================================================================================ 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, 2003 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[ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes[ ] No[X] AS OF MAY 13, 2003, THERE WERE 4,828,036 SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING. (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) ================================================================================ LEXINGTON PRECISION CORPORATION QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements.................................................... 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 22 Item 4. Controls and Procedures................................................ 23 PART II. OTHER INFORMATION Item 3. Defaults on Senior Securities.......................................... 24 Item 6. Exhibits and Reports on Form 8-K....................................... 24 - 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 ---------------------- 2003 2002 ---- ---- Net sales $ 32,383 $ 30,244 Cost of sales 28,653 27,276 --------- -------- Gross profit 3,730 2,968 Selling and administrative expenses 2,092 2,255 Plant closure costs - 522 --------- -------- Income from operations 1,638 191 Interest expense 1,780 1,796 --------- -------- Loss before income taxes (142) (1,605) Income tax provision 27 21 --------- -------- Net loss $ (169) $ (1,626) ========= ======== Per share data: Basic and diluted net loss applicable to common stockholders $ (0.04) $ (0.34) ========= ======== See notes to consolidated financial statements. - 1 - LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------ ASSETS: Current assets: Cash $ 1,617 $ 1,753 Accounts receivable, net 20,767 16,411 Inventories, net 9,350 8,841 Prepaid expenses and other current assets 2,847 3,682 Deferred income taxes 2,304 2,304 ---------- ---------- Total current assets 36,885 32,991 Property, plant, and equipment, net 47,432 49,029 Goodwill 7,831 7,831 Other assets, net 2,320 2,294 ---------- ---------- Total assets $ 94,468 $ 92,145 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable $ 10,674 $ 10,798 Accrued expenses, excluding accrued interest 7,031 6,256 Accrued interest expense 13,988 12,875 Short-term debt 71,018 69,665 Current portion of long-term debt 840 1,467 ---------- ---------- Total current liabilities 103,551 101,061 ---------- ---------- Long-term debt, excluding current portion 1,048 1,117 ---------- ---------- Deferred income taxes and other long-term liabilities 2,900 2,836 ---------- ---------- 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 (27,528) (27,366) ---------- ---------- Total stockholders' deficit (13,361) (13,199) ---------- ---------- Total liabilities and stockholders' deficit $ 94,468 $ 92,145 ========== ========== See notes to consolidated financial statements. - 2 - LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) THREE MONTHS ENDED MARCH 31 ---------------------------- 2003 2002 ---- ---- OPERATING ACTIVITIES: Net loss $ (169) $ (1,626) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 2,606 2,866 Amortization included in operating expense 165 183 Amortization included in interest expense 143 36 Changes in operating assets and liabilities that provided (used) cash: Accounts receivable, net (4,356) (3,188) Inventories, net (509) 283 Prepaid expenses and other current assets 695 204 Accounts payable (124) 1,307 Accrued expenses, excluding interest expense 775 636 Accrued interest expense 1,113 879 Other long-term liabilities 64 14 Other (13) 16 ---------- ---------- Net cash provided by operating activities 390 1,610 ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (899) (778) Net decrease (increase) in equipment deposits (47) 38 Expenditures for tooling owned by customers (77) (243) Other 151 3 ---------- ---------- Net cash used by investing activities (872) (980) ---------- ---------- FINANCING ACTIVITIES: Net increase in loans under revolving line of credit 3,142 2,128 Repayment of term notes and other debt (2,591) (2,876) Deferred financing charges (205) (10) ---------- ---------- Net cash provided (used) by financing activities 346 (758) ---------- ---------- Net decrease in cash (136) (128) Cash at beginning of period 1,753 189 ---------- ---------- Cash at end of period $ 1,617 $ 61 ========== ========== 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, 2002. 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, 2003, and the Company's results of operations and cash flows for the three-month periods ended March 31, 2003 and 2002. All such adjustments were of a normal, recurring nature. The results of operations for the three-month period ended March 31, 2003, 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's ability to refinance, extend, amend, or exchange substantially all of its outstanding debt, as more fully described below, is subject to risks and uncertainties. As a result, there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to the amounts or classification of assets or liabilities to reflect this uncertainty. 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. On July 10, 2002, the Company commenced an exchange offer for the 12 3/4% senior subordinated notes. The exchange offer was amended on March 7, 2003. If the amended exchange offer is consummated, at least 99% of the 12 3/4% senior subordinated notes will 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 the day before the date the amended exchange offer is consummated, which accrued interest will total $499.375 for each $1,000 principal amount of 12 3/4% senior subordinated notes assuming the amended exchange offer is consummated on July 1, 2003. Interest on the 11 1/2% senior subordinated notes will accrue from the date the amended exchange offer is consummated, and will be payable on each February 1, May 1, August 1, and November 1. Each $1,000 principal amount of 11 1/2% senior subordinated notes will 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 amended exchange offer is consummated, the Company will pay a participation fee of 3% of the principal amount of 12 3/4% senior subordinated notes that are exchanged. The Company's senior, secured lenders and the holder of the junior subordinated notes have waived the cross-default provisions with respect to the default on the senior subordinated notes through May 19, 2003, and August 1, 2003, respectively. The current expiration date of