SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
- --- Exchange Act of 1934 for the quarterly period ended November 30, 2001, or
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Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from ________ to _________.
Commission File No. 1-14187
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RPM, INC.
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(Exact name of Registrant as specified in its charter)
OHIO 34-6550857
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (330) 273-5090
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements for the past 90 days.
Yes X No .
--- ---
As of January 10, 2002
102,442,951 RPM Inc. Common Shares were outstanding.
RPM, INC. AND SUBSIDIARIES
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INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
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Consolidated Balance Sheets
November 30, 2001 and May 31, 2001 3
Consolidated Statements of Income
Three Months and Six Months
Ended November 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
Six Months Ended
November 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Part II. Other Information 12
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3
PART I. -- FINANCIAL INFORMATION
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ITEM 1. -- FINANCIAL STATEMENTS
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RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
(In thousands, except per share amounts)
ASSETS
------
November 30, 2001 May 31, 2001
----------------- ------------
Current Assets
Cash and short-term investments $ 45,600 $ 23,926
Trade accounts receivable (less allowance for doubtful
accounts $16,140 and $17,705, respectively) 353,287 411,718
Inventories 265,530 277,494
Prepaid expenses and other current assets 107,959 106,282
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Total current assets 772,376 819,420
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Property, Plant and Equipment, At Cost 634,978 623,054
Less: accumulated depreciation and amortization (282,026) (261,018)
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Property, plant and equipment, net 352,952 362,036
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Other Assets
Goodwill, net of amortization 601,877 571,276
Intangible assets, net of amortization 265,900 300,372
Other 25,122 25,386
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Total other assets 892,899 897,034
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Total Assets $ 2,018,227 $ 2,078,490
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Notes and accounts payable $ 124,796 $ 152,307
Current portion of long term debt 111,324 7,379
Accrued compensation and benefits 63,888 74,888
Accrued loss reserves 52,826 55,416
Other accrued liabilities 60,251 75,022
Income taxes payable 9,959 10,756
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Total current liabilities 423,044 375,768
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Long-term Liabilities
Long-term debt, less current maturities 817,182 955,399
Other long-term liabilities 48,327 53,479
Deferred income taxes 52,575 54,134
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Total long-term liabilities 918,084 1,063,012
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Shareholders' Equity
Common shares, stated value $.015 per share;
authorized 200,000 shares;
outstanding 102,387 shares and
102,211 shares, respectively 1,619 1,619
Paid-in capital 429,485 430,015
Treasury shares, at cost (97,210) (99,308)
Accumulated other comprehensive loss (52,876) (53,074)
Retained earnings 396,081 360,458
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Total shareholders' equity 677,099 639,710
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Total Liabilities And Shareholders' Equity $ 2,018,227 $ 2,078,490
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
November 30, November 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Sales $1,021,155 $1,054,827 $ 487,880 $ 499,904
Cost of Sales 548,513 570,351 265,912 271,744
---------- ---------- ---------- ----------
Gross Profit 472,642 484,476 221,968 228,160
Selling, General and Administrative Expenses 355,695 377,034 174,076 183,827
Interest Expense, Net 24,423 33,703 11,359 17,127
---------- ---------- ---------- ----------
Income Before Income Taxes 92,524 73,739 36,533 27,206
Provision for Income Taxes 31,465 28,021 12,043 10,338
---------- ---------- ---------- ----------
Net Income $ 61,059 $ 45,718 $ 24,490 $ 16,868
========== ========== ========== ==========
Basic and diluted earnings per common share $ 0.60 $ 0.45 $ 0.24 $ 0.17
========== ========== ========== ==========
Dividends per common share $ 0.2500 $ 0.2475 $ 0.1250 $ 0.1250
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands)
Six Months Ended November 30,
----------------------------
2001 2000
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Cash Flows From Operating Activities:
Net Income $ 61,059 $ 45,718
Depreciation and amortization 28,818 38,681
Items not affecting cash and other (7,773) (15,747)
Changes in operating working capital 12,048 (23,202)
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94,152 45,450
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Cash Flows From Investing Activities:
Additions to property and equipment (13,117) (29,084)
Acquisition of new businesses, net of cash - (1,641)
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(13,117) (30,725)
