a net deferred tax asset in conjunction with the adoption of FAS 109, "Accounting for Income Taxes" (see Note 14 of Notes to Financial Statements). (F) In 1998, includes $280,300 in plant consolidation expenses. 9
At June 30, ------------------------------------------------------------------------------------ 1998 (B) 1997 1996 1995(C) 1994 ------------------------------------------------------------------------------------ BALANCE SHEET DATA Current assets $16,463,600 $12,814,000 $13,023,000 $11,903,200 $ 9,244,500 Current liabilities 6,452,800 5,099,700 4,864,500 4,766,000 7,256,300 Working capital surplus 10,010,800 7,714,300 8,158,500 7,137,200 1,988,200 Total assets 40,563,800 30,634,400 29,055,700 30,359,400 24,939,000 Long-term debt 10,976,500 6,486,100 5,864,100 7,707,700 2,834,400 Total liabilities 19,155,900 11,589,800 10,732,600 12,477,700 10,095,700 Preferred stock - - - 3,000,000 3,875,000 Current ratio 2.6 to 1 2.5 to 1 2.7 to 1 2.5 to 1 1.3 to 1 Net book value per common share (A) $ 1.35 $ 1.35 $ 1.29 $ 1.15 $ .92
(A) Computed on the basis of the actual number of common shares outstanding at the end of the fiscal year. (B) Includes the effect of the Rotocast merger. (C) Includes the effect of the acquisition of CRM. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION To the extent that this 10-K Annual Report discusses matters which are not historical, including statements regarding future financial results, information or expectation about products or markets, or otherwise makes statements about future events, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These include, among others, fluctuations in costs of raw materials and other expenses, costs associated with plant closures, downturns in the markets served by the Company, the costs associated with new product introductions, as well as other factors described under the heading Item 3, "Legal Proceedings", under this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Footnote 1 to Financial Statements. OPERATIONS Net sales were $38,058,900 in fiscal 1998 which fell 3.4% below fiscal 1997 net sales of $39,385,100. Fiscal 1998 was transitional year for the Company as it endured difficult market conditions while continuing its internal efforts to increase manufacturing capabilities, promote efficient operations and restructure and build its marketing functions. Following fiscal 1997's stellar increase in custom molded sales, the Company reported a 17.6% drop in this category. As such, during fiscal 1998 this reduction accounted for the majority of the loss in sales volumes in the current period. The Company's markets have been unpredictable over the last few years and has caused the Company to readily adapt itself to always take the utmost advantage of the current economic and market conditions we operate in. During the fourth quarter of fiscal 1998, the Company began to see improvements in the marketplace. This coupled with the Rotocast merger resulted in improved sales volumes in the fourth quarter of fiscal 1998. Sales volumes increased approximately 26.5% to $12,798,400 for the three months ended June 30, 1998 compared to the same period last year. Sales from the recently merged Rotocast divisions accounted for 9% of the Company's net sales in fiscal 1998. Net sales increased $3,681,500 or 10.3% to $39,385,100 in fiscal 1997 compared to $35,703,600 in fiscal 1996. The majority of the Company's product lines sustained relatively level sales volumes as compared to fiscal 1996 with the increased volumes related directly to increases in marine, custom molded products and customer tooling. Custom molded products reported an impressive 40% increase over prior year volumes. Management attributes this gain to its experienced sales/engineering staff's ability to expand the Company's marketshare of these products. During the last several years the Company has also capitalized on the roto-molding industry's overall expanding marketplace for its products. In fiscal 1996, we experienced a lackluster marketplace due to volatile resin prices and then what appeared to be a return of consumer confidence in fiscal 1997. However, certain analysts in the industry have indicated that the industry appears to have reached a temporary plateau. Management continues to watch these trends to ascertain what impact it will have on the Company's growth projections. Cost of goods was $29,268,400 or 76.9% of net sales in fiscal 1998 compared to $29,292,100 or 74.4% and $26,443,700 or 74.1% of net sales in fiscal 1997 and 1996. Since fiscal 1995, the roto-molding industry has experienced extreme volatility in plastic resin prices. These price increases have resulted in substantial increases in raw material prices per pound since the beginning of this four year period. The price increases were enacted by the various resin suppliers in response to domestic and foreign material demands as well as various natural and internal disasters experienced by the resin suppliers. The cost of plastic resin represents a significant portion of the Company's manufacturing costs and has continually challenged the Company to effectively mitigate these increases. Since fiscal 1995, the Company was relatively successful in mitigating these resin price increases by initiating customer price increases and various raw material purchasing strategies. In fiscal 1997, the Company also benefited from increased volumes of custom molded products. Pricing structures for custom molded products typically follow market trends and allow the Company to obtain gross margin levels consistent with Company objectives. However, due to fiscal 1998's adverse market conditions which resulted in the reduction in fiscal 1998 sales volumes coupled with high resin prices during the majority of the year, the Company was unable to maintain consistent operating results. In the fourth quarter of fiscal 1998, management began to see more favorable trends in resin prices. As these trends continue into fiscal 1999, management is optimistic about improved gross profit margins. Management will continue to monitor these trends and their affect on the marketplace to maximize any obtainable benefits. During the fourth quarter of fiscal 1998, management also consolidated two of its manufacturing locations into its remaining ten locations. These restructuring efforts should have a positive impact on gross margins during future periods due to the elimination of the fixed overhead costs associated with the closed facilities. 11 Selling, general and administrative expenses were $7,047,000 or 18.5% of net sales in fiscal 1998 compared to $6,239,600 or 15.8% of net sales in fiscal 1997. The increase relative to net sales is attributed to the decrease in sales volumes during the first three quarters of fiscal 1998 plus the additional expenses related to the Rotocast operations (approximately $1.2 million) which was incurred in the fourth quarter of fiscal 1998. Since the Rotocast merger, management has focused its efforts on restructuring sales and administrative functions at these facilities. These efforts coupled with the plant consolidations mentioned above should result in necessary cost reductions to bring SG&A costs in synch with future sales volumes and management's objectives. Selling, general and administrative expenses were $6,239,600 or 15.8% of net sales in fiscal 1997 compared to $6,313,100 or 17.7% of net sales in fiscal 1996. The overall decrease is primarily attributable to the 10.3% increase in 1997 sales volumes and management's ability to keep these costs in synch with the current sales volume levels. Management continued the restructuring of its sales/engineering staff in fiscal 1997. The changes enacted have had a positive impact on the Company's sales growth with a minimal impact to increased selling costs. The Company continues to benefit from the operating efficiencies realized since the completed consolidation of the Illinois and Wisconsin facilities. Income from operations was $1,463,200 or 3.8% of net sales in fiscal 1998 compared to $3,853,400 or 9.8% and $2,946,800 or 8.3% of net sales in fiscal 1997 and 1996. Again, current year operations were effected by sluggish sales volumes, high resin prices and the additional SG&A costs related to the Rotocast operations. Management perceives some indication within the industry to move beyond its previous sales plateau. This potential improvement in market conditions coupled with favorable resin costs and the cost savings related to the recent plant consolidations should improve future operating results. However, if resin prices do not remain stable and the marketplace reacts adversely to current domestic and foreign economic conditions which have recently arisen, these factors could adversely effect the Company's ability to meet future operating objectives. Interest expense increased $237,200 to $793,700 in fiscal 1998, compared to $556,500 in fiscal 1997. The increase is primarily attributed to an increase in the Company's debt structure when compared to the same period last year. The increase in the Company's debt structure is attributed to the Colorado facility purchase and its subsequent improvements in the later part of fiscal 1997 and during fiscal 1998 (approximately $1.4 million), $1.6 million in capital expenditures at the other Company facilities in fiscal 1998, and the additional debt issued in connection with the Rotocast merger as well as the debt assumed in the transaction which together amount to approximately $3.8 million. In addition, the Company has incurred an increase in short-term borrowings due to a decrease in cash flows from operations. Interest expense decreased $140,000 to $556,500 in fiscal 1997 compared to $696,500 in fiscal 1996. The decrease is attributed to reductions in the Company's overall debt structure during the first half of fiscal 1997 coupled with stable interest rates during the majority of the year and the Company's extensive use of optional bank LIBOR interest rates. During later part of fiscal 1997, the Company made significant machinery and equipment purchases and purchased a 9.73 acre facility in Commerce City, Colorado to expand and relocate its Colorado operations. These expenditures set the stage for the Company's future growth and were funded by operating cash flows and the issuance of additional bank financing. The later has increased the Company's overall debt structure by approximately $725,000 at fiscal year end and which resulted in additional interest costs in fiscal 1998. Net income was $417,200 or $.03 per common share in fiscal 1998 compared to $1,441,800 or $.10 per common share in fiscal 1997. The decrease is directly related to the reduction in sales volume levels which impeded the preservation of the Company's gross margin goals coupled with the increases in SG&A and interest expenses outlined above. As we look forward, management is extremely pleased with the benefits which will result from the Rotocast merger and the consolidation of two of its operating divisions in fiscal 1998. The Rotocast merger has provided the Company a unique opportunity to capitalize on expanding its marketshare with the newly acquired product lines and distribution channels as well as the cost savings obtainable by combining various manufacturing, sales and administrative functions. Net income remained relatively consistent at $1,441,800 or $.10 per common share in fiscal 1997 compared to $1,472,700 or $.10 per common share in fiscal 1996. Although consistent with prior year, the Company's 1997 results included costs of $1,010,800 or $.07 per common share related to litigation settlement expenses (see Note 15 of "Notes to Financial