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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 SEPTEMBER 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 NOVEMBER 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.......................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......30
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities....................................31
Item 6. Exhibits and Reports on Form 8-K.................................31
i
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 31,532 $ 35,096 $ 101,184 $ 108,358
Cost of sales 27,787 31,608 87,382 95,324
---------- --------- --------- ----------
Gross profit 3,745 3,488 13,802 13,034
Selling and administrative expenses 2,194 2,633 7,320 8,372
---------- --------- --------- ----------
Income from operations 1,551 855 6,482 4,662
Interest expense 2,102 2,444 6,579 7,377
---------- --------- --------- ----------
Loss before income taxes (551) (1,589) (97) (2,715)
Income tax provision (benefit) (19) (208) 61 (168)
---------- --------- --------- ----------
Net loss $ (532) $ (1,381) $ (158) $ (2,547)
========== ========= ========= ==========
Basic and diluted net loss per share applicable to
common stockholders $ (0.11) $ (0.29) $ (0.03) $ (0.55)
========== ========= ========== ==========
See notes to consolidated financial statements.
-1-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------------- ----------------
ASSETS:
Current assets:
Cash $ 116 $ 65
Accounts receivable 22,855 19,912
Inventories 10,324 11,109
Prepaid expenses and other current assets 4,219 3,833
Deferred income taxes 2,049 2,049
--------- ----------
Total current assets 39,563 36,968
Property, plant, and equipment, net 58,694 62,778
Excess of cost over net assets of businesses acquired 7,909 8,147
Other assets 2,582 2,396
--------- ----------
Total assets $ 108,748 $ 110,289
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 15,365 $ 16,993
Accrued expenses 14,631 11,158
Short-term debt 84,341 88,996
--------- ----------
Total current liabilities 114,337 117,147
--------- ----------
Long-term debt, excluding current portion 1,476 104
--------- ----------
Deferred income taxes and other long-term liabilities 2,278 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 (23,840) (23,703)
--------- ----------
Total stockholders' deficit (9,673) (9,536)
--------- ----------
Total liabilities and stockholders' deficit $ 108,748 $ 110,289
========= ==========
See notes to consolidated financial statements
-2-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net (loss) $ (158) $ (2,547)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 8,951 8,971
Amortization included in operating expense 877 1,080
Amortization included in interest expense 142 149
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable (2,943) 1,654
Inventories 785 (1,221)
Prepaid expenses and other current assets (249) (1,151)
Accounts payable (1,053) 8,285
Accrued expenses 3,473 1,683
Other 20 349
--------- ----------
Net cash provided by operating activities 9,845 17,252
--------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (4,914) (13,339)
Decrease (increase) in equipment deposits (155) 677
Expenditures for tooling owned by customers (423) (906)
Other (129) 307
--------- ----------
Net cash used by investing activities (5,621) (13,261)
--------- ----------
FINANCING ACTIVITIES:
Increase (decrease) in loans under revolving line of credit 754 (102)
Proceeds from secured, amortizing term notes 2,000 2,460
Repayment of secured, amortizing term notes (6,604) (6,119)
Other (323) (134)
--------- ----------
Net cash used by financing activities (4,173) (3,895)
--------- ----------
Net increase in cash 51 96
Cash at beginning of period 65 8
--------- ----------
Cash at end of period $ 116 $ 104
========= ==========
See notes to consolidated financial statements.
-3-
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 Company's financial position at September 30, 2001, the
Company's results of operations for the three-month and nine-month periods ended
September 30, 2001 and 2000, and the Company's cash flows for the nine-month
periods ended September 30, 2001 and 2000. All such adjustments were of a
normal, recurring nature.
The results of operations for the three-month and nine-month periods
ended September 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.
In 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 would be
accomplished by means of an exchange offer pursuant to which the existing senior
subordinated notes would 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 was consummated. The accrued
and unpaid interest on the senior subordinated notes aggregated $7,573,000 at
September 30, 2001. The proposed 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.
-4-
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 exchange offer commenced on August 6, 2001, and has been extended
three times. It will expire on November 30, 2001, unless further extended. One
of the conditions to the consummation of the exchange offer is the tender for
exchange of at least 99% of the senior subordinated notes; as of November 13,
2001, the Company had received valid tenders of between 98% and 99% of the
senior subordinated notes.
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 notes 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 February
1, 2002. 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.
- In November 2001, the Company and the holder of the 12%
secured term note executed an agreement extending the maturity
of the note to October 31, 2006; the extended note is payable
in sixty equal, monthly installments of principal and
interest, commencing on November 30, 2001.
