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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK, $0.25 PAR VALUE, 4,828,036 SHARES AS OF MAY 10, 2001
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............25
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities.........................................26
Item 6. Exhibits and Reports on Form 8-K......................................26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------------
2001 2000
---- ----
Net sales $ 34,581 $ 37,666
Cost of sales 30,162 31,834
-------- --------
Gross profit 4,419 5,832
Selling and administrative expenses 2,475 3,019
-------- --------
Income from operations 1,944 2,813
Interest expense 2,325 2,437
-------- --------
Income (loss) before income taxes (381) 376
Income tax provision - 113
-------- --------
Net income (loss) $ (381) $ 263
======== ========
Basic and diluted net income (loss) available to
common stockholders $ (0.08) $ 0.05
======== ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS:
Current assets:
Cash $ 60 $ 65
Accounts receivable 21,984 19,912
Inventories 9,722 11,109
Prepaid expenses and other current assets 3,574 3,833
Deferred income taxes 2,049 2,049
--------- ---------
Total current assets 37,389 36,968
Property, plant, and equipment, net 60,933 62,778
Excess of cost over net assets of businesses acquired 8,068 8,147
Other assets 2,663 2,396
--------- ---------
Total assets $ 109,053 $ 110,289
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 13,919 $ 16,993
Accrued expenses 12,735 11,158
Short-term debt 89,626 88,996
--------- ---------
Total current liabilities 116,280 117,147
--------- ---------
Long-term debt, excluding current portion 101 104
--------- ---------
Deferred income taxes and other long-term liabilities 2,252 2,244
--------- ---------
Series B preferred stock 330 330
--------- ---------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,828,036 shares issued 1,207 1,207
Additional paid-in-capital 12,960 12,960
Accumulated deficit (24,077) (23,703)
--------- ---------
Total stockholders' deficit (9,910) (9,536)
--------- ---------
Total liabilities and stockholders' deficit $ 109,053 $ 110,289
========= =========
See notes to consolidated financial statements
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (381) $ 263
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 3,068 2,874
Amortization included in operating expense 304 394
Amortization included in interest expense 45 49
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable (2,072) 466
Inventories 1,387 (304)
Prepaid expenses and other current assets 236 129
Accounts payable (3,074) 4,637
Accrued expenses 1,577 (267)
Other 6 (39)
------- -------
Net cash provided by operating activities 1,096 8,202
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INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (1,226) (6,151)
Net decrease (increase) in equipment deposits (181) 156
Expenditures for tooling owned by customers (194) (189)
Other 31 29
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Net cash used by investing activities (1,570) (6,155)
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FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 786 66
Proceeds of secured, amortizing term loans 2,000 -
Repayment of secured, amortizing term loans (2,159) (1,981)
Other (158) (63)
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Net cash provided (used) by financing activities 469 (1,978)
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Net increase (decrease) in cash (5) 69
Cash at beginning of period 65 8
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Cash at end of period $ 60 $ 77
======= =======
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"). The consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, the consolidated financial statements do not include all the
information and footnotes included in the Company's annual consolidated
financial statements. Significant accounting policies followed by the Company
are set forth in Note 1 to the consolidated financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
Subject to the Company's ability to successfully restructure its
indebtedness as discussed below, in the opinion of management, the unaudited
interim consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company at March 31, 2001, and the
Company's results of operations and cash flows for the three-month periods ended
March 31, 2001 and 2000. All such adjustments were of a normal, recurring
nature.
The results of operations for the three-month period ended March 31,
2001, are not necessarily indicative of the results to be expected for the full
year or for any succeeding quarter.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year's presentation.
The Company's consolidated financial statements have been presented on
a going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company is in default on its senior subordinated notes because it
did not make the payments of principal, in the amount of $27,412,000, and
interest, in the amount of $1,748,000, that were due on February 1, 2000. On
December 28, 1999, the Company had commenced a consent solicitation seeking
consents of the holders of the senior subordinated notes to an extension of the
maturity date of the senior subordinated notes to February 1, 2003, and
providing for certain increases in the interest rate payable on the notes. The
consent solicitation expired on December 29, 2000, without the Company having
received the requisite consents.
During March 2001, the Company reached an agreement in principle with
the four largest holders of the senior subordinated notes on the terms of a
restructuring of the senior subordinated notes. The major terms of the agreement
in principle are set forth below:
- conversion of the accrued and unpaid interest on the senior
subordinated notes through the day before the effective date
of the proposed restructuring into additional senior
subordinated notes; the accrued and unpaid interest on the
senior subordinated notes aggregated $5,825,000 at March 31,
2001,
- an extension of the maturity date to December 31, 2004,
- an increase in the interest rate to 14% for the period from
the effective date of the proposed restructuring through
December 31, 2001, and to 15% thereafter,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- a change in the frequency of interest payments from
semi-annual to quarterly, and
- a number of changes in financial covenants, primarily designed
to reduce the Company's ability to incur additional debt, pay
cash dividends, and redeem capital stock.
If the proposed restructuring becomes effective, the Company will pay a
consent fee of 3% of the principal amount of senior subordinated notes in
respect of which it receives valid consents and issue warrants to purchase, in
the aggregate, approximately 3% of the Company's common stock.
Since February 1, 2000, the holders of substantially all of the
Company's indebtedness other than the senior subordinated notes have waived
cross-default provisions with respect to the default on the senior subordinated
notes and have granted extensions of loans that have been scheduled to mature.
The Company has made all scheduled payments of interest and principal on all of
its indebtedness as extended, other than the senior subordinated notes, since
February 1, 2000. The actions of the various lenders are set forth below:
- The lenders providing loans under the Company's revolving line
of credit and the lenders providing secured, amortizing term
loans have waived the cross-default provisions with respect to
the default on the senior subordinated notes through August 1,
2001. Since February 1, 2000, the Company has been permitted
to continue borrowing under its revolving line of credit and
has received new term loans secured by equipment in the
aggregate principal amount of $4,460,000 under two of its
equipment lines of credit.
