SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended May 28, 1999 Commission File Number 1-5197
Plymouth Rubber Company, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1733970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 Revere Street, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
(781) 828-0220
Registrant's telephone number, including area code
Not Applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by checkmark 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 receding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class A common stock, par value $1 - 810,586
Class B common stock, par value $1 - 1,260,414
PLYMOUTH RUBBER COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements: Page No.
Condensed Consolidated Statement of Operations
and Retained Earnings (Deficit). . . . . . . . . 2
Condensed Consolidated Balance Sheet . . . . . . 3
Condensed Consolidated Statement of Cash Flows . 4
Notes To Condensed Consolidated Financial Statements 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 11-16
PART II. OTHER INFORMATION 17
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PLYMOUTH RUBBER COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
(In Thousands Except Share and Per Share Amounts)
(Unaudited)
Second Quarter Ended Six Months Ended
--------------------------------------------
May 28, May 29, May 28, May 29,
1999 1998 1999 1998
--------- --------- --------- ---------
Net Sales. . . . . . . . . . . $ 21,505 $ 18,510 $ 37,911 $ 32,974
--------- --------- --------- ---------
Cost and Expenses:
Cost of products sold . . . 15,506 12,903 27,557 24,611
Selling, general and
administrative. . . . . . 4,081 3,349 7,365 6,375
Insurance settlement. . . . (1,750) -- (1,750) --
--------- --------- --------- ---------
17,837 16,252 33,172 30,986
--------- --------- --------- ---------
Operating income . . . . . . . 3,668 2,258 4,739 1,988
Interest expense . . . . . . . (542) (453) (1,027) (851)
Other expense . . . . . . . . (46) (9) (33) (34)
--------- --------- --------- ---------
Income before taxes . . . . . 3,080 1,796 3,679 1,103
Provision for income taxes . . (1,237) (716) (1,477) (446)
--------- --------- --------- ---------
Net income . . . . . . . . . . 1,843 1,080 2,202 657
Retained earnings (deficit)
at beginning of period. . (85) (2,705) (444) (2,282)
--------- --------- --------- ---------
Retained earnings (deficit)
at end of period . . . . . $ 1,758 $ (1,625) $ 1,758 $ (1,625)
========= ========= ========= =========
Per Share Data:
Basic Earnings Per Share:
Net Income . . . . . . . . . . $ .89 $ .52 $ 1.06 $ .32
========= ========= ========= =========
Weighted average number of
shares outstanding. . . . . 2,072,033 2,074,050 2,076,700 2,064,404
========= ========= ========= =========
Diluted Earnings Per Share:
Net Income.. . . . . . . . . . $ .84 $ .49 $ 1.00 $ .30
========= ========= ========= =========
Weighted average number of
shares outstanding . . . . . 2,200,855 2,205,860 2,203,248 2,182,836
========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements
2
PLYMOUTH RUBBER COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands)
May 28, Nov. 27,
1999 1998
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
- --------------
Cash . . . . . . . . . . . . . . . $ 4 $ 54
Accounts receivable. . . . . . . . 16,645 13,077
Allowance for doubtful accounts. . (477) (544)
Inventories:
Raw materials. . . . . . . . . 4,396 3,800
Work in process. . . . . . . . 2,149 1,968
Finished goods . . . . . . . . 5,834 5,202
--------- ---------
12,379 10,970
--------- ---------
Deferred tax assets, net . . . . . 1,542 1,542
Prepaid expenses and other current
assets . . . . . . . . . . . . . 734 908
--------- ---------
Total current assets . . . . . 30,827 26,007
--------- ---------
PLANT ASSETS:
- ------------
Plant assets . . . . . . . . . . . 41,445 39,384
Less: Accumulated depreciation. . 18,864 17,821
--------- ---------
Total plant assets, net. . . . 22,581 21,563
--------- ---------
OTHER ASSETS:
- ------------
Deferred tax assets, net . . . . . 1,695 1,882
Other long-term assets . . . . . . 1,142 1,249
--------- ---------
2,837 3,131
--------- ---------
TOTAL ASSETS $ 56,245 $ 50,701
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
- -------------------
Revolving line of credit . . . . . $ 12,500 $ 10,117
Trade accounts payable . . . . . . 6,042 6,090
Accrued expenses. . . . . . . . . 5,142 4,220
Current portion of long-term
borrowings . . . . . . . . . . . 2,902 2,834
--------- ---------
Total current liabilities 26,586 23,261
--------- ---------
LONG-TERM LIABILITIES:
- ---------------------
Borrowings . . . . . . . . . . . . 12,008 11,527
Pension obligation . . . . . . . . 2,577 2,849
Other. . . . . . . . . . . . . . . 2,505 2,543
--------- ---------
Total long-term liabilities 17,090 16,919
--------- ---------
STOCKHOLDERS' EQUITY
- --------------------
Preferred stock . . . . . . . . . -- --
Class A voting common stock . . . 810 810
Class B non-voting common stock . 1,278 1,275
Paid in capital. . . . . . . . . . 9,080 9,077
Retained earnings (deficit). . . . 1,758 (444)
Accumulated other comprehensive
income (loss). . . . . . . . . . (147) (69)
Deferred compensation. . . . . . . (95) (114)
--------- ---------
12,684 10,535
Less: Treasury stock at cost . . . (115) (14)
--------- ---------
12,569 10,521
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 56,245 $ 50,701
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements
3
PLYMOUTH RUBBER COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) (Unaudited)
Six Months Ended
-----------------------
May 28, May 29,
1999 1998
