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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2004
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 AUGUST 12, 2004, THERE WERE 4,931,767 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.....................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................24
Item 4. Controls and Procedures........................................................................25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................27
- i -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 31,410 $ 30,873 $ 64,416 $ 63,256
Cost of sales 28,939 27,587 57,870 56,240
-------- -------- -------- --------
Gross profit 2,471 3,286 6,546 7,016
Selling and administrative expenses 2,203 2,173 4,272 4,265
-------- -------- -------- --------
Income from operations 268 1,113 2,274 2,751
Gain on repurchase of debt 3,252 -- 3,252 --
Interest expense 2,182 1,760 4,329 3,540
-------- -------- -------- --------
Income (loss) before income taxes 1,338 (647) 1,197 (789)
Income tax provision 56 27 71 54
-------- -------- -------- --------
Net income (loss) $ 1,282 $ (674) $ 1,126 $ (843)
======== ======== ======== ========
Per share data:
Basic and diluted net income (loss) applicable to
common stockholders $ 0.26 $ (0.14) $ 0.23 $ (0.17)
======== ======== ======== ========
See notes to consolidated financial statements.
-1-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
ASSETS:
Current assets:
Cash $ 39 $ 189
Accounts receivable, net 19,692 17,277
Inventories, net 10,168 8,527
Prepaid expenses and other current assets 1,989 2,481
Deferred income taxes 1,360 1,360
-------- --------
Total current assets 33,248 29,834
Property, plant, and equipment, net 41,719 42,632
Goodwill 7,623 7,623
Other assets, net 3,720 3,598
-------- --------
Total assets $ 86,310 $ 83,687
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 11,781 $ 10,038
Accrued expenses 6,962 6,473
Deferred gain on repurchase of debt -- 3,252
Short-term debt 17,059 12,246
Current portion of long-term debt 5,679 5,585
-------- --------
Total current liabilities 41,481 37,594
-------- --------
Long-term debt, excluding current portion 61,293 63,681
-------- --------
Deferred income taxes and other long-term liabilities 1,889 1,904
-------- --------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,931,767 shares issued 1,233 1,233
Additional paid-in-capital 13,169 13,169
Accumulated deficit (32,755) (33,894)
-------- --------
Total stockholders' deficit (18,353) (19,492)
-------- --------
Total liabilities and stockholders' deficit $ 86,310 $ 83,687
======== ========
See notes to consolidated financial statements
-2-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
SIX MONTHS ENDED
JUNE 30
--------------------------
2004 2003
---------- -------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss) $ 1,126 $ (843)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 4,294 5,106
Amortization included in operating expense 221 296
Amortization included in interest expense 528 273
Gain on repurchase of debt (3,252) --
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net (2,415) (3,217)
Inventories, net (1,641) (409)
Prepaid expenses and other current assets 639 642
Accounts payable 1,743 (112)
Accrued expenses, excluding interest expense (230) 805
Accrued interest expense 719 2,229
Other long-term liabilities (15) 92
Other 15 (5)
------- -------
Net cash provided by operating activities 1,732 4,857
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (3,185) (2,734)
Net decrease in equipment deposits (299) (35)
Expenditures for tooling owned by customers (248) (113)
Other (147) 202
------- -------
Net cash used by investing activities (3,879) (2,680)
------- -------
FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 4,813 2,677
Repayment of term notes and other debt (2,507) (4,529)
Deferred financing charges (309) (434)
------- -------
Net cash provided (used) by financing activities 1,997 (2,286)
------- -------
Net decrease in cash (150) (109)
Cash at beginning of period 189 1,753
------- -------
Cash at end of period $ 39 $ 1,644
======= =======
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, 2003. In
the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments, consisting only of adjustments of a normal,
recurring nature, necessary to present fairly the financial position of the
Company at June 30, 2004, the Company's results of operations for the
three-month and six-month periods ended June 30, 2004 and 2003, and the
Company's cash flows for the six-month periods ended June 30, 2004 and 2003. To
prepare the accompanying interim consolidated financial statements, the Company
is required to make estimates and assumptions that affect the reported amounts
and disclosures. Actual results could differ from those estimates.
The results of operations for the three-month and six-month periods
ended June, 2004, are not necessarily indicative of the results to be expected
for the full year or for any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories at June 30, 2004, and December 31, 2003, are set forth
below (dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Finished goods $ 3,746 $ 3,793
Work in process 3,441 2,018
Raw materials and purchased parts 2,981 2,716
------- -------
$10,168 $ 8,527
======= =======
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at June 30, 2004, and December 31, 2003,
are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Land $ 2,350 $ 2,350
Buildings 23,055 22,863
Equipment 117,285 116,557
-------- --------
142,690 141,770
Accumulated depreciation 100,971 99,138
-------- --------
Property, plant, and equipment, net $ 41,719 $ 42,632
======== ========
-4-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
Debt at June 30, 2004, and December 31, 2003, is set forth below
(dollar amounts in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Short-term debt:
Revolving line of credit $ 16,901 $ 12,088
12 3/4% Senior Subordinated Notes 158 158
-------- --------
Subtotal 17,059 12,246
Current portion of long-term debt 5,679 5,585
-------- --------
Total short-term debt 22,738 17,831
-------- --------
Long-term debt:
Equipment Term Loan 12,000 13,500
Real Estate Term Loan 10,925 11,500
12% Senior Subordinated Notes 42,441 42,441
13% Junior Subordinated Notes 347 347
Unsecured, amortizing term notes 214 104
Capital lease obligations 301 573
Series B Preferred Stock 609 594
Other 135 207
-------- --------
Subtotal 66,972 69,266
Less current portion (5,679) (5,585)
-------- --------
Total long-term debt 61,293 63,681
-------- --------
Total debt $ 84,031 $ 81,512
======== ========
REVOLVING LINE OF CREDIT
At June 30, 2004, the aggregate principal amount of loans outstanding
under the revolving line of credit was $16,901,000 and net unused availability
totaled $1,805,000. The revolving line of credit expires on June 30, 2006. Loans
under the revolving line of credit bear interest at either the prime rate plus
1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at the Company's
option. The loans outstanding under the revolving line of credit are classified
as short-term debt because the revolving line of credit provides that the
Company's cash receipts are automatically used to reduce such loans on a daily
basis, by means of a lock-box sweep arrangement, and the lender has the ability
to modify certain terms of the revolving line of credit without the Company's
approval. Loans under the revolving line of credit are limited to 88% of
eligible accounts receivable plus 65% of eligible inventories. All loans under
the revolving line of credit are secured by first priority liens on
substantially all of the Company's assets other than real property.