- The holder of the Company's 12% secured term note, in the
outstanding principal amount of $1,370,000, has extended the
maturity date of that note to July 31, 2001; that note has no
cross-default provision with respect to the default on the
senior subordinated notes. The Company recently reached an
agreement in principle with the holder of the 12% secured term
note to extend the maturity of the note to the fifth
anniversary of the effective date of the restructuring of the
senior subordinated notes. If the extension of the note is
completed, the principal amount of the note would be payable
in sixty equal, monthly installments.
- The holder of the Company's senior, unsecured note, in the
outstanding principal amount of $7,500,000, has extended the
maturity date of that note to August 1, 2001, and has waived
the cross-default provisions with respect to the default on
the senior subordinated notes. During 2000, the Company
reached a non-binding agreement with the holder of the senior,
unsecured note on a proposed amendment to the terms of the
senior, unsecured note. In connection with that non-binding
agreement, the effective interest rate on the note increased
to 12 1/2% for the twelve-month period ending August 1, 2001.
The Company recently made a revised proposal to amend the
terms of the senior, unsecured note. The principal terms of
that proposal are the following:
- an extension of the maturity date to December 31,
2004,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- an increase in the interest rate to 13% for the
period from the effective date of the proposed
restructuring through December 31, 2001, with a
further increase to 14% thereafter, and
- quarterly principal payments of $625,000, commencing
on March 31, 2002.
The Company has offered to pay an amendment fee of 2% of the
principal amount of the senior, unsecured note. The holder of
the senior, unsecured note has not yet responded to the
Company's proposal.
- The holder of the Company's junior subordinated notes, in the
outstanding principal amount of $347,000, has extended the
maturity date of those notes to August 1, 2001, has deferred
six quarterly interest payments on those notes to August 1,
2001, and has waived the cross-default provision with respect
to the default on the senior subordinated notes. The Company
has reached an agreement in principle with the holder of the
junior subordinated notes to extend the maturity date of the
junior subordinated notes to March 31, 2005, and to increase
the interest rate thereon to 15% for the period from the
effective date of the extension through December 31, 2001, and
to 16% thereafter.
- The holders of the Company's junior subordinated convertible
notes, which were outstanding on December 31, 1999, in the
aggregate principal amount of $1,000,000, have deferred one
quarterly interest payment on those notes to August 1, 2001,
and have waived the cross-default provision with respect to
the default on the senior subordinated notes. On February 1,
2000, the junior subordinated convertible notes were converted
into 440,000 shares of our common stock. The Company has
reached an agreement in principle with the holders of the
junior subordinated convertible notes to convert the deferred
interest to additional junior subordinated notes due March 31,
2005.
In order to complete the extensions of its matured and maturing debt,
the Company must also renegotiate its senior, secured financing arrangements in
order to provide financing for its on-going working capital and capital
expenditure requirements and reduce its past-due accounts payable. The Company
believes that it will be unable to obtain adequate financing to reduce its
accounts payable to levels that are customary for the industries in which it
operates. As a result, the Company is negotiating with certain of its trade
creditors to further extend the payment dates of its past-due accounts payable
and has reached agreements in principle with a number of such trade creditors on
such an extension.
The Company expects to begin shortly a consent solicitation seeking
consent of the holders of the senior subordinated notes to an amendment that
reflects the terms of the agreement in principle with the four largest holders
of the senior subordinated notes; however, the Company can give no assurance
that it will be able to obtain the necessary consents, to reach an agreement for
an extension of the senior, unsecured notes, to negotiate an extension of
past-due accounts payable, or to renegotiate its senior, secured financing
arrangements on satisfactory terms. If the Company is unable to do so, it may be
forced to seek relief from its creditors under the Federal bankruptcy code. Any
proceeding under the Federal bankruptcy code could have a material adverse
effect on the Company's results of operations and financial position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- INVENTORIES
Inventories at March 31, 2001, and December 31, 2000, are set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Finished goods $ 4,432 $ 5,067
Work in process 2,498 2,677
Raw materials and purchased parts 2,792 3,365
---------- ----------
$ 9,722 $ 11,109
========== ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 2001, and December 31,
2000, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Land $ 2,350 $ 2,348
Buildings 24,075 24,022
Equipment 107,117 106,004
----------- ----------
133,542 132,374
Accumulated Depreciation 72,609 69,596
----------- ----------
Property, plant, and equipment, net $ 60,933 $ 62,778
=========== ==========
NOTE 4 -- ACCRUED EXPENSES
At March 31, 2001, and December 31, 2000, accrued expenses included
accrued interest expense of $6,105,000 and $5,234,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- DEBT
Debt at March 31, 2001, and December 31, 2000, is set forth below
(dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
Short-term debt:
Revolving line of credit $ 19,963 19,177
Secured, amortizing term loans 33,021 33,178
12% secured term note 1,370 1,370
Senior, unsecured note 7,500 7,500
Senior subordinated notes 27,412 27,412
Junior subordinated notes 347 347
Current portion of long-term debt 13 12
--------- --------
Total short-term debt $ 89,626 $ 88,996
========= ========
Long-term debt:
Other 114 116
Less current portion 13 12
--------- --------
Total long-term debt $ 101 $ 104
========= ========
REVOLVING LINE OF CREDIT
The loans outstanding under the revolving line of credit at March 31,
2001, and December 31, 2000, have been classified as short-term debt because the
Company's cash receipts are automatically used to reduce such loans on a daily
basis, by means of a lock-box sweep arrangement, and the lender has the ability
to modify certain terms of the revolving line of credit without the approval of
the Company. The loans are also classified as short-term at March 31, 2001, and
December 31, 2000, because at each of those dates the Company's lenders had
granted waivers, for a period of less than one year, of the cross-default
provisions of the revolving line of credit with respect to the default on the
senior subordinated notes.
At March 31, 2001, availability under the revolving line of credit
totaled $2,265,000, before outstanding checks of $1,071,000 were deducted. At
March 31, 2001, the interest rates on loans outstanding under the revolving line
of credit were the London Interbank Offered Rate (LIBOR) plus 2 1/2% and the
prime rate.
