Item 1. Description of Business
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 Plymouth Rubber 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. These products are sold either through sales personnel employed by the Company and/or through distributors and/or commissioned sales representatives. Brite-Line Technologies manufactures and supplies rubber and plastic highway marking and safety products, sold through sales personnel employed by the Company.
The Company purchases raw materials from a variety of industry sources. Principal raw materials include resins, plasticizers, synthetic and natural rubber, and textiles. There are a number of alternate suppliers of materials. The primary sources of natural rubber are domestic suppliers with operations in Southeast Asia; in addition, textiles are acquired from both domestic and foreign suppliers. While temporary shortages of raw materials may occur occasionally, these items are currently readily available. However, their continuing availability and price are subject to domestic and world market and political conditions, as well as to the direct or indirect effect of United States government regulations. The impact of any future raw material shortages on the Company as a whole cannot be accurately predicted. Operations and products may at times be adversely affected by legislation, shortages, or international or domestic events; however, at this time, management is not aware of any legislation, shortage, or events which will materially affect the Company's business.
The Company owns a number of patents and/or intellectual property rights on products manufactured. Patents held and licenses granted do not materially affect current operations.
Because products are manufactured for inventory as well as to order for specific customers, both the order backlog and the inventory turnover vary significantly from market to market. In general, on a Company-wide basis, the backlog is equivalent to approximately one month's sales volume. The Company grants various payment terms in accordance with the standards dictated by individual markets; however, extended payment terms generally are not granted with the exception of certain foreign markets where payment terms may consider local customs and practices.
The markets served by the Company are highly competitive. Competition comprises a number of domestic and foreign companies, some of which have larger sales organizations and substantially greater resources than the Company. In general, the Company regards itself as having an average competitive position in the industry, although, based on available market information, it is believed that the Company is a significant factor in, and has captured significant shares of the markets for friction, rubber and vinyl tape products. The estimated number of competitors varies from market to market. The Company relies upon product design, product quality, price and service to maintain its competitive position in the markets served and no single product accounts for a predominant amount of the Company's total sales volume. Since 1988, the Company has been the primary source of PVC (vinyl) harness tapes for the North American wire harness operations of the Delphi Packard Electric Division ("PED") of General Motors and its successor corporation, Delphi Automotive Systems Corporation ("Delphi") which was spun off from General Motors as of May 1999, and has also supplied part of PED's and Delphi's tape requirements for Europe and South America. In 2000, the Company signed a new contract with Delphi to supply PVC and some textile tapes until 2005. Delphi accounted for approximately 32%, 33% and 33% of the Company's net sales in 2003, 2002 and 2001, respectively. As Delphi constitutes a significant percentage of the Company's sales, loss of the business would have a material adverse effect on the Company. The Company is diversifying its automotive tapes business by adding new customers in the United States and abroad, and by developing new tapes for harnessing, as well as other products for other markets. The following table sets forth information with regard to competition in the worldwide markets from which the Company derives its largest volume of sales:
Estimated No. of Market Competitors Competitor ----- ----------- ---------- Electrical Tapes 15 3M Automotive Tapes Numerous None Industrial Tapes & Films Numerous None Highway Marking Tapes 6 3M
The Company is subject to various federal, state and local environmental protection regulations. To date, compliance with these regulations has not had a significant effect upon the capital expenditures, earnings or competitive position of the continuing operations of the Company. Refer to Item 3. Legal Proceedings and Note 11 of the Notes To Consolidated Financial Statements for a discussion of environmental liabilities associated with past operations.
With the exception of Plymouth Rubber Europa, S.A., the Company has no manufacturing operations in foreign countries; products sold to foreign customers are either exported from the United States or shipped from inventories maintained in foreign countries. Sales and purchases are largely performed in U.S. dollars. Certain sales and purchases are performed in foreign currencies.
The Company employs approximately 390 people.
The Company files its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the "SEC"). The Company reports filed with the SEC are available at the SEC's website at www.sec.gov.
Item 2.
Item 2. Properties
Substantially all of the Company's manufacturing, administrative and principal sales facilities are owned and are located in Canton, Massachusetts. These facilities comprise approximately 500,000 square feet. Plymouth Rubber Europa, S.A., owns an 11,000 square foot facility in Porrino, Spain, and Brite-Line Technologies, Inc. leases a 50,000 square foot facility in Denver, Colorado.
The Company rents space for its sales operations at various locations. These rentals are not material in the aggregate. The Company believes that its facilities are suitable and adequate for its current needs, and that its facilities and technology are competitive with those of its principal foreign and domestic competitors. For further information with respect to security interests in the properties of the Company, see Note 2 of the Notes to Consolidated Financial Statements, herein.
Item 3.
Item 3. Legal Proceedings
Environmental
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 PRPs, shipped some resultant sludges and wastewater 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" and non-participating parties' shares, the Company most recently has been contributing approximately 2.24% toward the performing PRP group's ongoing expenses. Approximately $15 million in response costs have been spent or committed at this Site. Based upon
the extensive investigations and remedial actions conducted at the Site to date, it is presently estimated that the total future costs at the SRS Site may range from approximately $18 million to $50 million. In the accompanying consolidated financial statements as of November 28, 2003, management has accrued $392,000 as a reserve against the Company's potential future liability in this matter, which is net of approximately $334,000 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" PRPs (such as the Company), the EPA has named a number of other PRPs 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 PRPs' waste volume at the OSL Site to the Company, which is a fraction of the undetermined total waste volume at the Site. The remediation program at the OSL Site has been divided into two phases, called Operable Units ("OU"). OU#1 primarily involves capping of the site and OU#2 is groundwater remediation, if any. A Record of Decision ("ROD") was issued in September, 1994 for OU#1 and, in December, 1997, following mediation, the Company contributed $140,000 in full settlement of OU#1 (toward a total contribution by the SRS transshipper PRPs of approximately $2.5 million). The SRS transshipper PRPs' payment of $2.5 million represented approximately 8% of the OU#1 total settlement. At present, neither the remedy for OU#2 nor the allocation of the costs thereof among the PRPs has been determined. Whatever remedy ultimately is selected, the SRS transshippers' allocable share of the OU#2 expenses likely will be greater than the 8% paid for OU#1. It has been estimated that the total costs of OU#2 may range from $10 million to $50 million. Management has accrued $334,000 in the accompanying consolidated financial statements as a reserve against the Company's potential future liability in this matter, which is net of approximately $171,000 in payments made to date by the Company.
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 contamination had occurred. The Company duly reported these findings regarding each location to the Massachusetts Department of Environmental Protection ("DEP"), and the DEP has issued Notices of Responsibility under Massachusetts General Laws Chapter 21E to the Company for each location (RTN No. 3-11520 for the set of five tanks and RTN Nos. 3-15347 and 3-19744 for the set of three tanks). 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 contamination appears to be confined to a small area of soil 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 and groundwater in the vicinity of the tanks. Costs incurred to date in connection with these two locations have totaled approximately $683,000. These costs have been funded through operating cash flows. It presently is estimated that the combined future costs to complete the assessment and remediation actions at the two locations will total approximately $224,000, and that amount has been accrued in the accompanying consolidated financial statements.
In January 1997, the Company received a Chapter 21E Notice of Responsibility from the DEP concerning two sites located in Dartmouth, Massachusetts (RTN No. 4-0234) and Freetown, Massachusetts (RTN No. 4-0086), respectively. According to the 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. The DEP contends that an independent disposal firm allegedly hired by the Company and other PRPs, 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 PRPs. A group of PRPs, including the Company, has retained an LSP to conduct subsurface investigations at both sites. The LSP has completed Limited Subsurface Investigations at both sites. At the Freetown site, no reportable contamination was found either in soil or groundwater, and the LSP has recommended that the DEP close the site out. At the Dartmouth site, no reportable contamination was
found in soil, while reportable, but lower than historical levels of contaminants were found in groundwater. The LSP's investigation at the Dartmouth site further indicates that there may be an upgradient off-site source of contaminants (which the Company would not be responsible for) that is impacting the site, and recommends further investigation into that possibility. While the results of the Limited Subsurface Investigations at these sites are relatively encouraging, until additional data is gathered, it is not possible to reasonably estimate the costs of any further investigation or cleanup that may be required at one or both sites, or the Company's potential share of liability or responsibility therefor. Accordingly, no reserve has been recorded in the accompanying financial statements with respect to these two sites.