the amended exchange offer is May 15, 2003. One of the conditions to the consummation of the amended exchange offer is the tender for exchange of at least 99% - 4 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) of the senior subordinated notes. As of May 13, 2003, the Company had received tenders of $27,209,000 principal amount of 12 3/4% senior subordinated notes, or 99.3% of the notes. There are additional conditions to the consummation of the amended exchange offer that may not be satisfied by the expiration date. The Company has reached an agreement with the holders of its 14% junior subordinated notes on the terms of a restructuring of those notes. If the restructuring is completed, the Company will exchange new 12 1/2% junior subordinated notes due November 1, 2007, for the existing 14% junior subordinated notes, and the accrued interest on the 14% junior subordinated notes for the period November 1, 1999, through the day before the restructuring is consummated, which will total $213,000 assuming the restructuring is consummated on July 1, 2003, will be converted into shares of the Company's common stock at a price of $2.27 per share. Interest on the 12 1/2% junior subordinated notes will accrue from the date the restructuring is consummated, and will be payable on each February 1, May 1, August 1, and November 1. Each $1,000 principal amount of 12 1/2% junior subordinated notes will 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 November 1, 2007. If the restructuring is completed, the Company also will pay a participation fee of 3% of the principal amount of 14% junior subordinated notes. The Company has been in default on its senior, unsecured note, since April 30, 2002, when it did not make the payments of principal, in the amount of $7,500,000, and interest, in the amount of $78,000, that were due on that date. If the other aspects of the financial restructuring program are completed, the Company has proposed to repurchase the senior, unsecured note for $5,550,000, plus interest from November 1, 2002, to the date the amended exchange offer is consummated, at the prime rate. The Company's senior, secured lenders and the holders of the junior subordinated notes have waived the cross-default provisions with respect to the default on the senior, unsecured note through May 19, 2003, and August 1, 2003, respectively. 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 amended exchange offer, restructure the senior, unsecured note, or refinance its senior, secured credit facilities on satisfactory terms. If the Company is unable to do so, it may file a petition under the federal bankruptcy code in order to effect a debt restructuring on terms substantially similar to those discussed above, or on other terms. Although the Company believes that such a debt restructuring could be accomplished without material 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. - 5 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 -- INVENTORIES Inventories at March 31, 2003, and December 31, 2002, are set forth below (dollar amounts in thousands): MARCH 31, DECEMBER 31, 2003 2002 ---------- ----------- Finished goods $ 3,179 $ 3,580 Work in process 3,408 2,493 Raw materials and purchased parts 2,763 2,768 ---------- ---------- $ 9,350 $ 8,841 ========== ========== NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at March 31, 2003, and December 31, 2002, are set forth below (dollar amounts in thousands): MARCH 31, DECEMBER 31, 2003 2002 ---------- ----------- Land $ 2,314 $ 2,314 Buildings 22,945 22,935 Equipment 114,202 113,291 ---------- ---------- 139,461 138,540 Accumulated depreciation 92,029 89,511 ---------- ---------- Property, plant, and equipment, net $ 47,432 $ 49,029 ========== ========== NOTE 4 -- ACCRUED INTEREST EXPENSE At March 31, 2003, and December 31, 2002, accrued interest expense included $12,815,000 and $11,941,000, respectively, of accrued interest expense on the 12 3/4% senior subordinated notes, and $938,000 and $703,000, respectively, of accrued interest on the senior, unsecured note. - 6 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 -- DEBT Debt at March 31, 2003, and December 31, 2002, is set forth below (dollar amounts in thousands): MARCH 31, DECEMBER 31, 2003 2002 ---------- ------------ Short-term debt: Revolving line of credit $ 18,577 $ 15,435 Secured, amortizing term notes 17,182 18,971 Senior, unsecured note 7,500 7,500 Senior subordinated notes 27,412 27,412 Junior subordinated notes 347 347 ---------- ---------- Subtotal 71,018 69,665 Current portion of long-term debt 840 1,467 ---------- ---------- Total short-term debt 71,858 71,132 ---------- ---------- Long-term debt: 12% secured term note 1,061 1,119 Unsecured, amortizing term notes 48 643 Other 779 822 ---------- ---------- Subtotal 1,888 2,584 Less current portion (840) (1,467) ---------- ---------- Total long-term debt 1,048 1,117 ---------- ---------- Total debt $ 72,906 $ 72,249 ========== ========== REVOLVING LINE OF CREDIT The Company's revolving line of credit is currently scheduled to expire on May 21, 2003. The Company intends to replace the revolving line of credit with a revolving line of credit provided by a new lender or to negotiate an extension of the May 21, 2003, expiration date with its existing lender. The Company can give no assurance that it will be able to replace or extend the revolving line of credit. At March 31, 2003, availability under the revolving line of credit totaled $1,200,000, before outstanding checks of $952,000 were deducted. At March 31, 2003, loans outstanding under the revolving line of credit accrued interest at one percent over the prime rate, which equated to 5.25%. 