The loans outstanding under the Company's revolving line of credit are
collateralized by substantially all of the assets of the Company, including
accounts receivable, inventories, equipment, certain real estate, and the stock
of Lexington Rubber Group, Inc., a subsidiary of the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM LOANS
Secured, amortizing term loans outstanding at March 31, 2001, and
December 31, 2000, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- -------------
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.37% $ 2,396 $ 2,454
Term loans payable in equal monthly principal installments, final
Maturities in 2002, LIBOR plus 2 3/4% 904 1,091
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,164 1,191
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,279 2,330
Term loans payable in equal monthly principal installments, final
Maturities in 2002, prime rate and LIBOR plus 2 1/2% 993(1) 1,222(1)
Term loan payable in equal monthly principal installments, final
Maturity in 2003, prime rate 363 409
Term loan payable in equal monthly principal installments, final
Maturity in 2003, prime rate and LIBOR plus 2 1/2% 221(1) 251(1)
Term loan payable in equal monthly principal installments, final
Maturities in 2003, LIBOR plus 2 3/4% 667 747
Term loans payable in equal monthly principal installments, final
Maturities in 2004, LIBOR plus 2 3/4% 1,062 1,145
Term loan payable in equal monthly principal installments, final
Maturity in 2004, prime rate and LIBOR plus 2 1/2% 860 928
Term loans payable in equal monthly principal installments, final
Maturities in 2004, prime rate and LIBOR plus 2 1/2% 8,433(1) 9,136(1)
Term loan payable in equal monthly principal installments, final
Maturity in 2005, LIBOR plus 2 1/2% 971 1,027
Term loan payable in equal monthly principal installments, final
Maturity in 2005, prime rate and LIBOR plus 2 1/2% 1,033(1) 1,094(1)
Term loan payable in equal monthly principal installments, final
Maturity in 2006, prime rate 414 435
Term loans payable in equal monthly principal installments, final
Maturities in 2006, prime rate and LIBOR plus 2 1/2% 5,171(1) 5,422(1)
Term loans payable in equal monthly installments, final maturity in
2007, prime rate and LIBOR plus 2 1/2% 4,123(1) 4,296(1)
Term loans payable in equal monthly installments, final maturity in
2008, prime rate and LIBOR plus 2 1/2% 1,967(1) -
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$33,021 $33,178
======= =======
(1) Maturity date can be accelerated by the lender if the Company's revolving
line of credit expires prior to the stated maturity date of the term loan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The portions of the secured, amortizing term loans that are due more
than one year after the date of the consolidated financial statements were
classified as short-term debt because the Company's lenders had granted waivers,
for a period of less than one year, of the cross-default provisions of such term
loans with respect to the default on the senior subordinated notes.
The secured, amortizing term loans are collateralized by substantially
all of the assets of the Company, including accounts receivable, inventories,
equipment, certain real estate, and the stock of Lexington Rubber Group, Inc.
SENIOR, UNSECURED NOTE
The senior, unsecured note, due August 1, 2001, bore interest at 10
1/2% per annum until July 31, 2000. The effective interest rate increased to 12
1/2% on August 1, 2000. The holder of that note has waived, until August 1,
2001, the cross-default provision of the note with respect to the default on the
senior subordinated notes. The senior, unsecured note is senior in right of
payment to the senior subordinated notes and the junior subordinated notes.
SENIOR SUBORDINATED NOTES
The senior subordinated notes, which matured on February 1, 2000, are
unsecured obligations of the Company that are subordinated in right of payment
to all of the Company's existing and future secured debt and to the payment of
the senior, unsecured note. The senior subordinated notes currently bear
interest at 12 3/4% per annum. On February 1, 2000, the Company failed to make
the payments of interest and principal then due on the senior subordinated notes
in the amounts of $1,748,000 and $27,412,000, respectively. For a more detailed
discussion of the status of the senior subordinated notes, refer to Note 1,
"Basis of Presentation."
JUNIOR SUBORDINATED NOTES
The junior subordinated convertible notes and the junior subordinated
nonconvertible notes are unsecured obligations of the Company. The $1,000,000
principal amount of junior subordinated convertible notes were converted into
440,000 shares of common stock on February 1, 2000. The junior subordinated
nonconvertible notes are due on August 1, 2001, and are subordinated in right of
payment to all existing and future secured debt of the Company, to the senior,
unsecured note, and to the senior subordinated notes. The junior subordinated
notes currently bear interest at 14% per annum. The holders of the junior
subordinated notes have deferred until August 1, 2001, all interest payments
that were due on or after February 1, 2000, and have waived their cross-default
provisions with respect to the default on the senior subordinated notes.
RESTRICTIVE COVENANTS
Certain of the Company's financing arrangements contain covenants that
set minimum levels of working capital, net worth, and cash flow coverage. The
covenants also place certain restrictions and limitations on the Company's
business and operations, including the incurrence or assumption of additional
debt, the level of past-due accounts payable, the sale of all or substantially
all of the Company's assets, the purchase of plant and equipment, the purchase
of common stock, the redemption
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of preferred stock, and the payment of cash dividends. In addition,
substantially all of the Company's financing agreements include cross-default
provisions.
From time to time, the Company's lenders have agreed to waive or amend
certain of the financial covenants contained in the Company's various loan
agreements in order to maintain or otherwise ensure the Company's current or
future compliance. The Company cannot assure you that its lenders will agree to
waive or amend these covenants in the future. In the event that the Company is
not in compliance with any of its covenants in the future and its lenders do not
agree to amend or waive those covenants, the lenders would have the right to
declare the indebtedness under their loan agreements to be immediately due and
payable and the violation might trigger cross-default provisions under
substantially all of the Company's other indebtedness. In those circumstances,
the holders of that indebtedness, would, among other things, have the right to
declare the indebtedness to be immediately due and payable, in which event the
Company might be required to consider alternatives, including seeking relief
from its creditors under the Federal bankruptcy code. Any proceeding under the
Federal bankruptcy code could have a material adverse effect upon the Company's
results of operations and financial position. For a more detailed discussion of
recent amendments to and waivers under the Company's various loan agreements,
refer to Note 1, "Basis of Presentation."
