10-Q 1 form10q.txt FORM 10-Q 05/31/2002 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 31, 2002 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 - 1,248,390 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 Statement of Comprehensive Income (Loss). . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheet . . . . . . . . . . 4 Condensed Consolidated Statement of Cash Flows . . . . . 5 Notes to Condensed Consolidated Financial Statements . . 6-10 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 31, June 1, May 31, June 1, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net Sales. . . . . . . . . $ 17,854 $ 18,308 $ 31,795 $ 33,325 ---------- ---------- ---------- ---------- Costs and Expenses: Cost of products sold . . 13,704 14,234 24,558 28,059 Selling, general and administrative. . . . . 3,101 3,295 5,916 6,294 ---------- ---------- ---------- ---------- 16,805 17,529 30,474 34,353 ---------- ---------- ---------- ---------- Operating income (loss). . 1,049 779 1,321 (1,028) Interest expense . . . . . (489) (546) (984) (1,159) Other income (expense), net 53 (37) 172 47 ---------- ---------- ---------- ---------- Income (loss) before taxes 613 196 509 (2,140) Benefit (provision) for income taxes. . . . . . . 105 (45) 82 (38) ---------- ---------- ---------- ---------- Net income (loss). . . . . 718 151 591 (2,178) Retained earnings (deficit) at beginning of period . (4,455) (3,640) (4,328) (1,311) ---------- ---------- ---------- ---------- Retained earnings (deficit) at end of period . . . . $ (3,737) $ (3,489) $ (3,737) $ (3,489) ========== ========== ========== ========== Per Share Data: Basic Earnings Per Share: Net income (loss). . . . . $ 0.35 $ 0.07 $ 0.29 $ (1.07) ========== ========== ========== ========== Weighted average number of shares outstanding . . . 2,058,976 2,036,890 2,058,976 2,036,890 ========== ========== ========== ========== Diluted Earnings Per Share: Net income (loss). . . . . $ 0.34 $ 0.07 $ 0.29 $ (1.07) ========== ========== ========== ========== Weighted average number of shares outstanding . . . 2,092,026 2,038,215 2,067,307 2,036,890 ========== ========== ========== ========== See Accompanying Notes to Condensed Consolidated Financial Statements 2 PLYMOUTH RUBBER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In Thousands) (Unaudited) Second Quarter Ended Six Months Ended ----------------------- ----------------------- May 31, June 1, May 31, June 1, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income (loss). . . . . $ 718 $ 151 $ 591 $ (2,178) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment. . . . . . 72 (77) 57 (28) ---------- ---------- ---------- ---------- Other comprehensive income (loss). . . . . 72 (77) 57 (28) ---------- ---------- ---------- ---------- Comprehensive income (loss) $ 790 $ 74 $ 648 $ (2,206) ========== ========== ========== ========== See Accompanying Notes to Condensed Consolidated Financial Statements 3 PLYMOUTH RUBBER COMPANY, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands) May 31, Nov. 30, 2002 2001 ---------- ---------- (Unaudited) Assets Current Assets: Cash . . . . . . . . . . . . . . . . . . . . . . . $ 25 $ 7 Accounts receivable. . . . . . . . . . . . . . . . 14,138 13,059 Allowance for doubtful accounts. . . . . . . . . . (462) (422) Inventories: Raw materials . . . . . . . . . . . . . . . . . 3,509 3,540 Work in process . . . . . . . . . . . . . . . . 1,861 1,870 Finished goods. . . . . . . . . . . . . . . . . 6,883 5,207 ---------- ---------- 12,253 10,617 ---------- ---------- Prepaid expenses and other current assets. . . . . 376 772 ---------- ---------- Total current assets. . . . . . . . . . . . 26,330 24,033 ---------- ---------- Plant Assets: Plant assets . . . . . . . . . . . . . . . . . . . 47,478 47,654 Less: Accumulated depreciation. . . . . . . . . . (24,919) (23,801) ---------- ---------- Total plant assets, net. . . . . . . . . 22,559 23,853 ---------- ---------- Other long-term assets. . . . . . . . . . . . . . . . 858 772 ---------- ---------- $ 49,747 $ 48,658 ========== ========== Liabilities and Stockholders' Equity Current Liabilities: Short-term debt. . . . . . . . . . . . . . . . . . $ 15,751 $ 13,467 Current portion of long-term obligations . . . . . 10,022 10,222 Accounts payable . . . . . . . . . . . . . . . . . 8,094 9,474 Accrued expenses . . . . . . . . . . . . . . . . . 3,857 4,531 ---------- ---------- Total current liabilities . . . . . . . . . 37,724 37,694 ---------- ---------- Long-Term Liabilities: Borrowings . . . . . . . . . . . . . . . . . . . . 789 830 Pension obligation . . . . . . . . . . . . . . . . 3,701 3,253 Deferred tax liability . . . . . . . . . . . . . . 113 107 Other. . . . . . . . . . . . . . . . . . . . . . . 2,623 2,625 ---------- ---------- Total long-term liabilities . . . . . . . . 7,226 6,815 ---------- ---------- Stockholders' Equity: Preferred stock. . . . . . . . . . . . . . . . . . -- -- Class A voting common stock. . . . . . . . . . . . 810 810 Class B non-voting common stock. . . . . . . . . . 1,281 1,281 Paid in capital. . . . . . . . . . . . . . . . . . 