At June 30, 2004, net availability under the revolving line of credit
was being reduced by two separate reserves established by the lender, which
totaled $1,850,000. The elimination of $500,000 of these reserves is subject to
the attainment of certain specified financial performance goals and the
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
elimination of the balance of the reserve is at the discretion of the lender. We
cannot predict at this time whether any of the remaining reserves will be
released.
12 3/4% SENIOR SUBORDINATED NOTES
The 12 3/4% Senior Subordinated Notes matured on February 1, 2000, and
are unsecured obligations of the Company that are subordinated to all of the
Company's existing and future senior debt. In December 2003, 99.3% of the
outstanding Senior Subordinated Notes were exchanged for units consisting of 12%
Senior Subordinated Notes and warrants to purchase common stock. The $158,000
principal amount of 12 3/4% Senior Subordinated Notes that did not participate
in the exchange remain outstanding.
12% SENIOR SUBORDINATED NOTES
The 12% Senior Subordinated Notes mature on August 1, 2009, and are
unsecured obligations of the Company that are subordinated in right of payment
to all of the Company's existing and future senior debt. Interest on the 12%
Senior Subordinated Notes is payable quarterly on February 1, May 1, August 1,
and November 1.
SERIES B PREFERRED STOCK
At June 30, 2004, there were outstanding 3,300 shares of the Company's
$8 Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), par value $100 per share, with a carrying value of $609,000.
Redemptions of $90,000 are scheduled on November 30 of each year in order to
retire 450 shares of Series B Preferred Stock annually. The Company failed to
make scheduled redemptions in the aggregate amount of $360,000 on November 30,
2000, 2001, 2002, and 2003.
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("FAS 150"), which established
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer that have characteristics of
both liabilities and equity. As a result of the adoption of FAS 150, the Company
classifies the Series B Preferred Stock as debt in the consolidated financial
statements. Subsequent to adoption, the accretions in the fair value of the
Series B Preferred Stock and payments of quarterly dividends have been recorded
by monthly charges to interest expense.
RESTRICTIVE COVENANTS
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require the Company to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum fixed charge coverage
ratio, minimum levels of net worth and earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. The
Company also has other covenants that place restrictions on its business and
operations, including covenants relating to the sale of all or substantially all
of its assets, the purchase of common stock, the redemption of preferred stock,
compliance with specified laws and regulations, the purchase of property, plant,
and equipment, and the payment of cash dividends.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
From time to time, the Company's secured lenders have agreed to waive,
amend, or eliminate certain of the financial covenants contained in the
Company's various financing agreements in order to maintain or otherwise ensure
the Company's current or future compliance. Effective March 31, 2004, the
Company's two senior, secured lenders amended their fixed charge coverage ratio
and their annual limitation on unfinanced capital expenditures in order for the
Company to avoid projected defaults under these two covenants during 2004.
Effective May 31, 2004, one of the Company's secured lenders amended its minimum
net worth covenant and effective June 30, 2004, the Company's two secured
lenders amended certain of their financial covenants, including their respective
fixed charge coverage ratio, minimum EBITDA, and leverage ratios as applicable
in order for us to maintain or otherwise ensure our 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 financing agreements to be due and payable immediately.
NOTE 5 -- INCOME TAXES
At June 30, 2004, and December 31, 2003, the Company's net deferred
income tax assets were fully reserved by a valuation allowance. The income tax
provisions recorded during the three-month and six-month periods ended June 30,
2004 and 2003, consisted of estimated state income taxes payable.
NOTE 6 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net loss per common share for the
three-month and six-month periods ended June 30, 2004 and 2003, are set forth
below (in thousands, except per share data). The pro forma conversion of the
Series B Preferred Stock and the pro forma exercise of outstanding warrants to
purchase the Company's common stock, which were issued on December 18, 2003 (the
"Warrants"), were not dilutive. As a result, the calculation of diluted net loss
per common share set forth below does not reflect the pro forma conversion of
the Series B Preferred Stock or the pro forma exercise of the Warrants.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator-- income (loss) applicable to common
stockholders $ 1,282 $ (674) $ 1,126 $ (843)
========= ========= ========= =======
Denominator-- weighted average common shares 4,932 4,828 4,932 4,828
========= ========= ========= =======
Basic and diluted net income (loss) per common share $ 0.26 $ (0.14) $ 0.23 $ (0.17)
========= ========= ========= =======
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- SEGMENTS
Information relating to the Company's operating segments and its
Corporate Office for the three-month and six-month periods ended June 30, 2004
and 2003, is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ -------------------------
2004 2003 2004 2003
---- ---- ---- ----
NET SALES:
Rubber Group $ 27,044 $ 26,645 $ 54,847 $ 53,367
Metals Group 4,366 4,228 9,569 9,889
-------- -------- -------- --------
Total net sales $ 31,410 $ 30,873 $ 64,416 $ 63,256
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,607 $ 3,020 $ 6,149 $ 5,839
Metals Group (1,589) (1,259) (2,549) (1,842)
-------- -------- -------- --------
Subtotal 1,018 1,761 3,600 3,997
Corporate Office (750) (648) (1,326) (1,246)
-------- -------- -------- --------
Total income from operations $ 268 $ 1,113 $ 2,274 $ 2,751
======== ======== ======== ========
ASSETS:
Rubber Group $ 64,876 $ 64,819 $ 64,876 $ 64,819
Metals Group 17,096 21,666 17,096 21,666
-------- -------- -------- --------
Subtotal 81,972 86,485 81,972 86,485
Corporate Office 4,338 6,099 4,338 6,099
-------- -------- -------- --------
Total assets $ 86,310 $ 92,584 $ 86,310 $ 92,584
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 1,684 $ 1,805 $ 3,424 $ 3,680
Metals Group 520 816 1,071 1,703
-------- -------- -------- --------
Subtotal 2,204 2,621 4,495 5,383
Corporate Office 10 10 20 19
-------- -------- -------- --------
Total depreciation and amortization $ 2,214 $ 2,631 $ 4,515 $ 5,402
======== ======== ======== ========
CAPITAL EXPENDITURES (2):
Rubber Group $ 1,572 $ 1,392 $ 2,482 $ 2,219
Metals Group 418 443 901 619
-------- -------- -------- --------
Subtotal 1,990 1,835 3,383 2,838
Corporate Office -- -- -- 2
-------- -------- -------- --------
Total capital expenditures $ 1,990 $ 1,835 $ 3,383 $ 2,840
======== ======== ======== ========
(1) Does not include amortization of deferred financing expenses, which
totaled $276,000 and $130,000 during the three-month periods ended June
30, 2004 and 2003, respectively, and $528,000 and $273,000 during the
six-month periods ended June 30, 2004 and 2003, respectively, which is
included in interest expense.