- 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 February 1, 2002, 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 February 1,
2002. The Company recently reached a revised, non-binding
agreement 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 amendment fee of 2% of the principal amount of the
senior, unsecured note, payable through the issuance
of an additional $150,000 principal amount of senior,
unsecured notes,
-5-
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, and to 14%
thereafter, and
- quarterly principal payments of $637,500, commencing
on March 31, 2003.
- 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 February 1, 2002, has deferred
seven quarterly interest payments on those notes to February
1, 2002, 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
February 1, 2002, 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 the Company's 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.
The Company has negotiated with certain of its trade creditors to
further extend the payment dates of its past-due accounts payable and, as of
November 13, 2001, had executed agreements with a number of those trade
creditors to convert $3,097,000 of past due accounts payable into notes that are
payable in seventeen equal, monthly principal installments starting in the
fourth quarter of 2001, with interest at the prime rate in effect on the day
each note was issued. The Company is continuing to negotiate with other trade
creditors in an effort to extend the payment dates of its remaining past-due
accounts payable.
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. The Company can give no assurance that it will be able
to consummate the exchange offer or the amendment of the senior, unsecured note,
to negotiate additional 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.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The Company will adopt
the provisions of FAS 142 during the first quarter of 2002. The elimination of
goodwill amortization pursuant to FAS 142 is expected to result in an increase
of approximately $316,000 in the Company's income from operations during fiscal
2002. 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, these tests will have on its
results of operations or financial position.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which is effective for
all fiscal periods beginning after December 15, 2001. FAS 144 sets forth the
conditions under which an impairment charge should be recognized for long-lived
assets to be held and used, except for goodwill, assets to be disposed of by
sale, and assets to be disposed of other than by sale. The Company is still in
the process of reviewing FAS 144 and has not yet determined what effect, if any,
the adoption of FAS 144 will have on its results of operations or financial
position.
NOTE 2 -- INVENTORIES
Inventories at September 30, 2001, and December 31, 2000, are set forth
below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------- ----------------
Finished goods $ 5,046 $ 5,067
Work in process 2,515 2,677
Raw materials and purchased parts 2,763 3,365
--------- ---------
$ 10,324 $ 11,109
========= =========
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at September 30, 2001, and December 31,
2000, are set forth below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------------ ----------------
Land $ 2,349 $ 2,349
Buildings 24,095 24,022
Equipment 110,217 106,003
----------- -----------
136,661 132,374
Accumulated depreciation 77,967 69,596
----------- -----------
Property, plant, and equipment, net $ 58,694 $ 62,778
=========== ===========
NOTE 4 -- ACCRUED EXPENSES
At September 30, 2001, and December 31, 2000, accrued expenses included
accrued interest expense of $7,854,000 and $5,234,000, respectively, of which
$7,573,000 and $4,078,000, respectively, was accrued on the senior subordinated
notes.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- DEBT
Debt at September 30, 2001, and December 31, 2000, is set forth below
(dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------- ----------------
Short-term debt:
Revolving line of credit $ 19,931 $ 19,177
Secured, amortizing term notes 28,574 33,178
12% secured term note - 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 577 12
-------- ---------
Total short-term debt $ 84,341 $ 88,996
======== =========
Long-term debt:
12% secured term note $ 1,370 $ -
Unsecured, amortizing term notes 575 -
Other 108 116
-------- ---------
2,053 116
Less current portion (577) (12)
-------- ---------
Total long-term debt $ 1,476 $ 104
======== =========
REVOLVING LINE OF CREDIT
The revolving line of credit expires on April 1, 2002, unless it is
renewed or otherwise extended.
At September 30, 2001, availability under the revolving line of credit
totaled $2,057,000, before outstanding checks of $1,212,000 were deducted. At
September 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% or 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.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM NOTES
Secured, amortizing term notes outstanding at September 30, 2001, and
December 31, 2000, are set forth below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Term notes payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2002, 8.37% $ 2,279 $ 2,454
Term notes payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2 3/4% 530 1,091
Term note payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,111 1,191
Term note payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,179 2,330
Term notes payable in equal monthly principal installments, final
maturities in 2002, prime rate and LIBOR plus 2 1/2% 535(1) 1,222(1)
Term note payable in equal monthly principal installments, final
maturity in 2003, prime rate 272 409
Term note payable in equal monthly principal installments, final
maturity in 2003, prime rate and LIBOR plus 2 1/2% 161(1) 251(1)
Term note payable in equal monthly principal installments, final
maturities in 2003, LIBOR plus 2 3/4% 507 747
Term notes payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 894 1,145
Term note payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 725 928
Term notes payable in equal monthly principal installments, final
maturities in 2004, prime rate and LIBOR plus 2 1/2% 7,028(1) 9,136(1)
Term note payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 1/2% 858 1,027
Term note payable in equal monthly principal installments, final
maturity in 2005, prime rate and LIBOR plus 2 1/2% 912(1) 1,094(1)
Term note payable in equal monthly principal installments, final
maturity in 2006, prime rate 373 435
Term notes payable in equal monthly principal installments, final
maturities in 2006, prime rate and LIBOR plus 2 1/2% 6,438(1) 5,422(1)
Term notes payable in equal monthly principal installments, final
maturity in 2007, prime rate and LIBOR plus 2 1/2% 3,772(1) 4,296(1)
------- -------
$28,574 $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 note.
