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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2005
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.)
40 EAST 52ND STREET, NEW YORK, NY 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 319-4657
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.25 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in rule 405 of the Securities Act: Yes No X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark if the registrant is a non-accelerated filer (as defined
in rule 12b-2 of the Act). Yes X No
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
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The aggregate market value of the registrant's common stock, $0.25 par value per
share, held by non-affiliates of the registrant, as of June 30, 2006, was
approximately $1,081,000.
The number of shares of common stock outstanding as of March 17, 2006, was
4,981,767.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be issued in connection with its
2006 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III. Only those portions of the Proxy Statement which are
specifically incorporated by reference are deemed filed as part of this report
on Form 10-K.
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LEXINGTON PRECISION CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business...................................................... 1
Item 1A. Risk Factors.................................................. 5
Item 2. Properties.................................................... 8
Item 3. Legal Proceedings............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........... 8
PART II
Item 5. Market for Our Common Stock and Other Stockholder Matters..... 9
Item 6. Selected Financial Data....................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 29
Item 8. Financial Statements and Supplementary Data................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 64
Item 9A. Controls and Procedures....................................... 64
Item 9B. Other Information............................................. 64
PART III
Item 10. Directors and Executive Officers of the Registrant............ 65
Item 11. Executive Compensation........................................ 65
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................... 65
Item 13. Certain Relationships and Related Transactions................ 65
Item 14. Principal Accountant Fees and Services........................ 65
PART IV
Item 15. Financial Statements, Financial Statement Schedules, Exhibits,
and Reports on Form 8-K....................................... 66
PART I
ITEM 1. BUSINESS
Our company was incorporated in Delaware in 1966. Substantially all of our
business is conducted in the continental United States. Through our two
operating segments, the Rubber Group and the Metals Group, we manufacture rubber
and metal components that are sold to other manufacturers.
In 2005, net sales of the Rubber Group totaled $84,884,000, or 87.7% of our
consolidated net sales. The Rubber Group manufactures connector seals used in
automotive wiring systems and insulators used in automotive ignition wire sets.
We believe that we are the leading manufacturer of these types of components in
North America. During 2005, sales to automotive customers represented 86.8% of
the total net sales of the Rubber Group. The Rubber Group also manufactures
molded rubber components used in a variety of medical devices, such as
intravenous feeding systems and syringes.
In 2005, net sales from continuing operations of the Metals Group totaled
$11,958,000, or 12.3% of our consolidated net sales. The Metals Group
manufactures machined components from aluminum, brass, and steel bars. During
2005, sales to automotive customers represented 82.4% of the total net sales of
the Metals Group.
Financial data and other information about our operating segments can be
found in Note 8, "Segments," in the notes to our consolidated financial
statements in Part II, Item 8.
DISCONTINUED OPERATIONS
During the third quarter of 2004, we committed to a plan to discontinue the
operations of the die casting division, which had been one of two operating
units within our Metals Group segment. During 2005, we sold or liquidated all of
the assets of the division except its land and buildings. In this Form 10-K, the
die casting division is reported as discontinued operations. For more
information about the closing of the die casting division, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7, and to Note 13, "Discontinued Operations," in
the notes to our consolidated financial statements in Part II, Item 8. Unless
otherwise indicated, the data set forth in this Form 10-K relates solely to our
continuing operations.