--------- ---------
Cash flows relating to operating activities:
Net Income . . . . . . . . . . . . . . . . . . $ 2,202 $ 657
Adjustments to reconcile net income to
net cash provided by (used in)operating
activities:
Depreciation and amortization. . . . . 1,248 827
Amortization of deferred compensation. 19 19
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . (3,779) (633)
Inventory. . . . . . . . . . . . . . . (1,469) (1,012)
Prepaid expenses . . . . . . . . . . . 172 276
Other assets . . . . . . . . . . . . . (20) (14)
Accounts payable . . . . . . . . . . . 7 245
Accrued expenses . . . . . . . . . . . 1,035 478
Pension obligation . . . . . . . . . . (144) (71)
Product warranties . . . . . . . . . . -- (50)
Other liabilities. . . . . . . . . . . (38) 46
--------- ---------
Net cash provided by (used in) operating activities (767) 768
--------- ---------
Cash flows relating to investing activities:
Capital expenditures . . . . . . . . . . . . . (2,380) (3,405)
Sale/leaseback of plant assets . . . . . . . 155 --
--------- ---------
Net cash used in investing activities (2,225) (3,405)
--------- ---------
Cash flows relating to financing activities:
Net increase in revolving line of credit . . . 2,444 1,921
Proceeds from term loan. . . . . . . . . . . . 1,750 3,710
Payments of term loan. . . . . . . . . . . . . (884) (2,813)
Payments on capital leases . . . . . . . . . . (285) (195)
Treasury stock purchase. . . . . . . . . . . . (101) (6)
Proceeds from issuance of common stock . . . . 6 10
--------- ---------
Net cash provided by financing activities 2,930 2,627
--------- ---------
Effect of exchange rates on cash . . . . . . . . . 12 2
--------- ---------
Net change in cash . . . . . . . . . . . . . . . . (50) (8)
Cash at the beginning of the period. . . . . . . . 54 12
--------- ---------
Cash at the end of the period. . . . . . . . . . . $ 4 $ 4
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest. . . . . . . . . . . . . . $ 1,014 $ 941
========= =========
Cash paid for income taxes . . . . . . . . . . . . $ 176 $ 79
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements
4
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(1) The Company, in its opinion, has included all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results
for the interim periods. The interim financial information is not
necessarily indicative of the results that will occur for the full year.
The financial statements and notes thereto should be read in conjunction
with the financial statements and notes for the years ended November 27,
1998, November 28, 1997, and November 29, 1996, included in the Company's
1998 Annual Report to the Securities and Exchange Commission on Form 10-K.
(2) Environmental Proceedings
Claims under CERCLA
The Company has been named as a Potentially Responsible Party ("PRP") by
the United States Environmental Protection Agency ("EPA") in two ongoing
claims under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"). These CERCLA claims involve attempts by the EPA
to recover the costs associated with the cleanup of two Superfund Sites in
Southington, Connecticut--the Solvent Recovery Service of New England
Superfund Site ("SRS Site") and the Old Southington Landfill Superfund Site
("OSL Site"). SRS was an independent and licensed solvent recycler/disposal
company. The EPA asserts that SRS, after receiving and processing various
hazardous substances from PRP's, shipped some resultant sludges and waste-
water from the SRS Site to the OSL Site.
The Company received a PRP notification regarding the SRS Site in June,
1992. The EPA originally attributed a 1.74% share of the aggregate waste
volume at the SRS Site to the Company. Remedial action is ongoing at the
Site, and the Company is a participant in the performing PRP group. Largely
because of "orphaned shares," the Company recently has been contributing
approximately 2.05% toward the performing PRP group's expenses. Based upon
the investigations and remedial actions conducted at the Site to date,
including the recently completed phytoremediation study, it is presently
estimated that the total cost of the cleanup at the Site will range from
approximately $25 million to $50 million. In the accompanying consolidated
financial statements as of May 28, 1999, management has accrued $484,000 as
a reserve in this matter (which is net of approximately $242,000 in payments
made to date by the Company).
The Company received a PRP notification regarding the OSL Site in January,
1994. In addition to numerous "SRS transshipper" PRP's (such as the
Company), EPA has named a number of other PRP's who allegedly shipped waste
materials directly to the OSL Site. Based on EPA's asserted volume of
shipments to SRS, EPA originally attributed 4.89% of the "SRS transshipper"
PRP's waste volume at the OSL Site to the Company, which is a fraction of
the undetermined total waste volume at the Site. A Record of Decision
"ROD") was issued in September, 1994 for the first phase of the cleanup and,
in December, 1997, following mediation, the Company contributed $140,180
(toward a total contribution by the "SRS transshipper" PRP's of
approximately $2.5 million) in full settlement of the first phase. At
present, neither the remedy for the second phase of the cleanup
(groundwater) nor the allocation of the costs thereof among the PRP's has
been determined. It has been estimated that the total costs of the second
phase may range from $10 million to $50 million. Management has accrued
$337,000 in the accompanying consolidated financial statements as a reserve
against the Company's potential future liability in this matter.