9,084 9,084 Retained earnings (deficit). . . . . . . . . . . . (3,737) (4,328) Accumulated other comprehensive loss . . . . . . . (2,456) (2,513) ---------- ---------- 4,982 4,334 Less: Treasury stock at cost . . . . . . . . . . . (185) (185) ---------- ---------- Total stockholders' equity. . . . . . . . . 4,797 4,149 ---------- ---------- $ 49,747 $ 48,658 ========== ========== See Accompanying Notes to Condensed Consolidated Financial Statements 4 PLYMOUTH RUBBER COMPANY, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) (Unaudited) Six Months Ended ----------------------- May 31, June 1, 2002 2001 ---------- ---------- Cash flows relating to operating activities: Net income (loss) . . . . . . . . . . . . . . . . . $ 591 $ (2,178) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . 1,479 1,531 Gain on disposal of plant assets. . . . . . . . (131) -- Amortization of deferred compensation . . . . . -- 19 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . (929) (1,112) Inventory . . . . . . . . . . . . . . . . . . . (1,558) 2,122 Prepaid expenses and other current assets . . . 398 591 Other assets. . . . . . . . . . . . . . . . . . (109) (6) Accounts payable. . . . . . . . . . . . . . . . (1,449) 250 Accrued expenses. . . . . . . . . . . . . . . . (280) 402 Pension obligation. . . . . . . . . . . . . . . 75 47 Other liabilities . . . . . . . . . . . . . . . (9) (132) ---------- ---------- Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . (1,922) 1,534 ---------- ---------- Cash flows relating to investing activities: Capital expenditures . . . . . . . . . . . . . . . . (115) (332) Sale/lease back of plant assets. . . . . . . . . . . 47 -- Proceeds from sales of plant assets. . . . . . . . . 131 -- ---------- ---------- Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . 63 (332) ---------- ---------- Cash flows relating to financing activities: Net increase (decrease) in short-term debt . . . . . 2,256 (26) Payments on term debt. . . . . . . . . . . . . . . . (241) (871) Payments on capital leases . . . . . . . . . . . . . (114) (313) ---------- ---------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . 1,901 (1,210) ---------- ---------- Effect of exchange rates on cash. . . . . . . . . . . (24) 6 ---------- ---------- Net change in cash. . . . . . . . . . . . . . . . . . 18 (2) Cash at the beginning of the period . . . . . . . . . 7 4 ---------- ---------- Cash at the end of the period . . . . . . . . . . . . $ 25 $ 2 ========== ========== Supplemental Disclosure of Cash Flow Information Cash paid for interest. . . . . . . . . . . . . . . . $ 971 $ 1,154 ========== ========== Cash paid for income taxes. . . . . . . . . . . . . . $ 26 $ 13 ========== ========== See Accompanying Notes to Condensed Consolidated Financial Statements 5 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 adjustments) 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 condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto for the years ended November 30, 2001, December 1, 2000, and December 3, 1999, included in the Company's 2001 Annual Report filed with the Securities and Exchange Commission on Form 10-K. (2) The Company's revolving credit and long term loan agreements contain various covenants which, among other things, prohibit cash dividends without the consent of the lenders and specify that the Company meet certain financial requirements, including minimum working capital, tangible net worth, and fixed charge and EBITDA coverage ratios and maximum ratio of total liabilities to net worth. In addition, for the Company's working capital and real estate lender, the agreements contain certain subjective provisions which would result in an event of default if the bank would deem itself "insecure" for any reason. As of May 31, 2002, the Company was not in compliance with the minimum working capital, tangible net worth, fixed charge coverage ratio and maximum ratio of total liabilities to net worth covenants of its term debt agreements. The Company has not been in compliance with certain of these financial covenants since the third quarter of fiscal 2000. Because of a cross default provision, the Company was therefore also not in compliance with a covenant with its working capital and real estate term loan lender. As a result, all of the Company's term debt facilities, except that of its Spanish subsidiary, were classified as current liabilities on the consolidated balance sheet as of both May 31, 2002 and November 30, 2001 and are currently payable on demand. On July 11, 2002, the Company received a demand from its primary term debt lender for the payment of some of their outstanding loan balances and expects a follow-up letter for the remaining balances. The aggregate demanded by this lender is approximately $7,213,000 of principal outstanding. The Company has also received a demand letter from a smaller equipment lender for approximately $69,000 of principal due. The Company is negotiating with these two lenders to seek relief on their demands and to restructure existing debt facilities. Should these negotiations be unsuccessful and the lenders pursue their legal remedies, the Company may be forced to seek Chapter 11 bankruptcy protection. The Company