In April 2000, the Company received a Chapter 21E Notice of Responsibility from the DEP concerning an oil release in the portion of the East Branch of the Neponset River that flows through the Company's property in Canton, Massachusetts (RTN No. 3-19407). The Company had duly reported the presence of oil in the river to the appropriate government agencies. The Company commenced cleanup and investigatory actions as soon as it became aware of the presence of the oil, and immediately retained both an LSP to oversee response actions in this matter and also an environmental services firm to perform cleanup and containment services. At the present time, neither the source nor the cause of the release has been positively determined. Costs incurred to date have totaled approximately $278,000. It presently is estimated that the future costs in this matter will total approximately $60,000, which has been accrued in the accompanying financial statements.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF THE COMPANY
Messrs. Maurice J. Hamilburg, Joseph D. Hamilburg, Fiore D. DiGiovine, Alan I. Eisenberg, Sheldon S. Leppo, Joseph J. Berns and David M. Kozol have held their present positions during each of the past five years.
Mr. Kevin H. White joined the Company in October 1996. Form 1996 to 2001 he served as Director, Sales and Marketing Brite-Line Technologies and was appointed VP-Brite-Line Technologies in 2002.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
(a) Price Range of Common Stock
The Company's Class A and Class B common stock is traded on the American Stock Exchange ("AMEX") under the symbols PLRA and PLRB. The following table sets forth the reported high and low prices for Plymouth Rubber Company Class A and Class B common stock, which shares are listed and traded on the American Stock Exchange.
(b) Approximate Number of Equity Security Holders
As of February 24, 2004, the approximate number of holders of each class of equity securities of the Company was:
The number of holders listed above does not include shareholders for whom shares are held in a "nominee" or "street" name.
(c) Dividends
The Company has not paid cash dividends on its common stock since fiscal year 1970. Under the Company's loan agreements, the Company is prohibited from paying any cash dividends with respect to its capital stock without a waiver from its lender, so long as any obligation under the loan agreements remains outstanding. In addition, a payment of dividends will depend, among other factors, on earnings, capital requirements and the working capital needs of the Company. At the present time, the Company intends to follow a policy of retaining earnings in order to finance the development of its business.
(d) Equity Compensation Plan Information
The following table sets forth a summary of the Company's equity compensation plans as of November 28, 2003. Details of the plans are discussed in Note 7 to the Consolidated Financial Statements.
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal Year 2003 Compared with Fiscal Year 2002
Company Overview
There are certain key factors, which management believes have the largest impact on the overall profit and loss of Plymouth Rubber Company:
(1) the level of sales has a large impact on profits. Since most of the Company's costs (except for raw materials) are largely fixed in the short/medium term, an increase or decrease in sales affects profit significantly.
(2) the variable margin on sales, which is determined by selling prices and the cost of manufacturing and raw materials, has a large effect on profit. This margin is, in turn, affected by a number of factors, which include purchase prices of raw material, especially PVC resin, competition, both domestic and international, competitive pricing, direct labor costs, internal production methods and efficiencies, among others.
(3) given the magnitude of the Company's fixed cost structure, increases or decreases have a large impact on profits. There are a number of large fixed or semi-fixed cost components, which include salaries, indirect labor, and benefits, utilities, equipment maintenance and repair, and insurance. Thus changes in rates or usage of these cost components can have a large effect on profit.
Overall Summary of 2003 Financial Results
For fiscal 2003, sales increased only slightly from 2002, with an increase at Plymouth Tapes and a decrease at Brite-Line, although this is an improvement compared to sales decreases in the previous three years. Management believes that increased sales levels are a critical component of improved profitability.
Costs in 2003, both variable and fixed, increased significantly in 2003 compared to 2002, resulting in a loss in 2003 compared to 2002, which was approximately a break even year. The largest unfavorable cost factors were increased PVC resin prices, health and business insurance cost increases, and utility rate increases, and there were a number of other smaller items as well. There was some favorable offset resulting from lower direct, indirect, and salaried labor costs, beginning in August 2003, as management imposed salary reductions for all domestic employees, and other factors. There was also some offsetting income from discontinued operations.
Sales and Margins
Sales increased 0.9% to $65,873,000 in 2003 from $65,259,000 in 2002, benefiting from a 10.2% increase in sales during the fourth quarter of 2003, compared to the fourth quarter of 2002. Sales at Plymouth Tapes increased 2.6% to $57,712,000 in 2003 from $56,237,000 in 2002. Sales in the automotive markets decreased approximately 1.6% compared to 2002, despite higher demand in the fourth quarter, while sales in all other markets also increased approximately 4.2% from 2002, due largely to increases in the retail and contractor industrial markets. This latter increase results in part from the marketing and sales investments made during the last two years. Sales at Brite-Line Technologies decreased 9.5% to $8,161,000 in 2003, from $9,022,000 in 2002, due in large part to delays in highway construction spending.
Gross margin decreased $2,609,000, or 19.3%, to $10,921,000 in 2003 from $13,530,000 in 2002. Gross margin, as a percentage of sales, decreased to 16.6% in 2003 from 20.7% in 2002. Plymouth Tapes' gross margin decreased $1,943,000, or 18.1%, to $8,785,000 in 2003 from $10,728,000 in 2002. Gross margin, as a percentage of sales, decreased to 15.2% in 2003 from 19.1% in 2002. The two major factors driving this decrease were: higher raw material costs for 2003, primarily for PVC resins, which accounted for approximately $1,000,000 of unfavorable margin, or 1.7% of sales; and increased rates for utilities and fuel, which accounted for approximately $700,000 of unfavorable margin, or 1.2% of sales. Other contributing factors to the reduction in gross margin were increases in health and business insurance, and lower production yields. At Brite-Line Technologies, gross margin decreased $666,000, or 23.8%, to
$2,136,000 in 2003 from $2,802,000 in 2002 and, as a percentage of sales, decreased to 26.2% in 2003 from 31.1% in 2002. The two major factors driving this decrease were lower production levels, which translated into higher unabsorbed manufacturing cost, and higher purchase prices for raw materials.
Expenses
Selling, general and administrative expenses in 2003 increased $147,000, 1.2%, to $11,917,000 from $11,770,000 in 2002. Selling, general and administrative expenses, as a percentage of sales, increased slightly to 18.1% in 2003 from 18.0% in 2002. At Plymouth Tapes, selling, general and administrative expenses in 2003 increased $149,000, or 1.5%, to $10,230,000 from $10,081,000 in 2002. Selling, general and administrative expenses, as a percentage of sales, decreased slightly to 17.7% in 2003 from 17.9% in 2002. The major increases were higher freight costs of $333,000, a $221,000 increase in advertising to support new sales strategies in the retail and contractor industrial markets, and a $145,000 increase in salaries and fringe benefits, partially offset by a $186,000 absence of a freight loss which occurred in 2002, a $173,000 absence of a 2002 loss in cash surrender value of officer life insurance, and a $141,000 reduction in deferred compensation expense. At Brite-Line Technologies, selling, general and administrative expenses in 2003 were approximately level at $1,687,000 compared to $1,689,000 in 2002, and, as a percentage of sales, increased to 20.7% from 18.7% in 2002, because of the lower sales. Decreases in salaries and fringe ($47,000) and professional fees ($53,000) were mostly offset by an increase in bad debt expense $74,000 and travel expenses $33,000.
Interest expense in 2003 decreased 11.8% to $1,787,000 from $2,026,000 in 2002, because of lower interest rates and lower average balances on the revolving line of credit, lower average balances on term debt, and lower fees. Other income was $29,000 in 2003, primarily due to foreign exchange gains, compared to $242,000 in 2002, which included $64,000 of foreign exchange gains, a $131,000 gain on the sale of equipment, and $43,000 of miscellaneous income.
Resulting Profit/Loss
The pre-tax loss from continuing operations for 2003 was $2,754,000, compared to a pre-tax loss of $24,000 in 2002. The after-tax loss from continuing operations for 2003 was $2,815,000, compared to an after-tax profit of $101,000 in 2002. In accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS109), a full valuation allowance was recorded for any tax benefits generated from the Company's domestic operations in 2003, as they could not be carried back to recover taxes paid and may not be offset by the reversal of future taxable differences. The Company's liquidity situation at November 28, 2003 also provides significant negative evidence regarding its ability to generate sufficient taxable income in the future to realize any deferred tax benefit. A $61,000 tax expense was recorded in 2003 for the Company's Spanish subsidiary. 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 $62,000 expense was recorded for the Company's Spanish subsidiary.