5
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited) (Continued)
Based on all available information as well as its prior experience, management
believes that its accruals in these two matters are reasonable. However, in
each case the reserved amount is subject to adjustment for future developments
that may arise from one or more of the following -- the long range nature
of the case, legislative changes, insurance coverage, the joint and several
liability provisions of CERCLA, the uncertainties associated with the ultimate
groundwater remedy selected, and the Company's ability to successfully negotiate
an outcome similar to its previous experience in these matters.
Claims under Massachusetts General Laws, Chapter 21E
While in the process of eliminating the use of underground storage tanks at the
Company's facility in Canton, Massachusetts, the Company arranged for the
testing of the areas adjacent to the tanks in question--a set of five tanks in
1994 and a set of three tanks in 1997. The tests indicated that some localized
soil contamination had occurred. The Company duly reported these findings
regarding each location to the Massachusetts Department of Environmental
Protection ("DEP") in 1994 and 1997 respectively, and DEP issued Notices of
Responsibility under Massachusetts General Laws Chapter 21E to the Company
for each location (RTN No. 3-11520 and RTN No. 3-15347, respectively). The
Company has retained an independent Licensed Site Professional ("LSP") to
perform assessment and remediation work at the two locations. With regard to
the first matter (involving the set of five tanks), the LSP has determined that
the soil contamination appears to be confined to a small area and does not pose
an environmental risk to surrounding property or community. With regard to the
second matter (involving the set of three tanks), a limited amount of solvent
has been found in the soil in the vicinity of the tanks; however, additional
sampling is required. It presently is estimated that the combined future costs
to complete the assessment and remediation actions at the two locations will
total approximately $325,000, and that amount has been accrued in the
accompanying financial statements.
In January, 1997 the Company received a Chapter 21E Notice of Responsibility
from DEP concerning two sites located in Dartmouth, Massachusetts (RTN No.
4-0234) and Freetown, Massachusetts (RTN No. 4-0086), respectively. According
to DEP, drums containing oil and/or hazardous materials were discovered at the
two sites in 1979, which led to some cleanup actions by the DEP. DEP contends
that an independent disposal firm allegedly hired by the Company and other
PRP's, H & M Drum Company, was responsible for disposing of drums at the two
sites. To date, the DEP has issued Notices of Responsibility to approximately
100 PRP's. A group of PRP's, including the Company, has retained an LSP to
conduct groundwater investigations at both sites. Those investigations are
still in progress, and until additional data is gathered, it is not possible
to reasonably estimate the extent of the problem, the costs of any cleanup
that may be required at either or both sites, or the Company's potential share
of liability or responsibility therefor. Accordingly, no reserve has been
accrued in the accompanying financial statements with respect to these two
sites.
6
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited) (Continued)
(3) The following table reflects the factors used in computing earnings per
share and the effect on income and the weighted average number of shares
of potentially dilutive common stock.
Second Quarter Ended May 28, 1999
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ----------
Basic EPS
Income available to common
stockholders $ 1,843,000 2,072,033 $ .89
=========
Effect of Dilutive Security (A)
options -- 128,822
----------- ----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 1,843,000 2,200,855 $ .84
=========== ========== =========
Second Quarter Ended May 29, 1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ----------
Basic EPS
Income available to common
stockholders $ 1,080,000 2,074,050 $ .52
=========
Effect of Dilutive Security (A)
options -- 131,810
----------- ----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 1,080,000 2,205,860 $ .49
=========== ========== =========
(A) Options for 188,400 and 138,633 shares of common stock were outstanding at
May 28, 1999 and May 29, 1998, respectively, but were not included in
computing diluted earnings per share in each of the respective periods
because their effects were anti-dilutive.
7
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited) (Continued)
Six Months Ended May 28, 1999
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ----------
Basic EPS
Income available to common
stockholders $ 2,202,000 2,076,700 $ 1.06
=========
Effect of Dilutive Security (B)
options -- 126,548
----------- ----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 2,202,000 2,203,248 $ 1.00
=========== ========== =========
Six Months Ended May 29, 1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
Basic EPS
Income available to common
stockholders $ 657,000 2,064,404 $ .32
=========
Effect of Dilutive Security (B)
options -- 118,432
----------- ----------
Diluted EPS
Income available to common
stockholders and assumed
conversions $ 657,000 2,182,836 $ .30
=========== ========== =========
(B) Options for 195,900 and 160,265 shares of common stock were outstanding at
May 28, 1999 and May 29, 1998, respectively, but were not included in
computing diluted earnings per share in each of the respective periods
because their effects were anti-dilutive.
8
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited) (Continued)
(4) During the first quarter of fiscal 1999 the Company adopted Statement of
Financial Accounting Standards No. 130 - Reporting Comprehensive Income.