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. The lenders providing loans under the Company's revolving line of credit have waived the cross-default provisions with respect to the defaults on the senior subordinated notes and the senior, unsecured note through May 19, 2003. - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURED, AMORTIZING TERM NOTES Secured, amortizing term notes outstanding at March 31, 2003, and December 31, 2002, are set forth below (dollar amounts in thousands): MARCH 31, DECEMBER 31, 2003 2002 --------- ------------ Term notes payable in equal monthly principal installments based on a 180-month amortization schedule, final maturities in 2003, prime rate plus 3/4% $ 1,929 $ 1,988 Term note payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2003, prime rate plus 3/4% 951 978 Term note payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2003, prime rate plus 3/4% 1,877 1,927 Term note payable in equal monthly principal installments, final maturity in 2003, prime rate - 45 Term note payable in equal monthly principal installments, final maturity in 2003, prime rate plus 1% - 10(1) Term note payable in equal monthly principal installments, final maturities in 2003, LIBOR plus 2 3/4% 27 107 Term notes payable in equal monthly principal installments, final maturities in 2004, LIBOR plus 2 3/4% 392 476 Term note payable in equal monthly principal installments, final maturity in 2004, prime rate and LIBOR plus 2 1/2% 318 386 Term notes payable in equal monthly principal installments, final maturities in 2004, prime rate plus 1% 3,144(1) 3,846(1) Term note payable in equal monthly principal installments, final maturity in 2005, LIBOR plus 2 1/2% 522 579 Term note payable in equal monthly principal installments, final maturity in 2005, prime rate plus 1% 549(1) 609(1) Term note payable in equal monthly principal installments, final maturity in 2006, prime rate 249 270 Term notes payable in equal monthly principal installments, final maturities in 2006, prime rate plus 1% 4,494(1) 4,847(1) Term notes payable in equal monthly installments, final maturity in 2007, prime rate plus 1% 2,730(1) 2,903(1) --------- --------- $ 17,182 $ 18,971 ========= ========= (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 May 21, 2003. At March 31, 2003, and December 31, 2002, the secured, amortizing term notes were classified as short-term debt because the Company's lenders had granted waivers, for a period of less than one year, - 8 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) of the cross-default provisions of such term notes with respect to the default on the senior subordinated notes and the senior, unsecured note or because the revolving line of credit was scheduled to expire in less than one year. 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. The lenders providing secured, amortizing term notes have waived the cross-default provisions with respect to the defaults on the senior subordinated notes and the senior, unsecured note through May 19, 2003, and August 1, 2003. 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 currently bears interest at 12 1/2% per annum. On April 30, 2002, the Company did not make the payments of principal and interest then due on the senior, unsecured note in the amounts of $7,500,000 and $78,000, respectively, and the Company has not made any payments on the senior, unsecured note since that date. At March 31, 2003, the accrued and unpaid interest on the senior, unsecured note totaled $938,000. For more information about the senior, unsecured note, refer to Note 1. 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 principal and interest then due on the senior subordinated notes in the amounts of $27,412,000 and $1,748,000, respectively, and the Company has not made any payments on the senior subordinated notes since that date. At March 31, 2003, the accrued and unpaid interest on the senior subordinated notes totaled $12,815,000. For more information about the senior subordinated notes, refer to Note 1. JUNIOR SUBORDINATED NOTES The junior subordinated notes are due on August 1, 2003, and are subordinated in right of payment to all existing and future secured debt of the Company, the senior, unsecured note, and the senior subordinated notes. The junior subordinated notes bear interest at 14% per annum. The holders of the junior subordinated notes have deferred until August 1, 2003, the interest payments that were due on or after February 1, 2000, and have waived the cross-default provisions with respect to the default on the senior, unsecured note and the senior subordinated notes. At March 31, 2003, the accrued and unpaid interest on the junior subordinated notes totaled $201,000. For more information on the junior subordinated notes, refer to Note 1. - 9 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12% SECURED TERM NOTE The 12% secured term note is payable in sixty equal, monthly installments of principal and interest that commenced on November 30, 2001. The 12% secured term note has no cross-default provision with respect to defaults on any of the Company's other debt. RESTRICTIVE COVENANTS Certain of the Company's financing arrangements contain covenants that require the Company to maintain 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 trade accounts payable, the sale of all or substantially all of the Company's assets, the purchase of property, plant, and equipment, the purchase of common stock, the redemption of preferred stock, and the payment of cash dividends. In addition, most of the Company's financing agreements include cross-default provisions. From time to time, the Company's lenders have agreed to waive, amend, or eliminate 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, waive, or eliminate those covenants, the lenders would have the right to declare the borrowings under their note agreements to be due and payable. For a more detailed discussion of recent amendments to and waivers under the Company's various note agreements, refer to Note 1. NOTE 6 -- SERIES B PREFERRED STOCK At March 31, 2003, 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, 2003, the Company was in arrears in the payment of thirteen dividends on the series B preferred stock in the aggregate amount of $86,000 and in the redemption of 1,350 shares of series B preferred stock for $270,000. NOTE 7 -- INCOME TAXES At March 31, 2003, and December 31, 2002, the Company's net deferred income tax assets were fully offset by a valuation allowance. The income tax provisions recorded during the three-month periods ended March 31, 2003 and 2002, consisted of estimated state income taxes payable. 