NOTE 6 -- SERIES B PREFERRED STOCK
At March 31, 2001, and December 31, 2000, there were outstanding 3,300
shares of the Company's $8 cumulative convertible preferred stock, series B, par
value $100 per share. Each share of series B preferred stock is redeemable at
$200 per share.
As more fully discussed in Note 1, the Company did not make the
payments of interest and principal on the senior subordinated notes that were
due on February 1, 2000, in the amounts of $1,748,000 and $27,412,000,
respectively. As a result, the Company is prohibited from making any dividend
payments on or redemptions of the series B preferred stock until it cures the
payment default. At March 31, 2001, the Company was in arrears on the payment of
five dividends and the redemption of 450 shares of series B preferred stock in
the amount of $33,000 and $90,000, respectively.
NOTE 7 -- INCOME TAXES
At March 31, 2001, and December 31, 2000, the Company's net deferred
income tax assets were fully offset by a valuation allowance.
NOTE 8 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common
share for the first three months of 2001 and 2000 are set forth below (in
thousands, except per share amounts). The pro forma conversion of the Company's
potentially dilutive securities (the 14% junior subordinated convertible notes
and the $8 cumulative convertible preferred stock, series B) was not dilutive
for the three-month periods ended March 31, 2001 and 2000. As a result, the
calculations of diluted net income or loss per common share set forth below do
not reflect any pro forma conversion.
For purposes of calculating earnings per share, earnings are reduced by
(1) preferred stock dividends and (2) the amount by which payments made to
redeem preferred stock exceeded the par value
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14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of such shares. During the three-month periods ended March 31, 2001 and 2000,
the Company did not pay any dividends on, or redeem any shares of, the series B
preferred stock.
THREE MONTHS
ENDED
MARCH 31
----------------------
2001 2000
---- ----
Numerators:
Net income (loss) $ (381) $ 263
Preferred stock dividends - (7)
Excess of redemption value over par value of
preferred stock redeemed during the year - (11)
------- --------
Numerator for basic net income (loss) per share--
income (loss) available to common stockholders (381) 245
Effect of assumed conversion of dilutive securities:
14% junior subordinated convertible notes - -
------- --------
Numerator for diluted net income (loss) per share--
income (loss) available to common stockholders
$ (381) $ 245
======= ========
Denominators:
Denominator for basic net income (loss) per share--
weighted-average common shares 4,828 4,641
Adjustments to derive denominator for diluted net
income (loss) per share:
Conversion of 14% junior subordinated
convertible notes into 440,000 common shares - 150
Issuance of 125,000 shares of restricted common
stock - 37
------- --------
Denominator for diluted net income (loss) per share--
adjusted weighted average common shares 4,828 4,828
======= ========
Per share data:
Basic and diluted net income (loss) available to
common stockholders $ (0.08) $ 0.05
======= ========
-12-
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month periods ended March 31, 2001 and 2000, is
summarized below (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------------
2001 2000
---- ----
NET SALES:
Rubber Group $ 23,939 $ 28,971
Metals Group 10,642 8,695
---------- ----------
Total net sales $ 34,581 $ 37,666
========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 1,869 $ 3,719
Metals Group 570 (297)
---------- ----------
Subtotal 2,439 3,422
Corporate office (495) (609)
---------- ----------
Total income from operations $ 1,944 $ 2,813
========== ==========
ASSETS:
Rubber Group $ 71,637 $ 74,331
Metals Group 34,526 37,225
---------- ----------
Subtotal 106,163 111,556
Corporate office 2,890 2,494
---------- ----------
Total assets $ 109,053 $ 114,050
========== ==========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,201 $ 2,039
Metals Group 1,149 1,210
---------- ----------
Subtotal 3,350 3,249
Corporate office 22 19
---------- ----------
Total depreciation and amortization $ 3,372 $ 3,268
========== ==========
CAPITAL EXPENDITURES:
Rubber Group $ 1,067 $ 4,067
Metals Group 159 2,083
---------- ----------
Subtotal 1,226 6,150
Corporate office - 1
---------- ----------
Total capital expenditures $ 1,226 $ 6,151
========== ==========
(1) Does not include amortization of deferred financing expenses, which
totaled $45,000 and $49,000 during the three-month periods ended
March 31, 2001 and 2000, respectively, and which is included in
interest expense in the consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Some of our statements in this section are "forward-looking
statements," as that term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements usually can be identified by our use of
words like "believes," "expects," "may," "will," "should," "anticipates,"
"estimates," "projects," or the negative thereof. They may be used when we
discuss strategy, which typically involves risk and uncertainty, and they
generally are based upon projections and estimates rather than historical facts
and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- unanticipated operating results and cash flows,
- increases or decreases in capital expenditures,
- changes in economic conditions,
- strength or weakness in the North American automotive market,
- changes in the competitive environment,
- changes in interest rates,
- the possibility of product warranty claims,
- labor interruptions at our facilities or at our customers'
facilities,
- the impact on our operations of the defaults on our
indebtedness and the delays in paying our accounts payable,
and
- our inability to obtain additional borrowings or to refinance
our existing indebtedness.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate.
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All forward-looking statements are expressly qualified by the
discussion above.
RESULTS OF OPERATIONS-- FIRST QUARTER OF 2001 VERSUS FIRST QUARTER OF 2000
The following table sets forth our consolidated operating results for
the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 34,581 100.0% $ 37,666 100.0%
Cost of sales 30,162 87.2 31,834 84.5
--------- ------- --------- -------
Gross profit 4,419 12.8 5,832 15.5
Selling and administrative expenses 2,475 7.2 3,019 8.0
--------- ------- --------- -------
Income from operations 1,944 5.6 2,813 7.5
Add back depreciation and amortization (1) 3,372 9.8 3,268 8.6
--------- ------- --------- -------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 5,316 15.4% $ 6,081 16.1%
========= ======= ========= =======
Net cash provided by operating
activities (3) $ 1,096 3.2% $ 8,202 21.8%
========= ======= ========= =======
(1) Does not include amortization of deferred financing expenses,
which totaled $45,000 and $49,000 during the first quarters of
2001 and 2000, respectively, and which is included in interest
expense in the consolidated financial statements.