Income from discontinued operations, net of tax of 0, was $511,000 in 2003, compared to zero in 2002, due to a reduction in product warranty reserves for a roofing business that was discontinued in 1984. Management believes that this reserve, which was last charged with a claim in fiscal 1998, is no longer required, due to the expirations of warranties and a lack of claim activity. The net loss for 2003 was $2,304,000 compared to the $101,000 net profit in 2002.
The U.S. dollar is the functional currency for the Company's U.S. operations. For these operations, all gains and losses from foreign currency transactions are included in income currently. The Company operates a wholly owned subsidiary in Spain, which accounted for 13.8% of the Company's revenues in fiscal 2003. The functional currency of this subsidiary was the Peseta and is the Euro in 2003. Changes in the Euro/Dollar exchange rate could affect the reporting of the subsidiary's earnings in the Consolidated Statement of Operations. The Company occasionally enters into purchase or sales contracts in currencies other than the functional currency, and hedges only those transactions that are of significant size. The Company did not enter into any foreign currency forward contracts in 2003 and 2002 and did not have any forward contracts outstanding at the end of 2003 and 2002.
Fiscal Year 2002 Compared with Fiscal Year 2001
Sales decreased 1.9% to $65,259,000 in 2002 from $66,498,000 in 2001. Sales at Plymouth Tapes decreased 2.3% to $56,237,000 from $57,553,000 in 2001. The largest decrease was in the contractor industrial and OEM markets, where sales decreased 12.0% from 2001, largely because of the 2002 economic slowdown. Sales in the automotive market
decreased 1.5%, which reflected relatively stable demand from Plymouth's automotive customers. Sales at Brite-Line Technologies increased 0.9% to $9,022,000, from $8,945,000 in 2001.
Gross margin increased to 20.7% in 2002 from 17.6% in 2001. Plymouth Tapes' gross margin increased to 19.1% in 2002 from 15.7% in 2001. The major factors which drove this increase were (1) lower manufacturing spending, which was approximately $700,000 favorable in 2002 compared to 2001, and (2) lower raw material costs for 2002, primarily for PVC resins, which accounted for approximately $600,000 of favorable margin. At Brite-Line Technologies, gross margin increased to 31.1% in 2002 from 30.1% in 2001, as a result of improved manufacturing overhead absorption and improved manufacturing yields.
Selling, general and administrative expenses were incurred and recorded in both Plymouth Tapes and Brite-Line Technologies. Certain of the selling, general and administrative expenses recorded in Plymouth Tapes could have been considered as incurred for the benefit of Brite-Line, but were not allocated to that segment. These expenses included certain management, accounting, personnel and sales services, and a limited amount of travel, insurance, directors' fees and other expenses.
Selling, general and administrative expenses, as a percentage of sales, decreased to 18.0% in 2002 from 18.6% in 2001. At Plymouth Tapes, selling, general and administrative expenses, as a percentage of sales, decreased to 17.9% in 2002 from 18.4% in 2001, although total selling, general and administrative expenses decreased 4.8% to $10,081,000 from $10,589,000 in 2001. The major contributors to the lower amount were a $653,000 decrease in salaries and fringe benefits due to headcount and salary reductions, a $118,000 reduction in freight, and a $85,000 decrease in depreciation and amortization. These reductions were partially offset by a $141,000 recognition of deferred compensation expenses, a $173,000 loss on the cash surrender value of officer life insurance, and an $186,000 increased 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 $286,000 of Company funds intended to reimburse the Company's freight carriers for normal services. Approximately $100,000 of those 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 $186,000 was recorded in fiscal 2002.
At Brite-Line, selling, general and administrative expenses, as a percentage of sales, decreased to 18.7% in 2002 from 20.0% in 2001. The largest factors were reductions in freight ($76,000), applicator equipment ($45,000), travel ($30,000), and advertising ($27,000).
Interest expense in 2002 decreased 11.8% to $2,026,000 from $2,298,000 in 2001, because of lower interest rates and loan balances on the Company's borrowings under the revolving working capital facility. Foreign currency exchange gain was $64,000 in 2002 compared to a foreign currency exchange loss of $25,000 in 2001. Other income was $178,000 in 2002, due to a $131,000 gain on the sale of equipment and $44,000 of miscellaneous income, compared to $99,000 in 2001, which included non-recurring rental income of $35,000, a $25,000 gain on the sale of securities, and other net income items of $39,000.
The pre-tax loss from continuing operations for 2002 was $24,000, compared to a pre-tax loss from continuing operations of $2,910,000 in 2001. The net profit was $101,000 in 2002, compared to a net loss of $2,899,000 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 $62,000 tax expense was recorded for the Company's Spanish subsidiary.
Liquidity and Capital Resources
Debt Arrangements
Prior to December, 2002, the Company's term debt agreements had contained various covenants specifying certain financial requirements, including minimum tangible net worth, fixed charge and EBITDA coverage ratios, 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 determines that an event
of default has occurred.
As of each quarter end from September 1, 2000 through August 30, 2002, the Company had been in violation of certain covenants of its term debt facility and therefore, due to a cross default provision, the Company had not been in compliance with a covenant under its revolving working capital credit facility and real estate term loan. As a result, all of the Company's term loans (except for that of its Spanish subsidiary) had been classified as current liabilities on the Company's Consolidated Balance Sheet at the end of each fiscal quarter end. In addition, during July 2002, the Company received a demand from its primary term debt lender for the payment of their outstanding loan balances in the amount of $8,658,000, which represented the total of all future payments and accumulated late fees, and a demand letter from a smaller equipment lender for approximately $69,000 of payments due.
During 2002, the Company negotiated with these lenders and, in November 2002, reached formal agreement to obtain relief from their demands and to restructure existing term debt facilities. Under the new arrangements, the term debt lenders accepted significantly reduced principal payments over the next three years, eliminated financial covenants, waived existing defaults and rescinded demands for accelerated payment, in return for enhanced collateral positions.
Cash Pension Contributions for Defined Benefit Plan
The Company received pension funding waivers from the Internal Revenue Service for $855,000 in 2002 and $1,030,000 (of the $1,262,000 due) in 2003. These were waivers for plan years ending November 30, 2001 and November 30, 2002, and were conditioned on the Company satisfying the minimum funding requirements for the plan years ending November 30, 2003 and November 30, 2004, and on the waiver amount of $1,030,000 being secured, in a manner acceptable to the Pension Benefit Guaranty Corporations (the "PBGC"), by September 10, 2004. The minimum funding payment due in August 2004 is $1,533,000.
Overall Cash Position
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 Company's limited liquidity under existing debt arrangements, its working capital deficit, the recent history of losses, the pension payment due August 2004, and the overall risks associated with achieving the 2004 plan 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.
As of November 28, 2003, the Company had no unused borrowing capacity under its revolving line of credit with its primary working capital lender, after consideration of collateral limitations.
The Company's working capital position decreased from a negative $2,339,000 at November 29, 2002 to a negative $4,350,000 at November 28, 2003, due to a $2,119,000 increase in accounts payable and accrued expenses, a $717,000 increase in short term debt, a $232,000 increase in the current portion of long term borrowings, a $60,000 decrease in prepaid and other current assets, and a $27,000 decrease in cash, partially offset by a $734,000 increase in inventory and a $410,000 decrease in accounts receivable.
For fiscal 2004, management's plan is to increase sales and control expenses to improve profitability and provide additional cash from operating activities. The plan also calls for working with a variety of potential lending sources to acquire additional financing, as well as discussions with existing lenders and others to restructure various obligations.
It is management's belief that cash flows generated from operations, and/or additional financing, and/or a restructuring of existing debt and pension obligations will be sufficient to meet the Company's liquidity needs during fiscal 2004. Management also implemented a number of expense reductions during the fourth quarter of 2003, including wage and salary reductions and the deferral of certain personnel replacements or additions. 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. Failure to accomplish these plans could have an adverse impact on the Company's liquidity, financial position, and ability to continue operating as a going concern.
Cash provided by operating activities was $1,385,000 in 2003, compared to $1,291,000 in 2002. The major factors contributing to cash provided by operating activities were depreciation and amortization of $2,911,000, an increase in
accounts payable and accrued expenses of $2,149,000, a decrease in prepaid expenses of $64,000, and a $17,000 increase in environmental reserves, partially offset by a net loss of $2,304,000, a $511,000 decrease in warranty reserves related to discontinued operations, an increase in inventory of $422,000, a $337,000 decrease in pension obligation, a $113,000 increase in other assets, a decrease in other liabilities of $64,000, and a $5,000 decrease in accounts receivable. This cash provided by operating activities and additional short-term borrowings of $411,000 were used pay off term debt and capital leases of $1,535,000, and for capital expenditures of $308,000.