The portions of the secured, amortizing term notes 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
-10-
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 notes with respect to the default on the
senior subordinated notes.
The secured, amortizing term notes 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.
12% SECURED TERM NOTE
In November 2001, the Company and the holder of the 12% secured term
note executed an agreement extending the maturity of the note to October 31,
2006. The extended note is payable in sixty equal, monthly installments of
principal and interest commencing on November 30, 2001. The 12% secured term
note has no cross-default provision with respect to the default on the senior
subordinated notes.
SENIOR, UNSECURED NOTE
The senior, unsecured note, due February 1, 2002, 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 February 1,
2002, 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.
UNSECURED, AMORTIZING TERM NOTES
The unsecured, amortizing term notes mature in 2003, and are a series
of notes that are payable in seventeen equal, monthly principal installments,
with interest at the prime rate in effect on the day each note was issued. At
September 30, 2001, the interest rate on the unsecured, amortizing term notes
was 6%.
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 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 junior subordinated notes are due on February 1, 2002. The junior
subordinated notes currently bear interest at 14% per annum. The holders of the
junior subordinated
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
notes have deferred until February 1, 2002, 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.
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 note
agreements in order to maintain or otherwise ensure the Company's current or
future compliance. During the nine-month period ended September 30, 2001, a
covenant that limits the amount of past due accounts payable was amended twice,
most recently through October 30, 2001, and a covenant requiring a minimum level
of tangible net worth was amended through February 1, 2001. The Company cannot
assure you that, if the Company breaches a covenant in the future, its lenders
will agree to provide waivers or amendments. 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 note 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 note agreements,
refer to Note 1, Basis of Presentation.
NOTE 6 -- SERIES B PREFERRED STOCK
At September 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 a result of the default on the senior
subordinated notes, the Company has been prohibited from making any dividend
payments on or redemptions of the series B preferred stock since February 1,
2000. At September 30, 2001, the Company was in arrears in the payment of seven
dividends, which totaled $46,000, and the redemption of 450 shares of series B
preferred stock, which totaled $90,000.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- INCOME TAXES
At September 30, 2001, and December 31, 2000, the Company's net deferred
income tax assets were fully offset by a valuation allowance. The income tax
provision for the nine months ended September 30, 2001, consists of estimated
state income taxes.
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 nine-month periods ended September 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 nine-month
periods ended September 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 preferred stock dividends and the amount by which payments made
to redeem preferred stock exceeded the par value of such shares. During the
three-month periods ended September 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ----------------------
2001 2000 2001 2000
---- ---- ---- ----
Numerators:
Net loss $ (532) $ (1,381) $ (158) $ (2,547)
Preferred stock dividends - (7) - (20)
Excess of redemption value over par value of
preferred stock redeemed during the year - (11) - (34)
-------- -------- --------- ---------
Numerator for basic net loss per share--
loss applicable to common stockholders (532) (1,399) (158) (2,601)
Effect of assumed conversion of dilutive securities:
14% junior subordinated convertible notes - - - -
-------- -------- --------- ---------
Numerator for diluted net loss per share--
loss applicable to common stockholders $ (532) $ (1,399) $ (158) $ (2,601)
======== ======== ========= =========
Denominators:
Denominator for basic net loss per share--
weighted-average common shares 4,828 4,828 4,828 4,766
Adjustments to derive denominator for diluted net loss per
share:
Conversion of 14% junior subordinated
convertible notes into 440,000 common shares - - - 50
Issuance of 125,000 shares of restricted common stock - - - 12