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Cash Flows From Financing Activities:
Proceeds from stock option exercises 345 598
Repurchase of common shares - (11,101)
Increase (decrease) in debt (34,271) 20,349
Dividends (25,435) (25,174)
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(59,361) (15,328)
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Net Increase (Decrease) in Cash 21,674 (603)
Cash at Beginning of Period 23,926 31,340
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Cash at End of Period $ 45,600 $ 30,737
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
(UNAUDITED)
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NOTE A - BASIS OF PRESENTATION
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The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal, recurring accruals) considered necessary for a fair
presentation have been included for the six and three month periods ended
November 30, 2001 and 2000. For further information, refer to the consolidated
financial statements and notes included in the Company's Annual Report on Form
10-K for the year ended May 31, 2001.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation. In an effort to achieve improved reporting
consistency across divisions, and in conjunction with the migration to a new
reporting and consolidation system, the Company has adopted a new chart of
accounts. Accordingly, the Company has elected to reclassify certain internal
distribution costs from cost of sales to selling, general and administrative
expenses. Additionally, a portion of those costs are offset by the movement of
certain employee benefits costs respective to manufacturing personnel out of
selling, general and administrative expenses and into cost of sales. For the
three and six month periods ended November 30, 2000, the net effect of the
reclassification of these expenses resulted in the movement of approximately $9
million and $16 million, respectively, from cost of sales to selling, general
and administrative expenses.
NOTE B - BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
- --------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards, ("SFAS") No. 141, "Business Combinations",
which eliminates the pooling method of accounting for all business combinations
initiated after June 30, 2001, and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. The Company has adopted this accounting standard for business
combinations initiated after June 30, 2001.
The Company also adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
effective June 1, 2001. Under SFAS No. 142, goodwill is no longer amortized, but
is reviewed for impairment annually, or more frequently if certain indicators
arise. The Company has completed the transitional impairment test required upon
adoption of SFAS No. 142. The transitional test, which involved the use of
estimates related to the fair market values of the business operations with
which goodwill is associated, did not result in any impairment loss.
Prospectively, any losses resulting from the required annual impairment tests
will be reflected in operating income in the income statement.
7
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
(UNAUDITED)
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Had the Company been accounting for its goodwill and other intangible assets
under SFAS No. 142 for all periods presented, the Company's net income (in
thousands) and earnings per share would have been as follows:
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FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
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2001 2000 2001 2000
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NET INCOME:
Reported Net Income $ 61,059 $45,718 $ 24,490 $16,868
Add back goodwill amortization, net of tax - 9,589 - 4,757
Add back workforce amortization, net of tax - 802 - 402
Add back tradename amortization, net of tax - 244 - 121
---------- ------- ---------- -------
Adjusted net income $ 61,059 $56,353 $ 24,490 $22,148
========== ======= ========== =======
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net income $ 0.60 $ 0.45 $ 0.24 $ 0.17
Goodwill amortization, net of tax - 0.09 - 0.04
Workforce amortization, net of tax - 0.01 - 0.01
Tradename amortization, net of tax - - - -
---------- ------- ---------- -------
Adjusted net income $ 0.60 $ 0.55 $ 0.24 $ 0.22
========== ======= ========== =======
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8
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2001
(UNAUDITED)
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NOTE C - INVENTORIES
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Inventories were composed of the following major classes:
NOVEMBER 30, 2001 MAY 31, 2001
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(IN THOUSANDS)
Raw Materials and supplies $94,043 $89,071
Finished Goods 171,487 188,423
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$265,530 $277,494
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NOTE D - COMPREHENSIVE INCOME
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Other comprehensive income includes foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains or losses on
securities. Total comprehensive income, comprised of net income and other
comprehensive income, amounted to $18,540,000 and $6,164,000 during the second
quarter of fiscal years 2002 and 2001, respectively, and $61,257,000 and
$34,468,000 for the six months ended November 30, 2001 and 2000, respectively.