American Stock Exchange Compliance
On May 23, 2003, the Company received notification from the American Stock Exchange (the "AMEX") that, as of the first quarter of fiscal 2003, the Company was not in compliance with AMEX listing standards, due to shareholders' equity being less than $2,000,000 and losses from continuing operations and/or net losses in two of its three most recent fiscal years. In order to maintain the listing of its common stock on AMEX, Plymouth was required to submit a plan by June 23, 2003, subject to acceptance by AMEX, describing actions to be taken to bring it into compliance with listing requirements within 18 months. On June 23, 2003 the Company submitted to the American Stock Exchange a plan describing the program by which the Company will be brought back into compliance with AMEX's listing standards by the end of November 2004. On August 25, 2003, AMEX accepted this plan of compliance and granted an extension of time through November 2004 to regain compliance, subject to periodic review by AMEX during the extension period. Failure to make progress consistent with these listing standards could result in the Company's shares being delisted from AMEX.
On December 31, 2003, the Company received notification from the AMEX that the Company's Class A Common Stock and Class B Common Stock are each subject to delisting for having aggregate publicly held market values of less than $1,000,000 for more than 90 consecutive days. In order for the Company to maintain the listings of its Common Stock, it was to submit a plan, subject to acceptance by AMEX, by January 26, 2004 advising the AMEX of actions to bring it into compliance with continued listing standards by March 10, 2004. The Company has been considering the feasibility of such a plan of compliance and has asked AMEX for an extension of time to submit a compliance plan or pursue alternatives to continued AMEX listing.
A summary of the Company's cash requirements related to its outstanding long term debt, future minimum lease payments, and estimated pension funding requirements are as follows:
Critical Accounting Policies
The Company's significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements. 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, inventory reserves, provision for doubtful accounts receivable and impairment of long lived assets.
Recognition of a deferred tax asset is dependent on generating sufficient future taxable income prior to the expiration of the tax loss or 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.
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.
The Company periodically reviews the aging of accounts receivable to identify potentially uncollectible accounts and establishes a reserve based on experience and discussion with customers. Actual write-offs could differ from bad debt reserves.
The Company reviews long-lived assets annually or whenever events of circumstances indicate that the carrying amounts of the asset may not be recoverable in accordance with SFAS No. 121. Impaired assets are written down to their estimated fair value based on the best information available to the Company.
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 $725,000 as of November 28, 2003 to cover future environmental expenditures related to these claims, which is net of $505,000 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 November 28, 2003 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 $277,000 as of November 28, 2003 to cover estimated future environmental cleanup expenditures, which is net of $961,000 payments made to date. Actual future costs may be different from the amount accrued for as of November 28, 2003.
Impact of New Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34). FIN 45 clarifies the requirements of the FASB Statement No. 5 (FAS 5), Accounting for Contingencies, relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. Many guarantees are embedded in purchase or sales agreements, service contracts, joint venture agreements, or other commercial agreements and the guarantor in many of those arrangements does not receive separately identifiable up-front payment (e.g., a premium) for issuing the guarantee. Prior to FIN 45, many guarantors did not recognize an initial liability for such embedded guarantees. Now, however, they are required to recognize a liability at fair value upon issuance of the guarantees, regardless of whether they receive a separate premium for doing so. The Interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. For guarantees issued or modified after December 31, 2002, significant new disclosure requirements are effective beginning with 2002 calendar year-end financial statements, including a requirement to disclose the maximum amount of future payments that an entity might need to make under a guarantee and a reconciliation of during the period in their product warranty liabilities. At November 28, 2003, the Company had no guarantees falling in the scope of FIN 45. The Company will apply the provisions required by FIN 45 in future periods if any guarantees are formed.
On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FAS 123 (FAS 148). As the title of the standard implies, it is fairly limited in its scope, however it will have implications for all entities that issue stock-based compensation to their employees. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement permits two additional transition methods for entities that adopt the preferable method of accounting for stock-based employee compensation. Both of those methods avoid the ramp-up effect arising from prospective application of the fair value based method. In addition, to address concerns raised by some constituents about the lack of comparability caused by multiple transition methods, this Statement does not permit the use of the original Statement 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. During the first quarter of fiscal 2003 the Company adopted the additional disclosure provisions of FAS 148.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." The primary objective of the Interpretation is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights. Such entities are known as variable-interest entities (VIEs). Although the FASB's initial focus was on special-purpose entities (SPEs), the final guidance applies to a wide range of entities. FIN 46 applies to new entities that are created after the effective date, as well as applies to existing entities. The FIN is effective to preexisting entities as of the beginning of the first interim period beginning after June 15, 2003, and to any new entities beginning February 1, 2003. Once it goes into effect, FIN 46 will be the guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of Accounting Research Bulletin No. 51 (ARB51), Consolidated Financial Statements, or other existing authoritative guidance, or, alternatively, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. The Company will apply the consolidation requirement of FIN 46 in future periods if it should own any interest in any variable interest entity.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. At November 28, 2003, the Company had no financial instruments falling within the scope of FAS No. 149.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of FAS 150 did not have a material effect on the Company's financial statements.
In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. The provisions of that Statement do not change the measurement and recognition provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Statement 132(R) replaces FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, and adds among other things additional disclosure pertaining to plan assets, benefit obligations, key assumptions and measurement dates. The effective dates of the pronouncement for domestic plans are fiscal years ending after December 15, 2003.
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, risk of the Company's working capital lender and real estate lender demanding payment of outstanding balances, 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, and pricing pressures from competitors and customers.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At November 28, 2003, the carrying value of Company's debt totaled $23.4 million which approximated its fair value. This debt includes amounts at both fixed and variable interest rates. For fixed rate debt, interest rate changes affect the fair market value but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact earnings and cash flows, assuming other factors are held constant.
At November 28, 2003, the Company had fixed rate debt of $8.7 million and variable rate debt of $14.7 million. Holding other variables constant (such as foreign exchange rates and debt levels) a one percentage point decrease in interest rates would increase the unrealized fair market value of fixed rate debt by approximately $147,000. The earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $147,000, holding other variables constant.
Item 8.
Item 8. Financial Statements and Supplementary Data
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The financial statement schedule should be read in conjunction with the financial statements. Schedules not included with this financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Plymouth Rubber Company, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Plymouth Rubber Company, Inc. and its subsidiaries at November 28, 2003 and November 29, 2002, and the results of their operations and their cash flows for each of the three years in the period ended November 28, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and a net working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP Boston, Massachusetts February 13, 2004
PLYMOUTH RUBBER COMPANY, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
PLYMOUTH RUBBER COMPANY, INC.
CONSOLIDATED BALANCE SHEET -- (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these Consolidated Financial Statements.
PLYMOUTH RUBBER COMPANY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
The accompanying notes are an integral part of these Consolidated Financial Statements.
PLYMOUTH RUBBER COMPANY, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of these Consolidated Financial Statements.
PLYMOUTH RUBBER COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
A. The Company -- 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 Plymouth Rubber Company's business segments, based upon its process to review and assess Company performance, and to allocate 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.
B. Principles of Consolidation -- The consolidated financial statements include the accounts of Plymouth Rubber Company, Inc. and its wholly-owned subsidiaries, Brite-Line Technologies, Inc. and Plymouth Rubber Europa, S.A.. Significant intercompany accounts and transactions have been eliminated in consolidation.
C. Inventories -- Inventories are valued at the lower of cost, determined principally on the first-in, first-out method, or market.
D. Revenue Recognition -- The Company recognizes revenues at the point of passage of title, which is generally at the time of shipment.
E. Plant Assets -- Plant assets are stated at cost for purchased assets and at the lesser of the present value of minimum lease payments or fair value for capital lease assets. Additions, renewals and betterments of plant assets, unless those of relatively minor amounts, are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are provided on the straight-line method based upon the estimated useful lives of 15-45 years for buildings and 3-14 years for machinery and equipment. Capital leases are depreciated over the shorter of the estimated useful life or the life of the lease. The cost and related accumulated depreciation of fully depreciated and disposed assets are removed from the accounts. The Company reviews long-lived assets annually or whenever events of circumstances indicate that the carrying amounts of the asset may not be recoverable in accordance with FAS No. 144. Any impaired assets are written down to their estimated fair value based on the best information available to the Company. The Company wrote off approximately $0.1 million and $0.8 million of fully depreciated plant assets in 2003 and 2002, respectively.