(2) Capital expenditures for the six-month period ended June 30, 2004,
included $198,000 of equipment purchased under a vendor financing
agreement. Capital expenditures for the six-month period ended June 30,
2003, included $106,000 of equipment purchased under a capital lease
obligation.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- DEFERRED GAIN ON REPURCHASE OF DEBT
On December 18, 2003, the Company repurchased its $7,500,000 senior,
unsecured note, and all accrued and unpaid interest thereon, for a purchase
price of $5,810,000. The pre-tax gain of $3,252,000 on the repurchase of the
senior, unsecured note was deferred and recorded in current liabilities as
"Deferred gain on repurchase of debt" because the agreement governing the
repurchase of the note provided that the claim could be reinstated if certain
events occurred prior to April 20, 2004. Because none of these events occurred
prior to April 20, 2004, the Company realized the pre-tax gain of $3,252,000
during the three-month period ended June 30, 2004.
-9-
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." 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:
o increases and decreases in business awarded to us by our
customers,
o unanticipated price reductions for our products as a result of
competition,
o unanticipated operating results,
o changes in the cost of raw materials,
o increases or decreases in capital expenditures,
o changes in economic conditions,
o strength or weakness in the North American automotive market,
o changes in the competitive environment,
o changes in interest rates and the credit and securities
markets, and
o labor interruptions at our facilities or at our customers'
facilities.
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.
-10-
RESULTS OF OPERATIONS-- SECOND QUARTER OF 2004 VERSUS SECOND QUARTER OF 2003
The following table sets forth our consolidated operating results for
the three-month periods ended June 30, 2004 and 2003, and the reconciliation of
income from operations to earnings before interest, taxes, depreciation,
amortization, and other non-operating items of income or expense which is
commonly referred to as EBITDA (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30
---------------------------------------------------
2004 2003
---------------------- ----------------------
Net sales $31,410 100.0% $30,873 100.0%
Cost of sales 28,939 92.1 27,587 89.4
------- ----- ------- -----
Gross profit 2,471 7.9 3,286 10.6
Selling and administrative expenses 2,203 7.0 2,173 7.0
------- ----- ------- -----
Income from operations 268 0.9 1,113 3.6
Add back: depreciation and amortization (1) 2,214 7.0 2,631 8.5
------- ----- ------- -----
EBITDA (2) $ 2,482 7.9 $ 3,744 12.1%
======= ===== ======= =====
Net cash provided by operating activities (3) $ 1,657 5.3% $ 4,467 14.5%
======= ===== ======= =====
(1) Does not include amortization of deferred financing expenses,
which totaled $276,000 and $130,000 during the three-month periods
ended June 30, 2004 and 2003, respectively, and which is included
in interest expense in the consolidated financial statements.
(2) 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 accounting principles generally accepted in the
United States. 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, and
because it is used by our lenders in setting financial covenants.
Our definition of EBITDA may not be the same as the definition of
EBITDA used by other companies.
(3) The calculation of net cash provided by operating activities for
the six months ended June 30, 2004 and 2003, is detailed in the
consolidated statements of cash flows that are part of our
consolidated financial statements in Part I, Item 1.
Our net sales for the second quarter of 2004 were $31,410,000, compared
to net sales of $30,873,000 for the second quarter of 2003, an increase of
$537,000, or 1.7%. The increase in net sales was principally a result of
increased net sales of rubber components. EBITDA for the second quarter of 2004
was $2,482,000, or 7.9% of net sales, compared to EBITDA of $3,744,000, or 12.1%
of net sales, for the second quarter of 2003. The change in EBITDA was primarily
a result of a $534,000, or 11%,
-11-
reduction in EBITDA at our Rubber Group and a $626,000, or 141%, reduction in
EBITDA at our Metals Group.
Net cash provided by operating activities during the second quarter of
2004 totaled $1,657,000, compared to $4,467,000 for the second quarter of 2003.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
three-month periods ended June 30, 2004 and 2003.
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 as a whole.