PRINCIPAL END-USES FOR OUR PRODUCTS
The following table summarizes our net sales during 2005, 2004, and 2003,
by the type of product in which our components were utilized (dollar amounts in
thousands):
YEARS ENDED DECEMBER 31
-----------------------------------------------------
2005 2004 2003
--------------- ---------------- ----------------
Automobiles and trucks $83,577 86.3% $ 97,902 88.7% $ 97,146 85.8%
Medical devices 9,989 10.3 10,568 9.6 12,334 10.9
Other 3,276 3.4 1,883 1.7 3,751 3.3
------- ----- -------- ----- -------- -----
$96,842 100.0% $110,353 100.0% $113,231 100.0%
======= ===== ======== ===== ======== =====
-1-
The following table summarizes net sales of the Rubber Group and the Metals
Group during 2005, 2004, and 2003, by the type of product in which each
segment's components were utilized (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
----------------------------------------------------
2005 2004 2003
--------------- --------------- ----------------
Rubber Group:
Automobiles and trucks $73,721 86.8% $88,764 89.2% $ 89,642 86.8%
Medical devices 9,989 11.8 10,568 10.6 12,334 11.9
Other 1,174 1.4 233 0.2 1,267 1.3
------- ----- ------- ----- -------- -----
$84,884 100.0% $99,565 100.0% $103,243 100.0%
======= ===== ======= ===== ======== =====
Metals Group:
Automobiles and trucks $ 9,856 82.4% $ 9,138 84.7% $ 7,504 75.1%
Industrial equipment 699 5.8 313 2.9 428 4.3
Other 1,403 11.8 1,337 12.4 2,056 20.6
------- ----- ------- ----- -------- -----
$11,958 100.0% $10,788 100.0% $ 9,988 100.0%
======= ===== ======= ===== ======== =====
MAJOR CUSTOMERS
Our largest customer is Delphi Corporation. During 2005, 2004, and 2003,
our net sales to Delphi totaled $17,426,000, $23,413,000, and $24,591,000, which
represented 18.0%, 21.2%, and 21.7%, respectively, of our consolidated net sales
and 20.5%, 23.5%, and 23.8%, respectively, of the Rubber Group's net sales.
During 2005, 63.0% of the products we sold to Delphi were covered by a supply
contract that expires on December 31, 2009, and 6.2% were covered by a supply
agreement that expires on December 31, 2008. For more information about our
business relationship with Delphi, please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7.
During 2005, 2004, and 2003, net sales to General Cable Corporation totaled
$10,971,000, $11,636,000, $11,802,000, which represented 11.3%, 10.5%, and
10.4%, respectively, of our consolidated net sales and 12.9%, 11.7%, and 11.4%,
respectively, of the Rubber Group's net sales. No other customer accounted for
more than 10% of our consolidated net sales during 2005, 2004, or 2003. Loss of
a significant amount of business from Delphi, General Cable, or any of our other
large customers could have a material adverse effect on our results of
operations and financial condition if that business were not replaced by
additional business from existing or new customers.
In October 2005, Delphi filed for protection from its creditors under
chapter 11 of the federal bankruptcy code. The unpaid pre-petition accounts
receivable from Delphi total approximately $300,000. We believe that
substantially all of these claims qualify as reclamation claims that should be
accorded priority ahead of general unsecured pre-petition claims. We believe
that our reserve for uncollectible accounts receivable is adequate; however, our
results of operations and financial condition could be materially adversely
affected if any of our other large customers experience financial difficulties
that cause them to delay, or fail to make, payments for goods sold to them.
MARKETING AND SALES
Our marketing and sales effort is carried out by management personnel and
account managers.
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RAW MATERIALS
Our principal raw materials are silicone and organic rubber compounds and
aluminum, brass, and steel bars. We generally have had access to adequate
quantities of each of our principal raw materials from a number of suppliers.
Over the past two years, we have experienced tightening supplies and increasing
prices for most of our principal raw materials. There may be further increases
in the prices of these commodities.
We have generally been successful in passing through to our customers
increases in the prices of raw materials although price increases to our
customers have typically lagged behind the price increases from our suppliers.
We attempt to minimize the effect of price increases in raw materials by seeking
other sources of supply, substituting alternative materials, and reformulating
compounds.
To date, we have not experienced any disruption in our production as a
result of raw material shortages; however, we cannot assure you that we will not
experience such disruptions in the future.
PATENTS AND TRADEMARKS
We do not currently hold any patents, trademarks, or licenses that we
consider to be material to the successful operation of our business.
SEASONAL VARIATIONS
Our business generally is not subject to significant seasonal variation;
however, we generally experience decreased sales during the third calendar
quarter of each year due to shutdowns of our customers' plants in July as a
result of vacations and model-year changeovers and during the fourth calendar
quarter of each year due to shutdowns of our customers' plants for vacations and
holidays in December.