9
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2001
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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REPORTABLE SEGMENT INFORMATION
- ------------------------------
The Company has determined that it has two operating segments -- Industrial and
Consumer -- based on the nature of business activities, products and services;
the structure of management; and the structure of information as presented to
the Board of Directors. Within each segment, individual operating companies or
groups of companies generally address common markets, utilize similar
technologies, and can share manufacturing or distribution capabilities. The
Company evaluates the profit performance of the two segments based on earnings
before interest and taxes since interest expense is essentially related to
corporate acquisitions, as opposed to segment operations. Comparative six month
and second quarter results on this basis are as follows:
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SIX MONTHS ENDED NOVEMBER 30, QUARTER ENDED NOVEMBER 30,
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(In thousands) 2001 2000 2001 2000
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Net External Sales
Industrial Segment $ 559,882 $ 588,811 $ 270,714 $ 281,211
Consumer Segment 461,273 466,016 217,166 218,693
----------- ----------- ----------- -----------
TOTALS: $ 1,021,155 $ 1,054,827 $ 487,880 $ 499,904
=========== =========== =========== ===========
Earnings Before Interest and Taxes (EBIT)
Industrial Segment $ 69,937 $ 79,382 $ 27,759 $ 33,216
Consumer Segment 58,519 39,561 24,539 15,769
Corporate/Other (11,509) (11,501) (4,406) (4,652)
----------- ----------- ----------- -----------
TOTALS: $ 116,947 $ 107,442 $ 47,892 $ 44,333
=========== =========== =========== ===========
Identifiable Assets NOVEMBER 30, 2001 MAY 31, 2001
----------------- --------------
Industrial Segment $ 971,268 $ 1,002,209
Consumer Segment 973,837 1,016,067
Corporate/Other 73,122 60,214
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TOTALS: $ 2,018,227 $ 2,078,490
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10
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2001
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RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED NOVEMBER 30, 2001
- ------------------------------------
Fiscal 2002 second quarter sales of $487.9 million were $12 million, or 2.4
percent, lower than second quarter sales a year ago. The March 2001 divestiture
of DAP's $30 million commercial Durabond unit accounted for approximately 60
percent of the sales difference, or 1.5 percent. Also, as expected, sales
generally were affected by the continued soft economy and the atmosphere of
general economic uncertainty, resulting in ongoing operation's sales being off
by the remaining 0.9 percent change. Industrial sales were off 3.7 percent as a
number of flooring, roofing and other maintenance projects were postponed or
canceled, primarily within the private sector. Consumer sales, on the other
hand, were ahead nearly 3.0 percent in contrast to last year when the larger
retailers, in particular, were downward managing their inventories. Foreign
exchange differences had minimal impact on sales quarter over quarter.
The gross profit margin held steady at 45.5 percent of sales, compared with last
year's 45.6 percent. While the decline in flooring and roofing sales in the
industrial segment had a negative impact on gross margin, there were a number of
offsetting internal margin improvements, from reduced conversion costs resulting
from the fiscal 2000 and 2001 restructuring program, and from certain reduced
raw material costs. By segment, industrial margins declined to 46.4 percent from
47.8 percent, while consumer margins improved to 44.4 percent from 42.9 percent,
with a portion of the consumer margin improvement coming from the divestiture of
lower margin Durabond.
Selling, general and administrative (SG&A) expenses overall declined 5.3 percent
to 35.7 percent of sales from 36.8 percent in the second quarter of last year.
The Company adopted Statement of Financial Accounting Standards No. 142 ("FAS
142") Goodwill and Other Intangible Assets as of June 1, 2001, the beginning of
this fiscal year, and its impact is reflected in SG&A. On a pro forma basis,
last year's SG&A percentage under FAS 142 would also have been 35.7 percent of
sales. The divested Durabond unit of DAP within the consumer segment had also
carried a lower SG&A percentage and had an approximate negative effect of 0.4
percent of sales year over year. Adjusted for both FAS 142 and the divestiture,
last year's SG&A percentage would have been approximately 36.1 percent of sales.