Delphi Corporation is the Rubber Group's largest customer. During 2003,
2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000,
$24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and
25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of
connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000,
and $22,295,000, during 2003, 2002, and 2001, respectively. Substantially all of
the connector seals we sell to Delphi are sold pursuant to a supply agreement
that expires on December 31, 2004. We cannot predict whether we and Delphi will
enter into a new agreement for us to supply connector seals to Delphi when the
current agreement expires on December 31, 2004, or, if we do enter into a new
agreement, what the volume, pricing, duration, and other terms of that agreement
will be. Delphi has indicated to us that they currently plan to in-source,
during 2005, approximately 30 connector seals currently manufactured by us under
the supply agreement. Our aggregate net sales of these parts during 2003 were
$9,319,000. Assuming those connector seals were in-sourced by Delphi on the
earliest possible date, January 1, 2005, and we were unable to replace the lost
business with new business from Delphi or other customers, we estimate that the
operating profit and EBITDA of the Rubber Group would be reduced by
approximately $2,500,000 per annum. We are currently in discussions with Delphi
regarding our ongoing supply relationship, and we are developing plans to
restructure the operations of our connector seals division to reduce expenses
and mitigate the impact of any lost business. Any such restructuring of our
connector seals business could include, among other things, the closing of one
of our existing manufacturing facilities, which could result in significant cash
and non-cash expenses. Although we can give you no assurance, it is also
possible that, if we do continue to sell components to Delphi, the average price
for those components may increase, thereby partially offsetting the negative
impact of lower volume.
-12-
The following table sets forth the operating results of the Rubber
Group for the three-month periods ended June 30, 2004 and 2003, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30
---------------------------------------------------
2004 2003
---------------------- ----------------------
Net sales $27,044 100.0% $26,645 100.0%
Cost of sales 23,342 86.3 22,472 84.3
------- ----- ------- -----
Gross profit 3,702 13.7 4,173 15.7
Selling and administrative expenses 1,095 4.0 1,153 4.3
------- ----- ------- -----
Income from operations 2,607 9.6 3,020 11.3
Add back depreciation and amortization 1,684 6.2 1,805 6.8
------- ----- ------- -----
EBITDA $ 4,291 15.9% $ 4,825 18.1%
======= ===== ======= =====
During the second quarter of 2004, net sales of the Rubber Group
increased by $399,000, or 1.5%, compared to the second quarter of 2003. The
increase in net sales was primarily due to increased unit sales of connector
seals for automotive wiring systems because of increased sales to existing
customers, offset, in part, by reduced unit sales of insulators for automotive
ignition wire sets resulting primarily from reduced net sales to one customer,
and, to a lesser extent, reduced sales of components for medical devices. This
increase was offset, in part, by price reductions on certain automotive
components.
Cost of sales as a percentage of net sales increased during the second
quarter of 2004 to 86.3% of net sales from 84.3% of net sales during the second
quarter of 2003, primarily because of less than acceptable operating results at
our connector seals division, which have affected the Rubber Group's performance
for the past year. The factors that affected the connector seals division's
operating results included:
o costs for scrap, sorting, and repair, relating to a particular type of
connector seal;
o freight costs, which resulted from delivery issues related to those
quality problems;
o costs related to the rollout of new business at our operations that
mold seals from liquid silicone rubber;
o losses resulting from the production problems encountered in the
manufacture of automotive door grommets utilizing non-silicone
materials; and
o costs incurred due to the general disruption to our operations as we
attempted to cope with the problems listed above.
During the second half of 2003, we initiated a plan to reduce or
eliminate these operating issues, which included:
o upgrading management and supervisory personnel;
-13-
o installing and utilizing improved process controllers and centralized
data collection capabilities on all molding presses;
o implementing improved manufacturing procedures throughout the
operation;
o installing automated visual inspection and repair equipment; and
o improving utilization of the division's enterprise resource planning
software system.
During the second quarter of 2004, the plan was expanded to include:
o upgrading certain materials;
o modifying or replacing certain tooling; and
o initiating price increases on selected products.
Although the operating performance of the connector seals division
during the second quarter of 2004 was essentially unchanged when compared to the
second quarter of 2003, we believe that the operations improvement plan has
begun to benefit our results of operations and will continue to yield improved
results during the remainder 2004 as key components of the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during the second quarter of 2004, compared to the second quarter of
2003, primarily because of reduced salary expense and because certain of our
selling and administrative expenses are fixed, or partially fixed, in nature.
During the second quarter of 2004, income from operations totaled
$2,607,000, a decrease of $413,000, or 13.7%, compared to the second quarter of
2003. EBITDA for the second quarter of 2004 was $4,291,000, or 15.9% of net
sales, compared to $4,825,000, or 18.1% of net sales, during the second quarter
of 2003.
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 as a whole.
The Metals Group has incurred significant operating losses and negative
EBITDA over the past twelve months. We are currently assessing the economic
viability of the business units comprising the Metals Group. If we determine
that either of those business units is not economically viable, we may be
required to take action to restructure or close the business unit, which action
may result in a charge to operations.
-14-
The following table sets forth the operating results of the Metals
Group for the three-month periods ended June 30, 2004 and 2003, and the
reconciliation of the Metals Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30
------------------------------------------------------
2004 2003
------------------------ -------------------------
Net sales $ 4,366 100.0% $ 4,228 100.0%
Cost of sales 5,597 128.2 5,115 121.0
------- ----- ------- -----
Gross profit (loss) (1,231) (28.2) (887) (21.0)
Selling and administrative expenses 358 8.2 372 8.8
------- ----- ------- -----
Loss from operations (1,589) (36.4) (1,259) (29.8)
Add back depreciation and amortization 520 11.9 816 19.3
------- ----- ------- -----
EBITDA $(1,069) (24.5)% $ (443) (10.5)%
======= ===== ======= =====
During the second quarter of 2004, net sales of the Metals Group
increased by $138,000, or 3.3%, compared to the second quarter of 2003.
Cost of sales as a percentage of net sales increased to 128.2% of net
sales during the second quarter of 2004 from 121.0% of net sales during the
second quarter of 2003, primarily because of higher than anticipated start-up
costs on recently awarded machined metal components, quality problems
encountered on a particular die cast component, and the adverse effect of
relatively high fixed, or partially fixed, operating expenses in a period of low
sales volume. During the second quarter of 2004, the Metals Group's cost of
sales was reduced, in part, by lower depreciation and amortization expenses.
