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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 JUNE 30, 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 AUGUST 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.....................................29
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities..................................................................30
Item 4. Submission of Matters to a Vote of Security Holders............................................30
Item 6. Exhibits and Reports on Form 8-K...............................................................31
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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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 35,071 $ 35,596 $ 69,652 $ 73,262
Cost of sales 29,433 31,882 59,595 63,716
--------- -------- --------- ---------
Gross profit 5,638 3,714 10,057 9,546
Selling and administrative expenses 2,651 2,720 5,126 5,739
--------- -------- --------- ---------
Income from operations 2,987 994 4,931 3,807
Interest expense 2,152 2,496 4,477 4,933
--------- -------- --------- ---------
Income (loss) before income taxes 835 (1,502) 454 (1,126)
Income tax provision (benefit) 80 (73) 80 40
--------- -------- --------- ---------
Net income (loss) $ 755 $ (1,429) $ 374 $ (1,166)
========= ======== ========= =========
Basic and diluted net income (loss) available to
common stockholders $ 0.16 $ (0.30) $ 0.08 $ (0.25)
========= ======== ========= =========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
---------------- ----------------
ASSETS:
Current assets:
Cash $ 141 $ 65
Accounts receivable 24,514 19,912
Inventories 9,971 11,109
Prepaid expenses and other current assets 3,881 3,833
Deferred income taxes 2,049 2,049
---------- -----------
Total current assets 40,556 36,968
Property, plant, and equipment, net 58,739 62,778
Excess of cost over net assets of businesses acquired 7,988 8,147
Other assets 2,862 2,396
---------- -----------
Total assets $ 110,145 $ 110,289
========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 13,595 $ 16,993
Accrued expenses 13,741 11,158
Short-term debt 89,261 88,996
---------- -----------
Total current liabilities 116,597 117,147
---------- -----------
Long-term debt, excluding current portion 99 104
---------- -----------
Deferred income taxes and other long-term liabilities 2,267 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 (23,315) (23,703)
---------- -----------
Total stockholders' deficit (9,148) (9,536)
---------- -----------
Total liabilities and stockholders' deficit $ 110,145 $ 110,289
========== ===========
See notes to consolidated financial statements
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
----------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 374 $ (1,166)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 6,031 5,862
Amortization included in operating expense 600 739
Amortization included in interest expense 94 98
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable (4,602) 1,027
Inventories 1,138 (993)
Prepaid expenses and other current assets (76) (857)
Accounts payable (3,398) 6,763
Accrued expenses 2,583 1,017
Other (13) 285
-------- ----------
Net cash provided by operating activities 2,731 12,775
-------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (2,001) (10,918)
Decrease (increase) in equipment deposits (593) 342
Expenditures for tooling owned by customers (242) (536)
Other 44 237
--------- ----------
Net cash used by investing activities (2,792) (10,875)
--------- ----------
FINANCING ACTIVITIES:
Increase (decrease) in loans under revolving line of credit 2,646 (145)
Proceeds from secured, amortizing term loans 2,000 2,460
Repayment of secured, amortizing term loans (4,386) (4,020)
Other (123) (83)
--------- ----------
Net cash provided (used) by financing activities 137 (1,788)
--------- ----------
Net increase in cash 76 112
Cash at beginning of period 65 8
--------- ----------
Cash at end of period $ 141 $ 120
========= ==========
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 June 30, 2001, the
Company's results of operations for the three-month and six-month periods ended
June 30, 2001 and 2000, and the Company's cash flows for the six-month periods
ended June 30, 2001 and 2000. All such adjustments were of a normal, recurring
nature.
The results of operations for the three-month and six-month periods
ended June 30, 2001, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
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 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 restructuring will be
accomplished by means of an exchange offer pursuant to which the existing senior
subordinated notes will be exchanged for new senior subordinated notes in a
principal amount equal to the principal amount of the existing senior
subordinated notes being exchanged plus the accrued and unpaid interest thereon
through the day before the date the exchange offer is consummated. The accrued
and unpaid interest on the senior subordinated notes aggregated $6,699,000 at
June 30, 2001. The principal terms of the new senior subordinated notes are set
forth below:
- the maturity date will be December 31, 2004,
- the interest rate will be 14% for the period from the date the
exchange offer is consummated through December 31, 2001, and
15% thereafter, and
- interest will be payable quarterly.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If the exchange offer is consummated, the Company will pay a
participation fee of 3% of the principal amount of senior subordinated notes
that are tendered for exchange and issue warrants to purchase, in the aggregate,
approximately 3% of the Company's common stock.
