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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No_
COMMON STOCK, $0.25 PAR VALUE, 4,828,036 SHARES AS OF MAY 10, 2002
(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.....................................24
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities..................................................................25
Item 6. Exhibits and Reports on Form 8-K...............................................................25
- 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
MARCH 31
-----------------------------
2002 2001
---- ----
Net sales $ 30,244 $ 32,968
Cost of sales 27,276 28,549
-------- --------
Gross profit 2,968 4,419
Selling and administrative expenses 2,255 2,475
Plant closure costs 522 --
-------- --------
Income from operations 191 1,944
Interest expense 1,796 2,325
-------- --------
Loss before income taxes (1,605) (381)
Income tax provision 21 --
-------- --------
Net loss $ (1,626) $ (381)
======== ========
Per share data:
Basic and diluted net loss applicable to common stockholders $ (0.34) $ (0.08)
======== ========
See notes to consolidated financial statements.
-1-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
--------------- ----------------
ASSETS:
Current assets:
Cash $ 61 $ 189
Marketable securities 1,344 1,274
Accounts receivable 21,941 18,753
Inventories 8,210 8,493
Prepaid expenses and other current assets 3,513 3,523
Deferred income taxes 1,914 1,914
--------- ---------
Total current assets 36,983 34,146
Property, plant, and equipment, net 53,025 55,324
Excess of cost over net assets of businesses acquired 7,831 7,831
Other assets 2,577 2,576
--------- ---------
Total assets $ 100,416 $ 99,877
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 13,384 $ 12,077
Accrued expenses 16,101 14,586
Short-term debt 77,699 77,794
Current portion of long-term debt 2,625 2,617
--------- ---------
Total current liabilities 109,809 107,074
--------- ---------
Long-term debt, excluding current portion 1,339 2,000
--------- ---------
Deferred income taxes and other long-term liabilities 2,146 2,132
--------- ---------
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 (27,445) (25,826)
Accumulated other comprehensive income 70 --
--------- ---------
Total stockholders' deficit (13,208) (11,659)
--------- ---------
Total liabilities and stockholders' deficit $ 100,416 $ 99,877
========= =========
See notes to consolidated financial statements
-2-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
------------------------------
2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss $ (1,626) $ (381)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,866 3,068
Amortization included in operating expense 183 304
Amortization included in interest expense 36 45
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable (3,188) (2,072)
Inventories 283 1,387
Prepaid expenses and other current assets 204 236
Accounts payable 1,307 (3,074)
Accrued expenses 1,515 1,577
Other 30 6
--------- ---------
Net cash provided by operating activities 1,610 1,096
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (778) (1,226)
Net decrease (increase) in equipment deposits 38 (181)
Expenditures for tooling owned by customers (243) (194)
Other 3 31
--------- ---------
Net cash used by investing activities (980) (1,570)
--------- ---------
FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 2,128 786
Proceeds from issuance of long-term debt -- 2,000
Repayment of long-term debt (2,876) (2,159)
Other (10) (158)
--------- ---------
Net cash provided (used) by financing activities (758) 469
--------- ---------
Net decrease in cash (128) (5)
Cash at beginning of period 189 65
--------- ---------
Cash at end of period $ 61 $ 60
========= =========
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, 2001.
Subject to the Company's ability to successfully restructure its
indebtedness as discussed below, in the opinion of management, the unaudited
interim consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company at March 31, 2002, and the
Company's results of operations and cash flows for the three-month periods ended
March 31, 2002 and 2001. All such adjustments were of a normal, recurring
nature.
The results of operations for the three-month period ended March 31,
2002, are not necessarily indicative of the results to be expected for the full
year or for any succeeding quarter.
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year's presentation.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has been in default on its 12 3/4% senior subordinated
notes since February 1, 2000, when 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 that date. In April 2002, the Company reached an agreement in principle
with the holders of over 80% of the senior subordinated notes on the terms of a
restructuring of the notes. The Company plans to commence an exchange offer for
the 12 3/4% senior subordinated notes reflecting the terms of the agreement in
principle. If the exchange offer were consummated, the existing senior
subordinated notes would be exchanged for new 11 1/2% senior subordinated notes
due August 1, 2007, in a principal amount equal to the principal amount of the
12 3/4% senior subordinated notes being exchanged plus the accrued and unpaid
interest thereon through April 30, 2002, which accrued interest totals $350.625
for each $1,000 principal amount of 12 3/4% senior subordinated notes exchanged.
Interest on the 11 1/2% senior subordinated notes would accrue from May 1, 2002,
and would be payable on each August 1, November 1, February 1, and May 1. Each
$1,000 principal amount of 11 1/2% senior subordinated notes would be issued
with warrants to purchase ten shares of common stock at a price of $3.50 per
share at any time from January 1, 2004, through August 1, 2007. If the exchange
offer were consummated, the Company would pay a participation fee of 3% of the
principal amount of 12 3/4% senior subordinated notes that were tendered for
exchange. The consummation of the exchange offer is conditioned upon, among
other things, the valid tender for exchange of at least 99% of the senior
subordinated notes.