During the second quarter of 2004, the loss from operations at the Metals Group
included a loss from operations of $100,000 incurred at the Group's idle
facility in Casa Grande, Arizona, in order to maintain, insure, protect, and
depreciate the facility.
Selling and administrative expenses decreased during the second quarter
of 2004 compared to the second quarter of 2003, primarily because of a reduction
in salaried payroll expense and related employee benefit costs.
During the second quarter of 2004, the loss from operations was
$1,589,000 compared to a loss from operations of $1,259,000 during the second
quarter of 2003. EBITDA for the second quarter of 2004 was a negative
$1,069,000, or a negative 24.6% of net sales, a decrease of $626,000, compared
to the second quarter of 2003.
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.
-15-
The following table sets forth the operating results of the Corporate
Office for the three-month periods ended June 30, 2004 and 2003, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
THREE MONTHS ENDED
JUNE 30
----------------------
2004 2003
------- --------
Loss from operations $ (750) (648)
Add back depreciation and amortization 10 10
------- --------
EBITDA $ (740) $ (638)
======= ========
INTEREST EXPENSE
During the second quarters of 2004 and 2003, interest expense totaled
$2,182,000 and $1,760,000, respectively, which included amortization of deferred
financing expenses of $276,000 and $130,000, respectively. Interest expense
increased primarily because the amount of outstanding debt on which we accrued
and paid interest increased to $84,031,000 at June 30, 2004, from $70,503,000 at
June 30, 2003, due to the exchange of 12% Senior Subordinated Notes for 12 3/4%
Senior Subordinated Notes, which converted $15,029,000 of accrued interest to
12% Senior Subordinated Notes.
INCOME TAX PROVISION
At June 30, 2004, and December 31, 2003, our net deferred income tax
assets were fully reserved by a valuation allowance. The income tax provisions
recorded during the three-month periods ended June 30, 2004 and 2003, consisted
of estimated state income taxes.
-16-
RESULTS OF OPERATIONS-- FIRST SIX MONTHS OF 2004 VERSUS FIRST SIX MONTHS OF 2003
The following table sets forth our consolidated operating results for
the six-month periods ended June 30, 2004 and 2003, 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):
SIX MONTHS ENDED JUNE 30
--------------------------------------------------
2004 2003
----------------------- ----------------------
Net sales $64,416 100.0% $63,256 100.0%
Cost of sales 57,870 89.8 56,240 88.9
------- ----- ------- -----
Gross profit 6,546 10.2 7,016 11.1
Selling and administrative expenses 4,272 6.6 4,265 6.7
------- ----- ------- -----
Income from operations 2,274 3.5 2,751 4.4
Add back depreciation and amortization (1) 4,515 7.0 5,402 8.5
------- ----- ------- -----
EBITDA (2) $ 6,789 10.5% $ 8,153 12.9%
======= ===== ======= =====
Net cash provided by operating activities (3) $ 1,732 2.7% $ 4,857 7.7%
======= ===== ======= =====
(1) Does not include amortization of deferred financing expenses,
which totaled $528,000 and $273,000 during the first six months
of 2004 and 2003, respectively, and which is included in interest
expense in the consolidated financial statements.
(2) 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 accounting principles generally
accepted in the United States. 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, and because it is used by our lenders
in setting financial covenants. Our definition of EBITDA may not
be the same as the definition of EBITDA used by other companies.
(3) The calculation of net cash provided by operating activities is
detailed in the consolidated statements of cash flows that are
part of our consolidated financial statements in Part I, Item 1.
Our net sales for the first six months of 2004 were $64,416,000,
compared to net sales of $63,256,000 for the first six months of 2003, an
increase of $1,160,000, or 1.8%. EBITDA for the first six months of 2003 was
$6,789,000, or 10.5% of net sales, compared to $8,153,000, or 12.9% of net
sales, for the first six months of 2003. The change in EBITDA was primarily a
result of a $1,339,000 reduction in EBITDA at our Metals Group.
-17-
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
six-month periods ended June 30, 2004 and 2003.
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 as a whole.
The following table sets forth the operating results of the Rubber
Group for the six-month periods ended June 30, 2004 and 2003, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30
-----------------------------------------------------
2004 2003
------------------------ -----------------------
Net sales $54,847 100.0% $53,367 100.0%
Cost of sales 46,459 84.7 45,241 84.8
------- ----- ------- -----
Gross profit 8,388 15.3 8,126 15.2
Selling and administrative expenses 2,239 4.1 2,287 4.3
------- ----- ------- -----
Income from operations 6,149 11.2 5,839 10.9
Add back depreciation and amortization 3,424 6.2 3,680 6.9
------- ----- ------- -----
EBITDA $ 9,573 17.5% $ 9,519 17.8%
======= ===== ======= =====
During the first six months of 2004, net sales of the Rubber Group
increased by $1,480,000, or 2.8%, compared to the second quarter of 2003. The
increase in net sales was primarily due to increased unit sales of connector
seals for automotive wire systems because of increased sales to existing
customers, offset, in part, by reduced unit sales of insulators for automotive
ignition wire sets resulting primarily from reduced net sales to one customer.
This increase was also offset, in part, by price reductions on certain
automotive components.
Cost of sales as a percentage of net sales decreased during the first
six months of 2004 to 84.7% of net sales from 84.8% of net sales during the
first six months of 2003. Operating results for the first six months of 2004
were adversely affected by less than acceptable operating results at our
connector seals division. The factors that affected the connector seals
division's operating results for the first six months of 2004 included:
o increased costs for scrap, sorting, and repair, relating to a
particular type of connector seal;
o increased freight costs, which resulted from delivery issues related to
those quality problems;
o costs related to the rollout of new business at our operations that
mold seals from liquid silicone rubber;
-18-
o losses resulting from the production problems encountered in the
manufacture of automotive door grommets utilizing non-silicone
materials; and
o costs incurred due to the general disruption to our operations as we
attempted to cope with the problems listed above.