The comparable improvement to 35.7 percent of sales this year on lower sales
again results in part from the restructuring program, with fewer personnel year
over year, as well as discretionary spending and other cost controls in response
to the slower sales. By segment and with last year presented proforma reflecting
the adoption of FAS 142 for comparison, the industrial segment SG&A percentage
this second quarter was 36.1 percent, compared with 35.0 percent last year,
while the consumer segment improved to 33.1 percent of sales from 34.4 percent a
year ago. The decline in industrial sales volume, particularly flooring and
roofing at higher than average margins, was the main factor driving that
segment's higher SG&A percentage this year, along with higher distribution
costs. Corporate/other costs also fall within the SG&A category and were lower
than a year ago.
Net interest expense was $5.8 million lower than a year ago as a result of lower
interest rates on the variable debt portion (approximately 80 percent) of the
Company's total debt, and reduced debt levels during the past year.
The reduction of the income tax rate this second quarter to 33 percent compared
to last year's 38 percent results almost entirely from the adoption of FAS 142.
Additionally, a slight adjustment was recorded to bring the tax rate
year-to-date to the expected full year fiscal 2002 rate of approximately 34
percent.
The net income increase of $7.6 million, or 45 percent, to $24.4 million,
reflects the lower interest costs, the adoption of FAS 142, offset slightly by
the approximate 4 percent lower EBIT performance from operations caused by the
lower sales in the Company's industrial segment. Diluted earnings per share
improved $.07, or 41 percent, to $.24 from last year's $.17. On a pro forma
basis, last year's diluted earnings per share would have been $.05 higher under
FAS 142.
SIX MONTHS ENDED NOVEMBER 30, 2001
- ----------------------------------
Fiscal 2002 first half sales of $1,021.2 million were $33.7 million, or 3.2
percent lower than first half sales a year ago. The March 2001 divestiture
accounted for nearly half this difference, or 1.6 percent. The US dollar has
been comparatively stronger year over year, primarily against the Canadian
dollar, for a foreign exchange translation effect of a negative 0.4 percent. The
soft economy and atmosphere of general economic uncertainty impacted ongoing
operation's sales and accounted for the remaining sales difference of
approximately 1.2 percent. By segment, industrial sales were off 4.9 percent and
consumer sales excluding the impact of the Durabond divestiture were ahead
nearly 3 percent, for the same reasons given above for the second quarter
results.
The gross profit margin has improved to 46.3 percent from last year's 45.9
percent. Internal margin improvements, including reduced conversion costs
resulting from the restructuring program, and effective cost controls in light
of the slower sales, have been able to overcome the decline in higher margin
sales of flooring and roofing year over year. The divestiture had also carried
lower than average gross margins. By segment, the industrial margin of 47.4
percent fell behind last year's 47.9 percent, while the consumer margin improved
to 44.9 percent from 43.4 percent during the first half of fiscal 2001.
SG&A expenses declined 5.7 percent to 34.8 percent of sales from 35.7 percent in
the first half of last year. On a pro forma basis, last year's SG&A percentage
under FAS 142 accounting would have been 34.7 percent of sales. The divestiture
within the consumer segment had carried a lower SG&A percentage, having a
negative effect of approximately 0.4 percent of sales year over year. Adjusting
for both FAS 142 and the divestiture, last year's SG&A percentage would have
been approximately 35.1 percent of sales. The improvement to 34.8 percent of
sales this year on lower sales results from cost benefits of the restructuring
program, as well as discretionary spending and other cost controls in response
to the slower sales. By segment and with last year presented proforma reflecting
the adoption of FAS 142 for comparison, the industrial SG&A percentage this
first half was 34.9 percent, compared with 33.5 percent last year, while
consumer SG&A improved to 32.2 percent of sales from 33.7 percent a year ago.
The decline in industrial sales volume has been the main factor driving that
segment's higher SG&A percentage this year. Corporate/other expenditures were
essentially unchanged year over year.
Net interest expense was $9.3 million lower than a year ago as a result of lower
interest rates and reduced debt levels during the past year. The overall
effective interest rate this first half of 5.1 percent compares with 7.0 percent
last year.
The change in the income tax rate to 34 percent compared to last year's 38
percent rate is driven by the adoption of FAS 142.
Net income through six months has increased $15.3 million, or 34 percent, to
$61.1 million and reflects the lower interest costs, the adoption of FAS 142,
and slightly lower EBIT performance from operations, driven by the lower sales.