The Company commenced the exchange offer on August 6, 2001. The
exchange offer will expire on September 4, 2001, unless extended.
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 November
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 October 31, 2001; that note has
no 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 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 November 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 fifteen-month period ending November 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,
- an increase in the interest rate to 13% for the
period from the effective date of the proposed
restructuring through December 31, 2001, and to 14%
thereafter, and
- quarterly principal payments of $625,000, commencing
on March 31, 2002.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 November 1, 2001, has deferred seven
quarterly interest payments on those notes to
November 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 former 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 November
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 former
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 can give no assurance that it will be able to consummate
the exchange offer, to reach an agreement for an extension of the senior,
unsecured note, to negotiate extensions of past-due accounts payable, or to
renegotiate its senior, secured financing arrangements on terms satisfactory to
the Company. 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets" (FAS 142), which is effective for all fiscal periods
beginning after December 15, 2001. FAS 142 prohibits the amortization of
goodwill, but requires goodwill to be tested annually for impairment in
accordance with the requirements set forth in FAS 142. Other intangible assets
will continue to be amortized over their useful lives.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company will adopt the provisions of FAS 142 during the first quarter of
2002. Application of the nonamortization provisions of FAS 142 are expected to
result in an increase in the Company's income from operations during fiscal 2002
of approximately $316,000. During the first quarter of 2002, the Company will
perform the impairment tests required by FAS 142 on its unamortized goodwill as
of January 1, 2002. The Company has not yet determined what effect, if any, that
these tests will have on the results of operations or financial position of the
Company.
NOTE 2 -- INVENTORIES
Inventories at June 30, 2001, and December 31, 2000, are set forth
below (dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
Finished Goods $ 4,468 $ 5,067
Work in process 2,287 2,677
Raw materials and purchased parts 3,216 3,365
--------- ----------
$ 9,971 $ 11,109
========= ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 2001, and December 31, 2000,
are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
Land $ 2,349 $ 2,349
Buildings 24,087 24,022
Equipment 107,550 106,003
----------- -----------
133,986 132,374
Accumulated Depreciation 75,247 69,596
----------- -----------
Property, plant, and equipment, net $ 58,739 $ 62,778
=========== ===========
NOTE 4 -- ACCRUED EXPENSES
At June 30, 2001, and December 31, 2000, accrued expenses included
accrued interest expense of $6,976,000 and $5,234,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- DEBT
Debt at June 30, 2001, and December 31, 2000, is set forth below
(dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2001 2000
------- ------------
Short-term debt:
Revolving line of credit $21,823 $19,177
Secured, amortizing term loans 30,797 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 12 12
------- -------
Total short-term debt $89,261 $88,996
======= =======
Long-term debt:
Other 111 116
Less current portion 12 12
------- -------
Total long-term debt $ 99 $ 104
======= =======
REVOLVING LINE OF CREDIT
The loans outstanding under the revolving line of credit at June 30,
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 June 30, 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 June 30, 2001, availability under the revolving line of credit
totaled $2,187,000, before outstanding checks of $983,000 were deducted. At June
30, 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 June 30, 2001, and
December 31, 2000, are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2001 2000
------------- ----------------
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2002, 8.37% $ 2,337 $ 2,454
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2 3/4% 717 1,091
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,138 1,191
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,229 2,330
Term loans payable in equal monthly principal installments, final
maturities in 2002, prime rate and LIBOR plus 2 1/2% 763(1) 1,222(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate 318 409
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate and LIBOR plus 2 1/2% 191(1) 251(1)
Term loan payable in equal monthly principal installments, final
maturities in 2003, LIBOR plus 2 3/4% 587 747
Term loans payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 977 1,145
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 792 928
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate and LIBOR plus 2 1/2% 7,730(1) 9,136(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 1/2% 914 1,027
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate and LIBOR plus 2 1/2% 973(1) 1,094(1)
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate 394 435
Term loans payable in equal monthly principal installments, final
maturities in 2006, prime rate and LIBOR plus 2 1/2% 6,790(1) 5,422(1)
Term loans payable in equal monthly installments, final maturity in
2007, prime rate and LIBOR plus 2 1/2% 3,947(1) 4,296(1)
------- -------
$30,797 $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.