The Company has also reached an agreement in principle with the holders
of its 14% junior subordinated notes on the terms of a restructuring of those
notes. If the restructuring were completed, the
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company would exchange new 12 1/2% junior subordinated notes due November 1,
2007, for the $347,000 principal amount of existing 14% junior subordinated
notes and the accrued interest thereon for the period November 1, 1999, through
April 30, 2002, which accrued interest totals $156,000. Interest on the 12 1/2%
junior subordinated notes would accrue from May 1, 2002, and would be payable on
each August 1, November 1, February 1, and May 1. Each $1,000 principal amount
of 12 1/2% junior subordinated notes would be issued together with warrants to
purchase ten shares of common stock at a price of $3.50 per share at any time
from January 1, 2004, through November 1, 2007. If the restructuring were
completed, the Company also would pay a participation fee of 3% of the principal
amount of 14% junior subordinated notes.
The completion of the proposed restructuring of the senior subordinated
notes and the junior subordinated notes is subject to a number of conditions
precedent, including the restructuring of the Company's outstanding $7,500,000
senior, unsecured note on satisfactory terms. The Company has proposed that the
senior, unsecured note be restructured to provide for twenty equal quarterly
principal payments of $375,000 beginning on November 1, 2002, with a final
maturity date of August 1, 2007, interest at the rate of 10 1/2% per annum,
payable quarterly, and a 2% participation fee. On April 30, 2002, the maturity
date of the senior, unsecured note, the holder of the note rejected the
Company's proposal for a restructuring and turned down the Company's request for
an interim, three-month extension. The Company did not pay the principal of the
note or the monthly interest payment of $78,000 that was due on April 30, 2002.
The default on the senior, unsecured note has caused a cross default on the
loans outstanding under the Company's revolving line of credit, the secured,
amortizing term loans, the senior subordinated notes, and the junior
subordinated notes.
Another condition of the proposed restructuring of the senior
subordinated notes and the junior subordinated notes is the refinancing of the
Company's senior, secured debt on satisfactory terms. The Company was unable to
refinance its senior, secured debt on satisfactory terms in order to complete
earlier debt restructuring plans. The Company believes that the terms of the
revised exchange offer for the 12 3/4% senior subordinated notes outlined above
enhance the Company's ability to refinance its senior, secured debt on
satisfactory terms. The Company is currently in discussions with several lenders
regarding a refinancing of its senior, secured credit facilities.
The Company can give no assurance that it will be able to consummate
the exchange offer, restructure the senior, unsecured note, or renegotiate its
senior, secured financing arrangements on terms satisfactory to the Company. If
the Company is unable to do so, it may file a petition under the federal
bankruptcy code in order to carry out a debt restructuring plan on terms
substantially similar to those discussed above. Although the Company believes
that such a restructuring could be accomplished quickly and without disruption
to its operations, any such proceeding involves considerable risks and
uncertainties and could have a material adverse effect on the Company's
operations and financial position. The consolidated financial statements do not
include any adjustments to the amounts or classifications of assets or
liabilities to reflect those risks and uncertainties.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- INVENTORIES
Inventories at March 31, 2002, and December 31, 2001, are set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------- ----------------
Finished goods $ 2,972 $ 3,727
Work in process 2,633 2,060
Raw materials and purchased parts 2,605 2,706
--------- ---------
$ 8,210 $ 8,493
========= =========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 2002, and December 31,
2001, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2002 2001
-------------- ----------------
Land $ 2,309 $ 2,309
Buildings 22,708 22,601
Equipment 109,807 111,206
--------- ---------
134,824 136,116
Accumulated depreciation 81,799 80,792
--------- ---------
Property, plant, and equipment, net $ 53,025 $ 55,324
========= =========
NOTE 4 -- ACCRUED EXPENSES
At March 31, 2002, and December 31, 2001, accrued expenses included
accrued interest expense of $9,617,000 and $8,738,000, respectively, of which
$9,320,000 and $8,446,000, respectively, was accrued on the senior subordinated
notes.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- DEBT
Debt at March 31, 2002, and December 31, 2001, is set forth below
(dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------- ----------------
Short-term debt:
Revolving line of credit $ 18,313 $ 16,185
Secured, amortizing term loans 24,127 26,350
Senior, unsecured note 7,500 7,500
Senior subordinated notes 27,412 27,412
Junior subordinated notes 347 347
--------- ---------
Subtotal 77,699 77,794
Current portion of long-term debt 2,625 2,617
--------- ---------
Total short-term debt $ 80,324 $ 80,411
========= =========
Long-term debt:
12% secured term note 1,284 1,336
Unsecured, amortizing term notes 2,296 2,868
Other 384 413
--------- ---------
Subtotal 3,964 4,617
Less current portion (2,625) (2,617)
--------- ---------
Total long-term debt $ 1,339 $ 2,000
========= =========
REVOLVING LINE OF CREDIT
On March 29, 2002, the Company and the lenders providing loans under
the Company's revolving line of credit agreed to extend the expiration date of
the revolving line of credit from April 1, 2002, to July 1, 2002.