(2) Earnings before interest, taxes, depreciation, and amortization,
which is commonly referred to as EBITDA, is not a measure of
performance under accounting principles generally accepted in the
United States and should not be used as a substitute for income
from operations, net income, net cash provided by operating
activities, or other operating or cash flow statement data
prepared in accordance with generally accepted accounting
principles. We have presented data related to EBITDA because we
believe that EBITDA is used by investors as supplemental
information to evaluate the operating performance of a business,
including its ability to incur and to service debt. In addition,
our definition of EBITDA may not be the same as the definition of
EBITDA used by other companies.
(3) The calculation of net cash provided by operating activities is
detailed in the consolidated statement of cash flows that is part
of our consolidated financial statements in Part I, Item 1.
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The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the corporate office for the
three-month periods ended March 31, 2001 and 2000.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any material reduction in the level
of activity in the automotive industry may have a material adverse effect on the
results of operations of the Rubber Group and on our company taken as a whole.
The following table sets forth the operating results of the Rubber
Group for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 23,939 100.0% $ 28,971 100.0%
Cost of sales 20,757 86.7 23,581 81.4
--------- ------- --------- -------
Gross profit 3,182 13.3 5,390 18.6
Selling and administrative expenses 1,313 5.5 1,671 5.8
--------- ------- --------- -------
Income from operations 1,869 7.8 3,719 12.8
Add back depreciation and amortization 2,201 9.2 2,039 7.1
--------- ------- --------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 4,070 17.0% $ 5,758 19.9%
========= ======= ========= =======
During the first quarter of 2001, net sales of the Rubber Group
decreased by $5,032,000, or 17.4%, compared to the first quarter of 2000. This
decrease was primarily due to reduced unit sales of connector seals for
automotive wiring systems, and, to a lesser extent, reduced sales of insulators
for automotive ignition wire sets, which resulted primarily from a reduction in
the level of activity in the automotive industry, and price reductions on
certain automotive components.
During the first quarter of 2001, income from operations totaled
$1,869,000, a decrease of $1,850,000, or 49.7%, compared to the first quarter of
2000. Cost of sales as a percentage of net sales increased during the first
quarter of 2001 to 86.7% of net sales from 81.4% of net sales during the first
quarter of 2000, primarily because certain factory overhead expenses are
partially fixed in nature and because depreciation and amortization expenses
increased compared to the first quarter of 2000.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2001 compared to the first quarter of
2000, primarily because wages and employee benefits, incentive compensation, and
foreign selling expenses all decreased when compared to the first quarter of
2000.
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During the first quarter of 2001, EBITDA decreased to $4,070,000, a
decrease of $1,688,000, or 29.3%, compared to the first quarter of 2000.
Delphi Automotive Systems Corporation is the Rubber Group's largest
customer. During the year ended December 31, 2000, the Rubber Group's net sales
to Delphi totaled $29,126,000, which represented 27.5% of the Rubber Group's net
sales. Substantially all of the Rubber Group's sales to Delphi are connector
seals for automotive wiring systems.
For the last four years, most of the connector seals that we sold to
Delphi were subject to a multi-year agreement that expires on December 31, 2001.
During the third quarter of 2000, Delphi requested and we offered a proposal for
a multi-year extension of our agreements that would entail substantial price
reductions on a number of high-volume components. Although Delphi has not
accepted our proposal at this time, we currently believe that:
- Delphi will extend the agreements to December 31, 2006,
- after December 31, 2001, Delphi will insource approximately
$3,600,000 of components that we currently produce,
- we will give Delphi approximately $5,500,000 of annual price
reductions that will become effective at various times during
2001,
- we will achieve annual cost savings of approximately
$1,600,000 as a result of reduced material costs and changes
in our manufacturing processes,
- Delphi will purchase certain new tooling that will permit us
to make those changes in our manufacturing processes, and
- substantial new business awarded to the connector seals
division by Delphi and other customers and scheduled to begin
production in 2001 and subsequent years will generate
incremental profits that will, in conjunction with the above
mentioned cost savings, offset a major portion of the
reduction in profitability caused by the proposed price
reductions.
We cannot assure you that Delphi will accept our proposal or that, if
they accept our proposal, the consequences will be as set forth above.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
aluminum, brass, and steel components, primarily for automotive industry
customers. Any material reduction in the level of activity in the automotive
industry may have a material adverse effect on the results of operations of the
Metals Group and on our company taken as a whole.
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The following table sets forth the operating results of the Metals
Group for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
------------------------------------------
2001 2000
------------------- ------------------
Net sales $ 10,642 100.0% $ 8,695 100.0%
Cost of sales 9,405 88.4 8,253 94.9
--------- ------- --------- -------
Gross profit 1,237 11.6 442 5.1
Selling and administrative expenses 667 6.3 739 8.5
--------- ------- --------- -------
Income (loss) from operations 570 5.4 (297) (3.4)
Add back depreciation and
amortization 1,149 10.8 1,210 13.9
--------- ------- --------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 1,719 16.2% $ 913 10.5%
========= ======= ========= =======
During the first quarter of 2001, net sales of the Metals Group
increased by $1,947,000, or 22.4%, compared to the first quarter of 2000. The
increase resulted primarily from increased sales of high-volume machined metal
components.
The Metals Group recorded income from operations of $570,000 during the
first quarter of 2001, compared to a loss from operations of $297,000 during the
first quarter of 2000. Cost of sales, as a percentage of net sales decreased
during the first quarter of 2001 to 88.4% of net sales from 94.9% of net sales
during the first quarter of 2000, primarily because certain factory overhead
expenses are fixed in nature and because depreciation and amortization expense
decreased by $51,000 when compared to the first quarter of 2000.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2001 compared to the first quarter of
2000, primarily due to reduced consulting fees related to the installation of
new computer systems.
During the first quarter of 2001, EBITDA increased to $1,719,000, an
increase of $806,000, or 88.3%, compared to the first quarter of 2000.
CORPORATE OFFICE
Corporate office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our consolidated financial statements.