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 November 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 November 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, 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 $1,000,000
principal amount of junior subordinated convertible notes was converted into
440,000 shares of common stock on February 1, 2000. The junior subordinated
nonconvertible notes are due on November 1, 2001. The junior subordinated notes
currently bear interest at 14% per annum. The holders of the junior subordinated
notes have deferred until November 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 of preferred stock, and the payment of cash
dividends. In addition, substantially all of the Company's financing agreements
include cross-default provisions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. During the six-month period ended June 30, 2001, a covenant
that limits the amount of past due accounts payable has been amended through
August 30, 2001, and a covenant requiring a minimum level of tangible net worth
was amended through February 1, 2002. 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 June 30, 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 principal and interest on the senior subordinated notes that were
due on February 1, 2000, in the amounts of $27,412,000 and $1,748,000,
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 June 30, 2001, the Company was in arrears in the payment of
six dividends, which totaled $40,000, and the redemption of 450 shares of series
B preferred stock, which totaled $90,000.
NOTE 7 -- INCOME TAXES
At June 30, 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 three-month and six-month periods ended June 30, 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 and six-month periods
ended June 30, 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 June 30, 2001 and 2000, the
Company did not pay any dividends on, or redeem any shares of, the series B
preferred stock.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
Numerators:
Net income (loss) $ 755 $(1,429) $ 374 $(1,166)
Preferred stock dividends -- (6) -- (13)
Excess of redemption value over par value of
preferred stock redeemed during the year -- (11) -- (22)
------- ------- ------- -------
Numerator for basic net income (loss) per share--
income (loss) available to common stockholders 755 (1,446) 374 (1,201)
Effect of assumed conversion of dilutive securities:
14% junior subordinated convertible notes -- -- -- --
------- ------- ------- -------
Numerator for diluted net income (loss) per share--
income available to common stockholders $ 755 $(1,446) $ 374 $(1,201)
======= ======= ======= =======
Denominators:
Denominator for basic net income (loss) per share--
weighted-average common shares 4,828 4,828 4,828 4,735
Adjustments to derive denominator for diluted net
income (loss) per share:
Conversion of 14% junior subordinated
convertible notes into 440,000 common shares -- -- -- 75
Issuance of 125,000 shares of restricted common
stock -- -- -- 18
------- ------- ------- -------
Denominator for diluted net income (loss) per share--
adjusted weighted average common shares 4,828 4,828 4,828 4,828
======= ======= ======= =======
Per share data:
Basic and diluted net income (loss) available to
common stockholders $ 0.16 $ (0.30) $ 0.08 $ (0.25)
======= ======= ======= =======
-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 and six-month periods ended June 30, 2001
and 2000, is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
NET SALES:
Rubber Group $ 26,027 $ 26,762 $ 49,966 $ 55,733
Metals Group 9,044 8,834 19,686 17,529
--------- --------- --------- ---------
Total net sales $ 35,071 $ 35,596 $ 69,652 $ 73,262
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 3,321 $ 2,052 $ 5,190 $ 5,771
Metals Group 328 (592) 898 (889)
Corporate office (662) (466) (1,157) (1,075)
--------- --------- --------- ---------
Total income from operations $ 2,987 $ 994 $ 4,931 $ 3,807
========= ========= ========= =========
ASSETS:
Rubber Group $ 74,859 $ 76,365 $ 74,859 $ 76,365
Metals Group 31,894 36,434 31,894 36,434
Corporate office 3,392 3,450 3,392 3,450
--------- --------- --------- ---------
Total assets $ 110,145 $ 116,249 $ 110,145 $ 116,249
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,103 $ 2,086 $ 4,304 $ 4,125
Metals Group 1,135 1,224 2,284 2,434
Corporate office 21 23 43 42
--------- --------- --------- ---------
Total depreciation and amortization $ 3,259 $ 3,333 $ 6,631 $ 6,601
========= ========= ========= =========
CAPITAL EXPENDITURES:
Rubber Group $ 709 $ 4,099 $ 1,776 $ 8,166
Metals Group 63 668 222 2,751
Corporate office 3 -- 3 1
--------- --------- --------- ---------
Total capital expenditures $ 775 $ 4,767 $ 2001 $ 10,918
========= ========= ========= =========
(1) Does not include amortization of deferred financing expenses,
which totaled $94,000 and $98,000 during the six-month periods
ended June 30, 2001 and 2000, respectively, and which is
included in interest expense in the consolidated financial
statements.
-13-
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
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. All forward-looking statements are
expressly qualified by the discussion above.