Diluted earnings per share have improved $.15, or 33 percent, to $.60 from last
year's $.45. On a pro forma basis, last year's diluted earnings per share would
have been $.10 higher under FAS 142.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH PROVIDED FROM OPERATIONS
- -----------------------------
The Company generated $94.2 million of cash from operations during the past six
months compared with $45.5 million a year ago, a 107% increase. The positive
change in working capital year-over-year was $35.3 million. This improvement was
driven by the aforementioned increase in earnings, with the majority of the
balance of the increase reflecting the effectiveness of a strong focus on
working capital management and control.
The Company's cash flows from operations will continue as its primary source of
financing internal growth.
INVESTING ACTIVITIES
- --------------------
The Company is not capital intensive, and capital expenditures generally do not
exceed depreciation and amortization in a given year. Capital expenditures are
made primarily to accommodate the Company's continued growth through improved
production and distribution efficiencies and capacity, and to enhance
administration. In this year's first six month period, enhanced management
review and control over the capital investment process allowed for the majority
of the realized $16 million reduction in cash outlays when compared to the same
period a year ago. The focus is continuing prospectively.
FINANCING ACTIVITIES
- --------------------
During this year's first half, the Company refinanced its $200 million revolving
credit facility with a $200 million 364-day term loan due July 12, 2002. In
addition, on November 27, 2001, the Company issued and sold $30 million
aggregate principal amount of 7.3% Senior Unsecured Notes due 2008, $10 million
aggregate principal amount of 6.61% Senior Unsecured Notes due 2006, and $15
million aggregate principal amount of 6.12% Senior Unsecured Notes due 2004. The
proceeds of this offering were used to reduce the outstanding balances under the
Company's $500 million revolving credit agreement. Since the beginning of this
fiscal year, the Company's short-term debt increased to $111.3 million,
reflecting the current portion of the term loan described above. The Company
will continue to reduce this debt through internally generated cash flow and
intends to refinance the remaining portion. The Company's debt-to-capital ratio
was 57.8% at November 30, 2001 compared to 60.1% at May 31, 2001.
The effect in this second quarter of the strengthening dollar on the Company's
foreign net assets has tended to decrease shareholders' equity, and this trend
could continue if the dollar continues to strengthen. The Canadian dollar was
the principal currency weakening against the dollar.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2001
- --------------------------------------------------------------------------------
OTHER MATTERS
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ENVIRONMENTAL MATTERS
- ---------------------
Environmental obligations continue to be appropriately addressed and, based upon
the latest available information, it is not anticipated that the outcome of such
matters will materially affect the Company's results of operations or financial
condition (refer to Note H to the Consolidated Financial Statements contained in
our Annual Report on Form 10-K for the year ended May 31, 2001).
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion includes forward-looking statements relating to the
business of the Company. These forward-looking statements, or other statements
made by the Company, are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors (including those specified below) which are difficult to predict
and, in many instances, are beyond the control of the Company. As a result,
actual results of the Company could differ materially from those expressed in or
implied by any such forward-looking statements. These uncertainties and factors
include (a) general economic conditions; (b) the price and supply of raw
materials, particularly titanium dioxide, certain resins, aerosols and solvents;
(c) continued growth in demand for the Company's products; (d) environmental
liability risks inherent in the chemical coatings business; (e) the effect of
changes in interest rates; (f) the effect of fluctuations in currency exchange
rates upon the Company's foreign operations; (g) the potential impact of the
euro currency conversion; (h) the effect of non-currency risks of investing in
and conducting operations in foreign countries, including those relating to
domestic and international political, social, economic and regulatory factors;
(i) risks and uncertainties associated with the Company's ongoing acquisition
and divestiture activities; and (j) liability risks and insurance coverage
inherent in the Company's disclosed litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates since it funds its operations through long- and short-term
borrowings and denominates its business transactions in a variety of foreign
currencies. There were no material changes in the Company's exposure to market
risk from May 31, 2001.