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 periods ended March 31, 2003 and 2002, 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, 2003 and 2002. As a result, the calculations of diluted net income or loss per common share set forth below do not reflect any pro forma conversion. - 10 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For purposes of calculating earnings per share, earnings are reduced by (1) preferred stock dividend payments 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, 2003 and 2002, the Company did not pay any dividends on, or redeem any shares of, the series B preferred stock. THREE MONTHS ENDED MARCH 31 ------------------------ 2003 2002 ---- ---- Numerator-- loss applicable to common stockholders $ (169) $ (1,626) ========= ========= Denominator-- weighted average common shares 4,828 4,828 ========= ========= Basic and diluted net loss applicable to common stockholders $ (0.04) $ (0.34) ========= ========= - 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, 2003 and 2002, is summarized below (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ------------------------- 2003 2002 ---- ---- NET SALES: Rubber Group $ 26,722 $ 23,953 Metals Group 5,661 6,291 ---------- ---------- Total net sales $ 32,383 $ 30,244 ========== ========== INCOME (LOSS) FROM OPERATIONS: Rubber Group $ 2,812 $ 2,490 Metals Group (583) (1,716) ---------- ---------- Subtotal 2,229 774 Corporate Office (591) (583) ---------- ---------- Total income from operations $ 1,638 $ 191 ========== ========== ASSETS: Rubber Group $ 65,645 $ 70,656 Metals Group 23,239 25,675 ---------- ---------- Subtotal 88,884 96,331 Corporate Office 5,584 4,085 ---------- ---------- Total assets $ 94,468 $ 100,416 ========== ========== DEPRECIATION AND AMORTIZATION (1): Rubber Group $ 1,875 $ 2,000 Metals Group 887 1,028 ---------- ---------- Subtotal 2,762 3,028 Corporate Office 9 21 ---------- ---------- Total depreciation and amortization $ 2,771 $ 3,049 ========== ========== CAPITAL EXPENDITURES (2): Rubber Group $ 827 $ 663 Metals Group 176 115 ---------- ---------- Subtotal 1,003 778 Corporate Office 2 - ---------- ---------- Total capital expenditures $ 1,005 $ 778 ========== ========== (1) Does not include amortization of deferred financing expenses, which totaled $143,000 and $36,000 during the three-month periods ended March 31, 2003 and 2002, respectively, and which is included in interest expense in the consolidated financial statements. (2) Capital expenditures for the three-month period ended March 31, 2003, include $106,000 of equipment purchased under a capital lease obligation. - 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. As a result of the subsequent reduction in sales at the Arizona facility, the Company closed the facility in 2002. At March 31, 2003, the book value of the remaining Arizona assets totaled $2,046,000, which included $1,696,000 for the land and building and $341,000 for equipment. The following table sets forth certain operating data of the Arizona facility for the three-month periods ended March 31, 2003 and 2002 (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ------------------------ 2003 2002 ---- ---- Net sales $ - $ 332 ========= ========= Operating loss before nonrecurring costs $ (155) $ (701) --------- --------- Nonrecurring plant closure costs: Severance and other employee termination costs - 246 Asset relocation costs - 166 Other costs - 110 --------- --------- Subtotal - 522 --------- --------- Operating loss $ (155) $ (1,233) ========= ========= Depreciation included in operating loss $ 54 $ 265 ========= ========= The operating loss recorded during the first quarter of 2003 resulted primarily from the cost of maintaining, insuring, protecting, and depreciating the building and the remaining equipment in the facility. NOTE 11 -- OTHER COMPREHENSIVE INCOME Comprehensive income for the three-month periods ended March 31, 2003 and 2002, net of applicable income tax, if any, is set forth below: THREE MONTHS ENDED MARCH 31 ---------------------- 2003 2002 ---- ---- Net loss $ (169) $ (1,626) Other comprehensive income: Unrealized gain on marketable securities - 70 ---------- --------- Comprehensive income $ (169) $ (1,556) ========== ========= - 13 - 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 markets, - 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 - 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 with less debt. Our results of operations for any particular period are not necessarily indicative of the results to be expected for any one or more succeeding periods. The use of forward-looking statements should not be regarded as a representation that any of the projections or estimates expressed in or implied by those forward-looking statements will be realized, and actual results may vary materially. We cannot assure you that any of the forward-looking statements contained herein will prove to be accurate. All forward-looking statements are expressly qualified by the discussion above. - 14 - RESULTS OF OPERATIONS-- FIRST QUARTER OF 2003 VERSUS FIRST QUARTER OF 2002 The following table sets forth our consolidated operating results for the three-month periods ended March 31, 2003 and 2002, and the reconciliation of income from operations to earnings before interest, taxes, depreciation, and amortization, which is commonly referred to as EBITDA (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2003 2002 ------------------ ------------------ Net sales $ 32,383 100.0% $ 30,244 100.0% Cost of sales 28,653 88.5 27,276 90.2 --------- ------- --------- ----- Gross profit 3,730 11.5 2,968 9.8 Selling and administrative expenses 2,092 6.5 2,255 7.5 Plant closure costs(1) - - 522 1.7 --------- ------- --------- ---- Income from operations 1,638 5.0 191 0.6 Add back: depreciation and amortization(2) 2,771 8.6 3,049 10.1 --------- ------- --------- ----- EBITDA(3) $ 4,409 13.6% $ 3,240 10.7% ========= ======= ========= ===== Net cash provided by operating activities (4) $ 390 1.2% $ 1,610 5.3% ========= ======= ========= ===== (1) In 2002, we closed our metal machining facility in Casa Grande, Arizona. In connection with the closing, we recorded plant closing costs of $522,000 during the first quarter of 2002. 