-14-
17
RESULTS OF OPERATIONS-- SECOND QUARTER OF 2001 VERSUS SECOND QUARTER OF 2000
The following table sets forth our consolidated operating results for
the second quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30
-------------------------------------
2001 2000
----------------- -----------------
Net sales $35,071 100.0% $35,596 100.0%
Cost of sales 29,433 83.9 31,882 89.6
------- ------- ------- -------
Gross profit 5,638 16.1 3,714 10.4
Selling and administrative expenses 2,651 7.6 2,720 7.6
------- ------- ------- -------
Income from operations 2,987 8.5 994 2.8
Add back depreciation and
amortization (1) 3,259 9.3 3,333 9.4
------- ------- ------- -------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 6,246 17.8% $ 4,327 12.2%
======= ======= ======= =======
Net cash provided by operating
activities (3) $ 1,635 4.7% $ 4,573 12.8%
======= ======= ======= =======
(1) Does not include amortization of deferred financing expenses,
which totaled $43,000 and $49,000 during the second 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.
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 June 30, 2001 and 2000.
-15-
18
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 second quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30
----------------------------------
2001 2000
---------------- ---------------
Net sales $26,027 100.0% $26,762 100.0%
Cost of sales 21,318 81.9 23,138 86.5
------- ----- ------- -----
Gross profit 4,709 18.1 3,624 13.5
Selling and administrative expenses 1,388 5.3 1,572 5.8
------- ----- ------- -----
Income from operations 3,321 12.8 2,052 7.7
Add back depreciation and
amortization 2,103 8.0 2,086 7.8
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 5,424 20.8% $ 4,138 15.5%
======= ===== ======= =====
During the second quarter of 2001, net sales of the Rubber Group
decreased by $735,000, or 2.7%, compared to the second quarter of 2000. This
decrease was primarily due to reduced unit sales of connector seals for
automotive wiring systems and reduced unit 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, offset, in part, by increased sales of tooling.
During the second quarter of 2001, income from operations totaled
$3,321,000, an increase of $1,269,000, or 61.8%, compared to the second quarter
of 2000. Cost of sales as a percentage of net sales decreased during the second
quarter of 2001 to 81.9% of net sales from 86.5% of net sales during the second
quarter of 2000, primarily because our insulator division improved operating
efficiencies and reduced scrap.
Selling and administrative expenses as a percentage of net sales
decreased during the second quarter of 2001compared to the second quarter of
2000, primarily because of a reduction in personnel related expenses.
During the second quarter of 2001, EBITDA increased to $5,424,000, an
increase of $1,286,000, or 31.1%, compared to the second quarter of 2000.
-16-
19
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 was scheduled to expire on
December 31, 2001. In July 2001, Delphi and the Rubber Group entered into a new
agreement that will govern, through December 31, 2004, the purchase of many of
the component parts that we currently sell to Delphi. Under the terms of that
agreement:
- we sell and Delphi purchases approximately 100% of Delphi's
requirements for all specified components,
- we warrant that the components will remain competitive in
terms of technology, design, and quality,
- the selling prices of the components are adjusted to reflect
increases or decreases in material costs, and
- the selling prices of the components are reduced by
agreed-upon percentages in each of the years covered by the
agreement.
- we will give Delphi approximately $5,500,000 of annual price
reductions effective July 16, 2001, and
- Delphi will purchase certain new tooling.
We currently believe that after December 31, 2001, Delphi will insource
approximately $3,600,000 of components that we currently produce but have been
excluded from the new agreement.
To mitigate the effect of the price reduction and reduced unit volume,
we plan to achieve annual cost savings of approximately $1,600,000 as a result
of reduced material costs and changes in our manufacturing processes. Although
we can give no assurances, we believe that 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 price reductions.
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.
-17-
20
The following table sets forth the operating results of the Metals
Group for the second quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30,
-----------------------------------
2001 2000
---------------- ----------------
Net sales $ 9,044 100.0% $ 8,834 100.0%
Cost of sales 8,115 89.7 8,744 99.0
------- ----- ------- -----
Gross profit 929 10.3 90 1.0
Selling and administrative expenses 601 6.6 682 7.7
------- ----- ------- -----
Income (loss) from operations 328 3.7 (592) (6.7)
Add back depreciation and
amortization 1,135 12.5 1,224 13.9
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 1,463 16.2% $ 632 7.2%
======= ===== ======= =====
During the second quarter of 2001, net sales of the Metals Group
increased by $210,000, or 2.4%, compared to the second quarter of 2000. The
increase resulted primarily from increased sales of aluminum die castings.