FAS 130 requires that certain financial activity typically disclosed in
stockholders' equity be reported in the financial statements as an
adjustment to net income in determining comprehensive income.
The following table presents comprehensive income for the quarters ended
May 28, 1999 and May 29, 1998.
May 28, May 29,
1999 1998
------- -------
Net income . . . . . . . . . . . . . . . . . . . $1,843 $1,080
Other comprehensive income (loss):
Foreign currency translation adjustments. . . (43) 11
------ ------
Comprehensive income (loss) $1,800 $1,091
====== ======
The following table presents comprehensive income for the six months ended
May 28, 1999 and May 29, 1998.
Six Months Ended
-------------------
May 28, May 29,
1999 1998
------- -------
Net income. . . . . . . . . . . . . . . . . . . . . . $2,202 $ 657
Other comprehensive income (loss):
Foreign currency translation adjustments . . . . (78) (12)
------ ------
Comprehensive income (loss) $2,124 $ 645
====== =======
(5) On February 19, 1999 the Company amended its revolving line of credit and
real estate term loan agreement with its primary lender. The loan amendment
increases the maximum borrowing amount from $15 million to $18 million,
increases the real estate term loan from $1.25 million to $3.0 million,
and lowers the borrowing rate from prime plus 1/4% to prime. In addition,
the Company has the option to convert part or all of its loan balances at
variable rates to 30, 60, 90 or 180 day contracts at a fixed rate of LIBOR
plus 2%. The amendment is effective June 2, 1999 (except for the real
estate loan increase which was effective February 26, 1999) and extends
the agreement by three years to June 2, 2002. The term loan calls for
monthly interest only payments through June, 1999, and interest plus
monthly principal payments of $50,000, beginning July, 1999.
(6) Impact of New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued FAS 131 -
Disclosures about Segments of an Enterprise and Related Information. FAS
131 requires the reporting of selected segment information in quarterly
and annual reports. Information from operating segments is derived from
methods used by the Company's management to allocate resources and measure
performance. The Company is required to disclose profit/loss, revenues and
assets for each segment identified, including reconciliations of these
items to consolidated totals. The Company is also required to disclose the
basis for identifying the segments and the types of products and services
within each segment. FAS 131 is effective for the Company for the fiscal
year ended December 3, 1999, and quarterly beginning in fiscal 2000,
including the restatement of prior periods reported consistent with this
pronouncement, if practicable. The Company expects to have two reportable
segments, the tape business and the highway marking tape business.
9
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited) (Continued)
In February, 1998, the Financial Accounting Standards Board issued FAS 132 -
Employer's Disclosure About Pensions and Other Postretirement Benefits. FAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt the provisions of FAS 132 in fiscal
1999, and does not anticipate any significant impact on its Financial
Statements from this adoption.
In June, 1998, the Financial Accounting Standards Board issued FAS 133 -
Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities. FAS 133 will require the Company to record derivative
instruments, such as foreign currency hedges, on the Consolidated Balance
Sheet as assets or liabilities, measured at fair value. Currently, the
Company treats such instruments as off-balance-sheet items. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the specific use of each derivative instrument and whether
it qualifies for hedge accounting treatment as stated in the standard. FAS
133 will be effective for the Company on December 4, 1999, the beginning
of fiscal year 2000. The Company currently does not expect the impact of
adopting FAS 133 to be material.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
First Six Months, 1999, Compared with First Six Months, 1998
Sales increased 15% in the first six months of 1999 to $37,911,000 from
$32,974,000 in the previous year. Sales in Plymouth's tape business increased
11% to $32,867,000 from $29,501,000 last year. The increased sales resulted
from increased capacity from the new calender and coating line, which allowed
the Company to better meet customer demand, and to reduce backlog. Sales in
the automotive market increased 17% from last year, as automotive demand
continues to be strong, while sales in the electrical and other markets
increased 2% from last year. Sales in the Brite-Line highway marking
products business increased $1,571,000, or 45%, from last year.
Gross margin increased to 27.3% from 25.4% last year. Gross margin in
Plymouth's tape business increased to 26.3% from 24.8% last year. The major
factor in the improvement was higher production volume in the Canton operations
to meet increased sales demand, reduce backlog, and build inventories. This
was partially offset by some one-time process losses and higher levels of
manufacturing spending. Gross margin in the highway marking products
business increased to 33.8% from 30.3% last year. This was due to better
pricing and higher volume, partially offset by higher process losses and
manufacturing spending.
Selling, general and administrative expenses, as a percentage of sales,
increased to 19.4% from 19.3% last year. In Plymouth's tape business,
selling, general and administrative expenses decreased to 18.4% of sales
from 19.2% last year. The major factors were lower expenses, as a percentage
of sales, in professional fees, bad debt expense, and outside warehouse
charges, partially offset by higher salaries and benefits. In the Brite-Line
highway marking products business, selling, general and administrative expenses
increased to 26.3% of sales from 20.8% last year. The major factor was an
increase in professional fees for patent litigation, as well as higher
freight and salaries and benefits, partially offset by lower sample and
travel expenses. Professional fees at Brite-Line increased $412,000 from
last year.