is currently working with its other lenders to both defer principal payments and renegotiate its covenants. Unless these renegotiations are successful, the Company anticipates that it will not be in compliance with the existing covenants of these term debt and primary working capital facilities over the next twelve months. The Company has received a funding waiver from the Internal Revenue Service for the $855,000 payment due to its defined benefit plan for the year ended November 30, 2001, conditioned on the Company satisfying the minimum funding requirements for the plan years ending November 30, 2002 and November 30, 2003. The Company has notified the Pension Benefit Guarantee Corporation that the Company intends to make the contributions for plan year ending November 30, 2002, estimated preliminarily at $1,250,000, by the final due date of August 15, 2003 instead of on a quarterly basis. 6 PLYMOUTH RUBBER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The negative working capital position of $11,394,000, the demand status of the term debt facilities, the lack of borrowing capacity under the revolving line of credit, the funding requirement for the defined benefit plan and the recurring losses generated from operations during the first quarter of fiscal 2002 and during fiscal 2001, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Since September, 2001, the Company has been negotiating with its lenders to defer principal payments and modify the financial covenants under its existing debt facilities. In December 2001, the Company reached an agreement with its primary term debt lender to defer principal payments from August, 2001, through March, 2002, and to modify the financial covenants. In January, 2002, an agreement also was reached with the Company's working capital lender to defer certain principal payments on the real estate term loan from December 2001 through March 2002. However, these two agreements would not be deemed effective until all other lenders have agreed to similar terms, interest payments are current, and several other conditions are met. The Company has also negotiated a revised agreement with its equipment leasing lender. The Company continues to pursue restructured debt facilities and/or deferred principal payments at least through the end of fiscal 2002. As of May 31, 2002, the Company had deferred $2,162,000 in principal payments, which were due on its term debt and capital lease facilities. It is management's belief that if payments of principal on the Company's debt facilities can be deferred through the end of fiscal 2002, cash flows generated from operations will be sufficient to meet the Company's liquidity needs during fiscal 2002. Although management expects to be able to accomplish its business and financing plans, there is no assurance that it will be able to do so. Failure to accomplish these plans could have an adverse impact on the Company's liquidity, financial position, and ability to continue operations. (3) On March 9, 2002, the "Job Creation and Worker Assistance Act" was signed into law, under which the Company will be allowed to carryback its net operating losses for five years instead of three years. During the quarter ended May 31, 2002, the Company filed a claim with the Internal Revenue Service for a tax refund in the amount of $187,000 based on this new tax legislation. The Company recorded the related tax benefit in the consolidated statement of operations and retained earnings (deficit) for the quarter and six months ended May 31, 2002. In accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS109), during the six months ended June 1, 2001, the Company did not record the tax benefit of the loss generated from its domestic operations, because it could not be carried back to recover taxes paid in previous years, and it is more likely than not that it will not be offset by the reversal of future taxable difference and may expire prior to realizability. 7 PLYMOUTH RUBBER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) (4) Environmental The Company has been named as a Potentially Responsible Party by the United States Environmental Protection Agency in two ongoing claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The Company has also received Notices of Responsibility under Massachusetts General Laws Chapter 21E on two sites in Massachusetts. The Company has accrued $790,000 as of May 31, 2002 to cover future environmental expenditures related to these claims, which is net of $455,000 payments made to date. The accrual represents the Company's estimate of the remaining remediation costs based upon the best information currently available. Actual future costs may be different from the amount accrued for as of May 31, 2002 and may be affected by various factors, including future testing, the remediation alternatives taken at the sites, and actual cleanup costs. The final remediation costs could also be subject to adjustment because of the long term nature of the cases, legislative changes, insurance coverage, joint and several liability provisions of CERCLA, and the Company's ability to successfully negotiate an outcome similar to