At March 31, 2002, availability under the revolving line of credit
totaled $2,743,000, before outstanding checks of $2,173,000 were deducted. At
March 31, 2002, the interest rates on loans outstanding under the revolving line
of credit were the London Interbank Offered Rate (LIBOR) plus 2.5% 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.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM LOANS
Secured, amortizing term loans outstanding at March 31, 2002, and
December 31, 2001, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------ ----------------
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2002, 8.37% $ 2,161 $ 2,221
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2 3/4% 158 344
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,058 1,084
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.0% 2,078 2,128
Term loans payable in equal monthly principal installments, final
maturities in 2002, prime rate and LIBOR plus 2 1/2% 76(1) 305(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate 182 227
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate and LIBOR plus 2 1/2% 100(1) 131(1)
Term loan payable in equal monthly principal installments, final
maturities in 2003, LIBOR plus 2 3/4% 347 427
Term loans payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 727 810
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 589 657
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate and LIBOR plus 2 1/2% 5,622(1) 6,325(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 1/2% 746 802
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate and LIBOR plus 2 1/2% 791(1) 852(1)
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate 332 352
Term loans payable in equal monthly principal installments, final
maturities in 2006, prime rate and LIBOR plus 2 1/2% 5,735(1) 6,086(1)
Term loans payable in equal monthly installments, final maturity in
2007, prime rate and LIBOR plus 2 1/2% 3,425(1) 3,599(1)
------- -------
$24,127 $26,350
======= =======
(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 revolving line of credit is currently scheduled to
mature on July 1, 2002.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The secured, amortizing term loans were classified as short-term debt
because, effective April 30, 2002, a cross default occurred when the Company did
not pay the senior, unsecured note when it matured.
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, which matured on April 30, 2002, is senior
in right of payment to the senior subordinated notes and the junior subordinated
notes. The senior, unsecured note bore interest at 10 1/2% per annum until
August 1, 2000, when the effective interest rate increased to 12 1/2%. On April
30, 2002, the Company did not make the payments of interest and principal then
due on the senior, unsecured note in the amounts of $78,000 and $7,500,000,
respectively. For a more detailed discussion of the status of the senior,
unsecured note, refer to Note 1, "Basis of Presentation."
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 did not make the
payments of interest and principal then due on the senior subordinated notes in
the amounts of $1,748,000 and $27,412,000, respectively. For a more detailed
discussion of the status of the senior subordinated notes, refer to Note 1,
"Basis of Presentation."
JUNIOR SUBORDINATED NOTES
The junior subordinated convertible notes and the junior subordinated
nonconvertible notes are unsecured obligations of the Company. The $1,000,000
principal amount of junior subordinated convertible notes were converted into
440,000 shares of common stock on February 1, 2000. The junior subordinated
nonconvertible notes are due on July 1, 2002, and are subordinated in right of
payment to all existing and future secured debt of the Company, to the senior,
unsecured note, and to the senior subordinated notes. The junior subordinated
notes currently bear interest at 14% per annum. The holders of the junior
subordinated notes have deferred until July 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
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of preferred stock, and the payment of cash dividends. In addition,
substantially all of the Company's financing agreements include cross-default
provisions.
From time to time, the Company's lenders have agreed to waive or amend
certain of the financial covenants contained in its various note agreements in
order to maintain or otherwise ensure the Company's current or future
compliance. 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 borrowings under
their note agreements to be due and payable.
NOTE 6 -- SERIES B PREFERRED STOCK
At March 31, 2002, there were outstanding 3,300 shares of the Company's
$8 cumulative convertible preferred stock, series B, par value $100 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 2000. At March 31, 2002, the Company was
in arrears in the payment of nine dividends on the series B preferred stock in
the aggregate amount of $59,000 and in the redemption of 900 shares of series B
preferred stock for $180,000.
NOTE 7 -- INCOME TAXES
At March 31, 2002, and December 31, 2001, the Company's net deferred
income tax assets were fully offset by a valuation allowance.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common
share for the three months ended March 31, 2002 and 2001, are set forth below
(in thousands, except per share amounts). The pro forma conversion of the
Company's $8 cumulative convertible preferred stock, series B, was not dilutive
for the three-month periods ended March 31, 2002 and 2001. 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 of such shares. During the
three-month periods ended March 31, 2002 and 2001, the Company did not pay any
dividends on, or redeem any shares of, the series B preferred stock.