The Metals Group recorded income from operations of $328,000 during the
second quarter of 2001, compared to a loss from operations of $592,000 during
the second quarter of 2000. Cost of sales, as a percentage of net sales
decreased during the second quarter of 2001 to 89.7% of net sales from 99.0% of
net sales during the second quarter of 2000, primarily because of improved
operating efficiencies, lower employee benefit costs, and lower depreciation and
amortization expenses when compared to the second quarter of 2000, offset, in
part, by startup costs on new components.
Selling and administrative expenses as a percentage of net sales
decreased during the second quarter of 2001 compared to the second quarter of
2000, primarily due to reduced employee recruitment and relocation costs.
During the second quarter of 2001, EBITDA increased to $1,463,000, an
increase of $831,000, or 131.5%, compared to the second 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.
-18-
21
The following table sets forth the operating results of the corporate
office for the second quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED
JUNE 30,
------------------
2001 2000
----- -----
Loss from operations $(662) $(466)
Add back depreciation and amortization 21 23
----- -----
Earnings before interest, taxes, depreciation
and amortization $(641) $(443)
===== =====
Corporate office expense increased compared to the second quarter of
2000, primarily due to accruals for management incentive compensation.
INTEREST EXPENSE
During the second quarters of 2001 and 2000, interest expense totaled
$2,152,000 and $2,496,000, respectively. During the second quarter of 2001 and
2000, interest expense included amortization of deferred financing expenses of
$43,000 and $49,000, respectively. The decrease in interest expense was caused
primarily by lower rates of interest on our floating rate borrowings and a
reduction in the average amount of outstanding borrowings.
INCOME TAX PROVISION
At June 30, 2001, and December 31, 2000, our net deferred income tax
assets were fully offset by a valuation allowance.
-19-
22
RESULTS OF OPERATIONS-- FIRST SIX MONTHS OF 2001 VERSUS FIRST SIX MONTHS OF 2000
The following table sets forth our consolidated operating results for
the first six months of 2001 and 2000 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30
---------------------------------
2001 2000
---------------- --------------
Net sales $69,652 100.0% $73,262 100.0%
Cost of sales 59,595 85.6 63,716 87.0
------- ----- ------- -----
Gross profit 10,057 14.4 9,546 13.0
Selling and administrative expenses 5,126 7.3 5,739 7.8
------- ----- ------- -----
Income from operations 4,931 7.1 3,807 5.2
Add back depreciation and
amortization (1) 6,631 9.5 6,601 9.0
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization (2) $11,562 16.6% $10,408 14.2%
======= ===== ======= =====
Net cash provided by operating
activities (3) $ 2,731 3.9% $12,775 17.4%
======= ===== ======= =====
(3) Does not include amortization of deferred financing expenses,
which totaled $94,000 and $98,000 during the first six months
second quarters of 2001 and 2000, respectively, and which is
included in interest expense in the consolidated financial
statements.
(4) 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.
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
six-month periods ended June 30, 2001 and 2000.
-20-
23
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 six months of 2001 and 2000 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30
------------------------------------
2001 2000
---------------- ----------------
Net sales $49,966 100.0% $55,733 100.0%
Cost of sales 42,075 84.2 46,719 83.8
------- ------ ------- ------
Gross profit 7,891 15.8 9,014 16.2
Selling and administrative expenses 2,701 5.4 3,243 5.8
------- ------ ------- ------
Income from operations 5,190 10.4 5,771 10.4
Add back depreciation and
amortization 4,304 8.6 4,125 7.4
------- ------ ------- ------
Earnings before interest, taxes,
depreciation, and amortization $ 9,494 19.0% $ 9,896 17.8%
======= ====== ======= ======
During the first six months of 2001, net sales of the Rubber Group
decreased by $5,767,000, or 10.3%, compared to the second quarter of 2000. This
decrease was primarily due to reduced unit sales of connector seals for
automotive wiring systems, and 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 six months of 2001, income from operations totaled
$5,190,000, a decrease of $581,000, or 10.1%, compared to the first six months
of 2000. Cost of sales as a percentage of net sales increased during the first
six months of 2001 to 84.2% of net sales from 83.8% of net sales during the
first six months of 2000, primarily because certain factory overhead expenses
are partially fixed in nature and because depreciation and amortization expenses
increased compared to the second quarter of 2000.
Selling and administrative expenses as a percentage of net sales
decreased during the first six months of 2001 compared to the first six months
of 2000, primarily because wages and employee benefits, incentive compensation,
and depreciation expense all decreased when compared to the first six months of
2000.