BACKLOG
Sales of our products are made pursuant to a variety of arrangements and
practices. Our customers regularly revise release schedules to correspond to
their own production requirements. We believe that the aggregate value of
scheduled releases outstanding on our books at any time cannot be considered
firm backlog because those releases may be revised at any time. We also believe
that increases or decreases in the aggregate value of scheduled releases are not
necessarily indicative of any trend in our net sales.
COMPETITION
The markets we compete in are characterized by intense price competition
and increasing customer requirements for quality and service. We compete for
business primarily on the basis of quality, service, engineering capability, and
price. We encounter substantial competition from a large number of domestic and
foreign-based manufacturing companies. Our competitors range from small and
medium-sized specialized firms to large diversified companies, many of which
have resources substantially greater than ours. Additionally, some of our
customers have internal manufacturing operations that compete with us.
-3-
RESEARCH AND DEVELOPMENT
During 2005, 2004, and 2003, we spent approximately $931,000, $991,000, and
$1,168,000, respectively, on our research and development activities, which are
primarily related to improving our manufacturing processes in order to reduce
the cost and increase the quality of our products.
PRODUCT LIABILITY RISKS
We are subject to potential product liability risks inherent in the
manufacture and sale of components. Although there currently are no product
liability claims against us, we cannot assure you that any future claims will
not have a material adverse effect upon our results of operations or financial
condition. Although we maintain insurance coverage for product liability, we
cannot assure you that, in the event of a claim, the insurance coverage would
apply or that, in the event of an award arising out of a claim, the amount of
any applicable insurance coverage would be sufficient to satisfy the award.
ENVIRONMENTAL COMPLIANCE
Our operations are subject to numerous laws and regulations controlling the
discharge of materials into the environment or otherwise relating to the
protection of the environment. Although we make expenditures relating to the
protection of the environment, compliance with environmental laws and
regulations has not had a significant impact on our capital spending
requirements, earnings, or competitive position. We cannot assure you that
changes in environmental laws and regulations, or in the interpretation or
enforcement of those laws and regulations, will not require material
expenditures in the future.
EMPLOYEES
We believe that our employee relations are generally good. The following
table shows the number of employees at December 31, 2005, 2004, and 2003.
DECEMBER 31
--------------------
2005 2004 2003
---- ----- -----
Rubber Group 685 863 904
Metals Group 107 108 98
Corporate Office 5 7 8
--- --- -----
797 978 1,010
=== === =====
At December 31, 2005, 2004 and 2003, employees at the Rubber Group included
321, 340, and 322 hourly workers at two plant locations that were subject to
collective bargaining agreements, which expire on October 21, 2007, and December
11, 2008, respectively.
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
We do not make available through a website our annual report on Form 10-K,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, or any
amendments to those reports. We will furnish free of charge, upon written
request to our President at 40 East 52nd Street, New York, NY 10022, a paper
copy of the reports that we file with the Securities and Exchange Commission
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(the "Commission"). The reports have been filed electronically with the
Commission and are accessible on the Commission's website at www.sec.gov.
ITEM 1A. RISK FACTORS
FAILURE TO REFINANCE OUR DEBT MAY RESULT IN OUR REORGANIZATION.
Our revolving line of credit matures on June 30, 2006, and it will
automatically be extended for one year unless we are notified by the lender at
least 60 days prior to June 30, 2006, that the line of credit will not be
extended. If the line of credit is not extended, the equipment term loans and
the real estate term loan, which have maturity dates of June 30, 2007, will
instead mature on June 30, 2006.
We have received proposals from a number of lenders, including our existing
lenders, for new secured financing to replace our existing secured loans. We
have chosen to move forward with two new, prospective lenders who are completing
their due diligence investigation and preparing documentation relating to the
proposed refinancing. Accordingly, the prospective lenders have not yet provided
us with binding commitments for the proposed refinancing. Although we cannot
assure you that we will be able to complete a refinancing of our secured loans,
we believe that we will be able to refinance our secured loans on or before June
30, 2006. If we are unable to complete the refinancing of our secured loans on
or before June 30, 2006, we may be forced to seek relief from our creditors
under chapter 11 of the federal bankruptcy code.
WE ARE DEPENDENT ON A FEW MAJOR CUSTOMERS.