-------- -------- --------- ---------
Denominator for diluted net loss per share--
adjusted weighted average common shares 4,828 4,828 4,828 4,828
======== ======== ========= =========
Per share data:
Basic and diluted net loss applicable to common stockholders $ (0.11) $ (0.29) $ (0.03) $ (0.55)
======== ======== ========= =========
-13-
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 nine-month periods ended September 30,
2001 and 2000, is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET SALES:
Rubber Group $ 23,632 $ 25,930 $ 73,598 $ 81,663
Metals Group 7,900 9,166 27,586 26,695
---------- ----------- ----------- ----------
Total net sales $ 31,532 $ 35,096 $ 101,184 $ 108,358
========== =========== =========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,636 $ 1,945 $ 7,826 $ 7,716
Metals Group (655) (500) 243 (1,389)
Corporate office (430) (590) (1,587) (1,665)
---------- ----------- ----------- ----------
Total income from operations $ 1,551 $ 855 $ 6,482 $ 4,662
========== =========== =========== ==========
ASSETs:
Rubber Group $ 74,902 $ 75,748 $ 74,902 $ 75,748
Metals Group 31,193 36,646 31,193 36,646
Corporate office 2,653 2,605 2,653 2,605
---------- ----------- ----------- ----------
Total assets $ 108,748 $ 114,999 $ 108,748 $ 114,999
========== =========== =========== ==========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,069 $ 2,221 $ 6,373 $ 6,346
Metals Group 1,105 1,207 3,389 3,641
Corporate office 23 22 66 64
---------- ----------- ----------- ----------
Total depreciation and amortization $ 3,197 $ 3,450 $ 9,828 $ 10,051
========== =========== =========== ==========
CAPITAL EXPENDITURES:
Rubber Group $ 2,068 $ 1,732 $ 3,844 $ 9,898
Metals Group 845 689 1,067 3,440
Corporate office - - 3 1
---------- ----------- ----------- ----------
Total capital expenditures $ 2,913 $ 2,421 $ 4,914 $ 13,339
========== =========== =========== ==========
(1) Does not include amortization of deferred financing expenses, which
totaled $48,000 and $51,000 during the three-month periods ended
September 30, 2001 and 2002, respectively, and $142,000 and $149,000
during the nine-month periods ended September 30, 2001 and 2000,
respectively. Amortization of deferred financing expenses is included
in interest expense in the consolidated financial statements.
-14-
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. All forward-looking statements are
expressly qualified by the discussion above.
-15-
RESULTS OF OPERATIONS-- THIRD QUARTER OF 2001 VERSUS THIRD QUARTER OF 2000
The following table sets forth our consolidated operating results for
the third quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 31,532 100.0% $ 35,096 100.0%
Cost of sales 27,787 88.1 31,608 90.1
-------- --------- -------- --------
Gross profit 3,745 11.9 3,488 9.9
Selling and administrative expenses 2,194 7.0 2,633 7.5
-------- --------- -------- --------
Income from operations 1,551 4.9 855 2.4
Add back depreciation and amortization
(1) 3,197 10.1 3,450 9.8
-------- --------- -------- --------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 4,748 15.1% $ 4,305 12.2%
======== ========= ======== ========
Net cash provided by operating
activities (3) $ 7,114 22.6% $ 4,477 12.8%
======== ========= ======== ========
(1) Does not include amortization of deferred financing expenses,
which totaled $48,000 and $51,000 during the third 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 September 30, 2001 and 2000.
-16-
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 third quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 23,632 100.0% $ 25,930 100.0%
Cost of sales 19,799 83.8 22,589 87.1
--------- ------- --------- -------
Gross profit 3,833 16.2 3,341 12.9
Selling and administrative expenses 1,197 5.1 1,396 5.4
--------- ------- --------- -------
Income from operations 2,636 11.1 1,945 7.5
Add back depreciation and amortization 2,069 8.8 2,221 8.5
--------- ------- --------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 4,705 19.9% $ 4,166 16.1%
========= ======= ========= =======
During the third quarter of 2001, net sales of the Rubber Group
decreased by $2,298,000, or 8.9%, compared to the third quarter of 2000. This
decrease was primarily due to reduced unit sales of insulators for automotive
ignition wire sets and reduced unit sales of connector seals for automotive
wiring systems, 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 and medical
components.
Delphi Automotive Systems Corporation is the Rubber Group's largest
customer. 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,
-17-
- 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.
During the third quarter of 2001, the price reductions granted to
Delphi on July 16, 2001, reduced net sales by $791,000.