its previous experience in these matters. The Company has also received Notices of Responsibility under Massachusetts General Laws Chapter 21E on three sites at the Company's facilities in Canton, Massachusetts. In all of these cases, the Company has taken a variety of actions towards the ultimate cleanup, depending upon the status of each of the sites. These activities include the retention of an independent Licensed Site Professional, investigation, assessment, containment, and remediation. The Company has accrued $263,000 as of May 31, 2002 to cover estimated future environmental cleanup expenditures, which is net of $898,000 payments made to date. Actual future costs may be different from the amount accrued for as of May 31, 2002. (5) The following table reflects the factors used in computing earnings (loss) per share and the effect on income (loss) and the weighted average number of shares of potentially dilutive securities. Second Quarter Ended May 31, 2002 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ---------- ---------- ------- Basic EPS Income available to common stockholders $ 718,000 2,058,976 $ 0.35 ======= Effect of dilutive stock (A) options -- 33,050 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $ 718,000 2,092,026 $ 0.34 ========== ========= ======= 8 PLYMOUTH RUBBER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) Second Quarter Ended June 1, 2001 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ---------- ---------- ------- Basic EPS Income available to common stockholders $ 151,000 2,036,890 $ 0.07 ======= Effect of dilutive stock (A) options -- 1,325 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $ 151,000 2,038,215 $ 0.07 ========== ========= ======= (A) Options for 477,739 and 490,139 shares of common stock were outstanding at May 31, 2002 and June 1, 2001, respectively, but were not included in computing diluted earnings per share in each of the respective periods because their exercise prices were greater than the average market price of the Company's common stock for the period and their effects were anti-dilutive. Six Months Ended May 31, 2002 ------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ---------- ---------- ------- Basic EPS Income available to common stockholders $ 591,000 2,058,976 $ 0.29 ======= Effect of dilutive stock (B) options -- 8,331 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $ 591,000 2,067,307 $ 0.29 ========== ========= ======= Six Months Ended June 1, 2001 ------------------------------------ Loss Shares Per Share (Numerator) (Denominator) Amount ---------- ---------- ------- Basic EPS Loss available to common stockholders $ (2,178,000) 2,036,890 $ (1.07) ======= Effect of dilutive stock (B) options -- -- ---------- --------- Diluted EPS Loss available to common stockholders and assumed conversions $ (2,178,000) 2,036,890 $ (1.07) ========== ========= ======= 9 PLYMOUTH RUBBER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) (B) Options for 505,739 and 477,855 shares of common stock were outstanding at May 31, 2002 and June 1, 2001, respectively, but were not included in computing diluted earnings per share in each of the respective periods because their exercise prices were greater than the average market price of the Company's common stock for the period and their effects were anti-dilutive. In addition, options for 18,714 shares of common stock were outstanding at June 1, 2001, but were not included in computing diluted earnings per share because of the loss. (6) Plymouth Rubber Company, Inc. and its subsidiaries primarily operate through the following two business segments: Plymouth Tapes and Brite-Line Technologies. Management has determined these to be the Company's business segments based upon its process of reviewing and assessing Company performance and allocating resources. Plymouth Tapes manufactures plastic and rubber products, including automotive, electrical, and industrial tapes. Brite-Line Technologies manufactures and supplies rubber and plastic highway marking and safety products. Management evaluates the performance of its segments and allocates resources to them primarily based upon sales and operating income. Intersegment sales are at cost and are eliminated in consolidation. In addition, certain of the selling, general and administrative expenses recorded in Plymouth Tapes could be considered as incurred for the benefit of Brite-Line, but are currently not allocated to that segment. These expenses include certain management, accounting, personnel and sales services, and a limited amount of travel, insurance, directors fees and other expenses. The table below presents information related to Plymouth Rubber's business segments for the second quarter and six months ended May 31, 2002 and June 1, 2001. Second Quarter Ended Six Months Ended ----------------------- ----------------------- May 31, June 1, May 31, June 1, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Segment sales to unaffiliated,customers: Plymouth Tapes. . . . . . $ 14,432 $ 14,786 $ 28,071 $ 28,835 Brite-Line Technologies . 