In 2005, the three largest customers of the Rubber Group, accounted for
42.9% of the Rubber Group's net sales, and the three largest customers of the
Metals Group accounted for 61.1% of the Metals Group's net sales. Loss of a
significant amount of business from any of our large customers would have a
material adverse effect on our results of operations and financial condition if
such business were not substantially replaced by additional business from
existing or new customers. Additionally, our results of operations and financial
condition could be materially adversely affected if any of our large customers
experience financial difficulties that cause them to delay, or fail to make,
payments for goods sold to them.
WE ARE HIGHLY DEPENDENT ON THE AUTOMOTIVE INDUSTRY.
Net sales to customers in the automotive industry represented approximately
86.3%, 88.7%, and 85.8% of our consolidated net sales in 2005, 2004, and 2003,
respectively. Approximately 48.9% of our net sales in 2005 were to companies
that supply electrical wiring and ignition systems to manufacturers of new cars
and trucks. Sales to these customers are highly sensitive to the rate of sales
of new vehicles. A decline in new vehicle sales could have an adverse effect on
our results of operations and financial condition.
WE ENCOUNTER SIGNIFICANT COMPETITION.
The markets we compete in are characterized by intense price competition
and increasing customer requirements for quality and service. We compete for
business primarily on the basis of quality, service, engineering capability, and
price. We encounter substantial competition from a large number of domestic and
foreign-based manufacturing companies. Our competitors range from small and
medium-sized specialized firms to large diversified companies, many of which
have resources substantially greater than ours. Additionally, some of our
customers have internal manufacturing operations that compete with us.
-5-
OUR HIGH LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
FLEXIBILITY.
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.
WE MAY NOT BE ABLE TO COMPLY WITH OUR FINANCIAL COVENANTS.
We cannot assure you that we will be able to remain in compliance with our
financial covenants during 2006 or beyond. A number of factors may affect our
ability to comply with all of our loan covenants, including our ability to
continue to improve operations and the possible occurrence of any of the risks
and uncertainties set forth under this Item 1A, the occurrence of any of which
may cause our actual results or performance to be materially different from our
projected results. 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,
which could force us to seek relief from our creditors under chapter 11 of the
federal bankruptcy code.
PART OF OUR LABOR FORCE IS UNIONIZED.
At December 31, 2005, employees at the Rubber Group included a total of 321
hourly workers at two plant locations that were subject to collective bargaining
agreements, which expire on October 21, 2007, and December 11, 2008,
respectively. We cannot assure you that our existing union contracts will be
successfully renegotiated upon their expirations. If we were to experience a
strike or work slowdown, it would have a material adverse effect on our results
of operations and financial condition.
WE ARE SUBJECT TO LABOR INTERRUPTIONS AT MAJOR CUSTOMERS.
Delphi Corporation and the three largest domestic automobile manufacturers
have union contracts with various unions. Strikes or work slowdowns at Delphi or
at any of the three largest domestic automobile manufacturers could have a
material adverse effect on our results of operations and financial condition.
WE ARE VULNERABLE TO FLUCTUATIONS IN THE COST AND SUPPLY OF RAW MATERIALS.
We purchase raw materials from various suppliers. While all of our raw
materials are available from a number of suppliers, commodity raw materials are
subject to fluctuations in price. Because raw materials in the aggregate
constitute approximately 36% of our cost of goods sold, these fluctuations could
have a material adverse effect on our results of operations. We have generally
been successful in passing through to our customers increases in the prices of
raw materials although price increases to our customers have typically lagged
behind the price increases from our suppliers. We attempt to minimize the effect
of price increases in raw materials by seeking other sources of supply,
substituting alternative materials, and reformulating compounds.
To date, we have not experienced any disruption in our production as a
result of raw material shortages; however, we cannot assure you that we will not
experience such disruptions in the future.
WE ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND REGULATIONS.