During the first six months of 2003, we initiated a plan to reduce or
eliminate these operating issues, which included:
o upgrading management and supervisory personnel;
o installing and utilizing improved process controllers and centralized
data collection capabilities on all molding presses;
o implementing improved manufacturing procedures throughout the
operation;
o installing automated visual inspection and repair equipment;
o improving utilization of the division's enterprise resource planning
software system.
During the second quarter of 2004, the plan was expanded to include:
o upgrading certain materials;
o modifying or replacing certain tooling; and
o initiating price increases on selected products.
Although the income from operations of the connector seals division
during the first six months of 2004 was slightly less than the division's income
from operations during the first six months of 2003, we believe that the
operations improvement plan has begun to benefit our results of operations and
will yield improved results during the remainder of 2004 as key components of
the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during the first six months of 2004, compared to the first six months
of 2003, primarily because of reduced salary expense and because certain of our
selling and administrative expenses are fixed, or partially fixed, in nature.
During the first six months of 2004, income from operations totaled
$6,149,000, an increase of $310,000, or 5.3%, compared to the first six months
of 2003. EBITDA for the first six months of 2004 was $9,573,000, or 17.5% of net
sales, compared to $9,519,000, or 17.8% of net sales, for the first six months
of 2003.
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 as a whole.
-19-
The following table sets forth the operating results of the Metals
Group for the six-month periods ended June 30, 2004 and 2003, and the
reconciliation of the Metals Group's income from operations to its EBITDA
(dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30
---------------------------------------------------------
2004 2003
------------------------- -------------------------
Net sales $ 9,569 100.0% $ 9,889 100.0%
Cost of sales 11,411 119.2 10,999 111.2
-------- ----- -------- -----
Gross profit (loss) (1,842) (19.2) (1,110) (11.2)
Selling and administrative expenses 707 7.4 732 7.4
-------- ----- -------- -----
Loss from operations (2,549) (26.6) (1,842) (18.6)
Add back depreciation and amortization 1,071 11.2 1,703 17.2
-------- ----- -------- -----
EBITDA $ (1,478) (15.4)% $ (139) (1.4)%
======== ===== ======== =====
During the first six months of 2004, net sales of the Metals Group
decreased by $320,000, or 3.2%, compared to the first six months of 2003. The
decrease resulted primarily from reduced sales of machined metal components,
primarily due to the loss of a high-volume machined metal component because the
customer converted the part to a stamped metal component, the loss of a certain
customer, and the in-sourcing of certain components by one of our customers.
Cost of sales, as a percentage of net sales increased to 119.2% of net
sales during the first six months of 2004 from 111.2% of net sales during the
first six months of 2003, primarily because of higher than anticipated start up
costs on recently awarded machined metal components, quality problems
encountered on a particular die cast component, and the adverse effect of
relatively high fixed, or partially fixed, operating expenses in a period of low
sales volume. During the first six months 2004, the Metals Group's cost of sales
was reduced, in part, by lower depreciation and amortization expenses. During
the first six months of 2004, the loss from operations at the Metals Group
included a loss from operations of $267,000 incurred at the Group's idle
facility in Casa Grande, Arizona, primarily to maintain, insure, protect, and
depreciate the facility.
During the first six months of 2004, the loss from operations was
$2,549,000 compared to a loss from operations of $1,842,000 during the first six
months of 2003. EBITDA for the first six months of 2004 was a negative
$1,478,000, or a negative 15.4% of net sales, a decrease of $1,339,000, compared
to the first six months of 2003.
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 six-month periods ended June 30, 2004 and 2003, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
SIX MONTHS ENDED
JUNE 30
-----------------------
2004 2003
------- -------
Loss from operations $(1,326) $(1,246)
Add back depreciation and amortization 20 19
------- -------
EBITDA $(1,306) $(1,227)
======= =======
INTEREST EXPENSE
During the first six months of 2004 and 2003, interest expense totaled
$4,329,000 and $3,540,000, respectively, which included amortization of deferred
financing expenses of $528,000 and $273,000, respectively. Interest expense
increased primarily because the amount of outstanding debt on which we accrued
and paid interest increased to $84,031,000 at June 30, 2004, from $70,503,000 at
June 30, 2003, due to the exchange of 12% Senior Subordinated Notes for 12 3/4%
Senior Subordinated Notes, which converted $15,029,000 of accrued interest to
12% Senior Subordinated Notes.
INCOME TAX PROVISION
At June 30, 2004, and December 31, 2003, our net deferred income tax
assets were fully reserved by a valuation allowance. The income tax provision
recorded during the six-month periods ended June 30, 2004 and 2003, consisted of
estimated state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first six months of 2004, our operating activities provided
$1,732,000 of cash. Accounts receivable and inventories increased by $2,415,000
and $1,641,000, respectively, primarily due to increased levels of business
activity in May and June of 2004 versus November and December of 2003. Accounts
payable increased by $1,743,000, primarily due to increased levels of business
activity and to a lesser extent, a modest increase in amounts outstanding beyond
normal industry terms. At June 30, 2004, and December 31, 2003, accounts payable
included outstanding checks of $872,000 and $1,488,000, respectively. Prepaid
expenses and other current assets decreased by $639,000, primarily because of a
reduction in the amount of unbilled tooling being manufactured or purchased by
us for sale to our customers.
INVESTING ACTIVITIES
During the first six months of 2004, our investing activities used
$3,879,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group and the Metals Group totaled $2,482,000 and
$901,000, respectively, primarily for the purchase of equipment. Capital
expenditures for the Rubber Group during the first six months of 2004 include
$198,000 of equipment financed by the vendor of the equipment. Capital
expenditures for the Rubber Group, the Metals Group,
-21-
and the Corporate Office are currently projected to total $5,318,000,
$1,057,000, and $1,000, respectively, during 2004. At June 30, 2004, we had
outstanding commitments to purchase plant and equipment of approximately
$1,129,000.