Cost of sales as a percentage of net sales decreased during the third
quarter of 2001 to 83.8% of net sales from 87.1% of net sales during the third
quarter of 2000, primarily because our insulator division improved operating
efficiencies and reduced scrap, and because $414,000 of expenses related to the
services of a consulting firm that was retained during 2000 to assist the
management team of the insulator division in implementing improved operating
systems were not incurred during the third quarter of 2001. The impact of these
improvements was partially offset by the price reductions granted to Delphi in
the new multi-year agreement.
Selling and administrative expenses as a percentage of net sales
decreased during the third quarter of 2001 compared to the third quarter of
2000, primarily because of a reduction in personnel related expenses.
During the third quarter of 2001, income from operations was
$2,636,000, an increase of $691,000, or 35.5%, compared to the third quarter of
2000, and EBITDA was $4,705,000, an increase of $539,000, or 12.9%, compared to
the third quarter of 2000.
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.
-18-
The following table sets forth the operating results of the Metals
Group for the third quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------
2001 2000
---------------- ----------------
Net sales $ 7,900 100.0% $ 9,166 100.0%
Cost of sales 7,988 101.1 9,019 98.4
------- ------- ------- -------
Gross profit (88) (1.1) 147 1.6
Selling and administrative expenses 567 7.2 647 7.1
------- ------- ------- -------
Loss from operations (655) (8.3) (500) (5.5)
Add back depreciation and
amortization 1,105 14.0 1,207 13.2
------- ------- ------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 450 5.7% $ 707 7.7%
======= ======= ======= =======
During the third quarter of 2001, net sales of the Metals Group
decreased by $1,266,000, or 13.8%, compared to the third quarter of 2000. The
decrease resulted primarily from decreased sales of machined metal components.
Cost of sales, as a percentage of net sales increased during the third
quarter of 2001 to 101.1% of net sales from 98.4% of net sales during the third
quarter of 2000, primarily as a result of (1) reduced operating efficiencies and
higher scrap resulting from difficulties encountered in the start-up of several
new, high-volume components, and (2) the impact of fixed and partially fixed
manufacturing costs during a period of reduced net sales.
Selling and administrative expenses decreased during the third quarter
of 2001 compared to the third quarter of 2000, primarily due to reduced employee
recruitment and relocation costs.
The Metals Group recorded a loss from operations of $655,000 during the
third quarter of 2001, compared to a loss from operations of $500,000 during the
third quarter of 2000. EBITDA was $450,000 during the third quarter of 2001, a
decrease of $257,000, or 36.4%, compared to the third 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.
-19-
The following table sets forth the operating results of the corporate office for
the third quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED
SEPTEMBER 30
---------------------
2001 2000
-------- -------
Loss from operations $ (430) $ (590)
Add back depreciation and amortization 23 22
------- -------
Earnings before interest, taxes, depreciation,
and amortization $ (407) $ (568)
======= =======
Corporate office expense decreased compared to the third quarter of
2000, primarily due to the elimination of accruals for management incentive
compensation, and reduced office expenses and state franchise taxes.
INTEREST EXPENSE
During the third quarters of 2001 and 2000, interest expense was
$2,102,000 and $2,444,000, respectively, which included amortization of deferred
financing expenses of $48,000 and $51,000, 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 September 30, 2001, and December 31, 2000, our net deferred income
tax assets were fully offset by a valuation allowance.
-20-
RESULTS OF OPERATIONS-- FIRST NINE MONTHS OF 2001 VERSUS FIRST NINE MONTHS OF
2000
The following table sets forth our consolidated operating results for
the first nine months of 2001 and 2000 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------
2001 2000
-------------------- -------------------
Net sales $101,184 100.0% $ 108,358 100.0%
Cost of sales 87,382 86.4 95,324 88.0
--------- --------- --------- --------
Gross profit 13,802 13.6 13,034 12.0
Selling and administrative expenses 7,320 7.2 8,372 7.7
--------- --------- --------- --------
Income from operations 6,482 6.4 4,662 4.3
Add back depreciation and
amortization (1) 9,828 9.7 10,051 9.3
--------- --------- --------- --------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 16,310 16.1% $ 14,713 13.6%
========= ========= ========= ========
Net cash provided by operating
activities (3) $ 9,845 9.7% $ 17,252 15.9%
========= ========= ========= ========
(1) Does not include amortization of deferred financing expenses,
which totaled $142,000 and $149,000 during the first nine months
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
nine-month periods ended September 30, 2001 and 2000.