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The following table sets forth the operating results of the corporate
office for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------
2001 2000
-------- --------
Loss from operations $ (495) $ (609)
Add back depreciation and amortization 22 19
------- -------
Earnings before interest, taxes, depreciation
and amortization $ (473) $ (590)
======= =======
INTEREST EXPENSE
During the first quarters of 2001 and 2000, interest expense totaled
$2,325,000 and $2,437,000, respectively. During the first quarter of 2001 and
2000, interest expense included amortization of deferred financing expenses of
$45,000 and $49,000, respectively. The decrease in interest expense was caused
primarily by lower rates of interest on our floating rate indebtedness and a
reduction in the average amount of outstanding indebtedness.
INCOME TAX PROVISION
At March 31, 2001, and December 31, 2000, our net deferred income tax
assets were fully offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 2001, our operating activities provided
$1,096,000 of cash.
Accounts receivable increased by $2,072,000. The increase was caused
primarily by an increase in net sales during March 2001 compared to December
2000.
Accounts payable decreased by $3,074,000, primarily as a result of our
efforts to reduce the amount of past-due accounts payable. Although we made
significant reductions in our past-due accounts payable during the first quarter
of 2001, a significant amount of accounts payable remain outstanding beyond
normal industry terms at March 31, 2001. Our ability to continue to delay the
payment of accounts payable is dependent upon the continued forbearance of
numerous vendors and the willingness of certain vendors to continue to provide
us with goods and services despite delays in payment. We currently do not have
funds available to make further significant reductions in the level of accounts
payable. Any effort by significant trade creditors to collect past due accounts
payable could force us to seek relief from our creditors under the Federal
bankruptcy code. Any unwillingness of significant vendors to continue to provide
us with goods and services could cause us to be unable to meet the requirements
of our customers. Either of the foregoing events could have a material adverse
effect on our results of operations and financial position.
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INVESTING ACTIVITIES
During the first quarter of 2001, our investing activities used
$1,570,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group and the Metals Group totaled $1,067,000 and
$159,000, respectively. Capital expenditures for the first quarter of 2001
included $1,171,000 for equipment and $55,000 for land and building
improvements. We presently project that capital expenditures during 2001 will
total approximately $7,300,000, substantially all of which will be for the
purchase of equipment. Capital expenditures for the Rubber Group and the Metals
Group are projected to total approximately $5,200,000 and $2,100,000,
respectively. At March 31, 2001, we had outstanding commitments to purchase
plant and equipment of approximately $4,336,000, of which approximately
$2,867,000 is expected to be purchased during 2001 and approximately $1,469,000
is expected to be purchased in 2002. See also "Liquidity," below.
FINANCING ACTIVITIES
During the first quarter of 2001, our financing activities provided
$469,000 of cash. During the first quarter of 2001, we obtained a new term loan
in the amount of $2,000,000, which is being used for the purchase of certain
equipment for the Rubber Group.
Net borrowings under our revolving line of credit, which are classified
as short-term debt, increased by $786,000 during the first quarter of 2001; the
proceeds of these borrowings were used primarily to reduce accounts payable.
LIQUIDITY
We finance our operations with cash from operating activities and a
variety of financing arrangements, including term loans and loans under our
revolving line of credit. Our ability to borrow under our revolving line of
credit, which expires on April 1, 2002, is subject to covenant compliance and
certain availability formulas based on the levels of our accounts receivable and
inventories. At May 10, 2001, availability under our revolving line of credit
totaled $1,672,000 before outstanding checks of $640,000 were deducted.
We have substantial borrowings for a company our size. Because those
borrowings require us to make substantial interest and principal payments, any
negative event may have a greater adverse effect upon us than if we had less
debt. We are in default in the payment of our senior subordinated notes, which
have a principal amount of $27,412,000 and accrued interest, as of March 31,
2001, of $5,825,000. In addition, we have $11,543,000 of notes that are
scheduled to mature during the last nine months of 2001 and $6,208,000 of
principal payments that are scheduled to be made on our secured, amortizing term
loans during the last nine months of 2001 . We estimate that, if our debt is not
restructured or refinanced, the interest expense on all of our debt during 2001,
at existing contractual rates, would be approximately $9,400,000.
As discussed in more detail below, we are in the process of negotiating
extensions of all of our matured and maturing debt. Although there can be no
assurance that we will be successful in this effort, if we were to complete
these extensions on the proposed terms, which are set forth below, we estimate
that our monthly interest expense would increase by approximately $160,000.
Based upon our current business plan, even if we are unable to complete
the proposed extensions of our matured and maturing debt, we believe that we
will have adequate financing to meet our working
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capital and capital expenditure requirements and the scheduled payments on our
secured, amortizing term loans through the end of 2001, and to make gradual
reductions in our past-due accounts payable, without the need for additional
borrowings, if:
- the holders of our senior subordinated notes do not take
action to enforce their rights against us,
- none of our significant trade creditors take action to collect
past-due accounts payable or refuse to continue to provide us
with goods and services,
- the holders of our 12% secured term note, our senior,
unsecured note, and our junior subordinated notes are willing
to continue to grant waivers and extensions similar to those
granted previously,
- the holders of our secured, amortizing term loans are willing
to continue to grant waivers similar to those granted
previously and to extend the scheduled balloon maturities
during 2001, and
- the lenders under our revolving line of credit are willing to
continue to grant waivers similar to those granted previously
and to continue to provide revolving loans in accordance with
the availability formulas presently in effect.
We had a net working capital deficit of $78,891,000 at March 31, 2001,
compared to a net working capital deficit of $80,179,000 at December 31, 2000.
The net working capital deficit exists primarily because:
- our senior subordinated notes, which have an aggregate
principal balance of $27,412,000, matured during the first
half of 2000 and our 12% secured term note, our senior,
unsecured note, and our junior subordinated note, which have
an aggregate principal balance of $9,217,000, are scheduled to
mature during 2001; consequently, all of this indebtedness was
classified as current liabilities in our consolidated
financial statements at March 31, 2001, and December 31, 2000;
and
- the long-term portions of our secured, amortizing term loans
were classified as current liabilities at March 31, 2001, and
December 31, 2000, because at each of those dates, the lenders
had granted waivers, for a period of less than one year, of
defaults on those term loans related to the payment default on
the senior subordinated notes.