F. Environmental Matters -- Environmental expenditures that relate to current operations or to an existing condition caused by past operations are expensed. Liabilities are recorded without regard to possible recoveries from third parties, including insurers, when environmental assessments and/or remediation efforts are probable and the costs can be reasonably estimated.
G. Retirement Plans -- The Company provides certain pension and health benefits to retired employees. Pension costs are accounted for in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Unrecognized pension gains and losses are amortized on a straight-line basis over ten years. The cost of postretirement health benefits is accrued during the employees' active service period in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
H. Income Taxes -- The Company reports income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the Company's assets and liabilities. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain.
I. Earnings Per Share -- In accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128), basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share is computed by giving effect to all dilutive potential common shares that were outstanding during the period.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
J. Fair Value of Financial Instruments -- The carrying amounts reported in the accompanying consolidated balance sheets for accounts receivable, and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amount of the Company's fixed rate debt also approximates fair value based on current rates for similar debt.
K. Stock-Based Employee Compensation Plans -- The Company's stock option plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Company uses the disclosure requirements of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). Under APB No. 25, the Company does not recognize compensation expense on stock options granted to employees, because the exercise price of each option is equal to the market price of the underlying stock on the date of the grant. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by FAS 148, which the Company adopted during the first quarter of fiscal 2003, the Company's net loss and loss per share would have been reduced to the following pro forma amounts:
The weighted average fair value of the options granted during the fiscal 2002 and 2001 was $ 0.81 and $1.23 per option, respectively. No options were granted during fiscal 2003. Shares under the option plans that were excluded from the computation of diluted earnings per share at November 28, 2003, November 29, 2002, and November 30, 2001 due to their antidilutive effect.
L. Foreign Currencies -- The U.S. dollar is the functional currency for the Company's Brite-Line and U.S. tape operations. For these operations, all gains and losses from foreign currency transactions are included in the Consolidated Statement of Operations. The Company operates a wholly-owned tape subsidiary in Spain which accounted for approximately 13.8% of the Company's revenues in fiscal 2003. The functional currency of this subsidiary is the Euro. The balance sheet is translated at year end exchange rates and the statement of operations at weighted average exchange rates. Changes in the Euro exchange rate could affect the reporting of the subsidiary's earnings in the Consolidated Statement of Operations.
M. Accounting for Shipping and Handling Fees and Costs -- In accordance with Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" ("Issue 00-10"), the Company classifies shipping and handling fees as revenues and shipping and handling costs as part of selling, general and administrative expenses. Shipping and handling costs were $2,733,000, $2,409,000 and $2,603,000 in 2003, 2002 and 2001, respectively.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
N. Accounting for Derivatives -- Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), as amended, was effective for the Company as of December 2, 2000. FAS 133 establishes accounting and reporting standards requiring that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either assets or liabilities measured at fair value. FAS 133 requires that changes in the derivative instrument's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate, and assess the effectiveness of derivative instruments that receive hedge accounting. The Company did not hold any derivative positions for the years ended November 28, 2003, and November 29, 2002.
O. Use of Estimates -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
P. Reclassifications -- Certain reclassifications of prior year balances have been made to conform to the current presentation.
Q. Business Combinations, Goodwill and Other Intangible Assets -- 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 requires 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 28, 2003, the Company had unamortized goodwill of approximately $481,000, which is subject to the provisions of FAS 142.
R. Accounting for the Impairment or Disposal of Long-lived Assets -- 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. FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, as a result 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 adoption of FAS 144 did not have a material effect on Company's consolidated financial statements.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
S. Accounting for Stock Based Compensation -- On December 31, 2002, the Financial Accounting Standards Board (FASB or the Board) issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FAS 123 (FAS 148). As the title of the standard implies, it is fairly limited in its scope, however it will have implications for all entities that issue stock-based compensation to their employees. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement permits two additional transition methods for entities that adopt the preferable method of accounting for stock-based employee compensation. Both of those methods avoid the ramp-up effect arising from prospective application of the fair value based method. In addition, to address concerns raised by some constituents about the lack of comparability caused by multiple transition methods, this Statement does not permit the use of the original Statement 123 prospective method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. During the first quarter of fiscal 2003 the Company adopted the additional disclosures provisions of FAS 148.
T. Financial Accounting Standards Board Interpretation No. 45 -- In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantee, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34). FIN 45 clarifies the requirements of the FASB Statement No. 5 (FAS 5), Accounting for Contingencies, relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. Many guarantees are embedded in purchase or sales agreements, service contracts, joint venture agreements, or other commercial agreements and the guarantor in many of those arrangements does not receive separately identifiable up-front payment (e.g., a premium) for issuing the guarantee. Prior to FIN 45, many guarantors did not recognize an initial liability for such embedded guarantees. Now, however, they are required to recognize a liability at fair value upon issuance of the guarantees, regardless of whether they receive a separate premium for doing so. The Interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with a separately identified premium and guarantees issued without a separately identified premium. For guarantees issued or modified after December 31, 2002, significant new disclosure requirements are effective beginning with 2002 calendar year-end financial statements, including a requirement to disclose the maximum amount of future payments that an entity might need to make under a guarantee and a reconciliation of during the period in their product warranty liabilities At November 28, 2003, the Company had no guarantees falling in the scope of FIN 45. The Company will apply the provisions required by FIN 45 in future periods if any guarantees are formed.
U. Financial Accounting Standards Board Interpretation No. 46 -- In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." The primary objective of the Interpretation is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights. Such entities are known as variable-interest entities (VIEs). Although the FASB's initial focus was on special-purpose entities (SPEs), the final guidance applies to a wide range of entities. FIN 46 applies to new entities that are created after the effective date, as well as applies to existing entities. The FIN is effective to preexisting entities as of the beginning of the first interim period beginning after June 15, 2003, and to any new entities beginning February 1, 2003. Once it goes into effect, FIN 46 will be the guidance that determines (1) whether consolidation is required under the "controlling financial interest" model of Accounting Research Bulletin No. 51 (ARB51), Consolidated Financial Statements, or other existing authoritative guidance, or, alternatively, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. The Company will apply the consolidation requirement of FIN 46 in future periods if it should own any interest in any variable interest entity.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 1 -- Summary of Significant Accounting Policies -- (Continued)
V. Derivative Instruments and Hedging Activities -- In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. FAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. At November 28, 2003, the Company had no financial instruments falling within the scope of FAS No. 149.
W. Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity --In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of FAS 150 did not have a material effect on the Company's financial statements.
X. Pensions and Other Postretirement Benefits -- In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. The provisions of that Statement do not change the measurement and recognition provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. Statement 132(R) replaces FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, and adds among other things additional disclosure pertaining to plan assets, benefit obligations, key assumptions and measurement dates. The effective dates of the pronouncement for domestic plans are fiscal years ending after December 15, 2003.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 -- Going Concern, Borrowing Arrangements and Financing Commitments
Going Concern
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 Company's limited liquidity under existing debt arrangements, its working capital deficit, the recent history of losses, the pension payment due August 2004, and the overall risks associated with achieving the 2004 plan 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.
As of November 28, 2003, the Company had no unused borrowing capacity under its revolving line of credit with its primary working capital lender, after consideration of collateral limitations.
The Company's working capital position decreased from a negative $2,339,000 at November 29, 2002 to a negative $4,350,000 at November 28, 2003, due to a $2,119,000 increase in accounts payable and accrued expenses, a $717,000 increase in short term debt, a $232,000 increase in the current portion of long term borrowings, a $60,000 decrease in prepaid and other current assets, and a $27,000 decrease in cash, partially offset by a $734,000 increase in inventory and a $410,000 decrease in accounts receivable.
For fiscal 2004, management's plan is to increase sales and control expenses to improve profitability and provide additional cash from operating activities. The plan also calls for working with a variety of potential lending sources to acquire additional financing, as well as discussions with existing lenders and others to restructure various obligations.
It is management's belief that cash flows generated from operations, and/or additional financing, and/or a restructuring of existing debt and pension obligations will be sufficient to meet the Company's liquidity needs during fiscal 2004. Management also implemented a number of expense reductions during the fourth quarter of 2003, including wage and salary reductions and the deferral of certain personnel replacements or additions. 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. Failure to accomplish these plans could have an adverse impact on the Company's liquidity, financial position, and ability to continue operating as a going concern.