3,422 3,522 3,724 4,490 ---------- ---------- ---------- ---------- Consolidated net sales. . . $ 17,854 $ 18,308 $ 31,795 $ 33,325 ========== ========== ========== ========== Segment operating income (loss): Plymouth Tapes. . . . . . $ 521 $ (81) $ 1,179 $ (1,440) Brite-Line Technologies . 528 860 142 412 ---------- ---------- ---------- ---------- Consolidated segment operating income (loss). . 1,049 779 1,321 (1,028) Interest expense. . . . . . (489) (546) (984) (1,159) Other income (expense). . . 53 (37) 172 47 ---------- ---------- ---------- ---------- Consolidated income (loss), before taxes . . . $ 613 $ 196 $ 509 $ (2,140) ========== ========== ========== ========== 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations First Six Months, 2002, Compared with First Six Months, 2001 Sales decreased 4.6% to $31,795,000 in 2002 from $33,325,000 in 2001. Sales at Plymouth Tapes decreased 2.6% to $28,071,000 in 2002 from $28,835,000 in 2001. While sales in the automotive markets increased approximately 1% compared to 2001, sales in all other markets, including the electrical and contractor markets, decreased approximately 8% from 2001, due largely to the economic slowdown. Sales at Brite-Line Technologies decreased 17.1% to $3,724,000 in 2002, from $4,490,000 in 2001, due primarily to delays in certain highway construction projects. Gross margin increased to 22.8% in 2002 from 15.8% in 2001. Plymouth Tapes' gross margin increased to 22.3% in 2002 from 13.5% in 2001. The major factors driving this increase were (1) manufacturing overhead absorption and spending which was over $800,000 favorable compared to 2001, due to lower levels of manufacturing spending and increased production volumes, (2) lower raw material purchase prices for 2002, primarily for PVC resins, accounting for approximately $550,000 of favorable margin, and (3) overall production yields which improved approximately $200,000 compared to 2001. At Brite-Line Technologies, gross margin decreased to 26.6% in 2002 from 30.4% in 2001, due primarily to an increase in lower-margin foreign business. Selling, general and administrative expenses, as a percentage of sales, decreased to 18.6% in 2002 from 18.9% in 2001. At Plymouth Tapes, selling, general and administrative expenses, as a percentage of sales, decreased to 18.1% in 2002 from 18.5% in 2001. The major contributor was a $424,000 decrease in salaries and fringe benefits due to headcount and salary reductions, an $80,000 decrease in environmental expenses, a $37,000 reduction in depreciation, a $30,000 decrease in freight, and a $21,000 decrease in foreign selling expenses. These reductions were partially offset by a $141,000 recognition of a deferred compensation agreement, a $54,000 increase in professional fees, and a $209,000 reserve for a freight loss as described below. In February, 2002, KM Logistics, a third party freight audit and payment service provider, filed for Chapter 11 bankruptcy protection, and subsequently Chapter 7 bankruptcy, while holding approximately $309,000 of Company funds intended to reimburse the Company's freight carriers for normal services. Due to the bankruptcy filing, the Company has provided a reserve for the full amount of the funds held by KM Logistics. Approximately $100,000 of these payments had been made to KM Logistics prior to fiscal 2001 year-end; this charge was included as a selling, general and administrative expense at Plymouth Tapes in the fourth quarter of fiscal 2001. The remaining $209,000 was recorded in the first quarter of fiscal 2002 for the funds remitted to KM Logistics after November 30, 2001. At Brite-Line, selling, general and administrative expenses, as a percentage of sales, increased to 22.8% from 21.2% in 2001, although total expenses decreased 10.7% to $849,000 from $951,000, due mostly to reductions in freight, equipment, advertising, professional fees, and travel. Interest expense in 2002 decreased 15.1% to $984,000 from $1,159,000 in 2001, primarily because of lower interest rates on both the revolving line of credit and the real estate loan. Other income was $172,000 in 2002, due largely to a $131,000 gain on the sale of equipment, and $41,000 of miscellaneous income, compared to $47,000 in 2001. The after-tax profit for 2002 was $591,000, compared to an after- tax loss of $2,178,000 in 2001. In 2002, a $187,000 tax benefit was recorded for the Company's domestic operations, to recognize a tax refund resulting from a change in a U.S. tax law, and a $105,000 tax expense was recorded for the Company's Spanish subsidiary. In 2001, a $38,000 tax expense was recorded for the Company's Spanish subsidiary. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity and Capital Resources The Company's term debt agreements contain various covenants which specify that the Company meets certain financial requirements, including minimum tangible net worth, fixed charge and EBITDA coverage ratio and working capital and maximum ratio of total liabilities to net worth. In addition, the revolving working capital credit facility and the real estate term loan contain an acceleration provision, which can be triggered if the lender subjectively determines that an event of default has occurred. The Company has been in default of certain covenants of its term debt facility as of each quarter-end since September 1, 2000, and therefore, due to a cross default provision, the Company was also not in compliance with a covenant under its revolving working capital credit facility and real estate term loan. As of May 31, 2002 and November 30, 2001, the Company was not in compliance with the minimum working capital, tangible net worth, fixed charge coverage ratio and maximum ratio of total liabilities to net worth covenants under its term debt agreements, resulting in the working capital, real estate term loan and term debt facilities being payable on demand. As a result, all of the Company's term loans (except for that of its Spanish subsidiary) remain classified as current liabilities on the Company's Consolidated Balance Sheet at May 31, 2002 and November 30, 2001, respectively. As of May 31, 2002, the Company had delayed $2,162,000 in principal payments on its term debt and capital facilities. On July 11, 2002, the Company received a demand from its primary term debt lender for the payment of some of their outstanding loan balances and expects a follow-up letter for the remaining balances. The aggregate demanded by this lender is approximately $7,213,000 of principal outstanding. The Company has also received a demand letter from a smaller equipment lender for approximately $69,000 of principal due. The Company is negotiating with these two lenders to seek relief on their demands and to restructure existing debt facilities. Should these negotiations be unsuccessful and the lenders pursue their legal remedies, the Company may be forced to seek Chapter 11 bankruptcy protection. As of May 31, 2002, the Company had approximately $300,000 of unused borrowing capacity under its $18 million revolving line of credit with its primary working capital lender, after consideration of collateral limitations and a letter of credit related to a guarantee of 80 million pesetas (approximately $0.4 million) on a term loan agreement with a Spanish bank syndicate. The Company's working capital position increased from a negative $13,661,000 at November 30, 2001 to a negative $11,394,000 at May 31, 2002, due to a $1,636,000 increase in inventory, a $1,380,000 decrease in accounts payable, a $1,039,000 increase in accounts receivable, a $674,000 decrease in accrued expenses, a $200,000 decrease in current portion of long term borrowings, and $18,000 of increase in cash, partially offset by a $2,284,000 increase in short term debt and a $396,000 decrease in prepaid and other current assets. The Company has received a funding waiver from the Internal Revenue Service for the $855,000 payment due to its defined benefit plan for the year ended November 30, 2001, conditioned on the Company satisfying the minimum funding requirements for the plan years ending November 30, 2002 and November 30, 2003. The Company has notified the Pension Benefit Guarantee Corporation that the Company intends to make the contributions for plan year ending November 30, 2002, estimated preliminarily at $1,250,000, by the final due date of August 15, 2003 instead of on a quarterly basis. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The negative working capital position of $11,394,000, the demand status of the term debt facilities, the lack of borrowing capacity under the revolving line of credit, the funding requirement for the defined benefit plan and the recurring losses generated from operations during the first quarter of fiscal 2002 and during 2001, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Since September, 2001, the Company has been negotiating with its lenders to defer principal payments and modify the financial covenants under its existing debt facilities. In December 2001, the Company reached an agreement with its primary term debt lender to defer principal payments from August, 2001, through March, 2002, and to modify the financial covenants. In January, 2002, an agreement also was reached with the Company's working capital lender to defer certain principal payments on the real estate term loan from December 2001 through March 2002. However, these two agreements would not be deemed effective until all other lenders have agreed to similar terms, interest payments are current, and several other conditions are met. The Company has also negotiated a revised agreement with its equipment leasing lender. The Company continues to pursue restructured debt facilities and/or deferred principal payments at least through the end of fiscal 2002. It is management's belief that if payments of principal on the Company's debt facilities can be deferred through the end of fiscal 2002, cash flows generated from operations will be sufficient to meet the Company's liquidity needs during fiscal 2002. Although management expects to be able to accomplish its business and financing plans, there is no assurance that it will be able to do so. The Company's plans depend upon many factors, including those outlined in the Safe Harbor Statement below. Failure to accomplish these plans could have an adverse impact on the Company's liquidity, financial position, and ability to continue