THREE MONTHS ENDED
MARCH 31
-------------------------
2002 2001
---- ----
Numerator:
Net loss $ (1,626) $ (381)
Preferred stock dividends - -
Excess of redemption value over par value of preferred
stock redeemed during year - -
-------- --------
Numerator for basic and diluted net loss per share -
loss applicable to common stockholders $ (1,626) $ (381)
======== ========
Denominator:
Denominator for basic and diluted net loss per share -
adjusted weighted average common shares 4,828 4,828
======== =======
Per share data:
Basic and diluted net loss applicable to
common stockholders $ (0.34) $ (0.08 )
======== =======
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month periods ended March 31, 2002 and 2001, is
summarized below (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
-----------------------------
2001 2000
---- ----
NET SALES:
Rubber Group $ 23,953 $ 22,932
Metals Group 6,291 10,036
--------- ---------
Total net sales $ 30,244 $ 32,968
========= =========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,490 $ 1,869
Metals Group (1,716) 570
--------- ---------
Subtotal 774 2,439
Corporate office (583) (495)
--------- ---------
Total income from operations $ 191 $ 1,944
========= =========
ASSETS:
Rubber Group $ 70,656 $ 71,637
Metals Group 25,675 34,526
--------- ---------
Subtotal 96,331 106,163
Corporate office 4,085 2,890
--------- ---------
Total assets $ 100,416 $ 109,053
========= =========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,000 $ 2,201
Metals Group 1,028 1,149
--------- ---------
Subtotal 3,028 3,350
Corporate office 21 22
--------- ---------
Total depreciation and amortization $ 3,049 $ 3,372
========= =========
CAPITAL EXPENDITURES:
Rubber Group $ 663 $ 1,067
Metals Group 115 159
--------- ---------
Subtotal 778 1,226
Corporate office -- --
--------- ---------
Total capital expenditures $ 778 $ 1,226
========= =========
(1) Does not include amortization of deferred financing expenses, which
totaled $36,000 and $45,000 during the three-month periods ended
March 31, 2002 and 2001, respectively, and which is included in
interest expense in the consolidated financial statements.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 -- PLANT CLOSURE
During the fourth quarter of 2001, the Company was notified that the
Metal Group's largest customer would cease purchasing components from the Metals
Group after December 31, 2001. During 2001, this customer purchased $5,937,000
of machined metal components, which were manufactured primarily at the Company's
Casa Grande, Arizona, facility. As a result of the reduction in sales at the
Arizona facility, the Company closed the facility during the first quarter of
2002. In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company recorded, as of December 31, 2001, an impairment
charge of $2,047,000 to reduce to fair market value the carrying value of the
Arizona facility's land and building and certain metal machining equipment
currently idled by the loss of this business. The land, building, and equipment
idled by the loss of business is currently classified in property, plant, and
equipment and is being depreciated at the rate of approximately $36,000 per
month. These assets will be reclassified as assets held for sale if and when
they meet the criteria set forth in Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
the Company adopted on January 1, 2002.
During the first quarter of 2002, the Arizona facility recorded a loss
from operations of $1,223,000. The first quarter operating loss included
$522,000 of cost incurred to close the Arizona facility. Such plant closure
costs are separately classified in the Company's consolidated statement of
operations for the three months ended March 31, 2002. Plant closure costs
consisted of $246,000 for severance and other employee termination costs,
$166,000 of asset relocation costs, and other items totaling $110,000. At March
31, 2002, the Company had a reserve of $143,000 for the closure of the Arizona
facility, primarily for unpaid severance benefits. The remainder of the first
quarter operating loss, $701,000, resulted primarily from the underabsorption of
operating costs incurred during the first quarter of 2002 due to minimal sales
and poor operating efficiencies. Net sales at the Arizona facility during the
first quarter of 2002 totaled $332,000, compared to $2,858,000 during the first
quarter of 2001. In addition, the first quarter operating loss included the
write off of certain inventory in the amount of $75,000.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 11 -- OTHER COMPREHENSIVE INCOME
During the first quarter of 2002, the Company's other comprehensive
income consisted of a $70,000 unrealized gain on its marketable securities. No
income tax expense is currently allocable to this unrealized gain. Comprehensive
income for the three months ended March 31, 2002 and 2001, is set forth below:
THREE MONTHS ENDED
MARCH 31
------------------------
2002 2001
---- ----
Net loss $ (1,626) $ (381)
Other comprehensive income:
Unrealized gain on marketable securities 70 --
-------- ---------
Comprehensive income $ (1,556) $ (381)
======== =========
NOTE 12-- EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED (GOODWILL)
On January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). The standard, among other things, prohibits the
amortization of goodwill and other intangible assets with indefinite useful
lives, and requires that goodwill and other intangible assets with indefinite
useful lives be reviewed for impairment at least annually and written down to
fair value if found to be impaired. The Company does not possess any intangible
assets with indefinite lives other than goodwill. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives. In
accordance with the provisions of FAS 142, the Company will complete its initial
impairment test of goodwill by June 30, 2002. Although the Company is currently
in the process of performing the impairment testing, the Company has not yet
determined the likelihood or amount of any goodwill impairment. Prior to the
adoption of FAS No. 142, goodwill was amortized over forty years. The following
table sets forth a reconciliation of net loss and net loss per share information
adjusted for the non-amortization provisions of FAS No. 142.
