10-Q 1 pmc10q2.txt PMC 10-Q 3/31/2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number: 333-92019 PLASTICS MFG. COMPANY (Exact name of registrant as specified in charter) WISCONSIN 39-1867101 (State of incorporation) (I.R.S Employer Identification Number) W190 N11701 MOLDMAKERS WAY GERMANTOWN, WISCONSIN 53022-8214 (Address of principal executive office) Registrant's telephone number, including area code: 262-255-5790 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes No X The number of common shares outstanding at May 8, 2001 was 3,792,812. PLASTICS MFG. COMPANY AND SUBSIDIARIES INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets, March 31, 2001 (unaudited) and September 30, 2000 (derived from audited financial statements) 1 Consolidated Statements of Operations, Three Months and Six Months Ended March 31, 2001 (unaudited) and March 31, 2000 (unaudited) 2 Consolidated Statements of Cash Flows, Six Months Ended March 31, 2001 (unaudited) and March 31, 2000 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 6. Exhibits and Reports on Form 8-K 11 (i) PART I. FINANCIAL INFORMATION

-1-

-2-

-3- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The accompanying condensed financial statements, in the opinion of management, reflect all adjustments which are normal and recurring in nature and which are necessary for a fair statement of the results for the periods presented. Some adjustments involve estimates which may require revision in subsequent interim periods or at year-end. In all regards, the financial statements have been presented in accordance with accounting principles generally accepted in the United States. Refer to notes to the financial statements which appear in the Annual Report in Form 10-K for the year ended September 30, 2000 for our accounting policies which are pertinent to these statements. Note 2. Certain legal proceedings are described under Part II, Item 1 of this report. Note 3. Accounts receivable balances include an allowance for doubtful accounts of $218,000 at March 31, 2001, and $40,000 at September 30, 2000. Note 4. Inventory is valued at the lower of cost (determined by the FIFO method) or market. The components of inventory consist of the following:

Note 5. The accumulated depreciation on fixed assets was $859,833 as of March 31, 2001 and $379,772 as of September 30, 2000. The provision for depreciation for the six months ended March 31, 2001 and 2000 was $480,062 and $84,715, respectively. Note 6. In fiscal 2001 we have completed two business acquisitions. On December 31, 2000, we purchased the stock of Statistical Plastics Company ("SPC"). The results of operations for the three months ended March 31, 2001 include the operations of SPC for the full quarter. On March 31, 2001, we purchased the stock of PCI Consulting and Leasing, Inc. ("PCI"). The following table presents the unaudited proforma -4- condensed results of operations for the three months ended March 31, 2001 as if the acquisition of PCI was completed at the beginning of the period and the unaudited proforma condensed results of operations for the six months ended March 31, 2001 as if the acquisitions of SPC and PCI were completed at the beginning of the period:

The unaudited proforma financial information includes certain assumptions or adjustments, not material in amount, which we believe are necessary to fairly present such information. The proforma information does not purport to represent what our results of operations would actually have been if these transactions had occurred at the beginning of the earliest period presented. -5- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES. We experienced a sales increase of 133% in the second quarter of fiscal 2001 over the second quarter of fiscal 2000. Sales for the six months ended March 31, 2001 increased $22.2 million or 163% to $35.8 million. The acquisition of SPC at 12/31/00 accounted for $1.04 million for the three and six months ended March 31, 2001. As a percentage of total sales SPC represented 6% for the second quarter of fiscal 2001 and 3% for the six months ended March 31, 2001. The continued rapid increases are primarily attributable to improved plant efficiency, increased customer demand and addition of new customers. The increase in sales is also attributable to a contract with a major customer to supply parts for a cellular phone. This program is a short-term program expected to significantly decrease after the second quarter of fiscal 2001. During the second quarter of fiscal 2001 our backlog of unfilled orders, believed to be firm, is down slightly from $18.5 million at December 31, 2000 to $17.7 million at March 31, 2001. Of the backlog at March 31, 2001 