operations. Cash used in operating activities was $1,922,000 in 2002, as compared to cash generated of $1,534,000 in 2001. The major factors contributing to cash used in operating activities were an increase in inventory of $1,558,000, a decrease in accounts payable of $1,449,000, an increase in accounts receivable of $929,000, a decrease in accrued expenses of $280,000, a $131,000 gain on the disposal of plant assets, a $109,000 increase in other assets, and a $9,000 decrease in other liabilities, partially offset by depreciation and amortization of $1,479,000, net income of $591,000, a decrease in prepaid expenses of $398,000, and a $75,000 increase in pension obligation. Cash provided through additional short term borrowings of $2,256,000 and cash provided through the sale of plant assets and sale/leaseback of plant assets totaling $178,000 were used for operating cash, to pay off term debt and capital leases of $355,000, and for capital expenditures of $115,000. During the first quarter of 2001, the Company was contacted by the American Stock Exchange (AMEX) regarding minimum listing requirements on the number of public Class A common stockholders (200), and the aggregate market value of the publicly held Class A common stock ($1,000,000). The Company met with AMEX representatives and believes that it meets the minimum number of public Class A stockholders. The Company has reviewed various options regarding the aggregate market value of the publicly held Class A common stock. The Company has not received further communication from AMEX regarding this matter. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Second Quarter, 2002, Compared with Second Quarter, 2001 Sales decreased 2.5% to $17,854,000 in 2002 from $18,308,000 in 2001. Sales at Plymouth Tapes decreased 2.4% to $14,432,000 in 2002 from $14,786,000 in 2001. While sales in the automotive markets increased approximately 2% compared to 2001, sales in all other markets, including the electrical and contractor markets, decreased approximately 8% from 2001, due largely to the economic slowdown. Sales at Brite-Line Technologies decreased 2.8% to $3,422,000 in 2002, from $3,522,000 in 2001. Gross margin increased to 23.2% in 2002 from 22.3% in 2001. Plymouth Tapes' gross margin increased to 21.5% in 2002 from 17.7% in 2001. The major factors driving this increase were (1) manufacturing overhead absorption and spending which were approximately $300,000 favorable compared to 2001, due to lower levels of manufacturing spending and increased production volumes, (2) lower raw material purchase prices for 2002, primarily for PVC resins, accounting for approximately $250,000 of favorable margin, and (3) overall production yields which improved over $100,000 compared to 2001. At Brite-Line Technologies, gross margin decreased to 30.5% in 2002 from 41.5% in 2001, due primarily to an increase in lower-margin foreign business. Selling, general and administrative expenses, as a percentage of sales, decreased to 17.4% in 2002 from 18.0% in 2001. At Plymouth Tapes, selling, general and administrative expenses, as a percentage of sales, decreased to 17.9% in 2002 from 18.2% in 2001. The major contributor was a $202,000 decrease in salaries and fringe benefits due to headcount and salary reductions and an $80,000 decrease in environmental expenses. These reductions were partially offset by a $141,000 recognition of a deferred compensation agreement and a $61,000 increase in professional fees. At Brite-Line, selling, general and administrative expenses, as a percentage of sales, decreased to 15.0% of sales from 17.1% in 2001, due mostly to reductions in freight, advertising, field equipment, and professional fees. Interest expense in 2002 decreased 10.4% to $489,000 from $546,000 in 2001, primarily because of lower interest rates on both the revolving line of credit and the real estate loan. Other income was $53,000 in 2002, due to $32,000 of foreign exchange gains and $20,000 of miscellaneous income, partially compared to other expense of $37,000 in 2001, which had $67,000 of foreign exchange losses, partially offset by $28,000 of miscellaneous income. The after-tax profit for 2002 was $718,000, compared to an after- tax profit of $151,000 in 2001. In 2002, a $187,000 tax benefit was recorded for the Company's domestic operations, to recognize a tax refund resulting from a change in a U.S. tax law, and a $82,000 tax expense was recorded for the Company's Spanish subsidiary. In 2001, a $45,000 tax expense was recorded for the Company's Spanish subsidiary. Critical Accounting Policies The Company's significant accounting policies are discussed in Note 1 of the audited financial statements, which are included in the Company's most recent Annual Report on Form 10-K. Certain accounting policies are important to the portrayal of the Company's financial condition and results of operations, and require management's subjective judgments. These policies relate to the deferred tax asset valuation allowance and inventory reserves. Recognition of a deferred tax asset is dependent on generating sufficient future taxable income prior to the expiration of the tax loss and credit carryforward. The Company has taken a full valuation allowance for this tax benefit in accordance with the Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". Should the Company's liquidity situation improve, the amount of the deferred tax asset considered realizable could be increased and could result in a credit to income tax expense in the period such determination was made. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Company writes down its inventory for estimated obsolescence or unmarketable inventory based upon the difference between the cost of the inventory and the estimated net realizable value, based upon assumptions about future demand and market pricing. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Impact of New Accounting Pronouncements In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. FAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment. FAS 142 is effective for fiscal years beginning after December 15, 2001, and was adopted by the Company effective December 1, 2001. As of November 30, 2001, the Company had unamortized goodwill of approximately $360,000, subject to the provisions of FAS 142. The adoption of these standards did not have a material impact on the Company's consolidated financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143,"Accounting for Asset Retirement Obligations"(FAS 143). FAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the Company is required to capitalize a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. FAS 143 will be effective for fiscal years beginning after June 15, 2002 and will be adopted by the Company effective November 30, 2002. The Company is currently assessing the impact of the adoption of FAS 143. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" (FAS 144), which supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of" (FAS 121), and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB 30), for the disposal of a segment of a business. Because FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, two accounting models existed for long- lived assets to be disposed of. FAS 144 establishes a single accounting model, based on the framework established in FAS 121, for long-lived assets to be disposed of. It also addresses certain significant implementation issues under FAS 121. The provisions of FAS 144 will be effective for the Company as of November 30, 2002. The Company is in the process of assessing the impact of the adoption of FAS 144. 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 estimates is subject to certain risks and uncertainties. Actual results may differ materially from those projected, forecast 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 and /or markets in which its products are sold, the Company's ability to refinance its credit facilities or obtain additional financing, risk of the Company's lenders demanding principal payments on outstanding terms loans, risk of not receiving waiver from the government on the required contribution into the pension plan, the concentration of a substantial percentage of the Company's sales with a few major automotive customers, cost of raw materials, risk of raw material supply interruptions or shortages, and pricing pressures from competitors and customers. 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 30, 2001, and in Note 11 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 26, 2002. 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 677,986 5,000 The results on the voting of the following additional item were as follows: Approval of the adoption of 2002 Stock Incentive Plan In Favor Opposed Abstain Unvoted 499,869 43,739 1,160 138,218 The ratification of the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the next fiscal year: In Favor Opposed Abstain 678,968 3,315 703 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) Joseph J. Berns Joseph J. Berns Vice President - Finance Date: July 15, 2002 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 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)(xviii) to the Company's report on Form 10-Q for the quarter ended February 26, 1999. (4)(xx) Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated June 29, 1999 - incorporated by reference to Exhibit (4)(xx) to the Company's report on Form 10-Q for the quarter ended August 26, 1999. (4)(xxi) First Amended and Restated Schedule A - Special Provisions to Loan and Security Agreement between Plymouth Rubber Company, Inc., and LaSalle National Bank dated June 16, 1999 - incorporated by reference to Exhibit (4)(xxi) to the Company's report on Form 10-Q for the quarter ended March 3, 2000. 20 PLYMOUTH RUBBER COMPANY, INC. INDEX TO EXHIBITS (Continued) Exhibit No. Description (4)(xxii) Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated December 29, 1999 - incorporated by reference to Exhibit (4)(xxii) to the Company's report on Form 10-Q for the quarter ended March 3, 2000. (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. (11) Not Applicable. (15) Not Applicable. (18) Not Applicable. (19) Not Applicable. (22) Not Applicable. (23) Not Applicable. (24) Not Applicable. (27) Not Applicable. 21