THREE MONTHS ENDED
MARCH 31
------------------------
2002 2001
---- ----
Net loss as reported $ (1,626) $ (381)
Amortization of goodwill, net of tax -- 79
-------- ---------
Adjusted net loss $ (1,626) $ (302)
======== =========
Per share data:
Reported loss per share $ (0.34) $ (0.08)
Add back goodwill amortization, net of income tax -- 0.02
-------- ---------
Adjusted basic and diluted net loss applicable
to common stockholders $ (0.34) $ (0.06)
======== =========
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-Q, including this item, 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 and the credit and securities
market,
- 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-- FIRST QUARTER OF 2001 VERSUS FIRST QUARTER OF 2000
The following table sets forth our consolidated operating results for
the first quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
--------------------------------------------
2002 2001
--------------------- ---------------------
Net sales $ 30,244 100.0% $ 32,968 100.0%
Cost of sales 27,276 90.2 28,549 86.6
--------- --------- --------- ---------
Gross profit 2,968 9.8 4,419 13.4
Selling and administrative expenses 2,255 7.5 2,475 7.5
Plant closure costs (1) 522 1.7 -- --
--------- --------- --------- ---------
Income from operations 191 0.6 1,944 5.9
Add back depreciation and amortization (2) 3,049 10.1 3,372 10.2
--------- --------- --------- ---------
Earnings before interest, taxes, depreciation,
and amortization (EBITDA) (3) 3,240 10.7 5,316 16.1
Proforma adjustments for certain nonrecurring expenses:
Plant closure costs (1) 522 1.8 -- --
--------- --------- --------- ---------
Adjusted EBITDA (3) $ 3,762 12.4% $ 5,316 16.1%
========= ========= ========= =========
Net cash provided by operating
activities (4) $ 1,610 5.3% $ 1,096 3.3%
========= ========= ========= =========
(1) During the first quarter of 2002, we closed our metal
machining facility in Casa Grande, Arizona. As of December 31,
2001, we recorded a provision of $2,047,000 to write down the
value of certain of the facility's assets to fair value, and
during the first quarter of 2002, we incurred charges of
$522,000 to close the facility. For more information, refer to
the discussion of the results of operations of the Metals
Group in this section.
(2) Does not include amortization of deferred financing expenses,
which totaled $36,000 and $45,000 during the first quarters of
2002 and 2001, respectively, and which is included in interest
expense in the consolidated financial statements.
(3) 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 considered in
isolation or used as a substitute
-16-
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 use the term adjusted EBITDA to
refer to EBITDA adjusted to exclude nonrecurring items of
expense. During the first quarter of 2002, adjusted EBITDA
excluded the nonrecurring charges incurred to close the
Company's facility in Casa Grande, Arizona. We have presented
EBITDA and adjusted EBITDA here and elsewhere in this Form
10-K because we believe that these measures are 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 and adjusted EBITDA may not be the same as the
definition of EBITDA and adjusted EBITDA used by other
companies.
(4) 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.
Our net sales for the first quarter of 2002 were $30,244,000, compared
to net sales of $32,968,000 for the first quarter of 2001, a decrease of
$2,724,000, or 8.3%. The decrease in net sales was principally a result of a
$2,526,000 reduction in sales at our Arizona facility, which we closed during
the first quarter of 2002. EBITDA, excluding the $522,000 of plant closure
costs, for the first quarter of 2002 was $3,762,000, or 12.4% of net sales,
compared to $5,316,000, or 16.1% of net sales, for the first quarter of 2001.
This reduction was principally a result of the expenses related to the closing
of the Arizona facility and the transfer of certain equipment and business to
our Rochester, New York, facility.
Based upon the information available to us at this time, we currently
project that, for the second quarter of 2002, our net sales will be
approximately $32,000,000, and our EBITDA will be approximately $5,600,000, or
17.5% of net sales. During the second quarter of 2001, our net sales were
$33,831,000, and our EBITDA was $6,246,000, or 18.5% of net sales.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the corporate office for the
three-month periods ended March 31, 2002 and 2001.
-17-
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any material reduction in the level
of activity in the automotive industry may have a material adverse effect on the
results of operations of the Rubber Group and on our company taken as a whole.
The following table sets forth the operating results of the Rubber
Group for the first quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
----------------------------------------------------
2002 2001
----------------------- -----------------------
Net sales $ 23,953 100.0% $ 22,932 100.0%
Cost of sales 20,336 84.9 19,750 86.1
--------- --------- --------- ---------
Gross profit 3,617 15.1 3,182 13.9
Selling and administrative expenses 1,127 4.7 1,313 5.7
--------- --------- --------- ---------
Income from operations 2,490 10.4 1,869 8.2
Add back depreciation and amortization 2,000 8.3 2,201 9.6
--------- --------- --------- ---------
Earnings before interest, taxes, depreciation,
and amortization (EBITDA) $ 4,490 18.7% $ 4,070 17.7%
========= ========= ========= =========
During the first quarter of 2002, net sales of the Rubber Group
increased by $1,021,000, or 4.5%, compared to the first quarter of 2001. This
increase was primarily due to increased unit sales of connector seals for
automotive wiring systems and increased sales of medical components, offset, in
part by a slight reduction in sales of insulators for automotive ignition wire
sets, and price reductions on certain automotive components.
Cost of sales as a percentage of net sales decreased during the first
quarter of 2002 to 84.9% of net sales from 86.1% of net sales during the first
quarter of 2001, primarily because certain factory overhead expenses, employee
benefit costs, and depreciation and amortization expense decreased compared to
the first quarter of 2001.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2002, compared to the first quarter of
2001, primarily because of reduced international selling expenses, and the
elimination of the amortization of goodwill as required by Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which we adopted January 1, 2002.
During the first quarter of 2002, income from operations totaled
$2,490,000, an increase of $621,000, or 33.3%, compared to the first quarter of
2001. EBITDA increased to $4,490,000 from $4,070,000, while EBITDA as a
percentage of net sales increased to 18.7% from 17.7%.