-21-
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 nine months of 2001 and 2000 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
2001 2000
------------------ ------------------
Net sales $ 73,598 100.0% $ 81,663 100.0%
Cost of sales 61,874 84.1 69,308 84.9
--------- ------- --------- -------
Gross profit 11,724 15.9 12,355 15.1
Selling and administrative expenses 3,898 5.3 4,639 5.7
--------- ------- --------- -------
Income from operations 7,826 10.6 7,716 9.4
Add back depreciation and amortization 6,373 8.7 6,346 7.8
--------- ------- --------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 14,199 19.3% $ 14,062 17.2%
========= ======= ========= =======
During the first nine months of 2001, net sales of the Rubber Group
decreased by $8,065,000, or 9.9%, compared to the third 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 offset, in part, by increased sales of tooling and medical
components. The price reductions granted to Delphi on July 16, 2001, reduced net
sales for the first nine months of 2001 by $791,000.
Cost of sales as a percentage of net sales decreased during the first
nine months of 2001 to 84.1% of net sales from 84.9% of net sales during the
first nine months of 2000, primarily because our insulators division improved
operating efficiencies and reduced scrap and because $1,013,000 of expenses
related to the services of a consulting firm that was retained during 2000 to
assist the management team of the insulators division in implementing improved
operating systems were not incurred during the first nine months of 2001.
Selling and administrative expenses as a percentage of net sales
decreased during the first nine months of 2001 compared to the first nine months
of 2000, primarily because wages and employee benefits, incentive compensation,
and depreciation expense all decreased when compared to the first nine months of
2000.
-22-
During the first nine months of 2001, income from operations was
$7,826,000, an increase of $110,000, or 1.4%, compared to the first nine months
of 2000, and EBITDA was $14,199,000, an increase of $137,000, or 1.0%, compared
to the first nine months of 2000.
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 nine months of 2001 and 2000 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
2001 2000
------------------ -----------------
Net sales $ 27,586 100.0% $ 26,695 100.0%
Cost of sales 25,508 92.5 26,016 97.5
-------- ------- -------- -------
Gross profit 2,078 7.5 679 2.5
Selling and administrative expenses 1,835 6.7 2,068 7.7
-------- ------- -------- -------
Income (loss) from operations 243 0.9 (1,389) (5.2)
Add back depreciation and
amortization 3,389 12.3 3,641 13.6
-------- ------- -------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 3,632 13.2% $ 2,252 8.4%
======== ======= ======== =======
During the first nine months of 2001, net sales of the Metals Group
increased by $891,000, or 3.3%, compared to the first nine months of 2000. The
increase resulted primarily from increased sales of machined metal components,
die cast components, and tooling.
Cost of sales as a percentage of net sales decreased during the first
nine months of 2001 to 92.4% of net sales from 97.5% of net sales during the
first nine months of 2000, primarily because of improved operating efficiencies,
lower employee benefit costs, lower depreciation and amortization expenses, and
reduced losses on the disposal and write-down of assets held for sale when
compared to the first nine months 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 nine months of 2001 compared to the first nine months
of 2000, primarily due to reduced employee recruitment and relocation expense
and reduced consulting fees related to the installation of new computer systems.
-23-
During the first nine months of 2001, income from operations was
$243,000 compared to a loss from operations of $1,389,000 during the first nine
months of 2000, and EBITDA was $3,632,000, an increase of $1,380,000, or 61.3%,
compared to the first nine months 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.
The following table sets forth the operating results of the corporate
office for the first nine months of 2001 and 2000 (dollar amounts in thousands):
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
2001 2000
---- ----
Loss from operations $ (1,587) $ (1,665)
Add back depreciation and amortization 66 64
--------- ---------
Earnings before interest, taxes, depreciation,
and amortization $ (1,521) $ (1,601)
========= =========
INTEREST EXPENSE
During the first nine months of 2001 and 2000, interest expense was
$6,579,000 and $7,377,000, respectively, which included amortization of deferred
financing expenses of $142,000 and $149,000, 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 September 30, 2001, and December 31, 2000, our net deferred income
tax assets were fully offset by a valuation allowance. The income tax provision
for the nine months ended September 30, 2001, consists of estimated state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first nine months of 2001, our operating activities provided
$9,845,000 of cash.
Accounts receivable increased by $2,943,000. The increase was caused
primarily by an increase in net sales during September 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.
-24-
Accounts payable decreased by $1,628,000, primarily as a result of a
reduction in the amount of past-due accounts payable. In September 2001, we
converted $575,000 of past due accounts payable into notes that are payable in
seventeen equal, monthly principal installments, with interest at the prime rate
in effect on the day each note was issued. Between October 1, 2001, and November
13, 2001, we converted an additional $2,522,000 of past due accounts payable
into notes with similar terms. At November 13, 2001, approximately $900,000 of
accounts payable remained outstanding beyond normal industry terms.