approximately $1.1 million pertained to the short-term program described above. We continue to capitalize on our relationship with Moldmakers, Inc. and Prototype Mold & Design, two of our related companies within the MGS Group, to produce tooling as part of our total manufacturing solution. Tooling sales for the quarter ended March 31, 2001 were $2.5 million, which equals the $2.5 million in tooling sales for the quarter ended March 31, 2000. For the six months ended March 31, 2001 tooling sales were $4.3 million compared with $3.8 million for the six months ended March 31, 2000. COST OF GOODS SOLD. In keeping with our significant increase in sales, cost of goods sold increased 123% from the second quarter of fiscal 2000 to the second quarter of fiscal 2001. However, when expressed as a percentage of sales, cost of goods sold decreased from 83% in fiscal 2000 to 79% in fiscal 2001. This decrease allowed us to recognize a gross profit of $3,827,000 for the second quarter of fiscal 2001 as compared to a gross profit of $1,352,000 for the second quarter of fiscal 2000. For the six months ended March 31, 2001 gross profit was $7,268,000 up from $2,291,000 for the six months ended March 31, 2000. That represents an increase in gross profit from 17% to 20%, as expressed as a percentage of sales. Materials costs as a percentage of molding sales increased from 32% for the second quarter of fiscal 2000 to 37% for the second quarter of fiscal 2001. For the six months ended March 31, 2000 materials content was 27% of sales as compared to 39% for the six months ended March 31, 2001. The increase in materials costs is due to product mix and increased -6- business in assembly and value-added services. Direct labor costs continued to increase in order to meet current and future sales growth. Comparing labor costs for the second quarter of fiscal 2000 to fiscal 2001 shows a significant decrease in labor as a percent of sales from 18% to 13%. When comparing the six months ended March 31, 2000 and 2001 we were able to lower labor costs even more dramatically from 22% of sales to 13% of sales. Fixed overhead remained relatively constant from quarter to quarter with the second quarter of fiscal 2001 equaling 17% of sales and the second quarter of fiscal 2000 equaling 16% of sales. Those numbers are up slightly from the year-to-date numbers of 15% for the six months ended March 31, 2001 and 14% for the six months ended March 31, 2000. The increase is due primarily to higher freight costs and additional quality, maintenance and program management personnel to allow us to keep pace with growing customer demand. During the second quarter of fiscal 2000 we received credits of approximately $700,000 with respect to various purchase orders for tooling which had been completed by related parties. The credits for the tooling purchase orders reflected adjustments to the contract price to reflect the actual costs incurred by the parties. No similar credits relating to purchase orders for tooling were received during the second quarter of fiscal 2001. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses for the second quarter of fiscal 2001 were $1,360,000 compared to $790,000 for the second quarter of fiscal 2000. Expenses for the six months ended March 31, 2001 were $2,879,000 compared to $1,403,000 for the six months ended March 31, 2000. This increase is due to the addition of sales and management personnel in an effort to increase our customer base and meet the growing needs of current manufacturing operations. However, even with the additional personnel we were able to lower selling and administrative expenses from 9% of sales to 7% of sales over comparable quarters and from 10% to 8% over comparable six-month periods. During the third quarter of fiscal 2000 we reached an agreement to terminate the existing management agreements. The agreements called for us to record a management fee equal to 5% of gross sales payable to various related entities for sales and marketing, consulting and reference services. Under those agreements we incurred a management fee of $398,000 for the second quarter of fiscal 2000 and $680,000 for the six months ended March 31, 2000. Had the management agreements been in place during fiscal 2001 the management fee would have been $928,000 for the second quarter and $1,789,000 for the six months ended March 31, 2001. INTEREST EXPENSE. For the second quarter of fiscal 2001 interest expense totaled $145,000 compared with $51,000 for the second quarter of 2000. Interest expense for the six months ended March 31, 2001 and 2000 totaled $290,000 and $74,000, respectively. Interest expense arises from -7- borrowings on our line of credit and capital leases for