-18-
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars, 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 quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
--------------------------------------------------
2002 2001
----------------------- -----------------------
Net sales $ 6,291 100.0% $ 10,036 100.0%
Cost of sales 6,940 110.3 8,799 87.7
--------- --------- --------- ---------
Gross profit (649) (10.3) 1,237 12.3
Selling and administrative expenses 545 8.7 667 6.6
Plant closure costs 522 8.3 -- --
--------- --------- --------- ---------
Income from operations (1,716) (27.3) 570 5.7
Add back depreciation and amortization 1,028 16.3 1,149 11.4
--------- --------- --------- ---------
Earnings before interest, taxes, depreciation,
and amortization (EBITDA) (688) (10.9) 1,719 17.1
Proforma adjustments for certain nonrecurring expenses:
Plant closure costs 522 8.3 -- --
--------- --------- --------- ---------
Adjusted EBITDA $ (166) (2.6)% $ 1,719 17.1%
========= ========= ========= =========
During the fourth quarter of 2001, we were notified that the Metal
Group's largest customer would cease purchasing components from the Metals Group
after December 31, 2001. During 2001, this customer purchased $5,937,000 of
machined metal components, which were manufactured primarily at our Casa Grande,
Arizona, facility. As a result of the reduction in sales at the Arizona
facility, we closed the facility during the first quarter of 2002. In accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," we
recorded, as of December 31, 2001, an impairment charge of $2,047,000 to reduce
to fair market value the carrying value of the Arizona facility's land and
building and certain metal machining equipment currently idled by the loss of
this business. The land, building, and equipment idled by the loss of business
is currently classified in property, plant, and equipment and is being
depreciated at the rate of approximately $36,000 per month. These assets will be
reclassified as assets held for sale if
-19-
and when they meet the criteria set forth in Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which we adopted on January 1, 2002.
During the first quarter of 2002, the Arizona facility recorded a loss
from operations of $1,223,000. The first quarter operating loss included
$522,000 of costs incurred to close the Arizona facility. Such plant closure
costs are separately classified in our consolidated statement of operations for
the three months ended March 31, 2002. Plant closure costs consisted of $246,000
for severance and other employee termination costs, $166,000 of asset relocation
costs, and other items totaling $110,000. At March 31, 2002, we had a reserve of
$143,000 for the closure of the facility, primarily for unpaid severance
benefits. The remainder of the first quarter operating loss, $701,000, resulted
primarily from the under absorption of operating costs incurred during the first
quarter of 2002 due to minimal sales and poor operating efficiencies. Net sales
at the Arizona facility during the first quarter of 2002 totaled $332,000
compared to $2,858,000 during the first quarter of 2001. In addition, the first
quarter operating loss included the write off of certain inventory in the amount
of $75,000.
During the first quarter of 2002, net sales of the Metals Group
decreased by $3,745,000, or 37.3%, compared to the first quarter of 2001. The
decrease resulted from reduced sales of machined metal components due to the
departure, effective December 31, 2001, of the Metals Group's largest customer
and reduced sales to certain customers who had accumulated excess amounts of
inventory in prior periods.
Cost of sales, as a percentage of net sales increased during the first
quarter of 2002 to 110.3% of net sales from 87.7% of net sales during the first
quarter of 2001, primarily due to the first quarter operating loss incurred at
the Arizona facility, which resulted primarily from minimal sales and poor
operating efficiencies, and excess costs and production inefficiencies caused by
the transfer of certain business and equipment from Arizona to the Rochester,
New York, facility.
Selling and administrative expenses as a percentage of net sales
increased during the first quarter of 2002 compared to the first quarter of
2001, primarily because of the dramatically reduced sales level.
During the first quarter of 2002, the loss from operations was
$1,716,000 compared to income from operations of $570,000 during the first
quarter of 2001. Excluding the $522,000 of plant closure costs, the loss from
operations during the first quarter of 2002, was $1,194,000. EBITDA, excluding
the $522,000 of plant closure costs, decreased to negative $166,000, a decrease
of $1,885,000, compared to the first quarter of 2001.
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.
-20-
The following table sets forth the operating results of the corporate
office for the first quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------
2002 2001
---- ----
Loss from operations $ (583) $ (495)
Add back depreciation and amortization 21 22
-------- --------
Earnings before interest, taxes, depreciation
and amortization $ (562) $ (473)
======== =========
During the first quarter of 2002, corporate office expenses increased
compared to the first quarter of 2001, primarily because a credit for a refund
of state franchise taxes was recorded during the first quarter of 2001.
INTEREST EXPENSE
During the first quarters of 2002 and 2001, interest expense totaled
$1,796,000 and $2,325,000, respectively, which included amortization of deferred
financing expenses of $36,000 and $45,000, respectively. The decrease in
interest expense was caused primarily by lower rates of interest on our floating
rate indebtedness and a reduction in the average amount of outstanding
indebtedness.
INCOME TAX PROVISION
At March 31, 2002, and December 31, 2001, our net deferred income tax
assets were fully offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 2002, our operating activities provided
$1,610,000 of cash.
Accounts receivable increased by $3,188,000. The increase was caused
primarily by an increase in net sales during March 2002 compared to December
2001 and a one-day delay in the receipt of the monthly payment from one of our
largest customers.