During the first six months of 2001, EBITDA decreased to $9,494,000, an
decrease of $402,000, or 4.1%, compared to the first six months of 2000.
-21-
24
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.
The following table sets forth the operating results of the Metals
Group for the first six months of 2001 and 2000 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2001 2000
----------------- ------------------
Net sales $ 19,686 100.0% $ 17,529 100.0%
Cost of sales 17,520 89.0 16,997 97.0
-------- ----- -------- -----
Gross profit 2,166 11.0 532 3.0
Selling and administrative expenses 1,268 6.4 1,421 8.1
-------- ----- -------- -----
Income (loss) from operations 898 4.6 (889) (5.1)
Add back depreciation and
amortization 2,284 11.6 2,434 13.9
-------- ----- -------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 3,182 16.2% $ 1,545 8.8%
======== ===== ======== =====
During the first six months of 2001, net sales of the Metals Group
increased by $2,157,000, or 12.3%, compared to the first six months of 2000. The
increase resulted primarily from increased sales of high-volume machined metal
components and from increased sales of tooling.
The Metals Group reported income from operations of $898,000 during the
first six months of 2001, compared to a loss from operations of $889,000 during
the first six months of 2000. Cost of sales as a percentage of net sales
decreased during the first six months of 2001 to 89.0% of net sales from 97.0%
of net sales during the first six months of 2000, primarily because of improved
operating efficiencies, lower employee benefit costs, and lower depreciation and
amortization expenses when compared to the second quarter of 2000, offset, in
part, by startup costs on new components.
Selling and administrative expenses as a percentage of net sales
decreased during the first six months of 2001 compared to the first six months
of 2000, primarily due to reduced employee recruitment and relocation expense
and reduced consulting fees related to the installation of new computer systems.
During the first six months of 2001, EBITDA increased to $3,182,000, an
increase of $1,637,000, or 106.0%, compared to the first six months of 2000.
-22-
25
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.
The following table sets forth the operating results of the corporate
office for the first six-months of 2001 and 2000 (dollar amounts in thousands):
SIX MONTHS ENDED
JUNE 30
-------------------
2001 2000
---- ----
Loss from operations $(1,157) $(1,075)
Add back depreciation and amortization 43 42
------- -------
Earnings before interest, taxes, depreciation
and amortization $(1,114) $(1,033)
======= =======
Corporate office expenses increased compared to the first six months of
2000, primarily due to accruals for management incentive compensation.
INTEREST EXPENSE
During the first six months of 2001 and 2000, interest expense totaled
$4,477,000 and $4,933,000, respectively. During the first six months of 2001 and
2000, interest expense included amortization of deferred financing expenses of
$94,000 and $98,000, respectively. The decrease in interest expense was caused
primarily by lower rates of interest on our floating rate borrowings and a
reduction in the average amount of outstanding borrowings.
INCOME TAX PROVISION
At June 30, 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 six months of 2001, our operating activities provided
$2,731,000 of cash.
Accounts receivable increased by $4,602,000. The increase was caused
primarily by an increase in net sales during June 2001 compared to December
2000, an increase in the payment terms granted to certain large customers, and a
temporary increase resulting from delayed payment of accounts receivable by a
few large customers.
Accounts payable decreased by $3,398,000, 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
-23-
26
payable during the first six months of 2001, a significant amount of accounts
payable remain outstanding beyond normal industry terms at June 30, 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.
INVESTING ACTIVITIES
During the first six months of 2001, our investing activities used
$2,792,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the Corporate office
totaled $1,776,000, $222,000, and $3,000, respectively. Capital expenditures for
the first six months of 2001 included $1,935,000 for equipment and $66,000 for
land and building improvements. Capital expenditures for the Rubber Group and
the Metals Group are projected to total approximately $6,337,000 and $2,146,000,
respectively. At June 30, 2001, we had outstanding commitments to purchase plant
and equipment of approximately $2,747,000, of which approximately $2,099,000 is
expected to be purchased during 2001 and approximately $648,000 is expected to
be purchased in 2002. See also "Liquidity," below.
FINANCING ACTIVITIES
During the first six months of 2001, our financing activities used
$137,000 of cash. During the first six months 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 $2,646,000 during the first six months of 2001
primarily due to increased levels of accounts receivable.