12
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- -------------------------
EIFS LITIGATION
- ---------------
As previously reported, Dryvit Systems, Inc., a wholly-owned subsidiary of the
Company ("Dryvit"), is a defendant or co-defendant in numerous lawsuits seeking
damages for structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. As of November 30,
2001, Dryvit was a defendant or co-defendant in approximately 750 single family
residential EIFS cases, the vast majority of which are pending in North
Carolina, South Carolina and Alabama. Dryvit is also defending EIFS lawsuits
involving office buildings or other commercial structures. The vast majority of
Dryvit's EIFS lawsuits and most of the allegations involve claims of water
intrusion into structures and related property damages.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. ("Ruff"). As of December 11, 2001, a total
of 553 claims had been submitted to the claims administrator for verification
and validation. Of these 553 claims, 257 were actually paid through November 30,
2001 in the amount of $4,157,385. The remaining claims are at various stages of
investigation, review and validation by the claims administrator. Dryvit
continues to believe that it has adequate insurance commitments in place to
cover its obligations under the Ruff settlement.
As previously reported, Dryvit is a defendant in an attempted class action filed
in the U.S. District Court for the Eastern District of North Carolina
(5:99-CV-4700-BR(3)), styled Lienhart, et al. v. Dryvit Systems, Inc. et al.,
involving an EIFS-type product known as Fastrak System 4000 ("Leinhart"). On
June 26, 2001, the 4th Circuit U.S. Court of Appeals vacated the District
Court's December 18, 2000 class certification order ruling that certification
was not appropriate because it is likely that individual issues necessary to
adjudicate Dryvit's liability will predominate over class issues. The Court of
Appeals has remanded the Lienhart case to the District Court for further
proceedings in accordance with its order.
As previously reported, Dryvit is a defendant in an attempted state class action
filed in Jefferson County, Tennessee styled William J. Humphrey, et al. v.
Dryvit Systems, Inc. (Case No. 17,715-IV) ("Humphrey"). The Humphrey case is an
attempted state-wide class action which seeks various types of damages on behalf
of all similarly situated persons who paid for the purchase of a Dryvit
EIFS-clad structure in the State of Tennessee during the period beginning
November 14, 1990 to the date of the complaint.
As previously reported, Dryvit is a defendant in an attempted state class action
filed in Madison County, Illinois styled Osborne, et al. v. Dryvit Systems, Inc.
(Case No. 00L000395) ("Osborne"). The Osborne case is an attempted state-wide
class action which seeks various types of damages on behalf of a class of all
persons who owned a Dryvit EIFS-clad home located in the State of Illinois
during the period January 1, 1990 to the date of the complaint.
13
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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As previously reported, Dryvit is a defendant in an attempted state class action
filed in Mobile County, Alabama styled Tony Bryan, et al. v. Dryvit Systems,
Inc. (Case No. CV-01-00761 JSJ) ("Bryan"). The Bryan case is an attempted
state-wide class action which seeks various types of damages on behalf of all
"Persons who own a single residence in the State of Alabama on which an Exterior
Insulation and Finish system ("EIF system") has been installed or any previous
owner of such residence who incurred any costs or expenses to inspect, repair or
replace the EIF system at any time from November 14, 1990 until the date the
Defendants' continuing conduct is terminated." Pursuant to an order dated
December 5, 2001, the court will hear oral arguments on the Plaintiff's motion
for class certification as soon as practicable after October 21, 2002.
Dryvit, the Company's captive insurer, First Colonial Insurance Company, and two
third party insurers are parties to a cost-sharing arrangement which is
currently funding Dryvit's indemnity and defense costs. Dryvit believes that the
damages alleged in these EIFS cases are substantially covered by insurance and
that such insurance is presently adequate. Based on Dryvit's current insurance
arrangements, the Company continues to believe that the EIFS litigation will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
ASBESTOS LITIGATION
- -------------------
As previously reported, the Company, certain of its wholly-owned subsidiaries,
including Bondex International, Inc. ("Bondex") and Republic Powdered Metals,
Inc. ("Republic"), are defendants or co-defendants ("Defendants") in
asbestos-related bodily injury lawsuits filed on behalf of various individuals
in various jurisdictions. These cases generally seek damages for
asbestos-related diseases based on alleged exposures to asbestos-containing
products previously manufactured by the Defendants. In many cases, the
plaintiffs are unable to demonstrate that any injuries they have incurred, in
fact, resulted from exposure to one of Defendants' products. Defendants are
generally dismissed from those cases. With respect to those cases where
compensable disease, exposure and causation are established, Defendants
generally settle for various amounts based on the seriousness of the case, the
particular jurisdiction and the number and solvency of co-defendants in a given
case.