The first half of 1999 also included an insurance settlement with one of
Plymouth's previous liability insurance carriers. Under the terms of the
agreement, the insurance carrier made a one-time cash payment of $1,750,000,
in exchange for a release of all past, present, and future environmental
claims. The cash payment was recorded as operating income.
Interest expense increased $176,000 from last year. The major factor was
increased long-term borrowings (average monthly long-term borrowings of
$14,820,000 in 1999 compared to $11,930,000 in 1998), to finance the capital
investment program supporting Plymouth's tape business. In addition, there
were higher balances on the revolving line of credit to finance operations
and some capital improvements.
As a result of the above factors, income before tax increased 234% to
$3,679,000 from $1,103,000 last year, and net income increased 235% to
$2,202,000 from $657,000 last year.
Liquidity
The Company used $767,000 of operating cash flows during the first half of
1999. The operating cash flow was comprised of net income of $2,202,000,
depreciation of $1,248,000, an increase in accrued expenses of $1,035,000,
and other operating cash inflows, which was more than offset by a $3,779,000
increase in accounts receivable, due to higher sales volume and to the timing
of some large customer payments, and a $1,469,000 increase in inventory, to
better respond to customer demand in Plymouth's tape business, and to support
higher levels of activity in the highway marking products business. During
1999, the Company used $2,444,000 from its revolving line of credit and
$1,750,000 from additional term borrowings to finance capital expenditures of
$2,380,000 and payments of term debt and capital leases of $1,169,000, and to
fund operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
First Six Months, 1999, Compared with First Six Months, 1998
------------------------------------------------------------
(Continued)
As of May 28, 1999, the Company had fully utilized its current borrowing
capacity under its $15,000,000 line of credit with its primary lender, after
consideration of collateral limitations and a letter of credit related to a
guarantee of 80 million pesetas (approximately $0.6 million) on a term loan
agreement with a Spanish bank syndicate. However, on February 19, 1999, the
Company amended its revolving line of credit and real estate loan with its
primary lender, increasing the maximum borrowing capacity from $15,000,000
to $18,000,000, effective June 2, 1999. This loan amendment increased the
unused capacity under the line of credit to $2.3 million.
In the opinion of management, anticipated cash flow from operations, unused
capacity under existing borrowing agreements, and additional funds generated
from capital equipment lines of credit, will provide sufficient funds to meet
expected needs during fiscal 1999, including necessary working capital expansion
to support anticipated revenue growth and investments in capital equipment, and
to service its indebtedness. Although management expects to be able to
accomplish its plans, there is no assurance that it will be able to do so.
Failure to accomplish these plans could have had an adverse impact on the
Company's liquidity and financial position.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Second Quarter, 1999, Compared with Second Quarter, 1998
--------------------------------------------------------
Sales increased 16% in the second quarter of 1999 to $21,505,000 from
$18,510,000 in the same quarter last year. Sales increased $1,622,000, or
10%, in Plymouth's tape business. The increased sales resulted from increased
capacity from the new calender and coating line, which allowed the Company
to better meet customer demand, and to reduce backlog. Sales increased 18%
in the automotive market, as automotive demand remains strong, while sales in
the electrical and other markets decreased 1% from last year. Sales increased
$1,373,000, or 46%, in the Brite-Line highway marking products business.
Gross margin decreased to 27.9% from 30.3% last year. Gross margin in
Plymouth's tape business decreased to 24.3% from 28.7% last year, due
primarily to some one-time process losses, and higher levels of manufacturing
spending. Offsetting this decrease was an improvement in gross margin in the
highway marking products business to 42.2% from 38.5% last year, due to better
pricing and higher volume, partially offset by higher process losses and
manufacturing spending.
Selling, general and administrative expenses, as a percentage of sales,
increased to 19.0% from 18.1% last year. In the Brite-Line highway marking
products business, selling, general and administrative expenses increased to
22.7% of sales from 15.0% last year. The major factor was an increase in
professional fees for patent litigation, as well as higher freight and salaries
and benefits, partially offset by lower sample and travel expenses.
Professional fees increased at Brite-Line $414,000 from last year. In
Plymouth's tape business, selling, general and administrative expenses decreased
to 18.0% of sales from 18.7% last year. The major factors were lower
professional fees and outside warehouse charges, partially offset by higher
salaries and benefits, freight, commissions, and advertising.
The second quarter of 1999 also included an insurance settlement with one of
Plymouth's previous liability insurance carriers. Under the terms of the
agreement, the insurance carrier made a one-time cash payment of $1,750,000,
in exchange for a release of all past, present and future environmental claims.
The cash payment was recorded as operating income.
Interest expense increased $89,000 from last year. The major factor was
increased long-term borrowings (average monthly balance of $15,224,000 in 1999
compared to $12,074,000 in 1998), to finance the capital investment program
supporting Plymouth's tape business. In addition, there were higher balances
on the revolving line of credit to finance operations and some capital
improvements.