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 $143,000 and $36,000 during the first quarters of 2003 and 2002, respectively, and which is included in interest expense in the consolidated financial statements. (3) 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 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 EBITDA here and elsewhere in this Form 10-Q because this measure is used by investors, as well as our own management, to evaluate the operating performance of our business, including its ability to incur and to service debt. Our definition of EBITDA may not be the same as the definition of 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. - 15 - Our net sales for the first quarter of 2003 were $32,383,000, compared to net sales of $30,244,000 for the first quarter of 2002, an increase of $2,139,000, or 7.1%. The increase in net sales was principally a result of increased net sales of rubber components and machined metal components, offset, in part, by reduced sales of diecast components. EBITDA for the first quarter of 2003 was $4,409,000, or 13.6% of net sales, compared to EBITDA of $3,240,000, or 10.7% of net sales, for 2002. The increase in EBITDA was primarily a result of a $992,000 increase in EBITDA at our Metals Group. Cash flows from operations for the first quarter of 2003 totaled $390,000, compared to $1,610,000 for the first quarter of 2002. Please refer to the Consolidated Statement of Cash Flows in Part I, Item 1 for a comparison of the quarter to quarter changes in our individual operating activities and to our discussion of operating activities under the caption "Liquidity and Capital Resources" in this Part I, Item 2. 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, 2003 and 2002. RUBBER GROUP The Rubber Group manufactures silicone and organic rubber components primarily for automotive industry customers. Any significant 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 three-month periods ended March 31, 2003 and 2002, and the reconciliation of the Rubber Group's income from operations to its EBITDA (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2003 2002 ------------------ ------------------ Net sales $ 26,722 100.0% $ 23,953 100.0% Cost of sales 22,769 85.2 20,336 84.9 -------- ------- -------- ------- Gross profit 3,953 14.8 3,617 15.1 Selling and administrative expenses 1,141 4.3 1,127 4.7 -------- ------- -------- ------- Income from operations 2,812 10.5 2,490 10.4 Add back: depreciation and amortization 1,875 7.0 2,000 8.3 -------- ------- -------- ------- EBITDA $ 4,687 17.5% $ 4,490 18.7% ======== ======= ======== ======= During the first quarter of 2003, net sales of the Rubber Group increased by $2,769,000, or 11.6%, compared to the first quarter of 2002. This increase was primarily due to increased unit sales of all three of the Rubber Groups main product lines: connector seals for automotive wiring systems, insulators for automotive ignition wire sets, and medical components. The increase in first quarter net sales was offset, in part, by price reductions on certain automotive components. - 16 - Cost of sales as a percentage of net sales increased slightly during the first quarter of 2003 to 85.2% of net sales from 84.9% of net sales during the first quarter of 2002, primarily because of increased costs for sorting and repair, which were caused by quality problems encountered in the manufacture of a certain type of connector seal. We believe that these additional sorting and repair costs will start to abate in the third quarter of 2003 as we start to implement improved manufacturing processes and automated inspection and repair equipment. These increased costs were offset, in part, by reduced depreciation and amortization expenses. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 2003, compared to the first quarter of 2002, primarily because certain of our selling and administrative expenses are fixed, or partially fixed, in nature. During the first quarter of 2003, income from operations totaled $2,812,000, an increase of $322,000, or 12.9%, compared to the first quarter of 2002. EBITDA for the first quarter of 2003 was $4,687,000, or 17.5% of net sales, compared to $4,490,000, or 18.7% of net sales, during the first quarter of 2002. METALS GROUP The Metals Group manufactures aluminum die castings and machines components from aluminum, brass, and steel bars, primarily for automotive industry customers. Any significant 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 three-month periods ended March 31, 2003 and 2002, and the reconciliation of the Metals Group's income from operations to its EBITDA (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ---------------------------------------- 2003 2002 ----------------- ----------------- Net sales $ 5,661 100.0% $ 6,291 100.0% Cost of sales 5,884 103.9 6,940 110.3 -------- ------ -------- ------ Gross profit (223) (3.9) (649) (10.3) Selling and administrative expenses 360 6.4 545 8.7 Plant closure costs - - 522 8.3 -------- ------ -------- ------ Income from operations (583) (10.3) (1,716) (27.3) Add back: depreciation and amortization 887 15.7 1,028 16.3 -------- ------ -------- ------ EBITDA $ 304 5.4% $ (688) (10.9)% ======== ====== ======== ====== 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. As a result of the - 17 - reduction in sales at the Arizona facility, we closed the facility in 2002. At March 31, 2003, the book value of the remaining Arizona assets totaled $2,046,000, which included $1,696,000 for the land and building and $341,000 for equipment. The following table sets forth certain operating data of the Arizona facility for the three-month periods ended March 31, 2003 and 2002 (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ---------------------- 2003 2002 ---- ---- Net sales $ - $ 332 ========= ========= Operating loss before nonrecurring costs $ (155) $ (701) --------- --------- Nonrecurring plant closure costs: Severance and other employee termination costs - 246 Asset relocation costs - 166 Other costs - 110 --------- --------- Subtotal - 522 --------- --------- Operating loss $ (155) $ (1,233) ========= ========= Depreciation included in operating loss $ 54 $ 265 ========= ========= During the first quarter of 2002, the operating loss, excluding the plant closure costs, resulted primarily from the underabsorption of operating costs due to minimal sales and poor operating efficiencies while the facility was being shut down, and, to a lesser extent, from the cost of maintaining, insuring, protecting, and depreciating the facility and the remaining equipment. The operating loss during the first quarter of 2003 resulted primarily from the ongoing cost to maintain, insure, protect, and depreciate the building and the remaining equipment in the facility. During the first quarter of 2003, net sales of the Metals Group decreased by $630,000, or 10.0%, compared to the first quarter of 2002. The decrease resulted from reduced sales of diecast components, primarily due to the off-shore sourcing of certain components, offset, in part, by increased sales of machined metal components resulting primarily from the roll out of certain new business obtained from existing customers. Cost of sales, as a percentage of net sales decreased to 103.9% of net sales during the first quarter of 2003 from 110.3% of net sales during the first quarter of 2002, primarily because the gross profit at the Arizona facility improved to negative $125,000 from negative $897,000 in the first quarter of 2002. The Metals Group continued to be negatively affected by relatively high fixed, or partially fixed, operating expenses in a period of low to moderate sales volume. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 2003 compared to the first quarter of 2002, primarily because of the closing of the Arizona facility, which resulted in a reduction in selling and administrative expenses to $30,000 from $326,000 during the first quarter of 2002. - 18 - During the first quarter of 2003, the loss from operations was $583,000 compared to a loss from operations of $1,716,000 during the first quarter of 2002. Excluding the $522,000 of plant closure costs, the loss from operations during the first quarter of 2002, was $1,194,000. EBITDA for the first quarter of 2003 was $304,000, or 5.4% of net sales, an increase of $992,000, compared to the first quarter of 2002. PLANT CLOSURE COSTS For a discussion of plant closure costs please refer to our discussion of the Metals Group above. 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 three-month periods ended March 31, 2003 and 2002, and the reconciliation of the loss from operations to EBITDA (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ------------------ 2003 2002 ---- ---- Loss from operations $ (591) $ (583) Add back: depreciation and amortization 9 21 ------ ------ EBITDA $ (582) $ (562) ====== ====== INTEREST EXPENSE During the first quarters of 2003 and 2002, interest expense totaled $1,780,000 and $1,796,000, respectively, which included amortization of deferred financing expenses of $143,000 and $36,000, respectively. INCOME TAX PROVISION At March 31, 2003, and December 31, 2002, our net deferred income tax assets were fully offset by a valuation allowance. The income tax provisions recorded during the three-month periods ended March 31, 2003 and 2002, consisted of estimated state income taxes payable. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first quarter of 2003, our operating activities provided $390,000 of cash. Accounts receivable increased by $4,356,000. The increase was caused primarily by an increase in net sales during March 2003 compared to December 2002, an increase in accounts receivable related to sales of tooling, - 19 - and, at December 31, 2002, a payment by one customer of approximately $450,000 of invoices in advance of their scheduled due dates. Inventories increased by $509,000, or 5.8%, primarily because of the production of safety stocks in order to satisfy customer requirements during periods of high demand. Prepaid expenses and other current assets decreased by $695,000, primarily because of a reduction in the amount of unbilled tooling being manufactured or purchased by us for sale to our customers. Accrued interest expense increased by $1,113,000, reflecting additional interest accrued during the quarter on our senior, unsecured note, our senior subordinated notes, and our junior subordinated notes. INVESTING ACTIVITIES During the first quarter of 2003, our investing activities used $872,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group, the Metals Group, and the corporate office totaled $721,000, $176,000, and $2,000, respectively, primarily for the purchase of equipment. In addition, during the first quarter of 2003, the Rubber Group acquired another $106,000 of production equipment, which was financed under a capital lease obligation. We presently project that capital expenditures during 2003 will total approximately $7,353,000, substantially all of which will be for the purchase of equipment. Capital expenditures for the Rubber Group, the Metals Group, and the corporate office are projected to total approximately $6,285,000, $1,046,000, and $22,000, respectively, during 2003. At March 31, 2003, we had outstanding commitments to purchase property, plant, and equipment of approximately $2,659,000. FINANCING ACTIVITIES During the first quarter of 2003, our financing activities provided $346,000 of cash. During the first quarter of 2003, we made payments on our amortizing term notes totaling $2,591,000, and we increased the net borrowings under our revolving line of credit by $3,142,000. 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 is subject to certain availability formulas based on the levels of our accounts receivable and inventories. Our revolving line of credit is currently scheduled to expire on May 21, 2003. At May 13, 2003 the aggregate principal amount outstanding under our revolving line of credit was $18,007,000. We intend to replace the revolving line of credit with a revolving line of credit provided by a new lender or to negotiate an extension of the May 21, 2003, expiration date with our existing lender. We can give no assurance, however, that we will be able to replace or extend the revolving line of credit on favorable terms, or at all. At March 31, 2003, availability under our revolving line of credit totaled $1,200,000 before outstanding checks of $952,000 were deducted. Substantially all of our assets are pledged as collateral for various of our borrowings. A number of our financing arrangements contain covenants that require us to maintain 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 property, 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. - 20 - From time to time, our lenders have agreed to waive, amend, or eliminate certain of the financial covenants contained in our various financing 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, waive, or eliminate those covenants, the lenders would have the right to declare the borrowings under their financing agreements to be due and payable. We are in default in the payment of our senior subordinated notes and our senior, unsecured note, which have outstanding principal amounts of $27,412,000 and $7,500,000, respectively, and accrued interest, as of March 31, 2003, of $12,815,000 and $938,000, respectively. In addition, our revolving line of credit is currently scheduled to expire on May 21, 2003, we have $347,000 of junior subordinated notes that are scheduled to mature during 2003, and we have $9,335,000 of scheduled principal payments on our secured, amortizing term notes during the last nine months of 2003. We estimate that, at existing contractual and market rates, the interest expense on all of our debt during 2003 will be approximately $7,000,000. Interest paid during the first quarters of 2003 and 2002 totaled $524,000 and $881,000, respectively. We had a net working capital deficit of $66,666,000 at March 31, 2003, compared to a net working capital deficit of $68,070,000 at December 31, 2002. The net working capital deficit exists primarily because the majority of our debt is in default or subject to short-term waivers of cross defaults. As discussed in more detail below, we are in the process of negotiating extensions or refinancings 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 interest expense would be approximately $670,000. 