Borrowing Arrangements and Financing Commitments
In November 2002 the Company completed the restructuring of its term debt. Under the revised agreements, the term debt lenders (1) reduce principal payments from approximately $9.2 million to $4.1 million for the period April 1, 2002 through September 20, 2005; (2) establish the maturity dates of the remaining debt of approximately $4.5 million on October 1, 2005, and $1.3 million between October 1, 2005 and May 1, 2008; (3) eliminate all financial covenants; (4) waive existing defaults; and (5) rescind prior demands for accelerated payments. As part of the restructuring, the Company entered into Mortgage and Assignment of Leases and Rents, Security Agreement, Trademark Security Agreement and Patent Security Agreement (the "Security Agreements") with its lenders to secure performance of its obligations. Under the Security Agreements, the Company granted its (term debt) lenders (1) a subordinated mortgage on its manufacturing facility in Canton, Massachusetts and (2) security interests in all of its patents, trademarks, intangibles, accounts, fixtures, products and proceeds.
The restructured term debt agreements contain a provision beginning for the fiscal year ending November 2003 and continuing for each fiscal year thereafter, for annual payments of 25% of "Free Cash Flow". Free Cash Flow means the amount obtained by subtracting (a) the sum of (1) interest expense, (2) principal payments of debt paid, (3) non-financed capital expenditures, (4) federal and state income tax payments, (5) pension contributions payments, (6) environmental payments against reserves, from (b) EBITDA. Payments of Free Cash Flow are to be shared by the term debt lenders and are to be applied to outstanding principal on the term debt. For fiscal 2003 there was no Free Cash Flow payment required.
In addition, the revised agreement with the Company's primary term debt lender contains a provision, which allows for extended principal payments of the approximately $4.5 million due October 1, 2005. This provision requires that the Company demonstrate to the lender that (1) the senior lien priority of the mortgage on the Company's real property is limited to $2.0 million; and (2) that the appraised fair market value of the real property subject to the mortgage is not
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 -- Going Concern, Borrowing Arrangements and Financing Commitments -- (Continued)
less that $2.5 million. If these conditions are satisfied to the lender satisfaction, then the $4.5 million of principal due October 1, 2005 will have extended maturity dates from April 1, 2006 to April 1, 2011.
The revolving line of credit and term debt of the Company consisted of the following as of:
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 2 -- Going Concern, Borrowing Arrangements and Financing Commitments -- (Continued)
During the prior fiscal year, one of the Company's debt lenders was acquired by another financial institution. As a result, at the year ended November 29, 2002 a single term note replaced four individual term notes.
Maturities of long-term obligations in the next five years are: 2004 - $1,768,000; 2005 - $5,874,000; 2006 - $685,000; 2007 - $710,000; 2008 - $308,000; and thereafter - $0.
Note 3 -- Income Taxes
Income (loss) before taxes consists of the following:
The provision (benefit) for income taxes consists of the following:
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 3 -- Income Taxes -- (Continued)
The components of the net deferred tax asset (liability) are as follows:
In accordance with the Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" (FAS 109), management performed an analysis of the realizability of its deferred tax assets. FAS 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company increased the valuation allowance for deferred tax assets by $898,000 and $755,000 in 2003 and 2002, respectively. Such an increase was deemed necessary as the net deferred tax asset balance at November 28, 2003 and November 29, 2002 could not be carried back to recover taxes paid in previous years and will ot be offset by the reversal of future taxable differences. Also, the Company's liquidity situation at November 28, 2003 and November 29, 2002 provides significant negative evidence regarding the ability to generate sufficient taxable income in the future to recover these assets.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 3 -- Income Taxes -- (Continued)
A reconciliation of the statutory federal income tax rate and the effective income tax rate for income from continuing operations for the years ended November 28, 2003, November 29, 2002, and November 30, 2001, is as follows:
During 2003 and 2002, the Company recorded a $3,908,000 and $3,530,000 minimum pension liability and a full valuation allowance on the related deferred tax asset of $1,535,000 and $1,386,000. These amounts are included in Other Comprehensive Income (Loss) for the year ended November 28, 2003 and November 29, 2002, respectively.
Note 4 -- Accrued Expenses
The Company's accrued expenses consist of the following:
Note 5 -- Retirement and Other Benefit Plans
The Company has a non-contributory, defined benefit pension plan and a contributory, defined contribution profit sharing plan, covering substantially all employees. The Company's defined benefit pension plan provides benefits for stated amounts for each year of service through fiscal 1996 after which time benefits have been frozen. The Company's funding policy for the pension plan is to make contributions at least equal to the minimum required by the applicable regulations. The Company's defined contribution profit sharing trust allocates Company contributions based upon a combination of annual pay and employee elective deferral of pay. The Company may make a discretionary contribution to the profit sharing trust. During 2003, 2002 and 2001, the Company did not accrue for any profit sharing contribution.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5 -- Retirement and Other Benefit Plans -- (Continued)
The following table provides reconciliation of changes in benefit obligations and fair value of plan assets. In addition, this table shows the plan's funded status and the amounts recognized in the consolidated balance sheet for the Company's defined benefit pension plan.
Net periodic pension expense for the pension plan for the years ended November 28, 2003, November 29, 2002 and November 30, 2001, is as follows:
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5 -- Retirement and Other Benefit Plans -- (Continued)
Key weighted-average assumptions used in the measurement of the Company's defined benefit pension obligation are as follows:
In addition to pension benefits, the Company provides health insurance benefits to retirees disabled on the job and employees who elect early retirement after age 62, on a shared-cost basis. This coverage ceases when the employee reaches age 65 and becomes eligible for Medicare. In addition, the Company provides certain limited life insurance for retired employees. In accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", the cost of these benefits is accrued during the employees' active service period.
The following table provides a reconciliation of changes in benefit obligations. In addition, this table shows the funded status and the amounts recognized in the consolidated balance sheet for the Company's postretirement benefits.
Key weighted-average assumptions used in the measurement of the Company's postretirement benefit obligation are as follows:
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 5 -- Retirement and Other Benefit Plans -- (Continued)
For measurement purposes, a 10.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate assumed decreased gradually to 5.0% for 2010 and remains at that level thereafter.
The components of net postretirement expense are as follows:
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percent change in the assumed health care cost trend rates would have the following effects:
Note 6 -- Common Stock and Earnings (Loss) Per Share
The Company has authorized a class of preferred stock. To date, no shares have been issued.
Common stock activity was as follows:
In April 2003, the shareholders approved an amendment to the Company's Restated Articles of Organization reducing the par value for Class A and Class B Common Stock from $1.00 per share to $0.01 per share. Accordingly, the value for Class A and Class B Common Stock and Paid in capital on the Condensed Consolidated Balance Sheet, have been adjusted for this change in par value for all periods presented.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 6 -- Common Stock and Earnings (Loss) Per Share -- (Continued)
Treasury stock includes 32,914 shares of Class B Common Stock at November 28, 2003 and November 29, 2002, respectively. During fiscal 2001, 22,086 shares of treasury stock were issued to Directors in lieu of cash payment of annual non-employee director retainer fees.
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 dilutive potential common stock.
(a) Options for 548,372, 413,181, and 380,729 shares of common stock were outstanding at November 28, 2003, November 29, 2002 and November 30, 2001, respectively, but were not included in computing diluted earnings (loss) per share in each of the respective periods because their effects were anti-dilutive. In addition, options for 100,667 shares of common stock were outstanding November 30, 2001, respectively, but were not included in computing diluted earnings per share because of the net loss.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7 -- Stock Option and Stock Purchase Plans
The Company established on June 29, 1992, an incentive stock option plan entitled the "1992 Employee Stock Option Plan" (the "1992 Plan"). The 1992 Plan authorizes the granting of options to key employees and officers to purchase an aggregate of 225,000 shares of the Company's Class B Common Stock. The exercise price of the options granted under the 1992 Plan may be no less than the fair market value of the shares subject thereto on the date of grant. Although the Board of Directors or Committee administering the 1992 Plan may authorize variations from the standard terms, options under the 1992 Plan will generally be exercisable in annual one-fourth increments, beginning one year from the date of grant, with an additional one-fourth becoming exercisable at the end of each of the years thereafter. The options are exercisable for ten years from the date of grant. The period for granting options under this plan has expired.
On February 1, 1995, the Company established an incentive stock option plan entitled the "1995 Employee Incentive Stock Option Plan" (the "1995 Employee Plan") and a non-employee stock option plan entitled the "1995 Non-employee Directors Stock Option Plan" (the "1995 Director Plan").