As a result of the above factors, income before tax increased 72%, to
$3,080,000, from $1,796,000 last year, and net income increased 71%, to
$1,843,000, from $1,080,000 last year.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Year 2000
Computers, software and other equipment utilizing microprocessors that use only
two digits to identify a year in a data field may be unable to process
accurately certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company has assembled a
task force to oversee the entire Year 2000 project, which includes the Company's
domestic and foreign tape business and Brite-Line, for both information
technology ("IT") and non-IT systems. The Company believes that its greatest
potential risks are associated with its IT systems and non-IT systems embedded
in its operations and infrastructure. The task force has identified five phases
of the Year 2000 compliance process for the Company's IT and non-IT systems.
These phases are 1) issue identification, 2) assessment, 3) development of
remediation plans, 4) implementation and testing and 5) contingency planning.
The first three phases have been completed as planned, and parts of phase four
have been completed.
With respect to IT systems, the Company's strategy is to upgrade its mission
critical main information systems hardware and software and other support
software, and to replace a group of manufacturing support software. Regarding
the upgrade of the main information systems hardware and software and other
support software, the implementation and testing phase was 100% complete as of
April, 1999. Regarding the replacement of a group of manufacturing support
software, the Company is in the implementation and testing phase, which is 80%
complete. Completion of the implementation and testing phase for this group
of manufacturing support software is targeted for completion by August, 1999.
With respect to non-IT systems, the implementation phase is 90% complete. Large
and critical suppliers were selected for compliance confirmation; to date 90%
of the responses have been received and no critical problems have been
identified. The Company will continue to follow up with vendors yet to respond
satisfactorily or at all to its inquiries or with certain critical vendors who
may not yet have corrected and tested their mission critical systems.
Separately, the Company also is actively seeking information and assurances
of a more technical nature from certain vendors regarding the compliance
status of specific manufacturing and information processing equipment. In
addition to confirming compliance directly with suppliers and vendors, the
Company expects to perform its own testing of certain purchased equipment and
information processing equipment for compliance. One manufacturing control
device is not Year 2000 compatible and is being replaced by the end of October;
however, management believes this device is not a critical component to
operating in the Year 2000. The Company is monitoring the status of Year 2000
compliance of its most significant customers through direct contact, written
confirmation, and by reviewing publicly available information. The Company
cannot provide assurance that the Year 2000 compliance plans of its vendors
and customers will be successfully completed in a timely manner.
The Company developed a preliminary contingency plan for both IT and non-IT
systems, as appropriate. Possible contingency plans include building additional
raw material, and finished goods safety inventories in case of vendor supply
or power interruptions, using alternate suppliers, outsourcing to third
parties, utilizing alternative software, and reverting to manual processing
of information. Contingency plans will continue to be reassessed and refined
as additional information becomes available.
Costs incurred to date for Year 2000 have totaled approximately $450,000 and
have been expensed as incurred. The Company currently estimates that total
costs will approximate $600,000, including internal employee costs and costs
of external consultants, and it currently plans to be able to fund the costs
through operating cash flows. The Company does not expect a material adverse
impact of such costs on its long-term results of operations, liquidity or
financial position.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Cost estimates may be refined as remediation, testing and contingency planning
continue and as compliance status information becomes available from third
parties.
If the Company were not taking any of the remedial steps detailed above, Year
2000 issues would possibly cause significant technological problems for the
Company, disrupting business and resulting in a decline in earnings. At this
time, however, management does not believe that this will happen.
The most reasonably likely worst case scenario should the Company, its customers
or suppliers be unable to adequately resolve Year 2000 issues, would include a
temporary slowdown or abrupt stoppage of operations at one or more of the
Company's facilities due to the failure of one or more critical processes or
business systems. Such failures could result in interruptions in manufacturing,
safety and/or environmental systems; and/or a temporary inability to receive raw
materials, ship finished products and process orders and invoices. Although not
anticipated at this time, if such or similar scenarios were to occur, they
could, depending on their duration, have a material impact on the Company's
results of operations and financial position. Such theoretical consequences
are of a kind and magnitude generally shared with other manufacturing
companies. Assuming the successful completion of its Year 2000 program in a
timely manner, the company expects that any Year 2000 disruptions which occur,
should there be any, will be minor and not material to its business.
Estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events.
Impact of Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued FAS 131 -
Disclosures about Segments of an Enterprise and Related Information. FAS 131
requires the reporting of selected segment information in quarterly and annual
reports. Information from operating segments is derived from methods used by
the Company's management to allocate resources and measure performance. The
Company is required to disclose profit/loss, revenues and assets for each
segment identified, including reconciliations of these items to consolidated
totals. The Company is also required to disclose the basis for identifying the
segments and the types of products and services within each segment. FAS 131
is effective for the Company for the fiscal year ended December 3, 1999, and
quarterly beginning in fiscal 2000, including the restatement of prior periods
reported consistent with this pronouncement, if practicable. The Company
expects to have two reportable segments, the tape business and the highway
marking products business.
In February, 1998, the Financial Accounting Standards Board issued FAS 132 -
Employer's Disclosure About Pensions and Other Postretirement Benefits. FAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt the provisions of FAS 132 in fiscal
1999, and does not anticipate any significant impact on its Financial Statements
from this adoption.