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. On July 10, 2002, we commenced an exchange offer for the 12 3/4% senior subordinated notes. The exchange offer was amended on March 7, 2003. If the amended exchange offer is consummated, at least 99% of the 12 3/4% senior subordinated notes will 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 the day before the date the amended exchange offer is consummated, which accrued interest will total $499.375 for each $1,000 principal amount of 12 3/4% senior subordinated notes, assuming the amended exchange offer is consummated on July 1, 2003. Interest on the 11 1/2% senior subordinated notes will accrue from the date the amended exchange offer is consummated, and will be payable on each February 1, May 1, August 1, and November 1. Each $1,000 principal amount of 11 1/2% senior subordinated notes will 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 amended exchange offer is consummated, we will pay a participation fee of 3% of the principal amount of 12 3/4% senior subordinated notes that are exchanged. Our senior, secured lenders and the holders of the junior subordinated notes have waived the cross-default provisions with respect to the default on the senior subordinated notes through May 19, 2003, and August 1, 2003, respectively. The current expiration date of the amended exchange offer is May 15, 2003. One of the conditions to the consummation of the amended exchange offer is the tender for exchange of at least 99% of the senior subordinated notes. As of May 13, 2003, we had received tenders of $27,209,000 principal amount of 12 3/4% senior subordinated notes, or 99.3% of the notes. There are additional conditions to the consummation of the amended exchange offer that may not be satisfied by the expiration date. - 21 - We have reached an agreement with the holders of our 14% junior subordinated notes on the terms of a restructuring of those notes. If the restructuring is completed, we will exchange new 12 1/2% junior subordinated notes due November 1, 2007, for the existing 14% junior subordinated notes, and the accrued interest on the 14% junior subordinated notes for the period November 1, 1999, through the day before the restructuring is consummated, which will total $213,000, assuming the restructuring is consummated on July 1, 2003, will be converted into shares of our common stock at a price of $2.27 per share. Interest on the 12 1/2% junior subordinated notes will accrue from the date the restructuring is consummated, and will be payable on each February 1, May 1, August 1, and November 1. Each $1,000 principal amount of 12 1/2% junior subordinated notes will 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 November 1, 2007. If the restructuring is completed, we will also pay a participation fee of 3% of the principal amount of 14% junior subordinated notes. We have been in default on our senior, unsecured note since April 30, 2002, when we did not make the payments of principal, in the amount of $7,500,000, and the interest, in the amount of $78,000, that were due on that date. If the other aspects of the financial restructuring program are completed, we have proposed to repurchase the senior, unsecured note for $5,550,000 in cash plus interest on that amount from November 1, 2002, to the date the amended exchange offer is consummated, at the prime rate. Our senior, secured lenders and the holders of the junior subordinated notes have waived the cross-default provisions with respect to the default on the senior, unsecured note through May 19, 2003, and August 1, 2003, respectively. We are currently in discussions with several lenders regarding a refinancing of our senior, secured credit facilities. We can give no assurance that we will be able to consummate the amended exchange offer, restructure the senior, unsecured note, or refinance our senior, secured credit facilities on satisfactory terms. If we are unable to do so, we may file a petition under the federal bankruptcy code in order to effect a debt restructuring on terms substantially similar to those discussed above, or on other terms. Although we believe that such a debt restructuring could be accomplished without material disruption to our operations, any such proceeding involves considerable risks and uncertainties and could have a material adverse effect on our business, results of operations, cash flows, 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. 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, 2003, we had $35,908,000 of outstanding floating-rate debt at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%, the prime rate plus 1%, the prime rate plus 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, 2003, we had $36,998,000 of outstanding fixed-rate, long-term debt with a weighted-average interest rate of 12.7%, of which $34,912,000 has matured. We have received tenders of - 22 - over 99% of our 12 3/4% senior subordinated notes in exchange 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 the day before the date the exchange is effected, which accrued interest will total $499.375 for each $1,000 principal amount of 12 3/4% senior subordinated notes exchanged, if the exchange offer is consummated on July 1, 2003. The holders of our 14% junior subordinated notes have agreed to exchange the $347,000 principal amount of those notes for new 12 1/2% junior subordinated notes due November 1, 2007, and to convert the accrued interest on the notes into shares of common stock. If the other aspects of the financial restructuring are completed, we have proposed to repurchase our $7,500,000 senior, unsecured note for $5,550,000 plus interest on that amount from November 1, 2002, to the date of repurchase, at the prime rate. If the financial restructuring is completed on the terms currently negotiated, we estimate that our monthly interest expense would be approximately $670,000 and that a one percentage point increase or decrease in the applicable short-term rate would increase or decrease our monthly interest expense by approximately $34,000. 