FINANCING ACTIVITIES
During the first six months of 2004, our financing activities provided
$1,997,000 of cash. During the first six months of 2004, we made scheduled
monthly payments on our Equipment Term Loan and our Real Estate Term Loan of
$2,075,000. Net borrowings under our revolving line of credit increased by
$4,813,000 during the second quarter of 2004, primarily to fund capital
expenditures and increases in accounts receivable and inventories.
LIQUIDITY
We operate with substantial financial leverage and limited liquidity.
Our aggregate indebtedness as of June 30, 2004, totaled $84,031,000. During the
remaining six months of 2004, interest and scheduled principal payments are
projected to be approximately $3,700,000 and $2,700,000, respectively.
We finance our operations with cash from operating activities and a
variety of financing arrangements, including the Equipment Term Loan, the Real
Estate Term Loan, and loans under our revolving line of credit. The Equipment
Term Loan bears interest at the prime rate plus 1 1/2% or LIBOR plus 3 3/4%, at
our option. The Real Estate Term Loan bears interest at the prime rate plus 4%,
subject to a minimum rate of 8 1/4% and requires us to pay a fee of 1.875% of
the outstanding principal amount of the loans on each anniversary of the closing
date. Loans under the revolving line of credit bear interest at the prime rate
plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at our
option. The revolving loans are limited to 88% of eligible accounts receivable
plus 65% of eligible inventories. Our revolving line of credit is currently
scheduled to expire on June 30, 2006.
The revolving line of credit and the Equipment Term Loan are secured by
first priority liens on substantially all of our assets other than real
property. The Real Estate Term Loan is secured by first priority liens on all of
our real property and second priority liens on substantially all of our other
assets. At June 30, 2004, net availability under the revolving line of credit
was being reduced by two separate reserves established by the lender, which
totaled $1,850,000. The elimination of $500,000 of these reserves is subject to
the attainment of certain specified financial performance goals and the
elimination of the balance of the reserve is at the discretion of the lender. We
cannot predict at this time whether any of the remaining reserves will be
released.
At June 30, 2004, net availability under our revolving line of credit
totaled $1,805,000. At August 13, 2004, net availability under our revolving
line of credit totaled $1,009,000.
At June 30, 2004, and December 31, 2003, the aggregate principal amount
of loans outstanding under the revolving line of credit was $16,901,000 and
$12,088,000, respectively. These loans are classified as short-term debt because
the revolving line of credit requires that our cash receipts are automatically
used to reduce such loans on a daily basis, by means of a lock-box sweep
arrangement, and the lender has the ability to modify certain terms of the
revolving line of credit without our approval.
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require us to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum fixed charge coverage
ratio,
-22-
minimum levels of net worth, and earnings before interest, taxes, depreciation,
and amortization ("EBITDA"), and a maximum leverage ratio. We also have
covenants that limit our unfinanced capital expenditures to $6,250,000 per annum
and limit the amount of additional secured financing we can incur for the
purchase of plant and equipment to $2,500,000 per annum. Although we do not
believe this provision will limit our planned capital expenditures during 2004,
we may be required to obtain new borrowings in order to complete our planned
capital expenditures. We currently believe, although we can give you no
assurance, that the necessary new borrowings would be available to us under
financing arrangements that we may negotiate. We also have other covenants that
place restrictions on our business and operations, including covenants relating
to the sale of all or substantially all of our assets, the purchase of common
stock, the redemption of preferred stock, compliance with specified laws and
regulations, and the payment of cash dividends.
From time to time, our secured 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. Effective March 31, 2004, our two senior, secured lenders amended
the fixed charge coverage ratio and the annual limitation on unfinanced capital
expenditures in order for us to avoid projected defaults under these two
covenants during 2004. Effective May 31, 2004, one on our secured lenders
amended their minimum net worth covenant and effective June 30, 2004, our two
secured lenders amended certain of their financial covenants, including, their
respective fixed charge coverage ratio, minimum EBITDA, and leverage ratios as
applicable in order for us to maintain or otherwise ensure our current or future
compliance. In connection with the June 30, 2004, amendments, the rate on our
Equipment Term Loan was increased by 1/4 of 1% until we reach a specified fixed
charge coverage ratio, and the rate on our Real Estate Term Loan was increased
by 1% until we reach a specified fixed charge coverage ratio and a specified
minimum excess borrowing availability. As amended effective March 31, May 31,
and June 30, 2004, the financial covenants contained within the agreements
governing the revolving line of credit, the Equipment Term Loan, and the Real
Estate Term Loan are as follows:
- Fixed Charge Coverage. The fixed charge coverage ratio is
calculated by dividing EBITDA less capital expenditures by specified
fixed charges and is required to be not less than 0.45 for the
nine-month period ended September 30, 2004, 0.55 for the twelve-month
period ended December 31, 2004, 0.65 and 0.85 for the twelve-month
periods ended March 31, 2005, and June 30, 2005, respectively, 1.0 for
the twelve-month period ended September 30, 2005, 1.0 and 1.05 for the
twelve month period ended December 31, 2005, and 1.10 to 1.20 for the
twelve-month period ending on the last day of each calendar quarter
thereafter;
- Net Worth. Stockholders' equity adjusted to exclude certain non-cash
write-offs must not be less than negative $17,200,000 for July 31,
2004, negative $17,500,000 from August 31, 2004 through March 31, 2005,
negative $17,300,000 from April 30, 2005, through May 31, 2005,
negative $17,000,000 from June 30, 2005 through August 31, 2005,
negative $16,500,000 from September 30, 2005, through November 30,
2005, negative $16,000,000 at December 31, 2005, and negative
$15,000,000 at all times thereafter;
- EBITDA. Must be not less than $12,500,000 for the twelve-month period
ended September 30, 2004, $13,000,000 for the twelve-month period ended
December 31, 2004; $14,000,000 for the twelve-month period ended March
31, 2005, $15,000,000 for the twelve-month period ended June 30, 2005,
and $16,000,000 for the twelve-month period ended September 30, 2005,
and for each twelve-month period ending on the last day of the month
thereafter. In addition, EBITDA cannot be less than $6,600,000 for the
seven-month period ended July 31, 2004, cumulating each
-23-
month until the end of 2004, at which time EBITDA for the trailing
twelve-month period must not be less than $13,500,000; and
- Financial Leverage. The ratio of secured debt plus letters of credit to
EBITDA must not exceed 3.50 for each twelve-month period ending on the
last day of the month from July 31, 2004 through September 30, 2004,
3.25 for each twelve-month period ending on the last day of the month
from October 31, 2004 through December 31, 2004, 2.75 for each
twelve-month period ending on the last day of the month from January
31, 2005 through May 31, 2005, and 2.50 for the twelve-month period
ended June 30, 2005, and for each twelve-month period ending on the
last day of the month thereafter.