Statements). Total litigation costs represent an out of court settlement of $750,000 plus additional legal costs of $260,800. LIQUIDITY AND CAPITAL RESOURCES Working capital increased $2,296,500 to $10,010,800 at June 30, 1998 compared to $7,714,300 at June 30, 1997. The increase is primarily related to the inclusion of Rotocast's net current assets as of June 30, 1998, net of normal fluctuations in 12 accounts receivables and accounts payables, an increase in inventories related to raw material purchasing strategies and an increase in the current portion of long-term debt related to additional machinery and equipment financing. Cash provided by operations was $1,937,300 for fiscal 1998 which reflected a decrease of $1,841,600 in relation to prior period results. The reduction is primarily attributed to the lower sales volume levels reported in the current period which resulted in a decrease in net income of approximately $1 million, as well as a decrease in accounts payable and increases in accounts receivable and inventories, as indicated above, which increased cash used by operating activities by $769,000. The Company expended a total of $2,103,100 for property, plant and equipment during fiscal 1998 compared to $3,797,800 for fiscal 1997. The decrease over prior year is directly related to the costs incurred to purchase the Commerce City, Colorado facility. The Company continued to complete its internal expansion project that it began in fiscal 1997. During the current period the Company acquired two additional roto-molding machines for its Idaho facility, CNC routers for its Chicago, Nevada and Idaho facilities, as well as resin silo projects in Florida and Colorado. The Company has also substantially completed its building improvement project at its new Commerce City, Colorado facility. The Company will continue its internal expansion project in fiscal 1999 as it determines the additional requirements associated with the Rotocast operations. This commitment has allowed the Company to stay in the forefront of the industry and optimizes our position for future growth. In January 1998, the Company advanced $700,000 on its fourth machinery and equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to repay amounts originally borrowed under the Company's revolving line of credit to finance $875,000 in machinery and equipment purchases. The note is due in monthly interest only payments through November 15, 1998, at which time it will convert to a sixty month fully amortizable note. In connection with the Rotocast merger, the Company issued a eighteen month $2,000,000 note payable to the seller and also replaced Rotocast's existing line of credit and term debt with a 90 day bank note in the amount of $1,750,000. The note to the seller is payable with one interest only payment due March 25, 1999 and second principal and interest payment due upon maturity on September 25, 1999. The $2,000,000 note is secured by an irrevocable standby letter of credit which can only be called upon if the principal balance is not paid within 10 days of maturity. In April 1998, the bank increased the Company's total loan facility to $16.5 million. This was done in conjunction with an appraisal of Rotocast's fixed assets. The ninety day note which was issued to retire Rotocast's existing debt was replaced with a $2,000,000 sixty month fully amortizable note payable and then in July 1998, the note was increased to $3,000,000. The note is payable in monthly principal payments of $50,000 plus interest and will mature on July 1, 2003. Also, in July 1998, the bank replaced the Company's existing real estate loan with a new $2,000,000 loan secured by the Company's Bensenville, Illinois and Gainesville, Texas properties. The note will be due in monthly principal payments of approximately $6,700 plus interest on a twenty-five year amortization with the outstanding principal due on July 1, 2008. The other major change to the Company's total debt structure with the bank was an increase to the total principal available on the Company's line of credit from $5 million to $7 million which is also inclusive of a $2 million subfeature for the issuance of a standby letter of credit securing the note payable due to the seller of Rotocast. The maturity date of the line of credit was extended to October 1, 2000. In addition, the bank reduced the LIBOR interest rate spread from 2.5% down to 2.25% and made this option available on all bank borrowings. Net borrowings under the line of credit increased $1.5 million to $3.9 million between June 30, 1997 and June 30, 1998. Current increases in the line balance are related to a combination of the ongoing capital expenditures, including the building improvements in Commerce City, Colorado, payments made during the year in connection with the Bonar litigation settlement, the fiscal 1998 common stock dividend payment and an increased reliance on the line of credit due to the reduction in income from operations. At June 30, 1998, the Company had approximately $1.1 million available for future borrowings under the line of credit. The remaining $2,000,000 open on the line of credit is reserved for the letter of credit which was issued to secure the GSC note payable. With the advances on the additional long-term debt in July 1998 the available borrowings under the line of credit will increase by an additional $2 million. Effective July 15, 1998, the Company initiated an interest rate swap agreement with the bank. The agreement will allow the Company to fix a portion of its outstanding term and line of credit debt from a variable floating rate to a fixed interest rate in efforts to hedge against future increases in the bank's prime rate. The agreement matures July 15, 2003. Stockholder's equity increased $2,363,300 to $21,407,900 in fiscal 1998 and since fiscal 1992 stockholder's equity has more than doubled. This increase includes the effect of the Rotocast merger net of the Company's third annual common stock dividend of $.04 per common share, or $552,800, which was declared on December 9, 1997 and paid on January 28, 1998 to 13 stockholders of record on January 8, 1998. In fiscal 1998, the Company initiated and completed a common stock buy back program which resulted in the repurchase and subsequent retirement of 332,200 shares of common stock at a cost of $501,100. On April 16, 1996, the Company was named as a defendant in a complaint filed by Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims for breach of contract and promissory estoppel relating to an Agreement in Principle entered into in connection with a proposed acquisition of the Company by Bonar U.S., Inc. On April 3, 1996, the Company announced that it had terminated the Agreement of Principle pursuant to its terms. The complaint requested damages of $7,011,484. On May 17, 1996, the Company filed a counterclaim against Bonar U.S., Inc. and Bonar Plastic, Inc. seeking damages totaling $25,237,725 for breach of the Confidentiality Agreement with the Company, misappropriation of trade secrets, intentional interference with a prospective economic advantage which the Company obtained as a result of an indication of interest from a third party and breach of a Royalty Agreement between Bonar Plastic, Inc. and one of the Company's operating divisions (formally known as Custom Rotational Molding Inc.) In March 1997, the Company reached an amicable out of court settlement with Bonar. The settlement involved mutual general releases by the parties, dismissals of the actions brought by the parties and payments to Bonar of $400,000 in March 1997 and $350,000 in September 1997. The $350,000 payment had been previously accrued for and was included in accounts payable in the accompanying June 30, 1997 balance sheet. Cash flows from operations in conjunction with the Company's revolving line of credit and machinery and equipment loan commitment are expected to meet the Company's needs for working capital, capital expenditures and repayment of long-term debt for the foreseeable future. YEAR 2000 Management has been fully apprised of the issues surrounding the year 2000 dilemma. In assessing the potential impact this issue has on the Company, management reviewed both its manufacturing and accounting systems to ascertain critical applications which would be affected. Due to the nature of the Company's manufacturing process and the equipment utilized, it was determined that even equipment which was operated or incorporated computerized controls or programs were not dependent on calendar functions to operate and thus would not be impacted by the year 2000 problem. As part of the year 2000 issue the Company also assessed compliance of its network computing systems. To date the Company believes that all of its operating divisions except one are 2000 compliant. The remaining site along with the Company's Corporate division has resolved to make the necessary hardware and software enhancements to become compliant at this final site by the end of fiscal 1999 (June 30, 1999). The Company does not believe it will encounter any problems associated with the year 2000 issue between now and such time that it completes the necessary upgrades to is computer systems. The costs associated with becoming compliant will not have a material effect to the Company's financial position. To complete the Company's assessment of the year 2000 problem, the Company will be contacting its major suppliers to ascertain their readiness and ability to function beyond this critical date and what impact, if any, it will have on the Company's ability to continue normal operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Financial Statements and Financial Statement Schedules listed in Item 14(a)(1) and (2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The Company incorporates by reference the information set forth under the caption "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission, and mailed to stockholders in connection with the Company's Annual Meeting of the Stockholders to be held on December 8, 1998 ("the Proxy Statement") EXECUTIVE OFFICERS As of September 15, 1998, the executive officers of the Company were as follows:
Name Age Position - ---- ----- -------- Sherman McKinniss 62 President, Chief Executive Officer, Chairman of the Board Robert E. Gawlik 50 Chief Operating Officer E. Paul Tonkovich 60 Secretary, Director Douglas W. Russell 37 Chief Financial Officer, Assistant Secretary/Treasurer
SHERMAN MCKINNISS. Mr. McKinniss has served as President, Chief Executive Officer and a Director of the Company since August 1991 and was appointed as Chairman of the Board in December 1994. He was President and a Director of Rotonics from 1987-1991. Previously, he owned and operated RMI, which he sold to the Company in 1986 and was a partial owner of Rotational Molding, Inc.-Florida which was merged into Rotonics in 1988. ROBERT E. GAWLIK. Mr. Gawlik was appointed as Chief Operating Officer of the Company in August 1998. Prior to this, he served as General Manager for Bonar Plastic's Oregon facility from 1991-1998, and as Executive Vice-President of Encore Industries from 1986-1989, and later as President of Encore Group from 1989-1991. E. PAUL TONKOVICH. Mr. Tonkovich has served as Secretary and a Director of the Company since August 1991. He has been a practicing attorney since January 1966. He was legal counsel to Rotonics and to Mr. McKinniss and is now legal counsel for the Company. DOUGLAS W. RUSSELL. Mr. Russell has served as Chief Financial Officer and Assistant Secretary/Treasurer of the Company since 1991. Prior to that he was a Senior Auditor for the accounting firm Hallstein & Warner from 1988 until 1991, and was Assistant Controller of RMI from September 1985 to September 1987. ITEM 11. EXECUTIVE COMPENSATION The Company incorporates by reference the information set forth under the captions "Compensation of Executive Officers", the "Summary Compensation Table" and related disclosure information, "Certain Transactions", and "Compensation of Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company incorporates by reference the information set forth under the caption "Security Ownership by Certain Beneficial Holders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company incorporates by reference the information set forth under the headings "Information Concerning the Board of Directors" under the caption "Election of Directors", "Executive Officers", and "Certain Transactions" in the Proxy Statement. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:
Page ------ (1) Financial Statements: Report of Independent Public Accountants F-1 Balance Sheet, June 30, 1998 and 1997 F-2 Statement of Income, Years Ended June 30, 1998, 1997 and 1996 F-3 Statement of Changes in Stockholders' Equity, Years Ended June 30, 1998, 1997, and 1996 F-4 Statement of Cash Flows, Years Ended June 30, 1998, 1997, and 1996 F-5 Notes to Financial Statements F-6 (2) Financial Statement Schedules: VIII Valuation and Qualifying Accounts, Years Ended June 30, 1998, 1997, and 1996 F-17 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (b) Reports on Form 8-K. During the fourth quarter of fiscal year ended June 30, 1998, the registrant filed current reports on Form 8-K and 8-K/A for the following events: 1. March 25, 1998 (Date of earliest event reported), Item 2, "Acquisition or Disposition of Assets". This report provided a description of the Rotocast International Inc. and subsidiaries merger with the registrant. 2. March 25, 1998 (Date of earliest event reported), Item 7, "Financial Statements and Exhibits". This report was an amendment to the original Form 8-K and provided financial statements of Rotocast for the year ended December 31, 1997, and for the three months ended March 31, 1998, proforma combined balance sheets of Rotocast and the registrant as of March 31, 1998, and the proforma combined statement of operations for the year ended June 30, 1997, and for the nine months ended March 31, 1998. (c) The following exhibits are filed as part of this report:
Exhibit Number Exhibit Title - ------- ------------- 10.1 Credit Agreement and related Promissory notes between registrant and Wells Fargo Bank dated June 15, 1998. 23(a) Consent of Independent Public Accountants - Arthur Andersen LLP
16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROTONICS MANUFACTURING INC. By /s/ SHERMAN MCKINNISS ----------------------------------- Sherman McKinniss President, Chief Executive Officer Date 09/25/1998 By /s/ DOUGLAS W. RUSSELL ----------------------------------- Douglas W. Russell Chief Financial Officer Assistant Secretary/Treasurer Date 09/25/1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ E. PAUL TONKOVICH Secretary, Director 09/25/1998 - ------------------------------ E. Paul Tonkovich /s/ DAVID C. POLITE Director 09/25/1998 - ------------------------------ David C. Polite /s/ LARRY DEDONATO Director 09/25/1998 - ------------------------------ Larry DeDonato /s/ JAMES E. EVANS Director 09/25/1998 - ------------------------------ James E. Evans /s/ LARRY L. SNYDER Director 09/25/1998 - ------------------------------ Larry L. Snyder /s/ ROBERT GROSSMAN Director 09/25/1998 - ------------------------------ Robert Grossman
17 ROTONICS MANUFACTURING INC. FINANCIAL STATEMENTS * * * * * JUNE 30, 1998 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Rotonics Manufacturing Inc.: We have audited the accompanying balance sheets of ROTONICS MANUFACTURING INC. (a Delaware corporation) as of June 30, 1998 and 1997, and the related statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rotonics Manufacturing Inc. as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index appearing under Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Orange County, California August 27, 1998 F-1 ROTONICS MANUFACTURING INC. BALANCE SHEET
JUNE 30, ----------------------------- 1998 1997 ----------- ----------- ASSETS Current assets: Cash $ 30,700 $ 12,100 Accounts receivable, net of allowance for doubtful accounts of $148,000 and $90,000, respectively (Notes 8 and 9) 6,973,800 5,334,400 Current portion of notes receivable (Note 3) 62,600 48,100 Inventories (Notes 4 , 8 and 9) 7,081,900 5,602,700 Deferred income taxes, net (Note 14) 2,106,400 1,574,600 Prepaid expenses and other current assets 208,200 242,100 ----------- ----------- Total current assets 16,463,600 12,814,000 Notes receivable, less current portion (Note 3) 455,000 455,000 Investment in partnership (Note 5) 133,200 - Deferred income taxes, net (Note 14) - 1,441,400 Property, plant and equipment, net (Notes 6, 8 and 9) 18,250,000 10,799,500 Intangible assets, net (Note 7) 5,131,800 5,065,500 Other assets 130,200 59,000 ----------- ----------- $40,563,800 $30,634,400 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 9) $ 1,784,000 $ 1,281,300 Accounts payable 3,719,600 2,953,100 Accrued liabilities (Note 11) 949,200 865,300 ----------- ----------- Total current liabilities 6,452,800 5,099,700 Bank line of credit (Note 8) 3,926,200 2,373,400 Long-term debt, less current portion (Note 9) 5,050,300 4,112,700 Long-term debt due related parties (Note 10) 2,000,000 - Deferred income taxes, net (Note 14) 1,726,600 - Other liabilities - 4,000 ----------- ----------- Total liabilities 19,155,900 11,589,800 ----------- ----------- Commitments and contingencies (Note 15) Stockholders' equity: Common stock, stated value $.01: authorized 20,000,000 shares; issued and outstanding 15,806,361 and 14,065,995 shares, respectively, net of treasury shares (Notes 10 and 13) 26,921,400 24,422,500 Accumulated deficit (5,513,500) (5,377,900) ----------- ----------- Total stockholders' equity 21,407,900 19,044,600 ----------- ----------- $40,563,800 $30,634,400 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-2 ROTONICS MANUFACTURING INC. STATEMENT OF INCOME
For the year ended June 30, ------------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Net sales $ 38,058,900 $ 39,385,100 $ 35,703,600 ------------ ------------ ------------ Costs and expenses: Cost of goods sold 29,268,400 29,292,100 26,443,700 Selling, general and administrative expenses 7,047,000 6,239,600 6,313,100 Plant consolidation expenses (Note 2) 280,300 - - ------------ ------------ ------------ Total costs and expenses 36,595,700 35,531,700 32,756,800 ------------ ------------ ------------ Income from operations 1,463,200 3,853,400 2,946,800 ------------ ------------ ------------ Other (expense)/income: Interest expense (793,700) (556,500) (696,500) Lawsuit settlement (Note 15) - (1,010,800) - Other income, net 96,200 98,500 156,900 ------------ ------------ ------------ Total other expense (697,500) (1,468,800) (539,600) ------------ ------------ ------------ Income before income taxes 765,700 2,384,600 2,407,200 Income tax provision (Note 14) (348,500) (942,800) (934,500) ------------ ------------ ------------ Net income 417,200 1,441,800 1,472,700 Preferred stock dividends - - (62,000) ------------ ------------ ------------ Net income applicable to common shares 417,200 1,441,800 1,410,700 ------------ ------------ ------------ ------------ ------------ ------------ Basic/diluted income per common share (Note 1) $ .03 $ .10 $ .10 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-3 ROTONICS MANUFACTURING INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Preferred Stock Common Stock Deficit Total -------------------------- --------------------------- ------------ ------------ Shares Amount Shares Amount ----------- ----------- ----------- ------------ Balances, June 30, 1995 3,000,000 $ 3,000,000 $12,903,752 $21,980,500 $(7,098,800) $17,881,700 Redemptions of preferred stock (2,749,800) (2,749,800) 1,374,884 2,749,800 - - Stock issued in connection with exercise of outstanding options - - 5,333 4,200 - 4,200 Repurchase of preferred shares (250,200) (250,200) - - - (250,200) Repurchase of common stock - - (125,452) (157,100) - (157,100) Preferred stock dividends - - - - (62,000) (62,000) Common stock dividends - - - - (566,200) (566,200) Net income - - - - 1,472,700 1,472,700 ----------- ----------- ----------- ------------ ------------ ----------- Balances, June 30, 1996 - - 14,158,517 24,577,400 (6,254,300) 18,323,100 Stock issued in connection with exercise of outstanding options - - 7,500 6,100 - 6,100 Repurchase of common stock - - (100,022) (161,000) - (161,000) Common stock dividends - - - - (565,400) (565,400) Net income - - - - 1,441,800 1,441,800 ----------- ----------- ----------- ------------ ------------ ----------- Balances, June 30, 1997 - - 14,065,995 24,422,500 (5,377,900) 19,044,600 Stock issued in connection with Rotocast International Inc. merger - - 2,072,539 3,000,000 - 3,000,000 Repurchase of common stock - - (332,173) (501,100) - (501,100) Common stock dividends - - - - (552,800) (552,800) Net income - - - - 417,200 417,200 ----------- ----------- ----------- ------------ ------------ ----------- Balances, June 30, 1998 - $ - 15,806,361 $ 26,921,400 $(5,513,500) $21,407,900 ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ -----------
The accompanying notes are an integral part of these financial statements. F-4 ROTONICS MANUFACTURING INC. STATEMENT OF CASH FLOWS
For the year ended June 30, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------- Cash flows from operating activities: Net income $ 417,200 $ 1,441,800 $ 1,472,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,034,800 1,617,000 1,588,100 Loss on sales of equipment 67,500 21,800 - Deferred income tax expense 323,000 786,200 743,100 Provision for doubtful accounts 39,300 63,900 58,800 Changes in assets and liabilities, net of effect from purchase of business: (Increase)/decrease in accounts receivable (324,900) 392,400 (508,000) (Increase)/decrease in inventories (267,000) (663,300) 412,700 Decrease/(increase) in prepaid expenses and other current assets 177,200 (23,600) (103,700) (Increase)/decrease in other assets (72,400) 23,200 2,900 (Decrease)/increase in accounts payable (177,100) 243,700 329,000 Decrease in accrued liabilities (280,300) (124,200) (198,100) Decrease in income taxes payable - - (23,400) ------------ ------------ ------------- Net cash provided by operating activities 1,937,300 3,778,900 3,774,100 ------------ ------------ ------------- Cash flows from investing activities: Acquisition of Rotocast, net of cash obtained (74,100) - - (Advances)/repayments on notes receivable (11,600) (1,200) 5,800 Capital expenditures (2,103,100) (3,797,800) (981,100) Proceeds from sales of equipment 93,500 3,200 - Distribution from investment in partnership 2,300 - - ------------ ------------ ------------- Net cash used in investing activities (2,093,000) (3,795,800) (975,300) ------------ ------------ ------------- Cash flows from financing activities: Borrowings under line of credit 11,638,800 9,700,000 7,758,800 Repayments under line of credit (10,086,000) (9,310,100) (8,835,600) Proceeds from issuance of long-term debt 950,000 1,526,400 500,000 Repayments of long-term debt (1,285,500) (1,189,700) (1,264,600) Redemption of preferred stock - - (250,200) Payment of preferred stock dividends - - (85,400) Payment of common stock dividends (541,900) (554,300) (554,000) Proceeds from exercise of stock options and warrants - 6,100 4,200 Repurchases of common stock (501,100) (161,000) (157,100) ------------ ------------ ------------- Net cash provided by/(used in) financing activities 174,300 17,400 (2,883,900) ------------ ------------ ------------- Net increase/(decrease) in cash 18,600 500 (85,100) Cash at beginning of year 12,100 11,600 96,700 ------------ ------------ ------------- Cash at end of year $ 30,700 $ 12,100 $ 11,600 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of these financial statements. F-5 ROTONICS MANUFACTURING INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND OPERATIONS Rotonics Manufacturing Inc. (the "Company"), a Delaware corporation manufactures and markets plastic products for commercial, agricultural, refuse, pharmaceutical, marine, healthcare, retail, and residential use, as well as an array of custom molded plastic products to customers in a variety of industries located in diverse geographic markets. No single customer accounted for more than 10% of the Company's net sales in fiscal 1998, 1997, or 1996. In fiscal 1998, the Company purchased in aggregate approximately 89% of its plastic resin from four vendors. Plastic resin represents a significant portion of the Company's manufacturing costs. As such, economic factors which affect the Company's plastic resin vendors will have a potential impact on the Company's future operations. The Company's significant accounting policies are as follows: REVENUE RECOGNITION Revenues are recognized upon shipment to the customer or when title passes to the customer based on the terms of the sales, and are recorded net of sales discounts, returns and allowances. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of accounts receivable and trade payables approximates the fair value due to their short-term maturities. The carrying value of the Company's line of credit and notes payable is considered to approximate fair market value because the interest rates of these instruments are based predominately on variable reference rates. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT Depreciation is computed using the straight-line method and the estimated useful lives of the assets range from three to thirty-nine years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in income for the period. The cost of maintenance and repairs is charged to income as incurred; costs relating to significant renewals and betterments are capitalized. INTANGIBLE ASSETS The excess of the aggregate purchase price over the fair value of the net assets of businesses acquired is amortized on the straight-line basis over periods ranging from fifteen to forty years. Patents are amortized on the straight-line basis over their useful lives of seventeen years, or at their remaining useful life from date of acquisition. F-6 INCOME TAXES The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in tax laws or rates. EARNINGS PER SHARE Earnings per share are calculated under guidelines of SFAS No. 128 "Earnings per Share" which was adopted by the Company as of December 31, 1997. SFAS No. 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed the same way as fully diluted EPS except the calculation now uses the average share price for the reporting period to compute dilution from potential dilutive securities under the treasury stock method. Potential dilutive securities for the Company include outstanding stock options, which had no impact on EPS for all periods presented. The weighted average number of shares used in determining basic EPS was 14,445,200, 14,134,600 and 13,848,500 in fiscal 1998, 1997 and 1996, respectively. The adoption of this pronouncement had no impact to the Company's results of operations. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of" and SFAS No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123, the Company has elected to disclose pro forma net income and earnings per share as if the fair value based accounting method of SFAS No. 123 had been used for stock based compensation. The adoption of these pronouncements had no impact to the Company's financial position or results of operations. Effective September 30, 1998, the Company will be required to adopt SFAS No. 130 "Reporting Comprehensive Income". SFAS No. 130 defines comprehensive income as a measure of all changes in equity of an enterprise during a period that results from transactions and other economic events of the period other than transactions with owners. The adoption of this pronouncement is not expected to have a significant impact on the Company's results of operations. Effective for fiscal year end June 30, 1999, the Company will be required to adopt SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 introduces management's approach to defining operating segments. This approach corresponds to the way management organizes units and internally evaluates performance of its operations based on products, services, geography, legal or management structure. Once operating segments are identified, they are then grouped based on similar characteristics to determine reportable segments. This approach is anticipated to improve segment reporting which will improve analysis of companies involved in diverse business segments. The adoption of this pronouncement is not expected to significantly effect the way the Company reports its operating segments. NOTE 2 - ACQUISITIONS: Pursuant to an Agreement and Plan of Merger and Reorganization dated March 24, 1998 between the Company and GSC Industries, Inc. ("GSC"), the Company acquired all of GSC's outstanding common stock holdings in Rotocast International, Inc. ("Rotocast") and Rotocast's wholly owned subsidiaries Rotocast Plastic Products, Inc.; Wonder Products, Inc.; Nutron Plastic, Inc.; Rotocast Plastic Products of Texas, Inc.; Rotocast Plastic Products of Nevada, Inc.; Rotocast Plastic Products of Tennessee, Inc.; and Rotocast Management Corporation. In accordance with the merger and reorganization Rotocast was merged into the Company and the Company issued to GSC 2,072,539 shares of its own common stock and a $2,000,000 eighteen month promissory note bearing interest at 5.26% per annum. The promissory note is secured by a $2,000,000 irrevocable standby letter of credit issued by Wells Fargo Bank which can only be called upon if the principal balance of the note is not paid within ten days of maturity. Pursuant to the merger agreement the transaction was effective March 31, 1998. F-7 To provide recourse to the Company, five percent of the common shares issued to GSC will be held in an escrow account to cover any claims by the Company in the event of any breaches of representations, warranties or covenants by GSC as outlined in the agreement. The Company has incurred approximately $80,000 of fees and expenses in conjunction with the merger. In addition the Company obtained an appraisal on Rotocast's machinery and equipment which resulted in the write-up of Rotocast's machinery and equipment to $7.2 million and the recognition of goodwill amounting to $357,200. These amounts will be amortized over their estimated useful life of fifteen years. The above transaction was accounted for using the purchase accounting method and the results of the transaction were included in the Company's financial statements effective as of March 31, 1998. As part of the reorganization of Rotonics and Rotocast, the Company relocated its operations in Warminster, Pennsylvania and Arleta, California into its other operating facilities. The relocation of these plants resulted in non-recurring costs of approximately $280,300. PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma condensed statement of combined operations for the years ended June 30, 1998 and 1997 assumes the Rotocast merger occurred at the beginning of the respective periods after giving effect to certain adjustments, including amortization of goodwill, increased interest expense on acquisition debt, depreciation expense and related income tax effects. The pro forma results have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the combination been in effect on the date indicated, or which may occur in the future.
Combined For the years ended June 30, ------------------------------------ 1998 1997 -------------- ------------ Net sales $ 45,746,800 $ 49,152,100 Total costs and expenses (45,765,700) (47,422,300) ------------ ------------ Income/(loss) before provision for income taxes (18,900) 1,729,800 Provision for income taxes - (691,900) ------------ ------------ Net income/(loss) $ (18,900) $ 1,037,900 ------------ ------------ ------------ ------------ Income per common share $ .00 $ .06 ------- ------- ------- -------
NOTE 3 - NOTES RECEIVABLE: On March 31, 1995, the Company and a customer entered into an agreement under which the Company acquired from this customer certain assets, including molds and trade accounts receivable, at their total estimated fair value of $357,800, which was applied against the principal of a 1993 Promissory Note owed by this customer to the Company. The remaining unpaid principal, together with accrued interest and open trade receivable from this customer as of March 31, 1995, were exchanged for a new note with a principal balance of $455,000, bearing interest at 8% per annum and maturing on March 31, 2005. Effective March 31, 1995, the Company sold products manufactured using these molds directly to end users. The Company shall pay to this former customer royalties at the initial rate of 10% of the Company's net sales of these products. Half of the royalty payments shall be applied to reduce principal and interest until the former customer has received a total of $300,000 in royalty payments or March 31, 1998, whichever is earlier. Subsequently, all royalty payments shall be applied to principal and interest until such principal and interest are paid in full, at which time the royalty rate will be reduced to 5% through March 31, 2005. As of June 30, 1998 and 1997, the total balance of this note amounted to $517,600 and $503,100 including accrued interest of $62,600 and $48,100, respectively. The Company intends to hold this note until maturity. F-8 NOTE 4 - INVENTORIES:
June 30, ----------------------------- 1998 1997 ------------ ------------ Inventories consist of: Raw materials $ 4,002,400 $ 3,160,000 Finished goods 3,079,500 2,442,700 ------------ ------------ $ 7,081,900 $ 5,602,700 ------------ ------------ ------------ ------------
NOTE 5 - INVESTMENT IN PARTNERSHIP The Company owns a 33-1/3% interest in a real estate venture which was acquired in 1998 and is accounted for using the equity method. The investment consists principally of a note receivable which is payable in monthly installments, including interest at 7%, to 2004, with annual principal reductions as provided. NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
June 30, ------------------------------ 1998 1997 ------------ ------------ Property, plant and equipment consist of: Land $ 1,039,500 $ 1,039,500 Buildings and building improvements 4,021,000 3,274,500 Machinery, equipment, furniture and fixtures 21,534,500 13,762,700 Construction in progress 836,300 359,900 ----------- ------------ 27,431,300 18,436,600 Less - accumulated depreciation (9,181,300) (7,637,100) ----------- ------------ $18,250,000 $10,799,500 ----------- ------------ ----------- ------------
NOTE 7 - INTANGIBLE ASSETS:
June 30, ------------------------------ 1998 1997 ------------ ------------ Intangible assets consist of: Patents, net of accumulated amortization of $100,900 and $95,200 $ 51,300 $ 35,200 Goodwill, net of accumulated amortization of $2,377,000 and $2,070,000 5,080,500 5,030,300 ------------ ----------- $ 5,131,800 $ 5,065,500 ------------ ----------- ------------ -----------