Accounts payable increased by $1,307,000, primarily as a result of
increased purchases during March 2002 compared to December 2001. We rely on our
suppliers to provide us credit for our purchases. In many cases, we extend our
accounts payable beyond their stated terms. If our vendors were to reduce
materially the amount of credit available to us, it could have a material
adverse effect on our results of operations and financial position.
Accrued expenses increased by $1,515,000 during the first quarter of
2002, primarily due to an increase in accrued interest of $879,000, reflecting
unpaid interest on our senior subordinated notes and our junior subordinated
notes.
-21-
INVESTING ACTIVITIES
During the first quarter of 2002, our investing activities used
$980,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group and the Metals Group totaled $663,000 and
$115,000, respectively. Capital expenditures for the first quarter of 2002
included $772,000 for equipment and $6,000 building improvements. We presently
project that capital expenditures during 2002 will total approximately
$4,900,000, substantially all of which will be for the purchase of equipment.
Capital expenditures for the Rubber Group and the Metals Group are projected to
total approximately $3,200,000 and $1,700,000, respectively, during 2002. At
March 31, 2002, we had outstanding commitments to purchase plant and equipment
of approximately $1,500,000.
FINANCING ACTIVITIES
During the first quarter of 2002, our financing activities used
$758,000 of cash.
During the first quarter of 2002, we made payments on our long-term
debt totaling $2,876,000, and we increased the net borrowings under our
revolving line of credit by $2,128,000.
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 July 1, 2002, is subject to certain availability
formulas based on the levels of our accounts receivable and inventories. At May
13, 2002, availability under our revolving line of credit totaled $2,184,000
before outstanding checks of $1,689,000 were deducted.
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 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. 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 due and payable.
We are in default in the payment of our senior subordinated notes and
our senior, unsecured note. In addition, during the last nine months of 2002, we
have $5,163,000 of secured term notes and $347,000 of junior subordinated notes
that mature. During the last nine months of 2002, we also have scheduled
principal payments of $6,721,000 on our amortizing term loans. We estimate that,
at existing contractual and market rates, the interest expense on all of our
debt during 2002 will be approximately $7,400,000.
-22-
We had a net working capital deficit of $72,826,000 at March 31, 2002,
compared to a net working capital deficit of $72,928,000 at December 31, 2001.
The net working capital deficit exists primarily because the majority of our
debt is in default or subject to cross defaults. As discussed in more detail
below, we are in the process of negotiating extensions of all of our matured and
maturing debt, although there can be no assurance that we will be successful in
this effort.
We have been in default on our 12 3/4% senior subordinated notes since
February 1, 2000, when 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 that
date. In April 2002, we reached an agreement in principle with the holders of
over 80% of our senior subordinated notes on the terms of a restructuring. We
plan to commence an exchange offer for the 12 3/4% senior subordinated notes
reflecting the terms of the agreement in principle. If the exchange offer were
consummated, the 12 3/4% senior subordinated notes would be exchanged for new
11 1/2% senior subordinated notes due August 1, 2007, in a principal amount
equal to the principal amount of the existing senior subordinated notes being
exchanged plus the accrued and unpaid interest on those notes through April 30,
2002, which accrued interest totals $350.625 for each $1,000 principal amount of
12 3/4% senior subordinated notes exchanged. Interest on the 11 1/2% senior
subordinated notes would accrue from May 1, 2002, and would be payable on each
August 1, November 1, February 1, and May 1. Each $1,000 principal amount of
11 1/2% senior subordinated notes would be issued together with warrants to
purchase ten shares of common stock at a price of $3.50 per share at any time
from January 1, 2004, through August 1, 2007. If the exchange offer were
consummated, we would pay a participation fee of 3% of the principal amount of
12 3/4% senior subordinated notes that were tendered for exchange.
We have also reached an agreement in principle with the holders of our
14% junior subordinated notes on a restructuring of the terms of those notes. If
the restructuring were completed, we would exchange new 12 1/2% junior
subordinated notes due November 1, 2007, for the $347,000 principal amount of
existing 14% junior subordinated notes and the accrued interest thereon for the
period November 1, 1999, through April 30, 2002, which accrued interest totals
$156,000. Interest on the 12 1/2% junior subordinated notes would accrue from
May 1, 2002, and would be payable on each August 1, November 1, February 1, and
May 1. Each $1,000 principal amount of 12 1/2% junior subordinated notes would
be issued together with warrants to purchase ten shares of common stock at a
price of $3.50 per share at any time from January 1, 2004, through November 1,
2007. If the restructuring were completed, we also would pay a participation fee
of 3% of the principal amount of 14% junior subordinated notes.
The completion of the proposed restructuring of the senior subordinated
notes and the junior subordinated notes is subject to a number of conditions
precedent, including the restructuring of our outstanding $7,500,000 senior,
unsecured note on satisfactory terms. We have proposed that the senior,
unsecured note be restructured to provide for twenty equal quarterly principal
payments of $375,000 beginning on November 1, 2002, with a final maturity date
of August 1, 2007, interest at the rate of 10 1/2% per annum, payable quarterly,
and a 2% participation fee. On April 30, 2002, the maturity date of the senior,
unsecured note, the holder of the note rejected our proposal for a
restructuring, and turned down our request for an interim three-month extension.