equipment financing. Use of our line of credit has and will continue to increase with increased sales levels and the directly related increases in accounts receivable and inventory. INCOME TAX EXPENSE. Income tax expense was $908,000 for the second quarter of fiscal 2001 and $43,100 for the second quarter fiscal 2000. Income tax expense for the six months ended March 31, 2001 and 2000 totaled $1,628,000 and $51,000, respectively. These amounts are calculated as a percentage of pre-tax income at the end of the above stated periods. NET INCOME. Net income for the second quarter of fiscal 2001 and fiscal 2000 equaled $1,414,000 and $70,000, respectively. For the six months ended March 31, 2001 net income totaled $2,471,000 for a profit margin of 6.9% compared with net income of $83,000 and .6% for the six months ended March 31, 2000. We were able to greatly increase profitability due to the rapid sales increase and the corresponding increase in utilization of labor and equipment. During the second quarter of fiscal 2001 and the six months ended March 31, 2001, SPC accounted for $42,000 of the net income figures or 1.7% and 3.0% of the total for the three and six month periods. LIQUIDITY AND CAPITAL RESOURCES We are continuing to finance our operations with a combination of private capital, a bank line of credit facility and leases. We maintain a $7 million line of credit from M&I Northern Bank. The acquisition of SPC brought to PMC an additional line of credit of $500,000 from M&I Northern Bank. Net cash used by operating activities totaled $2,536,000 for the six months ended March 31, 2000; cash provided by operating activities totaled $1,295,000 for the six months ended March 31, 2001. Cash used in operating activities during the first six months of fiscal 2000 resulted primarily from the necessity of funding inventory and accounts receivable growth in excess of our accounts payable growth. Cash provided by operating activities during the first six months of fiscal 2001 is due primarily to net income of $2.5 million. Net cash used in investing activities totaled $746,000 for the first six months of fiscal 2000 while investing activities provided cash of $1,415,000 for the first six months of fiscal 2001. Cash used in investing activities for the first six months of fiscal 2000 resulted from the acquisition of leasehold improvements and manufacturing equipment. -8- Cash used in investing activities for the first six months of fiscal 2001 resulted from the acquisition of manufacturing equipment. Net cash provided by financing activities totaled $3,113,000 for the first six months of fiscal 2000 and $250,000 for the first three months of fiscal 2001. Cash provided by financing activities for the first six months of fiscal 2000 resulted primarily from draws on our bank line of credit and sale of company stock. Cash provided by financing activities for the first six months of fiscal 2001 resulted primarily from proceeds from long-term debt. We believe that current cash balances, cash flows from current operations, and available term debt and lease financing will be sufficient to fund working capital and capital expenditure requirements for the 2001 fiscal year. We currently are focusing on existing operations in Wisconsin and Illinois. Expansion plans beyond these operations are in their earliest stages. Our forecast of the period of time through which our financial resources will be adequate is a forward-looking statement that involves risks and uncertainties. Our actual funding requirements may differ materially from our forecasts as a result of a number of factors including our plans to expand our operations and the expansion of our value added and assembly operations as part of our total manufacturing solution. We cannot be certain that additional funds will be available on satisfactory terms when needed, if at all. If we are unable to raise additional necessary capital in the future, we may be required to scale down our expansion plans significantly. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS This report contains certain of our expectations and other forward- looking information regarding the company pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. While we believe that these forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and all such statements involve risk and uncertainties that could cause actual results to differ materially from those contemplated in this report. The assumptions, risks and uncertainties relating to the forward-looking statements in this report include general economic and business conditions, developments in our planned expansion, availability of adequate capital, changes in the prices of raw materials, and