Our past and present business operations and our ownership and operation of
real property are subject to extensive and changing environmental laws and
regulations pertaining to the discharge of
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materials into the environment, the handling and disposal of wastes, including
solid and hazardous wastes, and the protection of the environment. Some of our
existing and former locations use and have used substances and generate or have
generated or disposed of wastes that are or may be considered hazardous or
otherwise are subject to applicable environmental requirements. In addition, we
utilize storage tanks and bulk containers for petrochemicals and other
substances at our facilities. Based on our experience to date, we do not expect
environmental claims or the costs of compliance with federal, state, and local,
environmental laws and regulations to have a material impact on our capital
expenditures, operating results, or financial condition. We cannot assure you,
however, that the discovery of presently unknown environmental conditions,
changes in environmental laws and regulations or their interpretation, or other
unanticipated events will not give rise to expenditures or liabilities that may
have a material adverse effect on our results of operations and financial
condition.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND LITIGATION.
Our business exposes us to potential product liability litigation that is
inherent to the manufacture, marketing, and use of the components that we
produce. Many of the components manufactured and sold by us are designed to be
used for long periods of time. Component failures, manufacturing flaws, design
defects, or inadequate disclosure of product-related risks with respect to our
components or the products in which they are incorporated could result in
product failure or an unsafe condition or injury to, or death of, consumers. The
occurrence of such a problem could result in product liability claims or a
recall of, or safety alert relating to, our components or the products in which
they are incorporated. We cannot assure you that the product liability insurance
maintained by us would be available or sufficient to satisfy all claims against
us or that we will be able to obtain insurance in the future at satisfactory
rates, in adequate amounts, or at all. Future product liability claims,
regardless of their ultimate outcome, or product recalls could result in costly
litigation and could have a material adverse effect on our results of operations
and financial condition and could damage our reputation and limit our ability to
attract and retain customers.
WE ARE SUBJECT TO INTEREST RATE CHANGES.
At December 31, 2005, we had $25,147,000 of outstanding floating rate debt
at interest rates equal to either LIBOR plus 3 1/4%, the prime rate plus 1%, the
prime rate plus 4 3/4%, or the prime rate plus 5%. 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.
-7-
ITEM 2. PROPERTIES
The following table shows the locations and square footage of our
manufacturing facilities at December 31, 2005:
SQUARE
FEET
-------
Rubber Group:
Jasper, Georgia 100,000
North Canton, Ohio 42,000
Vienna, Ohio 64,000
Rock Hill, South Carolina 61,000
-------
Total Rubber Group 267,000
Metals Group: Rochester, New York 60,000
-------
Total Company 327,000
=======
All of our facilities are encumbered by mortgages. All of our plants are
general manufacturing facilities suitable for our operations. We believe that
our facilities are adequate to meet our current operating needs.
In May 2005, we sold our 64,000 square foot manufacturing facility in Casa
Grande, Arizona, and received net proceeds of $2,636,000, and, in October 2005,
we sold our 85,000 square foot manufacturing facility in LaGrange, Georgia, and
received net proceeds of $1,882,000.
We occupy, in the aggregate, 5,000 square feet of office space for
corporate executive and administrative purposes. We lease an office in
Cleveland, Ohio, and reimburse an affiliate for the cost of leasing an office in
New York City.
The manufacturing facility that was utilized by our discontinued die
casting division is located in Lakewood, New York, has 93,000 square feet of
space, and is available for sale. The facility is leased to a third party for
$150,000 per annum. The lessee has an option to purchase the facility for
$1,500,000. We also own a 10,000 square foot building in Lakewood, New York,
that is vacant and available for sale.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of our business activities.
It is our policy to record accruals for claims and legal proceedings when we
consider a loss to be probable and we can reasonably estimate the amount of that
loss. The various actions to which we are or may in the future be a party are at
various stages of completion. Although we cannot assure you as to the outcome of
existing or potential litigation, we currently believe, based upon the
information currently available to us, that the outcome of those actions will
not have a material adverse effect upon our results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2005.
-8-
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND OTHER STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market. At March 17,
2006, there were approximately 724 holders of record of our common stock.
Trading in shares of our common stock is limited. During 2005 and 2004, trading
data for our stock was available on the OTC Bulletin Board operated by the
National Association of Securities Dealers, Inc. (NASD). The following table
sets forth prices at which transactions in our common stock were reported on the
OTC Bulletin Board. Additional trading data can be found at the NASD website,
www.nasdaq.com.