The 1995 Employee Plan authorizes the granting of options to key employees and officers to purchase an aggregate of 300,000 shares of the Company's Class B Common Stock. The exercise price of the options granted under the 1995 Employee Plan may be no less than the fair market value of the shares subject thereto on the date of grant. Although the Board of Directors or Committee administering the 1995 Employee Plan may authorize variations from the standard terms, options under the 1995 Employee Plan will generally be exercised in annual one-fourth increments, beginning one year from the date of grant, with an additional one-fourth becoming exercisable at the end of each of the years thereafter. The options are exercisable for ten years from the date of grant. At November 28 2003, there were 68,742 options available for grant under this plan.
The 1995 Director Plan authorizes the granting of options only to non-employee directors to purchase an aggregate of 210,000 shares of the Company's Class B Common Stock. The exercise price of the options granted under the 1995 Director Plan may be no less than the fair market value of the shares subject thereto on the date of grant. The 1995 Director Plan provided for automatic grant, to each current non-employee director, of options to purchase 15,000 shares upon approval by the stockholders and to any new non-employee director upon their appointment or election. Although the Board of Directors or Committee administering the 1995 Director Plan may authorize variations from the standard terms, options under the 1995 Director Plan will generally be exercised in annual one-third increments, beginning one year from the date of grant, with an additional one-third becoming exercisable at the end of each of the years thereafter. The options are exercisable for ten years from the date of grant. As of November 28, 2003, there were no options available for grant under this plan.
On February 3, 2002, the Company established an incentive stock option plan entitled the "2002 Stock Incentive Plan" ("the 2002 Plan"). The 2002 Plan authorizes the granting of options to key employees to purchase an aggregate of 300,000 shares of the Company's Class B Common Stock. The exercise price of the options granted under the 2002 Plan may be no less than the fair market value of the shares subject thereto on the date of grant. Although the Board of Directors or Committee administering the 2002 Plan may authorize variations from the standard terms, options under the 2002 Plan will generally be exercised in annual one-third increments, beginning one year from the date of grant, with an additional one-third becoming exercisable at the end of each of the years thereafter. The options are exercisable for ten years from the date of grant. At November 28 2003, there were 118,200 options available for grant under this plan.
On April 26, 2002, the Company established a non-employee stock option plan entitled the "2002 Non-Employee Director Plan" ("the 2002 Director Plan"). The 2002 Director Plan authorizes the granting of options to non-employee directors to purchase an aggregate of 180,000 shares of the Company's Class B Common Stock. The exercise price of the options granted under the 2002 Director Plan may be no less than the fair market value of the shares subject thereto on the date of grant. Although the Board of Directors or Committee administering the 2002 Plan may authorize variations from the standard terms, options under the 2002 Director Plan will generally be exercised in annual one-third increments, beginning one year from the date of grant, with an additional one-third becoming exercisable at the end of each of the years thereafter. The options are exercisable for ten years from the date of grant. At November 28 2003, there were 108,000 options available for grant under this plan.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7 -- Stock Option and Stock Purchase Plans -- (Continued)
A summary of the Company's stock option plans as of November 28, 2003, November 29, 2002, and November 30, 2001, and the changes during the years then ended on those dates are presented below:
The following table summarizes information about all stock options outstanding at November 28, 2003:
The options outstanding at November 28, 2003 expire at various times in 2004 through 2012.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 7 -- Stock Option and Stock Purchase Plans -- (Continued)
The fair value of options at the date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
--------------- Expected life (years) ................... 10 Expected stock price volatility.......... 150% Risk-free interest rate.................. 4.00%
At November 28, 2003 and November 29, 2002, 15,828 shares of the Company's Class B non-voting common stock were reserved for issuance to employees at a purchase price of not less than $1.00 per share under the Company's Executive Incentive Stock Purchase Plan. Shares issued under the plan are restricted as to disposition by the employees, with such restrictions lapsing over periods ranging from five to nine years from the date of issuance. If the participant's employment is terminated during the restricted period, his or her shares are required to be offered to the Company for repurchase at the original purchase price. The restrictions for all shares of stock issued under this plan have lapsed. Repurchased shares totaled 3,720 at November 28, 2003 and at November 29, 2002. During 2003 and 2002, no shares were repurchased or issued throughout the year. At November 28, 2003 and at November 29, 2002, 30,452 shares were outstanding.
Note 8 -- Segment Information
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 Plymouth Rubber 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.
The reporting segments utilize the accounting policies as described in the summary of significant accounting policies in the Company's consolidated financial statements. 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.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 8 -- Segment Information -- (Continued)
The table below presents information related to Plymouth Rubber's business segments for each of the past three years.
The Company has one customer, whose operations are primarily in the automotive industry, which accounted for 32%, 33% and 33% of net sales in 2003, 2002, and 2001, respectively.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 9 -- Leases
Included in Plant Assets in the accompanying Consolidated Balance Sheet is leased property under capital leases as follows:
November 28, November 29, 2003 2002 ---------------- ---------------- Machinery and equipment $ 2,702,000 $ 2,832,000 Less: accumulated amortization ........ 1,375,000 1,355,000 ---------------- ---------------- $ 1,327,000 $ 1,477,000 ================ ================
The Company entered into agreements for the sale and leaseback of certain machinery and equipment in the aggregate amount of $60,000 in 2002. The leases are for periods of 5 years, at the end of which the Company has buy-out options. The leases have been accounted for in accordance with Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Amortization of the property under capital leases is included in depreciation expense.
The following is a schedule by year of future minimum lease payments under capital leases at November 28, 2003:
2004............................................... $ 381,000 2005............................................... 90,000 2006............................................... 52,000 2007............................................... 32,000 Thereafter......................................... 7,000 ----------- Total minimum lease payments 562,000 Less: Amount representing interest 10,000 ----------- $ 552,000 ===========
Minimum annual rentals under noncancelable operating leases (which are principally for equipment) are as follows:
2004............................................... $ 577,000 2005............................................... 463,000 2006............................................... 262,000 2007............................................... -- 2008............................................... --
Total rental expense for 2003, 2002 and 2001 was 966,000, $1,185,000, and $1,071,000, respectively. Included in the total rental expense in each year are the warehousing costs incurred at various locations. The cost of keeping inventory at these warehouses is primarily determined on a usage basis.
Note 10 -- Transactions with Related Parties
The Company has a consulting agreement with a Director of the Company to provide the Company with various consulting services. During 2003, 2002 and 2001, consulting fees of $56,400, $56,400, and $51,700, respectively, were paid pursuant to this agreement.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 11 -- Commitments and Contingencies
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 $725,000 as of November 28, 2003 to cover future environmental expenditures related to these claims, which is net of $505,000 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 November 28, 2003 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 $277,000 as of November 28, 2003 to cover estimated future environmental cleanup expenditures, which is net of $961,000 payments made to date. Actual future costs may be different from the amount accrued for as of November 28, 2003.
Note 12 -- Discontinued Operations
Income from discontinued operations, net of tax of was $511,000 in 2003, due to a reduction in product warranty reserves for a roofing business that was discontinued in 1984. Management believes that this reserve, which was last charged with a claim in fiscal 1998, is no longer required, due to the expirations of warranties and a lack of claim activity.
PLYMOUTH RUBBER COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Note 13 -- Unaudited Quarterly Financial Data
The following table presents the quarterly information for fiscal 2003 and 2002.
(a) Sales in the first and third quarters of 2003 in Plymouth Tapes were reduced due to normal seasonal fluctuations. In addition, sales for the first quarter of 2003 for Brite-Line Technologies were reduced due to the highly seasonal nature of the highway market segment. Net income for the fourth quarter of 2003 includes $511,000 income from Discontinued Operations.
(b) Sales in the first and third quarters of 2002 in Plymouth Tapes were reduced due to normal seasonal fluctuations. In addition, sales for the first quarter of 2002 for Brite-Line Technologies were reduced due to the highly seasonal nature of the highway market segment. Net loss for the fourth quarter of 2002 was due to lower margins at Plymouth Tapes, resulting from higher raw material and overhead costs. Net loss for the first quarter of 2002 was also increased due to lower margins at Brite-Line and lower margins on foreign sales
Item 9.
Item 9. Disagreement on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, management evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Our disclosure controls and procedures include our internal controls. Maurice J. Hamilburg, President and Co-Chief Executive Officer, Joseph D. Hamilburg, Chairman and Co-Chief Executive Officer, and Joseph J. Berns, Vice President of Finance and Chief Financial Officer supervised and participated in this evaluation. Based on this evaluation, Maurice J. Hamilburg, Joseph D. Hamilburg, and Joseph J. Berns, concluded that, as of the date of their evaluation, our disclosure controls and procedures were effective.