As of November 30, 2001, Defendants had a total of 1,656 active asbestos cases
compared to 834 as of November 30, 2000. For the quarter ended November 30,
2001, Defendants secured dismissals and/or settlements of 195 cases, the total
cost of which collectively to Defendants, net of insurer payments and excluding
defense costs, amounted to $348,000, which compared to dismissals and/or
settlements of 119 cases and $77,080 for the same quarter ended November 30,
2000. Substantially all of the foregoing settlement costs were attributable to
and paid by Bondex. This increase in the number of cases filed is due, in part,
to the bankruptcy filings of various other asbestos litigation defendants.
Defendants continue to vigorously defend all asbestos-related lawsuits. Under a
cost-sharing agreement among Defendants and their insurers, the insurers are
responsible for payment of substantially all of the indemnity and defense costs
with the Defendants each responsible for the balance. The Company continues to
believe that resolution of its current asbestos cases will not
14
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
have a material adverse effect on the Company's consolidated financial position
or results of operations.
In addition to the foregoing legal proceedings, various of the Company's
subsidiaries are, from time to time, parties to legal proceedings associated
with their businesses and operations. It is not possible to predict the outcome
of these proceedings, but management believes that these other proceedings will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ENVIRONMENTAL PROCEEDINGS
- -------------------------
As previously reported, various of the Company's subsidiaries are, from time to
time, identified as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act and similar state
environmental statutes. In some cases, the Company's subsidiaries are
participating in the cost of certain clean-up efforts or other remedial actions.
However, the Company's share of such costs has not been material and the Company
believes that these environmental proceedings will not have a material adverse
effect upon the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on October 12, 2001.
The following matter was voted on at the meeting.
1. Election of Edward B. Brandon, William A. Papenbrock, Thomas C.
Sullivan and Frank C. Sullivan as Directors of the Company. The
nominees were elected as Directors with the following votes:
Edward B. Brandon
-----------------
For 87,527,134
Withheld 3,065,481
Broker non-votes -0-
William A. Papenbrock
---------------------
For 87,580,995
Withheld 3,011,620
Broker non-votes -0-
Thomas C. Sullivan
------------------
For 80,022,755
Withheld 10,569,860
Broker non-votes -0-
15
Frank C. Sullivan
-----------------
For 79,770,371
Withheld 10,822,244
Broker non-votes -0-
In addition to the directors above, the following directors' terms of office
continued after the Annual Meeting of Shareholders: Dr. Max D. Amstutz; Lorrie
Gustin; E. Bradley Jones; James A. Karman; Donald K. Miller; Albert B. Ratner;
Dr. Jerry Sue Thornton and Joseph P. Viviano.
For information on how the votes for the above matter have been tabulated, see
the Company's definitive Proxy Statement used in connection with the Annual
Meeting of Shareholders on October 12, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
--------
Official Exhibit Number Description
----------------------- -----------
4.1 Note Purchase Agreement dated as of
November 15, 2001, between the
Company and the Purchasers thereto
with respect to the sale of $15
million principal amount of 6.12%
Senior Notes, Series A, due November
15, 2004, $10 million principal
amount of 6.61% Senior Notes, Series
B, due November 15, 2006, and $30
million principal amount of 7.3%
Senior Notes, Series C, due
November, 2008.
11.1 Statement regarding computation of
per share earnings.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the three
months ended November 30, 2001.
16
SIGNATURES
----------
Pursuant to the requirements 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.
RPM, Inc.
By /s/ Thomas C. Sullivan
--------------------------------
Thomas C. Sullivan
Chairman & Chief Executive Officer
By /s/ Robert L. Matejka
--------------------------------
Robert L. Matejka
Vice President - Chief Financial Officer and
Controller
Dated: January 14, 2002