YEARS ENDED DECEMBER 31
-----------------------------
2005 2004
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First quarter $0.69 $0.35 $0.85 $0.61
Second quarter $0.85 $0.42 $0.74 $0.61
Third quarter $0.90 $0.72 $0.68 $0.36
Fourth quarter $0.79 $0.70 $0.70 $0.36
We are not able to determine whether retail markups, markdowns, or
commissions were included in the above prices. We believe that ten brokerage
firms currently make a market in our common stock, although both bid and asked
quotations may be limited.
We have not paid dividends on our common stock since 1979, and we have no
current plans to reinstate the payment of dividends. In addition, agreements
defining the rights of the holders of our debt currently restrict us from paying
cash dividends on our common stock. We are current in the payment of dividends
on our $8 Cumulative Convertible Preferred Stock, Series B (the "Series B
Preferred Stock"); however, we are in arrears with respect to the redemption of
2,700 shares of the Series B Preferred Stock for an aggregate redemption price
of $540,000, representing the scheduled redemptions for 2000 through 2005.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about our equity compensation
plans as of December 31, 2005 (share amounts in thousands):
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE PRICE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF OF OUTSTANDING AVAILABLE FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, WARRANTS OPTIONS, UNDER EQUITY COMPENSATION
AND RIGHTS WARRANTS AND RIGHTS PLANS
----------------------------- ------------------------------- ------------------------------
Equity compensation plans
approved by security holders -- $NA 400
Equity compensation plans not
approved by security holders -- NA --
--- --- ---
Total -- $NA 400
=== === ===
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data,
including the reconciliation of income or loss from continuing operations to
earnings from continuing operations before interest, taxes, depreciation,
amortization, and other non-operating items of income or expense ("EBITDA"), for
each of the years in the five-year period ended December 31, 2005 (dollar
amounts in thousands, except per share amounts). The financial data has been
derived from our consolidated financial statements, which have been audited by
Ernst & Young LLP, an independent registered public accounting firm. This
information is not necessarily indicative of the results of future operations
and should be read in conjunction with, and is qualified by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7, and our consolidated financial statements in Part II, Item 8.
YEARS ENDED DECEMBER 31
---------------------------------------------------
2005 2004 2003 2002 2001
------- -------- -------- -------- --------
SUMMARY OF OPERATIONS:
Net sales $96,842 $110,353 $113,231 $112,363 $113,377
Cost of sales 87,369 98,304 99,773 97,571 96,880
------- -------- -------- -------- --------
Gross profit 9,473 12,049 13,458 14,792 16,497
Selling and administrative expenses 6,747 7,383 7,904 7,981 8,863
Gain on sale of assets held for sale (1,671)
Impairment of goodwill -- -- 47 -- --
Impairment of long-lived assets -- -- -- -- 2,047
Plant closure costs -- -- -- 609 --
Income from insurance company demutualization -- -- -- -- (1,274)
------- -------- -------- -------- --------
Income from operations 4,397 4,666 5,507 6,202 6,861
Other income (expense):
Interest expense (9,200) (8,662) (6,980) (7,158) (8,445)
Gain on sale of securities -- -- -- 248 --
Gain on repurchase of debt 77 8,598 -- -- --
------- -------- -------- -------- --------
Income (loss) from continuing operations
before income tax (4,726) 4,602 (1,473) (708) (1,584)
Income tax provision (benefit) (299) (196) 76 (538) 80
------- -------- -------- -------- --------
Income (loss) from continuing operations (4,427) 4,798 (1,549) (170) (1,664)
Income (loss) from discontinued operations
net of income taxes of $334 in 2005 644 (3,208) (4,653) (1,397) (487)
Cumulative effect of change in accounting
principle -- -- (247) -- --
------- -------- -------- -------- --------
Net income (loss) $(3,783) $ 1,590 $ (6,449) $ (1,567) $ (2,151)
======= ======== ======== ======== ========
Net income (loss) per diluted common share $ (0.77) $ 0.32 $ (1.36) $ (0.32) $ (0.45)
======= ======== ======== ======== ========
(continued on next page)
-10-
YEARS ENDED DECEMBER 31
-----------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
OTHER DATA (CONTINUING OPERATIONS):
Net cash provided by operating activities of