In June, 1998, the Financial Accounting Standards Board issued FAS 133 -
Accounting for Derivative and Similar Financial Instruments and for Hedging
Activities. FAS 133 will require the Company to record derivative
instruments, such as foreign currency hedges, on the Consolidated Balance Sheet
as assets or liabilities, measured at fair value. Currently, the Company
treats such instruments as off-balance-sheet items. Gains or losses resulting
from changes in the values of those derivatives would be accounted for depending
on the specific use of each derivative instrument and whether it qualifies for
hedge accounting treatment as stated in the standard. FAS 133 will be
effective for the Company on December 4, 1999, the beginning of fiscal year
2000. The Company currently does not expect the impact of adopting FAS 133 to
be material.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Continued)
Safe Harbor Statement
Certain statements in this report, in the Company's press releases and in oral
statements made by or with the approval of an authorized executive officer of
the Company may constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995. These may include
statements projecting, forecasting or estimating Company performance and
industry trends. The achievement of the projections, forecasts or estimate is
subject to certain risks and uncertainties. Actual results may differ
materially from those projected, forecasted or estimated. The applicable
risks and uncertainties include general economic and industry conditions that
affect all international businesses, as well as matters that are specific to
the Company and the markets it serves. General risks that may impact the
achievement of such forecast include: compliance with new laws and regulations,
significant raw material price fluctuations, changes in interest rates, currency
exchange rate fluctuations, limits on the repatriation of funds and political
uncertainty. Specific risks to the Company include: risk of recession in the
economies in which its products are sold, the concentration of a substantial
percentage of the Company's sales with a few major automotive customers, and
competition in pricing.
16
PLYMOUTH RUBBER COMPANY, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference is made to the information contained in Item 3 of the
Company's Annual Report on Form 10-K for its fiscal year ended
November 27, 1998, and in Note 12 of the Notes To Consolidated
Financial Statements contained in said report.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------
The Company's Annual Meeting was held on April 23, 1999.
The following members were elected to the Company's Board of
Directors to hold office for the ensuing three-year term:
Nominees In Favor Opposed
Jane H. Guy, Melvin L. Keating and
James M. Oates 742,752 30
The results on the voting of the following additional item were
as follows:
The ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors of the Company for the next fiscal year:
In Favor Opposed Abstain No Vote
742,557 -0- 225 -0-
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: See Index to Exhibits
(b) Not Applicable
17
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 thereto duly authorized.
Plymouth Rubber Company, Inc.
-----------------------------
(Registrant)
/s/Joseph J. Berns
-------------------------------
Joseph J. Berns
Vice President - Finance
Date: July 12, 1999
------------------------
18
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- ------------
(2) Not Applicable.
(3)(i) Restated Articles of Organization -- incorporated by reference to
Exhibit 3(i) of the Company's Annual Report on Form 10-K for the
year ended December 2, 1994.
(3)(ii) By Laws, as amended -- incorporated by reference to Exhibit (3)(ii)
of the Company's Annual Report on Form 10-K for the year ended
November 26, 1993.
(4)(i) Promissory Note between Plymouth Rubber Company, Inc. and General
Electric Capital Corporation dated December 29, 1995 -- incorporated
by reference to Exhibit (4)(viii) to the Quarterly Report on Form
10-Q for the Quarter ended March 1, 1996.
(4)(ii) Master Security Agreement between Plymouth Rubber Company, Inc. and
General Electric Capital Corporation dated December 29, 1995 --
incorporated by reference to Exhibit (4)(viii) to the Quarterly
Report on Form 10-Q for the quarter ended March 1, 1996.
(4)(iii) Demand Note between Plymouth Rubber Company, Inc. and LaSalle
National Bank dated June 6, 1996 -- incorporated by reference to
Exhibit (2)(i) to the report on Form 8-K with cover page dated
June 6, 1996.
(4)(iv) Loan and Security Agreement between Plymouth Rubber Company, Inc. and
LaSalle National Bank dated June 6, 1996 -- incorporated by reference
to Exhibit (2)(ii) to the report on Form 8-K with cover page dated
June 6, 1996.
(4)(v) Amendment to Master Security Agreement between Plymouth Rubber
Company, Inc. and General Electric Capital Corporation dated February
19, 1997 -- incorporated by reference to Exhibit (4)(xi) to the
Quarterly Report on Form 10-Q for the quarter ended February 25,
1997.
(4)(vi) Master Security Agreement between Plymouth Rubber Company, Inc. and
General Electric Capital Corporation dated January 29, 1997 --
incorporated by reference to Exhibit (4)(xii) to the Company's
Quarterly Report on Form 10-Q for the quarter ended February 25,
1997.
(4)(vii) Demand Note between Brite-Line Technologies, Inc. and LaSalle
National Bank dated February 28, 1997 -- incorporated by reference
to Exhibit (4)(xiii) to the Company's Quarterly Report on Form 10-Q
for the quarter ended May 30, 1997.
(4)(viii) Loan and Security Agreement between Brite-Line Technologies, Inc.
and LaSalle National Bank dated February 25, 1997 -- incorporated
by reference to Exhibit (4)(xiv) to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 30, 1997.
(4)(ix) Continuing Unconditional Guaranty between Brite-Line Technologies,
Inc. LaSalle National Bank dated February 25, 1997 -- incorporated
by reference to Exhibit (4)(xv) to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 30, 1997.