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 June 30, 2001, availability under our revolving line of credit
totaled $2,187,000 before outstanding checks of $983,000 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 June 30,
2001, of $6,699,000. In addition, we have $11,457,000 of notes that are
scheduled to mature during the last six months of 2001 and $4,322,000 of
principal payments that are scheduled to be made on our secured, amortizing term
loans during the last six months of 2001. As discussed in more detail below, we
are in the process of
-24-
27
negotiating extensions of all of our matured and maturing debt, although there
can be no assurance that we will be successful in this effort.
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 $8,700,000. If our debt were refinanced on the terms that
are set forth below, we estimate that our monthly interest expense would
increase by approximately $170,000.
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 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 $76,041,000 at June 30, 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 notes, which have
a combined 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 June 30, 2001, and
December 31, 2000; and
- the long-term portions of our secured, amortizing term loans
were classified as current liabilities at June 30, 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.
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Substantially all of our assets are pledged as collateral for certain
of our borrowings. 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.
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. During the
six-month period ended June 30, 2001, a covenant that limits the amount of past
due accounts payable was amended through August 30, 2001, and a covenant
requiring a minimum level of tangible net worth was amended through February 1,
2002. 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 borrowings under
their loan agreements to be immediately due and payable and the violation might
trigger cross-default provisions under substantially all of our other
borrowings. In those circumstances, the holders of that borrowings, would have,
among other things, the right to declare the borrowings 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 restructuring will be accomplished by
means of an exchange offer pursuant to which the existing senior subordinated
notes will be exchanged for new senior subordinated notes in a principal amount
equal to the principal amount of existing senior subordinated notes being
exchanged plus the accrued and unpaid interest thereon through the day before
the date the exchange offer is consummated. The accrued and unpaid interest on
the senior subordinated notes aggregated $6,699,000 at June 30, 2001. The
principal terms of the new senior subordinated notes are set forth below:
- the maturity date will be December 31, 2004,
- the interest rate will be 14% for the period from the date the
exchange offer is consummated through December 31, 2001, and
15% thereafter, and
- interest will be payable quarterly.
If the exchange offer is consummated, we will pay a participation fee
of 3% of the principal amount of senior subordinated notes that are tendered for
exchange and issue warrants to purchase, in the aggregate, approximately 3% of
our outstanding common stock.
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We commenced the exchange offer on August 6, 2001. The exchange offer
will expire on September 4, 2001, unless extended.
Since February 1, 2000, the holders of substantially all of our
borrowings 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 borrowings 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 the
default on the senior subordinated notes through November 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 October 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 November 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 fifteen-month period ending November 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, and 14%
thereafter, and
- quarterly principal payments of $625,000, commencing
on March 31, 2002.
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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 November
1, 2001, has deferred seven quarterly interest
payments on those notes to November 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 former 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 quarterly interest
payment on those notes to November 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 former 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 consummate the
exchange offer, 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets" (FAS 142), which is effective for all fiscal periods
beginning after December 15, 2001. FAS 142 prohibits the amortization of
goodwill, but requires goodwill to be tested annually for impairment in
accordance with the requirements set forth in FAS 142. Other intangible assets
will continue to be amortized over their useful lives. We will adopt the
provisions of FAS 142 during the first quarter of 2002. Application of the
nonamortization provisions of FAS 142 are expected to result in an increase in
our income from operations during fiscal 2002 of approximately $316,000. During
the first quarter of 2002, we will perform the impairment tests required by FAS
142 on our unamortized goodwill as of January 1, 2002. We have not yet
determined what effect, if any, that these tests will have on the results of
operations or financial position of the Company.
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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 June 30, 2001, we had $46,916,000 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 June 30, 2001, we had outstanding $42,444,000 of fixed-rate debt
with a weighted-average interest rate of 12.1%, of which $38,966,000 had matured
or was 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 existing weighted-average interest rate.
We have reached an agreement in principle with the holders of approximately 75%
of our $27,412,000 of outstanding senior subordinated notes to exchange their
notes for new senior subordinated notes that will mature on December 31, 2004,
and to accept additional senior subordinated notes in payment of accrued and
unpaid interest on the notes through the effective date of the proposed
exchange. The interest rate on the new senior subordinated notes will be 14% for
the period from the effective date of the proposed amendment through December
31, 2001, and 15% thereafter. We have also proposed to extend the maturity date
of our $7,500,000 senior, unsecured note 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 $170,000.
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
We are in default in respect of our 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 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
herein by reference.
We did not pay dividends on our $8 cumulative convertible preferred
stock, series B, during the three-month period ended June 30, 2001, in the
aggregate amount of $6,600. As of June 30, 2001, we were in arrears in the
payment of dividends in the amount of $33,000 and in the making of a scheduled
redemption in the amount of $90,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 22,
2001.