continuing operations $ 7,142 $ 7,068 $13,470 $14,766 $15,915
======= ======= ======= ======= =======
Reconciliation of income (loss) from continuing
operations to EBITDA from continuing
operations:
Income (loss) from continuing operations $(4,427) $ 4,798 $(1,549) $ (170) $(1,664)
Adjustments:
Depreciation and amortization included
in income from continuing operations 8,374 8,444 8,955 10,247 11,583
Gain on repurchase of debt (77) (8,598) -- -- --
Interest expense 9,200 8,662 6,980 7,158 8,445
Gain on sale of securities -- -- -- (248) --
Income tax provision (benefit) (299) (196) 76 (538) 80
------- ------- ------- ------- -------
EBITDA from continuing operations (1) $12,771 $13,110 $14,462 $16,449 $18,444
======= ======= ======= ======= =======
Capital expenditures (2) $ 3,330 $ 6,057 $ 5,686 $ 4,013 $ 5,420
DECEMBER 31
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
FINANCIAL POSITION (3):
Current assets $ 22,396 $ 28,907 $ 30,101 $ 32,991 $ 34,146
Current liabilities 41,092 35,777 37,687 101,061 107,074
-------- -------- -------- -------- --------
Net working capital deficit $(18,696) $ (6,870) $ (7,586) $(68,070) $(72,928)
======== ======== ======== ======== ========
Total assets $ 62,343 $ 78,377 $ 83,687 $ 92,145 $ 99,877
Long-term debt, excluding current portion $ 41,545 $ 58,949 $ 63,681 $ 1,117 $ 2,000
Total stockholders' deficit $(21,656) $(17,875) $(19,492) $(13,199) $(11,659)
(1) EBITDA is not a measure of performance under U.S. generally accepted
accounting principles 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 U.S. generally accepted accounting principles.
We have presented EBITDA here and elsewhere in this Form 10-K because this
measure is used by investors, as well as our 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 is not the same definition of EBITDA
used to calculate compliance with the financial covenants that are
incorporated in our secured loan agreements and may not be the same as the
definition of EBITDA used by other companies.
(2) Includes equipment purchased under capital leases and with seller-provided
financing.
(3) Data includes assets and liabilities of discontinued operations.
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-K 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:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- changes in the cost of raw materials,
- strength or weakness in the North American automotive market,
- financial difficulties encountered by our customers,
- the filing by one or more of our customers for protection under
the federal bankruptcy code,
- changes in the competitive environment,
- changes in interest rates,
- labor interruptions at our facilities or at our customers'
facilities,
- unanticipated operating results,
- changes in economic conditions, and
- our ability, or inability, to obtain financing on reasonable
terms.
For additional discussion about risks and uncertainties that may affect our
business, please refer to "Risk Factors" in Part I, Item 1A.
Our revolving line of credit matures on June 30, 2006, and it will
automatically be extended for one year unless we are notified by the lender at
least 60 days prior to June 30 that the line of credit will not be extended. If
the line of credit is not extended, the equipment term loans and the real estate
term loan, which have maturity dates of June 30, 2007, will instead mature on
June 30, 2006.
We have received proposals from a number of lenders, including our existing
lenders, for new secured financing to replace our existing secured loans. We
have chosen to move forward with two new, prospective lenders who are completing
their due diligence investigation and preparing documentation relating to the
proposed refinancing. Accordingly, the prospective lenders have not yet provided
us with binding commitments for the proposed refinancing. Although we cannot
assure you that we will be able
-12-
to complete a refinancing of our secured loans, we believe that we will be able
to refinance our secured loans on or before June 30, 2006. If we are unable to
complete the refinancing of our secured loans on or before June 30, 2006, we may
be forced to seek relief from our creditors under chapter 11 of the federal
bankruptcy code.
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 succeeding period. 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.
RESULTS OF OPERATIONS -- COMPARISON OF 2005, 2004, AND 2003
Unless otherwise indicated, the data set forth below in this Item 7 relate
solely to our continuing operations.