INVESTING ACTIVITIES
During the first nine months of 2001, our investing activities used
$5,621,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the corporate office
totaled $3,844,000, $1,067,000, and $3,000, respectively. Capital expenditures
for the first nine months of 2001 included $4,840,000 for equipment and $74,000
for land and building improvements. For the year ending December 31, 2001,
capital expenditures for the Rubber Group, the Metals Group, and the corporate
office are projected to total approximately $5,028,000, $1,461,000, and $19,000,
respectively. At September 30, 2001, we had outstanding commitments to purchase
plant and equipment of approximately $1,481,000, of which approximately $838,000
is expected to be purchased during 2001 and approximately $643,000 is expected
to be purchased in 2002. See also "Liquidity," below.
FINANCING ACTIVITIES
During the first nine months of 2001, our financing activities used
$4,173,000 of cash. We repaid $6,612,000 of secured, amortizing term loans, we
obtained a new term loan in the amount of $2,000,000, which we used for the
purchase of equipment, and we increased the borrowings under our revolving line
of credit by $754,000.
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. As discussed below, as part of our efforts to restructure our
indebtedness we are currently attempting to renegotiate the revolving line of
credit on terms that are satisfactory to us. At September 30, 2001, availability
under our revolving line of credit totaled $2,057,000 before outstanding checks
of $1,212,000 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 thereon, as of
September 30, 2001, of $7,573,000. In addition, our revolving line of credit is
scheduled to expire on April 30, 2002, and we have $14,521,000 of notes that are
scheduled to mature during the twelve months ending September 30, 2002, and
$8,019,000 of principal payments that are scheduled to be made on our secured,
amortizing term notes during the twelve months ending September 30, 2002. As
discussed in more detail below, we are in the
-25-
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 our debt were refinanced on the terms that are set forth below, we
estimate that our monthly cash 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 capital and capital expenditure
requirements and the scheduled payments on our secured, amortizing term notes
for the foreseeable future, 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 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 notes are willing
to continue to grant waivers similar to those granted
previously and to extend the scheduled balloon maturities, 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 $75,950,000 at September 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 senior, unsecured note, and our junior
subordinated notes, which have a combined aggregate principal
balance of $7,847,000, were scheduled to mature during 2001
and have subsequently been rescheduled to mature during the
first quarter of 2002; consequently, all of this indebtedness
was classified as current liabilities in our consolidated
financial statements at September 30, 2001, and December 31,
2000; and
- the long-term portions of our secured, amortizing term notes
were classified as current liabilities at September 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 notes related to the payment
default on the senior subordinated notes.
Substantially all of our assets are pledged as collateral for various
of our borrowings. A number 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
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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 note agreements in order to
maintain or otherwise ensure our current or future compliance. During the
nine-month period ended September 30, 2001, a covenant that limits the amount of
past due accounts payable was amended twice, most recently through October 30,
2001, and a covenant requiring a minimum level of tangible net worth was amended
through February 1, 2001. We cannot assure you that, if we breach a covenant in
the future, our lenders will agree to provide waivers or amendments. 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 note 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 lenders 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 would be accomplished by
means of an exchange offer pursuant to which the existing senior subordinated
notes would 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 was consummated. The accrued and unpaid interest on
the senior subordinated notes aggregated $7,573,000 at September 30, 2001. The
proposed 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.
The exchange offer commenced on August 6, 2001 and is presently
scheduled to expire on November 30, 2001, unless extended. One of the conditions
to the consummation of the exchange offer is
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the tender for exchange of at least 99% of the senior subordinated notes; as of
November 13, 2001, we had received valid tenders of between 98% and 99% of the
senior subordinated notes.
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 notes 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 February 1,
2002, and have amended certain covenants to eliminate defaults
that would otherwise have occurred because all of our secured,
amortizing term notes 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.
- In November 2001, the Company and the holder of our 12%
secured term note executed an agreement extending the maturity
of that note to October 31, 2006; the extended note is payable
in sixty equal, monthly installments of principal and interest
commencing on November 30, 2001.
- 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 February 1, 2002, 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 February 1, 2002. We have
recently reached a revised, non-binding agreement 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 amendment fee of 2% of the principal amount of the
senior unsecured note, payable through the issuance
of an additional $150,000 principal amount of senior,
unsecured notes,
- 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 $637,500, commencing
on March 31, 2003.