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. ITEM 4. CONTROLS AND PROCEDURES During the 90-day period prior to the date of this report, an evaluation was performed under the supervision, and with the participation, of our management, including our principal executive officers and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our principal executive officers and our chief financial officer concluded that our disclosure controls and procedures are effective to provide us with timely notice of material information required to be disclosed in periodic reports filed with the U.S. Securities and Exchange Commission. We also reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our previous evaluation. - 23 - 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 senior, unsecured note because we did not make the payments of principal, in the amount of $7,500,000, and interest, in the amount of $78,000, that were due on April 30, 2002. For more information regarding the default in respect of the 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, 2003, in the aggregate amount of $7,000. As of May 13, 2003, we were in arrears in the payment of dividends in the amount of $86,000 and in the making of mandatory redemptions in the amount of $270,000. 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, 2003, 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, 2003, among LPC, Michael A. Lubin, and Warren Delano 10-3 Agreement dated as of April 4, 2003, between LPC and Congress Financial Corporation ("Congress") 10-4 Agreement dated as of April 4, 2003, between Lexington Rubber Group, Inc. ("LRGI") and Congress 10-5 Agreement dated as of April 4, 2003, among LPC, LRGI, and Congress 10-6 Agreement dated as of April 30, 2003, between LPC and CIT Group/Equipment Financing, Inc. 10-7 Twelfth Amendment Agreement dated as of April 4, 2003, between LPC, LRGI, and Bank One, NA 10-8 Agreement dated as of April 4, 2003, among LPC, LRGI, and Bank One, NA - 24 - 99-1 Certification of Michael A. Lubin, Chairman of the Board and Co-Principal Executive Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99-2 Certification of Warren Delano, President and Co-Principal Executive Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99-3 Certification of Dennis J. Welhouse, Chief Financial Officer and Principal Financial Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K On January 10, 2003, we filed a report on Form 8-K that included a press release dated January 10, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from January 10, 2003, to 12 midnight, New York City Time on January 31, 2003, unless further extended. On January 31, 2003, we filed a report on Form 8-K that included a press release dated January 31, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from January 31, 2003, to 12 midnight, New York City Time on February 7, 2003, unless further extended. On February 7, 2003, we filed a report on Form 8-K that included a press release dated February 7, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from February 7, 2003, to 12 midnight, New York City Time on February 12, 2003, unless further extended. On February 12, 2003, we filed a report on Form 8-K that included a press release dated February 12, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from February 12, 2003, to 12 midnight, New York City Time on February 18, 2003, unless further extended. On February 18, 2003, we filed a report on Form 8-K that included a press release dated February 18, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from February 18, 2003, to 12 midnight, New York City Time on February 24, 2003, unless further extended. On February 24, 2003, we filed a report on Form 8-K that included a press release dated February 24, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from February 24, 2003, to 12 midnight, New York City Time on February 28, 2003, unless further extended. On February 28, 2003, we filed a report on Form 8-K that included a press release dated February 28, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from February 28, 2003, to 12 midnight, New York City Time on March 7, 2003, unless further extended. - 25 - On March 7, 2003, we filed a report on Form 8-K that included a press release dated March 7, 2003, stating that we were amending the terms of our exchange offer with respect to our 12 3/4% Senior Subordinated Notes Due February 1, 2000, and extending the expiration date of our offer to exchange our senior subordinated notes from March 7, 2003, to 12 midnight, New York City Time on March 20, 2003, unless further extended. On March 20, 2003, we filed a report on Form 8-K that included a press release dated March 20, 2003, stating that we were extending the expiration date of our offer to exchange our senior subordinated notes from March 20, 2003, to 12 midnight, New York City Time on April 3, 2003, unless further extended. - 26 - LEXINGTON PRECISION CORPORATION FORM 10-Q MARCH 31, 2003 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, 2003 By: /s/ Michael A. Lubin Date ---------------------------- Michael A. Lubin Chairman of the Board May 14, 2003 By: /s/ Warren Delano Date ---------------------------- Warren Delano President May 14, 2003 By: /s/ Dennis J. Welhouse Date ---------------------------- Dennis J. Welhouse Senior Vice President and Chief Financial Officer - 27 - CERTIFICATIONS I, Michael A. Lubin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lexington Precision Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Michael A. Lubin ------------------------------- Michael A. Lubin Chairman of the Board (Co-Principal Executive Officer) - 28 - I, Warren Delano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lexington Precision Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Warren Delano -------------------------------- Warren Delano President (Co-Principal Executive Officer) - 29 - I, Dennis J. Welhouse, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lexington Precision Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Dennis J. Welhouse ---------------------------- Dennis J. Welhouse Senior Vice President and Chief Financial Officer (Principal Financial Officer) - 30 -