The carrying values of long-lived assets are reviewed if the facts and circumstances suggest that an item may be impaired. If this review indicates that a long-lived asset will not be recoverable, as determined based on the future undiscounted cash flows of the asset, the Company's carrying value of the long-lived asset is reduced to fair value. F-9 NOTE 8 - BANK LINE OF CREDIT: The Company has a $7,000,000 revolving line of credit with Wells Fargo Bank, which matures on October 1, 2000. The line is secured by the Company's machinery and equipment, accounts receivable and inventories. Interest is payable monthly at the bank's prime rate. The bank's prime rate at June 30, 1998 was 8.5% per annum. In addition, the loan agreement allows the Company to convert the outstanding principal balance in increments of $250,000 to a LIBOR-based loan for up to 90-day periods. At June 30, 1998, total borrowings under the Company's line of credit were $3,926,200 of which $3,750,000 was borrowed under the LIBOR option. The LIBOR borrowings consist of two borrowings of $1,500,000 and $2,250,000 bearing a LIBOR interest rates of 8.15625% and 7.91797% per annum and maturing on July 5, 1998 and July 15, 1998, respectively. Proceeds from the loan were used for working capital purposes. At June 30, 1998, the Company had approximately $1,075,000 available for future borrowings under the revolving line of credit. The remaining $2,000,000 open on the line of credit is reserved for the letter of credit which was issued to secure the GSC note payable The loan agreement contains various covenants pertaining to tangible net worth, net income and liquidity ratios, capital expenditures, payments of dividends, payment of subordinated debt as well as various other restrictions. The Company was in compliance with these covenants for fiscal 1998. NOTE 9 - LONG-TERM DEBT:
June 30, ------------------------------ 1998 1997 ------------ ------------ Long-term debt consists of: Note payable - Bank (A) $ 1,533,300 $ 2,333,300 Note payable - Bank (B) 291,700 391,700 Note payable - Bank (C) 389,800 491,500 Note payable - Bank (D) 800,000 1,000,000 Note payable - Bank (E) 700,000 - Note payable - Bank (F) 2,000,000 - Note payable - Bank (G) 1,080,600 1,147,100 Other 38,900 30,400 ----------- ----------- 6,834,300 5,394,000 Less-current portion (1,784,000) (1,281,300) ----------- ----------- $ 5,050,300 $ 4,112,700 ----------- ----------- ----------- -----------
(A) In May 1995 the Company restructured its credit agreement with Wells Fargo Bank. The loan consists of a $4,000,000 sixty-month term loan. The note is due in monthly principal installments of $66,700 plus interest at the bank's prime rate (8.5% at June 30, 1998). In addition, the loan agreement allows the Company to convert all or a portion of the outstanding principal in increments of $250,000 to a LIBOR-based loan for periods up to 180 days. At June 30, 1998 the Company had $1,500,000 of the outstanding principal balance under the LIBOR option at 7.91797% per annum maturing on July 15, 1998. The note is secured by the Company's machinery and equipment, accounts receivable and inventories and matures on May 16, 2000. (B) In fiscal 1996, the Company was advanced $500,000 on its machinery and equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to repay amounts originally borrowed under the Company's revolving line of credit to finance approximately $700,000 in machinery and equipment purchases. The note is due in monthly principal installments of approximately $8,300 plus interest at the bank's prime rate (8.5% at June 30, 1998) or LIBOR interest rate option for periods up to six months. At June 30, 1998, the total outstanding principal was under the LIBOR option at 7.91797% per annum maturing July 15, 1998. The note is secured by the Company's machinery and equipment and matures on May 15, 2001. (C) In March 1997 the Company was advanced $500,000 on its second machinery and equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to repay amounts originally borrowed under the Company's revolving line of credit to finance approximately $625,000 in machinery and equipment purchased. The note is due in monthly principal installments of approximately $8,500 plus interest at the bank's prime rate (8.5% per annum at June 30, 1998) or LIBOR interest rate option for periods up to six months. At June 30, 1998, the total outstanding principal was under the LIBOR option at 7.91797% per annum maturing July 15, 1998. The note is secured by the Company's machinery and equipment and matures on May 15, 2002. F-10 (D) In June 1997, the Company was advanced $1,000,000 on its third machinery and equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to repay amounts originally borrowed under the Company's revolving line of credit to finance approximately $1,250,000 in machinery and equipment purchases. The note is due in monthly principal installments of approximately $16,700 plus interest at the bank's prime rate (8.5% per annum at June 30, 1998) or LIBOR interest rate option for periods up to three months. At June 30, 1998, the total outstanding principal was under the LIBOR option at 8.15625% per annum maturing July 6, 1998. The note is secured by the Company's machinery and equipment and matures on June 27, 2002. (E) In January 1998, the Company was advanced $700,000 on its fourth machinery and equipment term-loan commitment with Wells Fargo Bank. The proceeds were used to repay amounts originally borrowed under the Company's revolving line of credit to finance approximately $875,000 in machinery and equipment purchases. The note is due in monthly interest only payments at the bank's prime rate (8.5% per annum at June 30, 1998) or LIBOR interest rate option for periods up to three months until November 15, 1998. At such time the note will convert to a sixty month fully amortizable loan. At June 30, 1998, the total outstanding principal was under the LIBOR option at 8.15625% per annum maturing July 6, 1998. The note is secured by the Company's machinery and equipment and matures on July 15, 2003. At June 30, 1998, the Company had available a term-loan commitment in the amount of $500,000 for future machinery and equipment purchases. Advances under the line will be subject to monthly interest only payments at the bank's prime or LIBOR interest rates until November 15, 1998 at which time amounts borrowed will convert to a sixty month fully amortizable loan. (F) In connection with the Rotocast acquisition, the Company retired Rotocast's existing line of credit and long-term debt with a 90 day note issued by Wells Fargo Bank in the amount of $1,750,000. In April 1998, pursuant to an appraisal of Rotocast's machinery and equipment, this note was replaced with a $2,000,000 sixty month fully amortizable note. In July 1998, the note again was replaced with a $3,000,000 sixty month fully amortizable loan. The note is due in monthly interest only payments at the bank's prime rate (8.5% per annum at June 30, 1998) or LIBOR interest rate option for periods up to three months until August 15, 1998. At such time the note will convert to a sixty month fully amortizable loan. At June 30, 1998, the total outstanding principal was under the LIBOR option at 8.15625% per annum maturing July 6, 1998. The note is secured by the Company's machinery and equipment and matures on July 1, 2003. (G) This note was issued to Wells Fargo Bank on September 15, 1994 in connection with the purchase of real property in Bensenville, Illinois. The note is due in monthly principal installments of approximately $5,500 plus interest at the bank's prime rate (8.5% per annum at June 30, 1998) on a twenty-year amortization with the outstanding principal due in five years. The note is secured by a first trust deed on the real property and matures on September 15, 1999. In July 1998, this note was replaced with a new $2,000,000 real estate loan secured by the Company's Bensenville, Illinois and Gainesville, Texas properties. The note will be due in monthly principal installments of approximately $6,700 plus interest at the bank's prime rate or LIBOR interest rate option on a twenty-five year amortization with the outstanding principal due on July 1, 2008. Effective July 15, 1998, the Company initiated an interest rate swap agreement with the bank. The agreement will allow the Company to fix a portion of its outstanding term and line of credit debt from a variable floating rate to a fixed interest rate in efforts to hedge against future increases in the bank's prime rate. The agreement matures July 15, 2003. Aggregate annual maturities of long-term debt are summarized as follows:
Year Ending June 30, -------------------- 1999 $1,784,000 2000 2,699,400 2001 939,400 2002 824,800 2003 540,000 Thereafter 46,700 ---------- $6,834,300 ---------- ----------
F-11 NOTE 10 - RELATED PARTY DEBTS:
June 30, -------------------------- 1998 1997 ---------- --------- Related party debt consists of: Note payable - (A) $2,000,000 $ - ---------- --------- ---------- ---------
(A) This note was issued to GSC Industries, Inc., which a director of the Company has a 54% interest, in connection with the acquisition of Rotocast. The note bears interest at 5.26% per annum and is payable with one interest only payment due on March 25, 1999 and a second principal and interest payment due upon maturity of the note on September 25, 1999. The note is secured by a $2,000,000 irrevocable standby letter of credit which may be called upon if the principal balance of the note is not paid within ten days of maturity. ADDITIONAL RELATED PARTY TRANSACTIONS: In September 1995, in accordance with unanimous approval of the Board of Directors, an officer/director of the Company converted his remaining 2,158,950 outstanding shares of Series A Preferred Stock to 1,079,475 shares of the Company's common stock. The shares were converted on the basis of one share of common stock issued for every two shares of preferred outstanding. The Company sells plastic resin and molded plastic products to a company in which an officer/director of the Company has a minority interest. Sales to the Company amounted to $392,400, $412,300 and $319,900 in fiscal years 1998, 1997 and 1996, respectively. Amounts due on sales to this company were $171,800 and $151,500 at June 30, 1998 and 1997, respectively, and are included in accounts receivable in the accompanying balance sheet. In fiscal years 1998, 1997 and 1996, the Company incurred legal fees and costs amounting to $83,400, $103,400 and $83,000, respectively, for services by E. Paul Tonkovich Professional Corporation, of which an officer/director of the Company is an employee. The Company leases its facilities in Miami, Florida; Knoxville, Tennessee; Brownwood, Texas; Bossier City, Louisiana, and Las Vegas, Nevada from GSC Industries, Inc. of which a director of the Company has a 54% ownership interest. The facilities, except Bossier City which was leased on a month-to-month basis, are leased on a long-term basis through March 2013 and are subject to annual CPI adjustments. In fiscal 1998, the Company paid rent on these facilities amounting to $135,000. NOTE 11 - ACCRUED LIABILITIES:
June 30, -------------------------- 1998 1997 ---------- --------- Accrued liabilities consist of: Salaries, wages, commissions and related payables $ 607,900 $ 640,500 Other 341,300 224,800 ---------- --------- $ 949,200 $ 865,300 ---------- --------- ---------- ---------