Substantially all of our assets are pledged as collateral for certain
of our indebtedness. Certain of our financing arrangements contain covenants
with respect to the maintenance of minimum levels of working capital, net worth,
and cash flow coverage and other covenants that place certain restrictions on
our business and operations, including covenants relating to the incurrence or
assumption of additional debt, the level of past-due trade accounts payable, the
sale of all or substantially all of our assets, the purchase of plant and
equipment, the purchase of common stock, the redemption of preferred stock, and
the payment of cash dividends. In addition, substantially all of our financing
arrangements include cross-default provisions.
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From time to time, our lenders have agreed to waive or amend certain of
the financial covenants contained in our various loan agreements in order to
maintain or otherwise ensure our current or future compliance. We cannot assure
you that our lenders will agree to waive or amend these covenants in the future.
In the event that we are not in compliance with any of our covenants in the
future and our lenders do not agree to amend or waive those covenants, the
lenders would have the right to declare the indebtedness under their loan
agreements to be immediately due and payable and the violation might trigger
cross-default provisions under substantially all of our other indebtedness. In
those circumstances, the holders of that indebtedness, would have, among other
things, the right to declare the indebtedness to be immediately due and payable,
in which event, we might be required to consider alternatives, including seeking
relief from our creditors under the Federal bankruptcy code. Any proceeding
under the Federal bankruptcy code could have a material adverse effect on our
results of operations and financial position.
On December 28, 1999, we commenced a consent solicitation seeking
consents of the holders of our senior subordinated notes to an extension of the
maturity date of the notes from February 1, 2000, to February 1, 2003, and
providing for certain increases in the interest rate payable on the notes. The
consent solicitation expired on December 29, 2000, without our having received
the requisite consents.
In March 2001, we reached an agreement in principle with the four
largest holders of the senior subordinated notes on the terms of a restructuring
of the senior subordinated notes. The major terms of the agreement in principle
are set forth below:
- conversion of the accrued and unpaid interest on the senior
subordinated notes through the day before the effective date
of the proposed restructuring into additional senior
subordinated notes; the accrued and unpaid interest on the
senior subordinated notes aggregated $5,825,000 at March 31,
2001,
- an extension of the maturity date to December 31, 2004,
- an increase in the interest rate to 14% for the period from
the effective date of the proposed restructuring through
December 31, 2001, and to 15% thereafter,
- a change in the frequency of interest payments from
semi-annual to quarterly, and
- a number of changes in financial covenants, primarily designed
to reduce our ability to incur additional debt, pay cash
dividends, and redeem capital stock.
If the proposed restructuring becomes effective, we will pay a consent
fee of 3% of the principal amount of senior subordinated notes in respect of
which we receive valid consents and issue warrants to purchase, in the
aggregate, approximately 3% of our outstanding common stock.
Since February 1, 2000, the holders of substantially all of our
indebtedness other than the senior subordinated notes have waived cross-default
provisions with respect to the default on the senior subordinated notes and have
granted extensions of loans that have been scheduled to mature. We have made all
scheduled payments of interest and principal on all of our indebtedness as
extended, other than the senior subordinated notes, since February 1, 2000. The
actions of the various lenders are set forth below:
- The lenders providing loans under our revolving line of credit
and the lenders providing secured, amortizing term loans have
waived the cross-default provisions with respect to
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the default on the senior subordinated notes through August 1,
2001, and have amended certain covenants to eliminate defaults
that would otherwise have occurred because all of our secured,
amortizing term loans were classified as current liabilities
in our consolidated financial statements. Since February 1,
2000, we have been permitted to continue borrowing under our
revolving line of credit and have received new term loans
secured by equipment in the aggregate principal amount of
$4,460,000 under two of our equipment lines of credit.
- The holder of our 12% secured term note, in the outstanding
principal amount of $1,370,000, has extended the maturity date
of that note to July 31, 2001; that note has no cross-default
provision with respect to the default on the senior
subordinated notes. We recently reached an agreement in
principle with the holder of our 12% secured term note to
extend the maturity of that note to the fifth anniversary of
the effective date of the restructuring of the senior
subordinated notes. If the extension of the note is completed,
the principal amount of the note would be payable in sixty
equal, monthly installments.
- The holder of our senior, unsecured note, in the outstanding
principal amount of $7,500,000, has extended the maturity date
of that note to August 1, 2001, and has waived the
cross-default provisions with respect to the default on the
senior subordinated notes. During 2000, we reached a
non-binding agreement with the holder of our senior, unsecured
note on a proposed amendment to the terms of the senior,
unsecured note. In connection with that non-binding agreement,
the effective interest rate on the note increased to 12 1/2%
for the nine-month period ending August 1, 2001. We have
recently made a revised proposal to amend the terms of the
senior unsecured note. The principal terms of that proposal
are the following:
- an extension of the maturity date to December 31,
2004,
- an increase in the interest rate to 13% for the
period from the effective date of the proposed
restructuring through December 31, 2001, with a
further increase to 14% thereafter, and
- quarterly principal payments of $625,000, commencing
on March 31, 2002.
We have offered to pay an amendment fee of 2% of the principal
amount of the senior, unsecured note. The holder of the
senior, unsecured note has not yet responded to our proposal.
- The holder of our junior subordinated notes, in the
outstanding principal amount of $347,000, has extended the
maturity date of those notes to August 1, 2001, has deferred
six quarterly interest payments on those notes to August 1,
2001, and has waived the cross-default provision with respect
to the default on the senior subordinated notes. We have
reached an agreement in principle with the holder of the
junior subordinated notes to extend the maturity date of the
junior subordinated notes to March 31, 2005, and to increase
the interest rate thereon to 15% for the period from the
effective date of the extension through December 31, 2001, and
to 16% thereafter.
- The holders of our junior subordinated convertible notes,
which were outstanding on December 31, 1999, in the aggregate
principal amount of $1,000,000, have deferred one
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quarterly interest payment on those notes to August 1, 2001,
and have waived the cross-default provision with respect to
the default on the senior subordinated notes. On February 1,
2000, the junior subordinated convertible notes were converted
into 440,000 shares of our common stock. We have reached an
agreement in principle with the holders of the junior
subordinated convertible notes to convert the deferred
interest to additional junior subordinated notes due March 31,
2005.