- The holder of our junior subordinated notes, in the
outstanding principal amount of $347,000, has extended the
maturity date of those notes to February 1, 2002, has deferred
seven quarterly interest payments on those notes to February
1, 2002, and has
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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 February 1, 2002,
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 addition to the arrangements with the holders of our outstanding
indebtedness, we have negotiated with certain of our trade creditors to further
extend the payment dates of our past-due accounts payable and have, as of
November 13, 2001, converted $3,097,000 of past due accounts payable into notes
that are payable in 17 equal, monthly principal installments starting in the
fourth quarter of 2001, with interest at the prime rate in effect on the day
each note was issued. We are continuing to negotiate with other trade creditors
in an effort to extend the payment dates of our remaining past-due accounts
payable.
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. We can give you no assurance that we will be able to consummate
the exchange offer or the amendment of our senior, unsecured note, to negotiate
additional 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 September 30, 2001, we had $43,511,000 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 September 30, 2001, we had outstanding $42,306,000 of fixed-rate
debt with a weighted-average interest rate of 12.2%, of which $42,198,000 had
matured or was scheduled to mature during the twelve months ending September 30,
2002. 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 received tenders of between 98% and 99%
of our $27,412,000 of outstanding senior subordinated notes in exchange for new
senior subordinated notes that will mature on December 31, 2004, and additional,
new 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 agreed 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 proposed restructuring 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 cash
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
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 nine-month period ended September 30, 2001, in the
aggregate amount of $6,600. As of September 30, 2001, we were in arrears in the
payment of seven dividends in an aggregate amount of $46,000 and in the making
of a scheduled redemption 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 October 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 October 31, 2001, among
LPC, Michael A. Lubin, and Warren Delano
10-3 Amendment No. 8 to Note dated as of October 31, 2001,
between LPC and Tri-Links Investment Trust, as successor to
Nomura Holding America, Inc.
10-4 Tenth Amendment Agreement dated as of October 31, 2001,
between Lexington Rubber Group, Inc. ("LRGI") and Paul H.
Pennell
10-5 Agreement dated as of October 31, 2001, among LPC, LRGI,
and Congress Financial Corporation
10-6 Congress covenant amendment dated as of August 30, 2001
10-7 Agreement dated as of October 31, 2001, between LPC and CIT
Group/Equipment Financing, Inc.
10-8 Agreement dated as of October 31, 2001, among LPC, LRGI,
and Bank One, NA
(b) REPORTS ON FORM 8-K
On August 6, 2001, we filed a Form 8-K stating that on that date we had
applied for qualification of a new indenture on Form T-3 and that we had also
issued a press release dated August 6, 2001, announcing the commencement of an
exchange offer with respect to our senior subordinated notes.
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On September 5, 2001, we filed a Form 8-K that included a press release
dated September 5, 2001, stating that we were extending the expiration date of
our offer to exchange our senior subordinated notes from 5:00 p.m., New York
City time, on September 4, 2001, to 5:00 p.m., New York City time, on
September 17, 2001.
On September 14, 2001, we filed a Form 8-K that included a press release
dated September 13, 2001, stating that we were extending the expiration date of
our offer to exchange our senior subordinated notes from 5:00 p.m., New York
City time, on September 17, 2001, to 5:00 p.m., New York City time, on
October 1, 2001.
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
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)
November 13, 2001 By: /s/ Michael A. Lubin
- ----------------- ------------------------------
Date Michael A. Lubin
Chairman of the Board
November 13, 2001 By: /s/ Warren Delano
- ----------------- ------------------------------
Date Warren Delano
President
November 13, 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 October 31, 2001, between LPC and
Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Filed with this Form 10-Q
Convertible Increasing Rate Note dated
October 31, 2001, among LPC, Michael A.
Lubin, and Warren Delano
10-3 Amendment No. 8 to Note dated as of Filed with this Form 10-Q
October 31, 2001, between LPC and Tri-Links
Investment Trust, as successor to Nomura
Holding America, Inc.
10-4 Tenth Amendment Agreement dated Filed with this Form 10-Q
October 31, 2001, between LRGI and
Paul H. Pennell
10-5 Agreement dated as of October 31, 2001, among Filed with this Form 10-Q
LPC, LRGI, and Congress Financial Corporation
10-6 Congress covenant amendment dated Filed with this Form 10-Q
August 30, 2001
10-7 Agreement dated as of October 31, 2001, between Filed with this Form 10-Q
LPC and The CIT Group/Equipment Financing, Inc.
10-8 Agreement dated as of October 31, 2001, among Filed with this Form 10-Q
LPC, LRGI, and Bank One, NA