NOTE 12 - STOCK OPTION PLAN: In December 1994, at the Annual Meeting of Stockholders of the Company, the stockholders voted by majority decision to ratify and approve a new stock option plan as adopted by the Board of Directors in June 1994. The plan allows, at the discretion of the Board of Directors, for the granting of options to key employees, officers, directors, and consultants of the Company to purchase 1,000,000 shares of the Company's common stock. Under the terms and conditions set forth in the plan, the exercise price of the stock options will be a least 85% of the fair market value of the Company's common stock on the grant date. The plan expires June 12, 2004. F-12 STOCK OPTION ACTIVITY
Outstanding Exercisable Weighted Average Shares Shares Price Per Share ----------- ----------- ---------------- Balance outstanding at June 30, 1995 17,800 17,800 $0.8043 ----------- ----------- Exercised (5,300) $0.7852 ----------- Balance outstanding at June 30, 1996 12,500 12,500 $0.8125 ----------- ----------- Exercised (7,500) $0.8125 Canceled (5,000) $0.8125 ----------- Balance outstanding at June 30, 1997 - - ----------- ----------- ----------- -----------
In fiscal 1998, there was no activity on the plan. At June 30, 1998, 1,000,000 shares were available for future grants. In July 1998, the Company issued to an employee options to purchase 100,000 shares of common stock at fair market value. NOTE 13 - PREFERRED STOCK AND COMMON STOCK: In September 1995, the Company redeemed 250,232 shares of its preferred stock at the stated redeemed value of one dollar. Subsequent to the redemptions, in accordance with unanimous approval of the Board of Directors, the Company converted the remaining 2,749,768 shares of the outstanding Series A Preferred Stock to 1,374,884 shares of the Company's common stock. The shares were converted on the basis of one share of common stock for every two shares of preferred stock outstanding. On February 11, 1997, the Company amended its Articles of Incorporation to eliminate the authorization of the Company's Series A Preferred Stock. On December 9, 1997, at the Company's Annual Meeting of Stockholders, the Board of Directors declared a common stock dividend of $.04 per common share payable on January 28, 1998 to stockholders of record on January 8, 1998. This marks the third consecutive annual payment of dividends on the Company's common stock. In fiscal year 1998 and 1997, the Company retired 332,200 and 100,000 shares of its own common stock which it had purchased in connection with the Company's Buy Back Program at a total cost of $501,100 and $161,000, respectively. In March 1998, the Company issued 2,072,539 shares of the Company's common stock in connection with the Rotocast merger (see Note 2). Treasury stock is recorded at cost. At June 30, 1998 and 1997, the treasury stock consisted of 1,755 and 1,776 shares of common stock at a cost of $1,500, respectively. NOTE 14 - INCOME TAXES: The components of the income tax provision were:
For the years ended June 30, ------------------------------------------------------- 1998 1997 1996 ---------------- ---------------- ---------------- Current: Federal $ (6,400) $ (63,000) $ (62,000) State (19,100) (93,600) (129,400) ---------- ------------ ------------ (25,500) (156,600) (191,400) ---------- ------------ ------------ Deferred: Federal (301,500) (744,100) (642,000) State (21,500) (42,100) (101,100) ---------- ------------ ------------ (323,000) (786,200) (743,100) ---------- ------------ ------------ $ (348,500) $ (942,800) $ (934,500) ---------- ------------ ------------ ---------- ------------ ------------
F-13 At June 30, 1998, the Company has net operating loss (NOL) carryforwards of approximately $8,400,000 and $6,669,000 for federal and state income tax purposes, respectively. The NOL carryforwards, which are available to offset future taxable income of the Company and are subject to limitations should a "change in ownership" as defined in the Internal Revenue code occur, will begin to expire in 2003 and 1999 for federal and state purposes, respectively, if not utilized. The federal and state NOL carryforwards expire as follows:
Amount of unused operating loss carryforwards --------------------------------------------- Expiration during year Federal State ended June 30, ---------------- ------------ ---------------------- $ - $ 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 ----------- ----------- ----------- -----------
At June 30, 1998, the Company had a federal alternative minimum tax credit of approximately $253,000 which is available to offset future federal income taxes once the Company is no longer subject to an alternative minimum tax for federal income tax purposes. In conjunction with the adoption of FAS 109 in fiscal 1994, management determined the future taxable income of the Company will more likely than not be sufficient to realize the tax benefits of its NOL's. As such, an initial deferred tax asset of $4,013,000, net of a valuation allowance of $2,662,000 was recorded. Based on the operating results since the adoption of FAS 109 and management's continuing assessment, management believes that the Company will continue to utilize its NOL's in the normal course of business. As of fiscal 1997, management has reduced the initial $2,662,000 valuation allowance to zero. Since this time, the Company's deferred tax provision increased substantially in unison with the depletion of the federal valuation allowance in fiscal 1996. As such, the Company's will continue to report a large deferred tax provision until such time that the Company's NOL's and corresponding deferred tax assets are fully utilized. In connection with the Rotocast merger, the Company recorded a deferred tax asset of $394,400, net of a valuation allowance of $192,400 as of June 30, 1998, for the future benefit related to state NOL carryforwards. The current state valuation allowance represents the estimated amount of NOL's which will expire prior to their utilization. Again, realization of the future tax benefits of the NOL carryforwards is dependent on the Company's ability to generate taxable income within the carryforward period. Management will continue to assess the likelihood of utilizing its federal and state NOL's by taking into consideration historical results and current economic conditions in which the Company operates. Management does not consider any non-routine transactions in assessing the likelihood of realization of the recorded deferred tax asset. Any future adjustments to the valuation allowance will be reflected as a component of the current years tax provision. Management also notes that the deferred tax provision does not result in current outlays of cash flows due to the utilization of its NOL's. These cashflow savings are then available to supplement funding of the Company's expansion projects, pay common stock dividends and reduce outstanding debt. F-14 The following reconciles the federal statutory income tax rate to the effective rate of the provision for income taxes:
For the year ended June 30, -------------------------------------------- 1998 1997 1996 ---------- --------- ---------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes (net of federal benefit) 1.7 2.6 3.6 Goodwill amortization 13.6 4.3 4.3 Effect of decrease in valuation allowance - - (7.7) Other items, net (3.8) (1.4) 4.6 ---------- --------- ---------- Effective income tax rate 45.5% 39.5% 38.8% ---------- --------- ---------- ---------- --------- ----------
Deferred tax assets and liabilities are summarized as follows:
June 30, ---------------------------- 1998 1997 ---------- ---------- Deferred tax assets: Federal NOL $2,852,500 $3,164,800 State NOL (net of federal benefit) 387,600 - Tax credit carryforwards 253,100 208,100 Employment-related reserves 79,200 116,000 Allowance for doubtful accounts 57,700 35,100 Accruals not currently deductible - 136,500 ---------- ----------- 3,630,100 3,660,500 Deferred tax liabilities: Depreciation and amortization (3,057,900) (644,500) ---------- ----------- Net deferred tax assets before valuation allowance 572,200 3,016,000 Deferred tax assets valuation allowance (192,400) - ---------- ----------- Net deferred tax assets $ 379,800 $3,016,000 ---------- ----------- ---------- -----------
NOTE 15 - COMMITMENTS AND CONTINGENCIES: COMMITMENTS The Company leases various office and warehouse facilities, and equipment under long-term operating leases expiring through March 2013. Certain of the leases provide for five-year renewal options and rental increases based on the Consumer Price Index. Operating lease expense for fiscal 1998, 1997, and 1996 amounted to $896,300, $830,500 and $834,400, respectively. At June 30, 1998, the future minimum lease commitments, excluding insurance and taxes, are as follows:
Year Ending June 30, -------------------- 1999 $ 986,100 2000 949,500 2001 873,200 2002 646,800 2003 581,000 Thereafter 4,756,700 ---------- $8,793,300 ---------- ----------
CONTINGENCIES In the normal course of business, the Company encounters certain litigation matters, which in the opinion of management, will not have a significant adverse effect on the financial position or the results of operations of the Company. F-15 On April 16, 1996, the Company was named as a defendant in a complaint filed by Bonar U.S., Inc. in Delaware Superior Court. The complaint alleged claims for breach of contract and promissory estoppel relating to an Agreement in Principle entered into in connection with a proposed acquisition of the Company by Bonar U.S., Inc. On April 3, 1996, the Company announced that it had terminated the Agreement of Principle pursuant to its terms. The complaint requested damages of $7,011,484. On May 17, 1996, the Company filed a counterclaim against Bonar U.S., Inc. and Bonar Plastic, Inc. seeking damages totaling $25,237,725 for breach of the Confidentiality Agreement with the Company, misappropriation of trade secrets, intentional interference with a prospective economic advantage which the Company obtained as a result of an indication of interest from a third party and breach of a Royalty Agreement between Bonar Plastics, Inc. and one of the Company's operating divisions (formally known as Custom Rotational Molding, Inc.). In March 1997, the Company reached an amicable out of court settlement with Bonar. The settlement involved mutual general releases by the parties, dismissals of the actions brought by the parties and payments to Bonar of $400,000 in March 1997 and $350,000 in September 1997. The $350,000 is included in accounts payable in the accompanying balance sheet as of June 30, 1997. The total settlement payment of $750,000 plus additional related legal costs of $260,800 have been classified as lawsuit settlement in the accompanying statement of income. NOTE 16 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Supplemental disclosures of cash flows information are as follows:
For the years ended June 30, ----------------------------------------------- 1998 1997 1996 ----------- -------- -------- Cash paid during the year for: Interest $ 749,300 $555,900 $711,600 ----------- -------- -------- ----------- -------- -------- Income taxes $ 103,800 $188,500 $245,900 ----------- -------- -------- ----------- -------- -------- Non-cash investing activity: Acquisition of Rotocast by issuance of common stock $ 3,000,000 $ - $ - ----------- -------- -------- ----------- -------- -------- Non-cash financing activities: Acquisition of Rotocast by issuance of note payable $ 2,000,000 $ - $ - ----------- -------- -------- ----------- -------- -------- Conversion of Rotocast bank debt to new note payable $ 1,750,000 $ - $ - ----------- -------- -------- ----------- -------- -------- Common dividends declared but not paid $ 11,400 $ 11,700 $ 12,200 ----------- -------- -------- ----------- -------- --------
NOTE 17 - UNAUDITED QUARTERLY RESULTS:
Quarter Ended ----------------------------------------------------------------- September December March June -------------- ----------- ----------- ------------- Fiscal Year 1998: Net sales $8,597,000 $8,563,900 $8,099,600 $12,798,400 Gross Profit 1,803,700 1,873,900 1,700,200 3,412,700 Net income 98,300 107,600 48,400 162,900 Per share: Net income $ .01 $ .01 $ - $ .01 ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- Fiscal Year 1997: Net sales $10,229,900 $9,478,200 $9,560,300 $10,116,700 Gross Profit 2,606,300 2,476,400 2,186,600 2,823,700 Net income/(loss) 517,200 434,400 (14,200) 504,400 Per share: Net income $ .04 $ .03 $ - $ .03 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
F-16 ROTONICS MANUFACTURING INC. SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS Years Ended June 30, 1998, 1997 and 1996
Column A Column B Column C Column D Column E - ------------------------------------ -------------- ----------------------------------- --------------- ----------- Additions Balance at ----------------------------------- Balance at beginning Charged to end of Description of period Costs & Expenses Other Deductions period - ------------------------------------ ----------- ----------------- -------------- --------------- ----------- June 30, 1998: Allowance for doubtful accounts $ 90,000 $ 34,600 $ 49,800(4) $ (26,400)(1) $ 148,000 ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- ----------- Deferred tax asset valuation allowance $ - $ - $ 192,400(3) $ - 192,400 ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- ----------- June 30, 1997: Allowance for doubtful accounts $ 90,000 $ 63,900 $ - $ (63,900)(1) $ 90,000 ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- ----------- Deferred tax asset valuation allowance $ 54,500 $ - $ - $ (54,500)(2) $ - ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- ----------- June 30, 1996: Allowance for doubtful accounts $ 110,300 $ 58,800 $ - $ (79,100)(1) $ 90,000 ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- ----------- Deferred tax asset valuation allowance $ 590,300 $ - $ 54,500 (3) $ (590,300)(2) $ 54,500 ----------- ----------------- -------------- --------------- ----------- ----------- ----------------- -------------- --------------- -----------
(1) Doubtful accounts written off during the year. (2) Decrease in valuation allowance based on current years' additional utilization or expiration of net operating loss carryforwards. (3) Represents valuation allowance for potential state NOL's which will expire prior to utilization. (4) Represents Rotocast balance at date of merger. F-17 EX-10.1 2 CREDIT AGREEMENT CREDIT AGREEMENT THIS AGREEMENT is entered into as of June 15, 1998, by and between ROTONICS MANUFACTURING INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodations described below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to provide the Credits to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDITS SECTION 1.1. LINE OF CREDIT. (a) LINE OF CREDIT. Subject to the terms and conditions of this Agreement, Bank has agreed to make advances to Borrower from time to time up to and including October 1, 2000, not to exceed at any time the aggregate principal amount of Seven Million Dollars ($7,000,000.00) ("Line of Credit"), the proceeds of which shall be used for Borrower's working capital requirements. Borrower's obligation to repay advances under the Line of Credit is evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of Credit, Bank has agreed from time to time during the term thereof to issue standby letters of credit for the account of Borrower to finance a note payable to seller of Rotocast (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Two Million Dollars ($2,000,000.00). Each Letter of Credit shall be issued for a term not to exceed eighteen (18) months, as designated by Borrower; provided however, that no Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of -1- the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any draft is paid by Bank, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon from the date such amount is paid by Bank to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any demand deposit account maintained by Borrower with Bank for the amount of any such draft. Bank has issued a standby letter of credit for the amount of Two Million Dollars ($2,000,000.00), which is outstanding as of the date hereof and shall be deemed included within the definition of Letters of Credit set forth herein. (c) BORROWING AND REPAYMENT. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. TERM LOAN A. (a) TERM LOAN A. Bank has made a loan to Borrower in the original principal amount of One Million Dollars ($1,000,000.00) ("Term Loan A"), on which the outstanding principal balance as of the date hereof is $799,999.96. Borrower's obligation to repay Term Loan A is evidenced by a promissory note in the form of Exhibit B attached hereto ("Term Note A"), all terms of which are incorporated herein by this reference. Any reference in Term Note A to any prior loan agreement between Bank and Borrower shall be deemed a reference to this Agreement. Subject to the terms and conditions of this Agreement, Bank hereby confirms that Term Loan A remains in full force and effect. (b) REPAYMENT. The principal amount of Term Loan A shall be repaid in accordance with the provisions of Term Note A. (c) PREPAYMENT. Borrower may prepay principal on Term Loan A solely in accordance with the provisions of Term Note A. -2- SECTION 1.3. TERM LOAN B. (a) TERM LOAN B. Bank has made a loan to Borrower in the original principal amount of Four Million Dollars ($4,000,000.00) ("Term Loan B"), on which the outstanding principal balance as of the date hereof is $1,533,321.00. Borrower's obligation to repay Term Loan B is evidenced by a promissory note in the form of Exhibit C attached hereto ("Term Note B"), all terms of which are incorporated herein by this reference. Subject to the terms and conditions of this Agreement, Bank hereby confirms that Term Loan B remains in full force and effect. Any reference in Term Note B to any prior loan agreement between Bank and Borrower shall be deemed a reference to this Agreement. (b) REPAYMENT. The principal amount of Term Loan B shall be repaid in accordance with the provisions of Term Note B. (c) PREPAYMENT. Borrower may prepay principal on Term Loan B solely in accordance with the provisions of Term Note B. SECTION 1.5. TERM LOAN C. (a) TERM LOAN C. Bank granted a term commitment to Borrower in the original principal amount of Five Hundred Thousand Dollars ($500,000.00), which has been fully disbursed ("Term Loan C"), and on which the outstanding principal balance as of the date hereof is $389,830.46. Borrower's obligation to repay Term Loan C is evidenced by a promissory note in the form of Exhibit D attached hereto ("Term Note C"), all terms of which are incorporated herein by this reference. Any reference in Term Note C to any prior loan agreement between Bank and Borrower shall be deemed a reference to this Agreement. Subject to the terms and conditions of this Agreement, Bank hereby confirms that Term Loan C remains in full force and effect. (b) REPAYMENT. The principal amount of Term Loan C shall be repaid in accordance with the provisions of Term Note C. (c) PREPAYMENT. Borrower may prepay principal on Term Loan C at any time, in any amount and without penalty. All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid. SECTION 1.6. TERM LOAN D. (a) TERM LOAN D. Bank has made a loan to Borrower in the original principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Term Loan D"), on which the outstanding principal balance as of the date hereof is $291,650.00. Borrower's obligation to repay Term Loan D is evidenced by a promissory note in the form of Exhibit E attached hereto ("Term Note D"), all terms of which are incorporated herein by this reference. Any reference in Term Note D to any prior loan agreement between Bank -3- and Borrower shall be deemed a reference to this Agreement. Subject to the terms and conditions of this Agreement, Bank hereby confirms that Term Loan D remains in full force and effect. (b) REPAYMENT. The principal amount of Term Loan D shall be repaid in accordance with the provisions of Term Note D. (c) PREPAYMENT. Borrower may prepay principal on Term Loan D solely in accordance with the provisions of Term Note D. SECTION 1.7. TERM LOAN E. (a) TERM LOAN E. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of Three Million Dollars ($3,000,000.00) ("Term Loan E"), the proceeds of which shall be used to refinance an existing term loan originally used for equipment purchases and for additional equipment purchases. Borrower's obligation to repay Term Loan E shall be evidenced by a promissory note substantially in the form of Exhibit F attached hereto ("Term Note E"), all terms of which are incorporated herein by this reference. Bank's commitment to grant Term Loan E shall terminate on July 15, 1998. (b) REPAYMENT. The principal amount of Term Loan E shall be repaid in accordance with the provisions of Term Note E. (c) PREPAYMENT. Borrower may prepay principal on Term Loan E solely in accordance with the provisions of Term Note E. SECTION 1.8. TERM LOAN F. (a) TERM LOAN F. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make a loan to Borrower in the principal amount of Two Million Dollars ($2,000,000.00) ("Term Loan F"), the proceeds of which shall be used for financing real properties. Borrower's obligation to repay Term Loan F shall be evidenced by a promissory note substantially in the form of Exhibit G attached hereto ("Term Note F"), all terms of which are incorporated herein by this reference. Bank's commitment to grant Term Loan F shall terminate on July 15, 1998. (b) REPAYMENT. The principal amount of Term Loan F shall be repaid in accordance with the provisions of Term Note F. (c) PREPAYMENT. Borrower may prepay principal on Term Loan F solely in accordance with the provisions of Term Note F. -4- SECTION 1.9. TERM COMMITMENT (a) TERM COMMITMENT. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including November 1, 1998, not to exceed the aggregate principal amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) ("Term Commitment"), on which the outstanding principal balance as of the date hereof is $700,000.00, the proceeds of which shall be used to refinance an existing Term Commitment used for equipment purchases and for additional equipment purchases, and which shall be converted on November 1, 1998, to a term loan, as described more fully below. Borrower's obligation to repay advances under the Term Commitment shall be evidenced by a promissory note substantially in the form of Exhibit H attached hereto ("Term Commitment Note"), all terms of which are incorporated herein by this reference. (b) LIMITATION ON BORROWINGS. Notwithstanding any other provision of this Agreement, the aggregate amount of all outstanding borrowings under the Term Commitment shall not at any time exceed a maximum of eighty percent (80%) of the cost of each item of new equipment purchased with the proceeds thereof or seventy-five percent (75%) of the cost of each item of used equipment purchased with proceeds thereof, as evidenced by the seller's invoice. (c) BORROWING AND REPAYMENT. Borrower may from time to time during the period in which Bank will make advances under the Term Commitment borrow and partially or wholly repay its outstanding borrowings, provided that amounts repaid may not be reborrowed, subject to all the limitations, terms and conditions contained herein; provided however, that the total outstanding borrowings under the Term Commitment shall not exceed the maximum principal amount available thereunder, as set forth above. The principal amount of the Term Commitment shall be repaid in accordance with the provisions of the Term Commitment Note. (d) PREPAYMENT. Borrower may prepay principal on the Term Commitment solely in accordance with the provisions of the Term Commitment Note. SECTION 1.10. INTEREST/FEES. (a) INTEREST. The outstanding principal balances of Line of Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E, Term Loan F and the Term Commitment shall bear interest at the rates of interest set forth in the Line of Credit Note, Term Note A, Term Note B, Term Note C, Term Note D, Term Note E, Term Note F and the Term Commitment Note (collectively, the "Notes"). -5- (b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Notes. (c) COMMITMENT FEE. Borrower shall pay to Bank a non-refundable commitment fee for the Line of Credit equal to one hundred twenty-five hundredths percent (0.125%), which fee shall be due and payable in full on the date of this Agreement. (d) LETTER OF CREDIT FEES. Borrower shall pay to Bank fees upon the issuance of each Letter of Credit, upon the payment or negotiation by Bank of each draft under any Letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity. SECTION 1.11. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal and interest due under each Credit by charging Borrower's demand deposit account number 4624-074191 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.12. COLLATERAL. As security for all indebtedness of Borrower to Bank under the Line of Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E and the Term Commitment, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable, other rights to payment and general intangibles, inventory and equipment. As security for all indebtedness of Borrower to Bank under the Line of Credit, Term Loan A, Term Loan B, Term Loan C, Term Loan D, Term Loan E and the Term Commitment, Borrower shall cause Rotocast International, Inc., Rotocast Management Corp., Rotocast Plastic Products, Inc., Nutron Plastic Products, Inc., Wonder Products, Inc., Rotocast Plastic Products of Nevada, Inc., Rotocast Plastic Products of Tennessee, Inc. and Rotocast Plastic Products of Texas, Inc. to grant to Bank security interests of first priority in all their accounts receivable, other rights to payment and general intangibles, inventory and equipment. As security for all security for all indebtedness of Borrower to Bank under Term Loan F, Borrower hereby grants to Bank a lien of not less than first priority on real properties located at 736-738 and 740-746 Birginal Drive, Bensenville, Illinois 60106 and Highway I-35 at FM 1306, Gainesville, Texas 76240. -6- All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those -7- disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31,1998, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money -8- obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by Borrower to Bank in writing prior to the date hereof, with respect to any real property collateral required hereby: (a) All taxes, governmental assessments, insurance premiums, and water, sewer and municipal charges, and rents (if any) which previously became due and owing in respect thereof have been paid as of the date hereof. (b) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to any such lien) which affect all or any interest in any such real property and which are or may be prior to or equal to the lien thereon in favor of Bank. (c) None of the improvements which were included for purpose of determining the appraised value of any such real property lies outside of the boundaries and/or building restriction lines thereof, and no improvements on adjoining properties materially encroach upon any such real property. (d) There is no pending, or to the best of Borrower's knowledge threatened, proceeding for the total or partial condemnation of all or any portion of any such real property, and all such real property is in good repair and free and clear of any damage that would materially and adversely affect the value thereof as security and/or the intended use thereof. -9- ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to grant any of the Credits is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the granting of each of the Credits shall be satisfactory to Bank's counsel. (b) DOCUMENTATION. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Notes. (ii) Corporate Borrowing Resolution. (iii) Corporate Resolution: Third Party Collateral. (iv) Certificate of Incumbency. (v) Security Agreement: Equipment. (vi) Continuing Security Agreement: Rights to Payment and Inventory. (vii) Third Party Security Agreement: Equipment. (viii) Third Party Security Agreement: Rights to Payment and Inventory. (ix) UCC-1 Financing Statements. (x) Mortgage and Assignment of Rents and Leases. (xi) Amended and Restated Mortgage, and Assignment of Rents and Leases. (xii) Deed of Trust and Assignment of Rents and Leases. (xiii) Such other documents as Bank may require under any other Section of this Agreement. (c) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower. (d) INSURANCE. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank, including without limitation, policies of fire and extended coverage insurance covering all real property collateral required hereby, with replacement cost and mortgagee loss payable endorsements, and such policies of insurance against specific hazards affecting any such real property as may be required by governmental regulation or Bank. -10- (e) APPRAISALS. Bank shall have obtained, at Borrower's cost, an appraisal of all real property collateral required hereby, and all improvements thereon, issued by an appraiser acceptable to Bank and in form, substance and reflecting values satisfactory to Bank, in its discretion. (f) TITLE INSURANCE. Bank shall have received an ALTA Policy of Title Insurance, with such endorsements as Bank may require, issued by a company and in form and substance satisfactory to Bank, in such amount as Bank shall require, insuring Bank's lien on the real property collateral required hereby to be of the priority set forth in Section 1.12 hereof, subject only to such exceptions as Bank shall approve in its discretion, with all costs thereof to be paid by Borrower. (g) TAX SERVICE CONTRACT. Borrower shall have procured and delivered to Bank, at Borrower's cost, such tax service contract as Bank shall require for any real property collateral required hereby, to remain in effect as long as such real property secures any obligations of Borrower to Bank as required hereby. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. -11- ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any of the Credits at any time exceeds any limitation on borrowings applicable thereto. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, a consolidated audited financial statement of Borrower, prepared by certified public accountant acceptable to Bank, to include all schedules, notes and narratives reasonably included in Borrower's 10K; (b) not later than 45 days after and as of the end of each fiscal quarter, a consolidated financial statement of Borrower, prepared by Borrower, to include all schedules, notes and narratives reasonably included in Borrower's 10Q; and (c) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. -12- SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $100,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Current Ratio not at any time less than 1.25 to 1.00, measured as of each fiscal quarter end, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Tangible Net Worth not at any time less than $14,000,000.00, measured as of each fiscal quarter end, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Total Liabilities divided by Tangible Net Worth not at any time greater than 1.25 to 1.00, measured as of each fiscal quarter end, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. -13- (d) EBITDA Coverage Ratio not less than 1.5 to 1.0 as of each fiscal quarter end measured on a rolling four-quarter basis; not less than 1.75 to 1.0, beginning at third fiscal quarter end of 1999; and not less than 2.0 to 1.0, beginning at first fiscal quarter end of 2000; and thereafter, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property in excess of an aggregate of $50,000.00. SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms hereof as Bank may from time to time require. -14- ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $2,000,000.00. SECTION 5.3. LEASE EXPENDITURES. Incur operating lease expense in any fiscal year in excess of an aggregate of $200.000.00. SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof. -15- SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower has incurred any debt or other liability to any person or entity, including Bank. (e) The filing of a notice of judgment lien against Borrower; or the recording of any abstract of judgment against Borrower in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower; or the entry of a judgment against Borrower. (f) Borrower shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or -16- shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, or Borrower shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents. (h) The death or incapacity of Borrower. The dissolution or liquidation of Borrower; or Borrower, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower. (i) Any change in ownership during the term of this Agreement of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower. (j) The sale, transfer, hypothecation, assignment or encumbrance, whether voluntary, involuntary or by operation of law, without Bank's prior written consent, of all or any part of or interest in any real property collateral required hereby. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant -17- to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: ROTONICS MANUFACTURING INC. 17022 South Figueroa Street Gardena, CA 90248 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION South Bay Regional Commercial Banking Office 111 W. Ocean Blvd., Suite 300 Long Beach, CA 90802 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and -18- thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any of the Credits, Borrower or its business, or any collateral required hereunder. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. -19- SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) ARBITRATION. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) GOVERNING RULES. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. -20- (c) NO WAIVER; PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) ARBITRATOR QUALIFICATIONS AND POWERS; AWARDS. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) JUDICIAL REVIEW. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the -21- arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. -22- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, ROTONICS MANUFACTURING INC. NATIONAL ASSOCIATION By: /s/ SHERMAN MCKINNISS By: /s/ MICHAEL KURINIJ --------------------- ----------------------- Sherman McKinniss Michael Kurinij President/Chief Assistant Vice President Executive Officer By: /s/ DOUGLAS W. RUSSELL ---------------------- Douglas W. Russell Chief Financial Officer/ Assistant Secretary/ Treasurer -23- EX-23.A 3 EXHIBIT 23A EXHIBIT 23a CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report, dated August 27, 1998 on page F-1 of this Form 10-K which is incorporated by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 33-62721 and 33-70526) and in the Registration Statement on Form S-8 (No. 33-88410). ARTHUR ANDERSEN LLP Orange County, California September 25, 1998 -----END PRIVACY-ENHANCED MESSAGE-----