The matters voted upon at the Annual Meeting and the results of the
voting on each matter are set forth below:
- A proposal to elect four directors (Messrs. William B. Conner,
Warren Delano, Kenneth I. Greenstein, and Michael A. Lubin).
Mr. Conner:
Votes for Mr. Conner 4,520,191
Votes withheld from Mr. Conner 17,948
Mr. Delano:
Votes for Mr. Delano 4,514,662
Votes withheld from Mr. Delano 23,477
Mr. Greenstein:
Votes for Mr. Greenstein 4,520,191
Votes withheld from Mr. Greenstein 17,948
Mr. Lubin:
Votes for Mr. Lubin 4,514,962
Votes withheld from Mr. Lubin 23,177
- The ratification of Ernst & Young LLP as independent
auditors of the Company for the year ending
December 31, 2001.
Votes for Ernst & Young LLP 4,533,619
Votes against Ernst & Young LLP 1,020
Abstentions 3,500
There were no broker non-votes in respect of the foregoing matters.
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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 July 31, 2001, between Lexington Precision Corporation
("LPC") and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated as of July 31, 2001, among LPC,
Michael A. Lubin, and Warren Delano
10-3 Amendment No. 7 to Note dated as of July 31, 2001, between LPC
and Tri-Links Investment Trust, as successor to Nomura Holding
America, Inc.
10-4 Ninth Amendment Agreement dated July 31, 2001, between
Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell
10-5 Agreement dated as of July 31, 2001, among LPC, LRGI, and
Congress Financial Corporation
10-6 Congress covenant amendment dated June 29, 2001
10-7 Agreement dated as of July 31, 2001, between LPC and CIT
Group/Equipment Financing, Inc.
10-8 Agreement dated as of July 31, 2001, among LPC, LRGI, and Bank
One, NA
10-9 Amendment to promissory note dated July 31, 2001, between LPC,
LRGI, and Bank One, NA
10-10 Amendment to promissory note dated July 31, 2001, between LPC,
LRGI, and Bank One, NA
10-11 Bank One, NA covenant amendment dated June 30, 2001
10-12 Long Term Contract between Delphi Automotive Systems LLC and
Lexington Connector Seals *
* This exhibit has been filed in redacted form pursuant to a
request for confidential treatment, filed separately with the
Securities and Exchange Commission pursuant to Rule 24b-2.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the second quarter of 2001.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 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)
August 13, 2001 By: /s/ Michael A. Lubin
- --------------- -----------------------------------
Date Michael A. Lubin
Chairman of the Board
August 13, 2001 By: /s/ Warren Delano
- --------------- -----------------------------------
Date Warren Delano
President
August 13, 2001 By: /s/ Dennis J. Welhouse
- --------------- --------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Exhibit Location
------ ------- --------
10-1 Agreement relating to 14% Junior Subordinated Filed with this Form 10-Q
Notes dated July 31, 2001, between LPC and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible Filed with this Form 10-Q
Increasing Rate Note dated July 31, 2001, among LPC,
Michael A. Lubin, and Warren Delano
10-3 Amendment No. 7 to Note dated as of July 31, 2001, Filed with this Form 10-Q
between LPC and Tri-Links Investment Trust, as
successor to Nomura Holding America, Inc.
10-4 Ninth Amendment Agreement dated July 31, 2001, Filed with this Form 10-Q
between LRGI and Paul H. Pennell
10-5 Agreement dated as of July 31, 2001, among LPC, LRGI, Filed with this Form 10-Q
and Congress Financial Corporation
10-6 Congress covenant amendment dated June 29, 2001 Filed with this Form 10-Q
10-7 Agreement dated as of July 31, 2001, Filed with this Form 10-Q
between LPC and The CIT Group/Equipment
Financing, Inc.
10-8 Agreement dated as of July 31, 2001, among LPC, LRGI, Filed with this Form 10-Q
and Bank One, NA
10-9 Amendment to promissory note dated July 31, 2001, Filed with this Form 10-Q
between LPC, LRGI, and Bank One, NA
10-10 Amendment to promissory note dated July, 31, 2001, Filed with this Form 10-Q
between LPC, LRGI, and Bank One, NA
10-11 Bank One, NA covenant amendment dated June 30, 2001 Filed with this Form 10-Q
10-12 Long Term Contract between Delphi Automotive Systems Filed with this Form 10-Q
LLC and Lexington Connector Seals Dated July 12, 2001