competitive pricing in the markets served by us. These and other assumptions, risks and uncertainties are described under the caption "Cautionary Statement Regarding Forward-Looking Information" set forth in Item 1 of our Annual Report on Form 10-K for the year ended September, 2000. -9- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the information provided in response to Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2000. -10- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the second quarter we settled a lawsuit filed by us on February 7, 1999, in the District Court of Tarrant County, Texas, with respect to a lease entered into by us in November, 1998. As part of the settlement, we have agreed to pay rent in the sum of $250,000 and forfeit a lease deposit of $25,000. The costs of this settlement were expensed in the second quarter. ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K: The following exhibits have been filed with the Securities and Exchange Commission. Exhibits filed as part of this report, and listed below, are set forth on the Exhibit Index which follows the signature page. EXHIBIT NUMBER EXHIBIT DESCRIPTION 3.1 Registrant's Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 to Form S-1 (Registration No. 333-92019) 3.2 Registrant's By-laws, as amended November 29, 1999, incorporated by reference to Exhibit 3.2 to Form S-1 (Registration No. 333-92019) 4.1 Loan Agreement between M&I Northern Bank and PMC, as last amended November 7, 2000, incorporated by reference to Exhibit 4.2 to Annual Report on Form 10-K for the year ended September 30, 2000 (Commission File No. 333-92019) 10.01 Mark G. Sellers Stock Option Agreement, incorporated by reference to Exhibit 10.01 to Form S-1 (Registration No. 333-92019) 10.02 MGS Childrens' Trust Stock Option Agreement, incorporated by reference to Exhibit 10.02 to Form S-1 (Registration No. 333-92019) 10.03 Moose Lake Trust Stock Option Agreement, incorporated by reference to Exhibit 10.03 to Form S-1 (Registration No. 333-92019) 10.04 Moldmakers Leasing & Investments Limited Partnership, LLP Stock Option Agreement, incorporated by reference to Exhibit 10.04 to Form S-1 (Registration No. 333-92019) -11- 10.05 Moldmakers, Inc. Stock Option Agreement, incorporated by reference to Exhibit 10.05 to Form S-1 (Registration No. 333-92019) 10.06 Management Agreement Between Registrant and MGS Enterprises, Inc. dated December 31, 1996, as amended and terminated May 1, 2000, incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (Commission File No. 333-92019) 10.07 Management Agreement Between Registrant and Moldmakers Management, Inc. dated December 31, 1996, as amended and terminated May 1, 2000, incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (Commission File No. 333-92019) 10.08 Management Agreement Between Registrant and Statistical Plastics Corporation dated December 31, 1996, as amended and terminated May 1, 2000, incorporated by reference to Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (Commission File No. 333-92019) 10.09 Master Equipment Lease between Registrant and Moldmakers Leasing & Investments Limited Partnership, LLP, incorporated by reference to Exhibit 10.09 to Form S-1 (Registration No. 333-92019) 10.10 Master Equipment Lease between Registrant and PCI Consulting and Leasing, Inc., incorporated by reference to Exhibit 10.10 to Form S-1 (Registration No. 333-92019) 10.11 ITW Paslode, Cordless Tool Group Supply Agreement, incorporated by reference to Exhibit 10.11 to Form S-1 (Registration No. 333-92019) 10.12 Lease on Germantown, Wisconsin, Facility, incorporated by reference to Exhibit 10.13 to Form S-1 (Registration No. 333-92019) 10.13 Plastics Mfg. Company Restricted Stock Plan, incorporated by reference to Form S-8 (Registration No. 333-45830) 21.1 Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1 to Form S-1 (Registration No. 333-92019) (B) REPORTS ON FORM 8-K: A Form 8-K dated March 31, 2001 was filed on April 4, 2001 to report the acquisition of PCI Consulting and Leasing, Inc. ("PCI") pursuant to a share exchange in which PCI became a wholly-owned subsidiary of the company. We filed PCI's audited financial statements as of December 31, 2000 and 1999, and for each of the years in the three-year period ended December 31, 2000. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLASTICS MFG. COMPANY May 15, 2001 SCOTT W. SCAMPINI Scott W. Scampini Executive Vice President-Finance (On behalf of the Registrant and as Principal Financial Officer) -13- EXHIBIT INDEX TO FORM 10-Q OF PLASTICS MFG. COMPANY FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. Section 232.102(d)) Exhibits filed as part of this report: None -14-

PLASTICS MFG CO 10-Q