(b) Changes in internal controls. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect those controls.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
To the extent not included in Part I hereof, the information required by this item is hereby incorporated by reference from the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement involves the election of Directors and is expected to be filed with the Commission within 120 days after the close of the fiscal year ended November 28, 2003.
Item 11.
Item 11. Executive Compensation
The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement involves the election of Directors and is expected to be filed with the Commission within 120 days after the close of the fiscal year ended November 28, 2003.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement involves the election of Directors and is expected to be filed with the Commission within 120 days after the close of the fiscal year ended November 28, 2003.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement involves the election of Directors and is expected to be filed with the Commission within 120 days after the close of the fiscal year ended November 28, 2003.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this item is hereby incorporated by reference from the Company's definitive proxy statement pursuant to Regulation 14A, which proxy statement involves the election of Directors and is expected to be filed with the Commission within 120 days after the close of the fiscal year ended November 28, 2003.
PART IV
Item 15.
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)1. Financial statements filed as part of this report are listed in the index appearing on page 15.
(a)2. Financial statement schedules required as part of this report are listed in the index appearing on page 15.
(a)3. Exhibits required as part of this report are listed in the index appearing on pages 47 - 50.
(b) None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PLYMOUTH RUBBER COMPANY, INC. (Registrant)
By /s/ JOSEPH J. BERNS --------------------------------------- Joseph J. Berns Vice President - Finance and Treasurer Date: February 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on February 26 , 2003.
SCHEDULE II PLYMOUTH RUBBER COMPANY, INC.
RESERVES
ACCOUNTS RECEIVABLE
INVENTORY
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS Exhibit No. Description - ------- -----------
2 Not Applicable.
3.1 Restated Articles of Organization -- incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 2, 1994.
3.2 By Laws, as amended -- incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended November 26, 1993.
4.1 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated December 29, 1995 -- incorporated by reference to Exhibit 4.8 to the report on Form 10-Q for the Quarter ended March 1, 1996.
4.2 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 report on Form 10-Q for the quarter ended March 1, 1996.
4.3 Demand Note between Plymouth Rubber Company, Inc. and LaSalle National Bank dated June 6, 1996 -- incorporated by reference to Exhibit 2.1 to the report on Form 8-K with cover page dated June 6, 1996.
4.4 Loan and Security Agreement between Plymouth Rubber Company, Inc. and LaSalle National Bank dated June 6, 1996 -- incorporated by reference to Exhibit 2.2 to the report on Form 8-K with cover page dated June 6, 1996.
4.5 Amendment to Master Security Agreement between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated February 19, 1997 -- incorporated by reference to Exhibit 4.6 to the report on Form 10-Q for the quarter ended February 25, 1997.
4.6 Master Security Agreement between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated January 29, 1997 -- incorporated by reference to Exhibit 4.12 to the Company's report on Form 10-Q for the quarter ended February 25, 1997.
4.7 Demand Note between Brite-Line Technologies, Inc. and LaSalle National Bank dated February 28, 1997 -- incorporated by reference to Exhibit 4.13 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
4.8 Loan and Security Agreement between Brite-Line Technologies, Inc. and LaSalle National Bank dated February 25, 1997 -- incorporated by reference to Exhibit 4.14 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
4.9 Continuing Unconditional Guaranty between Brite-Line Technologies, Inc. LaSalle National Bank dated February 25, 1997 -- incorporated by reference to Exhibit 4.15 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
4.10 Amendment to Loan and Security Agreement between Plymouth Rubber Company, Inc. and LaSalle National Bank dated May 7, 1997 -- incorporated by reference to Exhibit 4.16 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
(Continued)
Exhibit No. Description - ------- -----------
4.11 Continuing Unconditional Guaranty between Plymouth Rubber Company, Inc. and LaSalle National Bank dated March 20, 1997 -- incorporated by reference to Exhibit 4.17 to the Company's report on Form 10-Q or the quarter ended May 30, 1997.
4.12 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 4.18 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
4.13 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 4.19 to the Company's report on Form 10-Q for the quarter ended May 30, 1997.
4.14 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated December 3, 1997 -- incorporated by reference to Exhibit 4.14 to the Company's Annual Report on Form 10-K for the year ended November 27, 1998.
4.15 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated April 13, 1998 -- incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 10-K for the year ended November 27, 1998.
4.16 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated November 12, 1998 -- incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 10-K for the year ended November 27, 1998.
4.17 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated November 25, 1998 -- incorporated by reference to Exhibit 4.17 to the Company's Annual Report on Form 10-K for the year ended November 27, 1998.
4.18 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 4.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 26, 1999.
4.19 Amendment to Loan and Security Agreement between Brite-Line Technologies, Inc., and LaSalle National Bank dated February 18, 1999 - incorporated by reference to Exhibit 4.19 to the Company's Quarterly Report on Form 10-Q for the quarter ended February 26, 1999.
4.20 Promissory Note between Plymouth Rubber Company, Inc. and General Electric Capital Corporation dated June 29, 1999 - incorporated by reference to Exhibit 4.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended August 27, 1999.
9.1 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.
9.2 Voting Trust Amendment Number 6 -- incorporated by reference to Exhibit 9.2 of the Company's Annual Report on Form 10-K for the year ended December 2, 1994.
10.1 1982 Employee Incentive Stock Option Plan -- incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended November 26, 1993.
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
(Continued)
Exhibit No. Description - ------- -----------
10.2 General Form of Deferred Compensation Agreement entered into between the Company and certain officers -- incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended November 26, 1993.
10.3 1992 Employee Incentive Stock Option Plan -- incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended November 26, 1993.
10.4 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.
10.5 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.
10.6 Sales contract entered into between the Company and Kleinewefers Kunststoffanlagen GmbH -- incorporated by reference to Exhibit 10.6 of the Company's report on Form 10-Q for the quarter ended February 28, 1997
10.7 Second Modification Agreement between Plymouth Rubber Company, Inc. and General Electric Capital Corporation --incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K dated December 16, 2003
10.8 Security Agreement by and between Plymouth Rubber Company, Inc., General Electric Capital Corporation, The CIT Group/Equipment Financing, Inc. and Banknorth, N.A. Corporation --incorporated by reference to Exhibit 99.3 of the Company's Current Report on Form 8-K dated December 16, 2003.
10.9 Patent Security Agreement by and between Plymouth Rubber Company, Inc., General Electric Capital Corporation, The CIT Group/Equipment Financing, Inc. and Banknorth, N.A. --incorporated by reference to Exhibit 99.4 of the Company's Current Report on Form 8-K dated December 16, 2003.
10.10 Trademark Security Agreement by and between Plymouth Rubber Company, Inc., General Electric Capital Corporation, The CIT Group/Equipment Financing, Inc. and Banknorth, N.A. --incorporated by reference to Exhibit 99.5 of the Company's Current Report on Form 8-K dated December 16, 2003.
10.11 Modification Agreement between Plymouth Rubber Company, Inc. and Banknorth Leasing Corporation --incorporated by reference to Exhibit 99.6 of the Company's Current Report on Form 8-K dated December 16, 2003.
10.12 Mortgage and Assignment of Leases and Rents by Plymouth Rubber Company, Inc. to and for the benefit of General Electric Capital Corporation, The CIT Group/Equipment Financing, Inc. and Banknorth, N.A. --incorporated by reference to Exhibit 99.7 of the Company's Current Report on Form 8-K dated December 16, 2003.
10.13 First Modification to Mortgage and Assignments of Leases and Rents to and for the benefit of General Electric Capital Corporation, The CIT Group/Equipment Financing, Inc. and Banknorth, N.A. --incorporated by reference to Exhibit 99.8 of the Company's Current Report on Form 8-K dated December 16, 2003
11 Not Applicable.
12 Not Applicable.
PLYMOUTH RUBBER COMPANY, INC.
INDEX TO EXHIBITS
(Continued)
Exhibit No. Description - ------- -----------
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 Consent of Independent Auditors.
24 Not Applicable.
27 Not Applicable.
28 Not Applicable.
29 Not Applicable.
31.1 Certification of President and Co-Chief Operating Officer Pursuant to Rule 13a-14(a) to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chairman and Co-Chief Operating Officer Pursuant to Rule 13a-14(a) to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3 Certification of Vice President - Finance and Chief Financial Officer Pursuant to Rule 13a-14(a) to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.