In order to complete the extensions of our matured and maturing debt,
we must also renegotiate our senior, secured financing arrangements in order to
provide financing for our on-going working capital and capital expenditure
requirements and reduce our past-due accounts payable. We believe that we will
be unable to obtain adequate financing to reduce our accounts payable to levels
that are customary in the industries in which we operate. As a result, we are
negotiating with certain of our trade creditors to further extend the payment
dates of our past-due accounts payable and have reached agreements in principle
with a number of those trade creditors on such an extension. We can give you no
assurance that we will be able to obtain the necessary financing or extensions
of past-due accounts payable. If we are unable to do so, we may be forced to
seek relief from our creditors under the Federal bankruptcy code. Any proceeding
under the Federal bankruptcy code could have a material adverse effect on our
results of operations and financial position.
We expect to begin shortly a consent solicitation seeking consent of
the holders of the senior subordinated notes to amendments that reflect the
terms of our agreement in principle with the four largest holders of the senior
subordinated notes; however, we can give you no assurance that we will be able
to obtain the necessary consents, to reach an agreement for an extension of our
senior, unsecured note, to negotiate extensions of our past-due accounts
payable, or to renegotiate our senior secured financing arrangements on terms
satisfactory to us. If we are unable to do so, we may be forced to seek relief
from our creditors under the Federal bankruptcy code. Any proceeding under the
Federal bankruptcy code could have a material adverse effect on our results of
operations and financial position.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is minimal.
At March 31, 2001, we had $47,145,000 of outstanding floating-rate debt
at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%, or the
prime rate. Currently we do not purchase derivative financial instruments to
hedge or reduce our interest rate risk. As a result, changes in either LIBOR or
the prime rate affect the rates at which we borrow funds under these agreements.
At March 31, 2001, we had outstanding $42,582,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.1%, of which
$38,955,000 has matured or is scheduled to mature during the remainder of 2001.
If we are able to refinance or extend the matured or maturing debt, it will be
at interest rates that are significantly higher than the weighted-average
interest rate on the matured or maturing debt. We have reached an agreement in
principle with the holders of approximately 75% of our $27,412,000 of
outstanding senior subordinated notes to extend the maturity date of those notes
from February 1, 2000, to December 31, 2004, to issue additional senior
subordinated notes in payment of accrued and unpaid interest on the notes
through the effective date of the proposed amendment, and to increase the
interest rate on the senior subordinated notes to 14% for the period from the
effective date of the proposed amendment through December 31, 2001, and to 15%
thereafter. We have also proposed to extend the maturity date of our $7,500,000
senior, unsecured note from May 1, 2001, to December 31, 2004, and to increase
the interest rate thereon to 13% from the effective date of the amendment
through December 31, 2001, and to 14% thereafter.
If we are successful in our effort to negotiate extensions of our
matured and maturing debt on the proposed terms discussed above and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity" in Part I, Item 2, we estimate that our monthly interest
expense would increase by approximately $160,000.
We recommend that you also read "Note 5 - Debt" in the notes to our
consolidated financial statements in Part I, Item 1.
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PART II. OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
(a) We are in default in respect of our 12 3/4% senior
subordinated notes because we did not make the payments of principal, in the
amount of $27,412,000, and interest, in the amount of $1,748,000, that were due
on February 1, 2000. For more information regarding the default in respect of
the 12 3/4% senior subordinated notes, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity," in Part
I, Item 2, which is incorporated by reference herein.
(b) We did not pay dividends on our $8 cumulative convertible
preferred stock, series B, during the three-month period ended March 31, 2001,
in the aggregate amount of $6,600. As of March 31, 2001, we were in arrears in
the payment of dividends in the amount of $33,000 and in the making of mandatory
redemptions in the amount of $90,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Agreement relating to 14% Junior Subordinated Notes dated
as of April 30, 2001, between Lexington Precision
Corporation ("LPC") and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated as of April 30, 2001, among LPC,
Michael A. Lubin, and Warren Delano
10-3 Amendment No. 6 to Note dated as of April 30, 2001, between
LPC and Tri-Links Investment Trust, as successor to Nomura
Holding America, Inc.
10-4 Eighth Amendment Agreement dated April 30, 2001, between
Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell
10-5 Agreement dated as of April 30, 2001, among LPC, LRGI, and
Congress Financial Corporation
10-6 Agreement dated as of April 30, 2001, between LPC and CIT
Group/Equipment Financing, Inc.
10-7 Agreement dated as of April 30, 2001, among LPC, LRGI, and
Bank One, NA
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the first quarter of 2001.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 2001
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.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 14, 2001 By: /s/ Michael A. Lubin
- ------------ ------------------------------
Date Michael A. Lubin
Chairman of the Board
May 14, 2001 By: /s/ Warren Delano
- ------------ -------------------------------
Date Warren Delano
President
May 14, 2001 By: /s/ Dennis J. Welhouse
- ------------ -------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Exhibit Location
------ ------- --------
10-1 Agreement relating to 14% Junior Subordinated Filed with this Form 10-Q
Notes dated April 30, 2001, between Lexington
Precision Corporation ("LPC") and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Filed with this Form 10-Q
Convertible Increasing Rate Note dated
April 30, 2001, among LPC, Michael A.
Lubin, and Warren Delano
10-3 Amendment No. 6 to Note dated as of Filed with this Form 10-Q
April 30, 2001, between LPC and Tri-Links
Investment Trust, as successor to Nomura
Holding America, Inc.
10-4 Eighth Amendment Agreement dated Filed with this Form 10-Q
April 30, 2001, between Lexington Rubber
Group, Inc. ("LRGI") and Paul H. Pennell
10-5 Agreement dated as of April 30, 2001, among Filed with this Form 10-Q
LPC, LRGI, and Congress Financial Corporation
10-6 Agreement dated as of April 30, 2001, Filed with this Form 10-Q
between LPC and The CIT Group/Equipment
Financing, Inc.
10-7 Agreement dated as of April 30, 2001, among Filed with this Form 10-Q
LPC, LRGI, and Bank One, NA