We did not pay the principal amount of the note or the monthly interest payment
of $78,000 that was due on April 30, 2002. The default on the senior, unsecured
note has caused a cross default on the loans outstanding under our revolving
line of credit, the secured, amortizing term loans, the senior subordinated
notes, and the junior subordinated notes.
Another condition to the proposed restructuring of the senior
subordinated notes and the junior subordinated notes is the refinancing of our
senior, secured debt on satisfactory terms. We were unable to refinance our
senior, secured debt on satisfactory terms in order to complete earlier debt
restructuring
-23-
plans. We believe that the terms of the revised exchange offer outlined above
enhance our ability to refinance our senior, secured debt on satisfactory terms.
We are currently in discussions with a number of lenders regarding a refinancing
of our senior, secured credit facilities. If we do not refinance our secured
debt by July 1, 2002, the expiration date of our existing revolving credit
facility, we intend to request an extension of that facility.
We can give no assurance that we will be able to consummate the
exchange offer, restructure the senior, unsecured note, or renegotiate our
senior, secured financing arrangements on terms satisfactory to us. If we are
unable to do so, we may file a petition under the federal bankruptcy code in
order to carry out a debt restructuring plan on terms substantially similar to
those discussed above. Although we believe that such a restructuring could be
accomplished quickly and without disruption to our operations, any such
proceeding involves considerable risks and uncertainties and could have a
material adverse effect on our operations and financial position. The
consolidated financial statements do not include any adjustments to the amounts
or classifications of assets or liabilities to reflect those risks and
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is minimal.
At March 31, 2002, we had $39,439,000 of outstanding floating-rate debt
at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%, or the
prime rate. Currently we do not purchase derivative financial instruments to
hedge or reduce our interest rate risk. As a result, changes in either LIBOR or
the prime rate affect the rates at which we borrow funds under these agreements.
At March 31, 2002, we had outstanding $42,224,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.2%, of which
$40,563,000 had matured or was scheduled to mature during 2002. If we were able
to refinance or extend the matured or maturing debt, it might be at interest
rates that are significantly higher than the weighted-average interest rate on
the matured or maturing debt. We have reached an agreement in principle with the
holders of over 80% of our 12 3/4% senior subordinated notes, to exchange the
12 3/4% senior subordinated notes for new 11 1/2% senior subordinated notes due
August 1, 2007, in a principal amount equal to the principal amount of the
existing 12 3/4% senior subordinated notes being exchanged plus the accrued and
unpaid interest thereon through April 30, 2002, which accrued interest totals
$350.625 for each $1,000 principal amount of 12 3/4% senior subordinated notes
exchanged. With respect to our $7,500,000 senior unsecured note, we have
proposed to extend the maturity date from April 30, 2002, to August 1, 2007, pay
interest at the rate of 10 1/2% per annum, and to commence twenty equal
quarterly principal payments in the amount of $375,000 beginning November 1,
2002. On April 30, 2002, the holder of the note rejected our proposal for a
restructuring and turned down our request for an interim, three-month extension.
If we negotiated 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 II, Item 7,
we estimate that our monthly interest expense would increase by approximately
$61,000.
For further information about our indebtedness, we recommend that you
also read Notes 1 and 5 of our consolidated financial statements in Part I, Item
1.
-24-
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
(a) We are in default in respect of our 12 3/4% senior
subordinated notes because we did not make the payments of principal, in the
amount of $27,412,000, and interest, in the amount of $1,748,000, that were due
on February 1, 2000. For more information regarding the default in respect of
the 12 3/4% senior subordinated notes, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity," in Part
I, Item 2, which is incorporated by reference herein.
We are in default in respect of our 10 1/2% senior, unsecured note
because we did not make the payment of principal, in the amount of $7,500,000,
and interest, in the amount of $78,000, that were due on that date. The default
on the senior, unsecured note has caused a cross default on the loans
outstanding under the Company's revolving line of credit, the secured amortizing
term loans, the senior subordinated debt, and the junior subordinated debt. For
more information regarding the default in respect of the 10 1/2% senior,
unsecured note, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity," in Part I, Item 2, which is
incorporated by reference herein.
(b) We did not pay dividends on our $8 cumulative convertible preferred
stock, series B, during the three-month period ended March 31, 2002, in the
aggregate amount of $6,600. As of May 10, 2002, we were in arrears in the
payment of dividends in the amount of $59,000 and in the making of mandatory
redemptions in the amount of $180,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Agreement relating to 14% Junior Subordinated Notes dated
as of April 30, 2002, between Lexington Precision
Corporation ("LPC") and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated as of April 30, 2002, among LPC,
Michael A. Lubin, and Warren Delano
10-3 Agreement dated as of April 30, 2002, among LPC, LRGI, and
Bank One, NA
10-4 Sixth Amendment Agreement dated April 1, 2002, between LPC,
Lexington Rubber Group, Inc. ("LRGI"), and Bank One, NA
10-5 Agreement dated as of April 30, 2002, between LPC and CIT
Group/Equipment Financing, Inc.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the first quarter of 2002.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 14, 2002 By: /s/ Michael A. Lubin
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Date Michael A. Lubin
Chairman of the Board
May 14, 2002 By: /s/ Warren Delano
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Date Warren Delano
President
May 14, 2002 By: /s/ Dennis J. Welhouse
- ------------ ------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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