(4)(x) Amendment to Loan and Security Agreement between Plymouth Rubber
Company, Inc. and LaSalle National Bank dated May 7, 1997 --
incorporated by reference to Exhibit (4)(xvi) to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 30, 1997.
19
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
(Continued)
Exhibit
No. Description
- ------- -----------
(4)(xi) Continuing Unconditional Guaranty between Plymouth Rubber Company,
Inc. and LaSalle National Bank dated March 20, 1997 -- incorporated
by reference to Exhibit (4)(xvii) to the Company's Quarterly Report
on Form 10-Q or the quarter ended May 30, 1997.
(4)(xii) Public Deed which contains the loan guaranteed by mortgage and
granted between Plymouth Rubber Europa, S.A. and Caja de Ahorros
Municipal de Vigo, Banco de Bilbao, and Vizcaya y Banco de Comercio
dated April 11, 1997 -- incorporated by reference to Exhibit (4)
(xviii) to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 30, 1997.
(4)(xiii) Corporate Guaranty between Plymouth Rubber Company, Inc. and Caja de
Ahorros Municipal de Vigo, Banco de Bilbao, and Vizcaya y Banco de
Comercio dated April 11, 1997 -- incorporated by reference to Exhibit
(4)(xix) to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 30, 1997.
(4)(xiv) Promissory Note between Plymouth Rubber Company, Inc. and General
Electric Capital Corporation dated December 3, 1997 - incorporated
by reference to Exhibit (4)(xiv) to the Company's Annual Report on
Form 10-K for the year ended November 27, 1998.
(4)(xv) Promissory Note between Plymouth Rubber Company, Inc. and General
Electric Capital Corporation dated April 13, 1998 - incorporated by
reference to Exhibit (4)(xv) to the Company's Annual Report on Form
10-K for the year ended November 27, 1998.
(4)(xvi) Promissory Note between Plymouth Rubber Company, Inc. and General
Electric Capital Corporation dated November 12, 1998 - incorporated
by reference to Exhibit (4)(xvi) to the Company's report on Form
10-K for the year ended November 27, 1998.
(4)(xvii) Promissory Note between Plymouth Rubber Company, Inc. and General
Electric Capital Corporation dated November 25, 1998 - incorporated
by reference to Exhibit (4)(xvii) to the Company's report on Form
10-K for the year ended November 27, 1998.
(4)(xviii) Amendments to Loan and Security Agreement between Plymouth Rubber
Company, Inc., and LaSalle National Bank dated July 15, 1998 and
February 18, 1999 - incorporated by reference to Exhibit (4)(xviii)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended February 26, 1999.
(4)(xix) Amendment to Loan and Security Agreement between Brite-Line
Technologies, Inc., and LaSalle National Bank dated February 18,
1999 - incorporated by reference to Exhibit (4)(xix) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
February 26, 1999.
(9)(i) Voting Trust Agreement, as amended, relating to certain shares of
Company's common stock -- incorporated by reference to Exhibit (9)
of the Company's Annual Report on Form 10-K for the year ended
November 26, 1993.
(9)(ii) Voting Trust Amendment Number 6 -- incorporated by reference to
Exhibit 9(ii) of the Company's Annual Report on Form 10-K for the
year ended December 2, 1994.
20
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
(Continued)
Exhibit
No. Description
- ------- ------------
(10)(i) 1982 Employee Incentive Stock Option Plan -- incorporated by
reference to Exhibit (10)(i) of the Company's Annual Report on
Form 10-K for the year ended November 26, 1993.
(10)(ii) General Form of Deferred Compensation Agreement entered into
between the Company and certain officers -- incorporated by
reference to Exhibit (10)(ii) of the Company's Annual Report on
Form 10-K for the year ended November 26, 1993.
(10)(iii) 1992 Employee Incentive Stock Option Plan -- incorporated by
reference to Exhibit (10)(iv) of the Company's Annual Report
on Form 10-K for the year ended November 26, 1993.
(10)(iv) 1995 Non-Employee Director Stock Option Plan -- incorporated by
reference to Exhibit (4.3) of the Company's Registration Statement
on Form S-8 dated May 4, 1995.
(10)(v) 1995 Employee Incentive Stock Option Plan -- incorporated by
reference to Exhibit (4.4) of the Company's Registration Statement
on Form S-8 dated May 4, 1995.
(10)(vi) Sales contract entered into between the Company and Kleinewefers
Kunststoffanlagen GmbH -- incorporated by reference to Exhibit
(10)(vi) of the Company's report on Form 10-Q for the quarter
ended February 28, 1997.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(15) Not Applicable
(16) Not Applicable.
(18) Not Applicable.
(19) Not Applicable
(21) Brite-Line Technologies, Inc. (incorporated in Massachusetts) and
Plymouth Rubber Europa, S.A. (organized under the laws of Spain).
(22) Not Applicable.
(23) Not Applicable.
(24) Not Applicable.
(27) Financial data schedule for the six months ended May 28, 1999.
(28) Not Applicable.
(29) Not Applicable.
21
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