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 immediately.
On December 18, 2003, we repurchased our $7,500,000 senior, unsecured
note, and all accrued and unpaid interest thereon, for a purchase price of
$5,810,000. The pre-tax gain of $3,252,000 on the repurchase was deferred and
recorded in current liabilities as "Deferred gain on repurchase of debt" because
the agreement governing the repurchase of the note provided that the claim could
be reinstated if certain events occurred prior to April 20, 2004. Because none
of these events occurred prior to April 20, 2004, during the second quarter of
2004 we realized a pre-tax gain of $3,252,000.
We had a net working capital deficit of $7,992,000 at June 30, 2004,
compared to a net working capital deficit of $7,760,000 at December 31, 2003.
The net working capital deficit exists primarily because we are required, under
accounting principles generally accepted in the United States, to classify the
loans outstanding under the revolving line of credit, which totaled $16,901,000
and $12,088,000, at June 30, 2004, and December 31, 2003, respectively, as
current liabilities.
Based on our most recent financial projections, we estimate that, in
addition to cash flow from operations and borrowings under our revolving line of
credit, we will not require any significant new borrowings during 2004 to meet
our working capital and debt service requirements and to fund projected capital
expenditures. If cash flow from operations or availability under existing and
new financing arrangements fall below expectations, we may be forced to delay
certain capital expenditures, reduce certain operating expenses, extend certain
trade accounts payable beyond terms that we believe are customary in the
industries in which we operate, or consider other alternatives designed to
improve our liquidity. Some of these actions could have a material adverse
effect upon our business.
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 insignificant.
At June 30, 2004, we had $39,826,000 of outstanding floating rate debt
at interest rates equal to either LIBOR plus 3 1/4%, LIBOR plus 3 3/4%, the
prime rate plus 1%, the prime rate plus 1 1/2%, the prime rate plus 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.
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At June 30, 2004, we had outstanding $44,205,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 11.9%, of which $158,000
had matured.
We currently estimate that our monthly cash interest expense during the
remaining six months of 2004 will be approximately $623,000 and that a one
percentage point increase or decrease in short-term interest rates would
increase or decrease our monthly interest expense by approximately $31,000.
For further information about our indebtedness, we recommend that you
also read Note 4 to our consolidated financial statements in Part I, Item 1 of
this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
Our Chairman of the Board, President, and Chief Financial Officer, with
the participation of the management of our operating divisions, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2004. Based on that evaluation, our Principal
Executive Officers and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms. We also
reviewed our internal controls, and determined that there have been no changes
in our internal controls or in other factors identified in connection with this
evaluation that have materially affected, or are reasonably likely to materially
affect our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 18,
2004.
The matters voted upon at the Annual Meeting and the results of the
voting on each matter are set forth below:
(1) A proposal to elect six directors (Messrs. William B. Conner,
Warren Delano, Kenneth I. Greenstein, Michael A. Lubin, and
Joseph A. Pardo, and Ms. Elizabeth Ruml).
Mr. Conner:
Votes for Mr. Conner 4,666,711
Votes withheld from Mr. Conner 16,897
Mr. Delano:
Votes for Mr. Delano 4,664,986
Votes withheld from Mr. Delano 18,622
Mr. Greenstein:
Votes for Mr. Greenstein 4,667,315
Votes withheld from Mr. Greenstein 16,293
Mr. Lubin:
Votes for Mr. Lubin 4,665,304
Votes withheld from Mr. Lubin 18,304
Mr. Pardo:
Votes for Mr. Pardo 4,666,829
Votes withheld from Mr. Pardo 16,779
Ms. Ruml:
Votes for Ms. Ruml 4,668,333
Votes withheld from Ms. Ruml 15,275
(2) The ratification of Ernst & Young LLP as independent auditors
of the Company for the year ending December 31, 2004.
Votes for Ernst & Young LLP 4,671,059
Votes against Ernst & Young LLP 3,077
Abstentions 9,472
There were no broker non-votes in respect of the foregoing matters.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Amendment Agreement dated as of August 16, 2004, between
Lexington Precision Corporation (LPC) and Congress Financial
Corporation
10-2 Amendment Agreement dated as of August 13, 2004, between LPC
and Ableco Finance LLC
31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Michael A.
Lubin, Chairman of the Board and Co-Principal Officer of the
registrant.
31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Warren
Delano, President and Co-Principal Officer of the registrant.
31-3 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Dennis J.
Welhouse, Chief Financial Officer and Principal Financial
Officer of the registrant.
32-1 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.
32-2 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.
32-3 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 April 16, 2004, we filed a report on Form 8-K that included a
press release dated April 14, 2004, announcing financial results
for the quarter and year ended December 31, 2003.
On May 18, 2004, we filed a report on Form 8-K that included a
press release dated May 17, 2004, announcing financial results for
the quarter ended March 31, 2004.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
August 17, 2004 By: /s/ Michael A. Lubin
- --------------- -----------------------------------
Date Michael A. Lubin
Chairman of the Board
August 17, 2004 By: /s/ Warren Delano
- --------------- --------------------------
Date Warren Delano
President
August 17, 2004 By: /s/ Dennis J. Welhouse
- --------------- --------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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