The following table sets forth our consolidated operating results for 2005,
2004, and 2003 and the reconciliation of income from operations to earnings
before interest, taxes, depreciation, and amortization ("EBITDA") for those
periods (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------------------------------------
2005 2004 2003
--------------- ---------------- ----------------
Net sales $96,842 100.0% $110,353 100.0% $113,231 100.0%
Cost of sales 87,369 90.2 98,304 89.1 99,773 88.1
------- ----- -------- ----- -------- -----
Gross profit 9,473 9.8 12,049 10.9 13,458 11.9
Selling and administrative expenses 6,747 7.0 7,383 6.7 7,904 7.0
Gain on sale of assets held for sale 1,671 1.7 -- -- -- --
Impairment of goodwill -- -- -- -- 47 --
------- ----- -------- ----- -------- -----
Income from operations 4,397 4.5 4,666 4.2 5,507 4.9
Add back: depreciation and amortization (1) 8,374 8.7 8,444 7.7 8,955 7.9
------- ----- -------- ----- -------- -----
EBITDA (2) $12,771 13.2% $ 13,110 11.9% $ 14,462 12.8%
======= ===== ======== ===== ======== =====
Net cash provided by operating activities
of continuing operations (3) $ 7,142 7.4% $ 7,068 6.3% $ 13,470 11.9%
======= ===== ======== ===== ======== =====
(continued on next page)
-13-
(1) Does not include amortization of deferred financing expenses, which totaled
$1,315,000, $1,098,000, and $610,000, in 2005, 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 U.S. generally accepted
accounting principles 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 U.S. generally accepted accounting principles.
We have presented EBITDA here and elsewhere in this Form 10-K 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 service
debt, and because it is used by our lenders in setting financial covenants.
Our definition of EBITDA is not the same definition of EBITDA used to
calculate compliance with the financial covenants that are incorporated in
our secured loan agreements and may not be the same as the definition of
EBITDA used by other companies.
(3) The calculation of net cash provided by operating activities is detailed in
the consolidated statement of cash flows that is part of our consolidated
financial statements in Part II, Item 8.
Our net sales for 2005 were $96,842,000, compared to net sales of
$110,353,000 for 2004, a decrease of $13,511,000, or 12.2%. The decrease in net
sales was principally a result of decreased net sales of rubber components,
offset, in part, by increased net sales of metal components. EBITDA for 2005 was
$12,771,000, or 13.2% of net sales, compared to EBITDA of $13,110,000, or 11.9%
of net sales, for 2004. The change in EBITDA reflected a $2,534,000 reduction in
EBITDA at our Rubber Group, offset by a $2,135,000 increase in EBITDA at our
Metals Group. In 2005, EBITDA of the Metals Group included a $1,100,000 gain on
the sale of assets.
Net cash provided by our operating activities during 2005 totaled
$7,142,000, compared to $7,068,000 for 2004. For more information about the net
cash provided by our operating activities, please refer to the consolidated
statements of cash flows in Part II, Item 8, and to our discussion of operating
activities under the caption "Liquidity and Capital Resources" in this Part II,
Item 7.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for
2005, 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 could 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. Net sales to
Delphi Packard Electric Systems, a business unit of Delphi Corporation, of
connector seals for automotive wire harnesses totaled $11,527,000, $19,802,000,
and $20,227,000 during 2005, 2004, and 2003, respectively. During 2005, Delphi
Packard in-sourced 34 high-volume connector seals that had been produced by our
connector seals division. The majority of in-sourced parts were taken over by
Delphi Packard on January 1, 2005, although several parts were taken over at
various times during the first half of 2005. Effective January 1, 2005, Delphi
Packard and our connector seals division entered into an agreement pursuant to
which Delphi Packard agreed to purchase from the division 100% of its
requirements through December 31, 2009, for all connector seals not designated
to be in-sourced. Pursuant to the agreement, our connector seals division
received price increases on a majority of the connector seals covered by the new
agreement, which offset a substantial portion of the profit lost due to the
in-sourcing. We have restructured the operations of our connector seals division
to reduce expenses and further mitigate the impact of the
-14-
reduced volume. The restructuring of our connector seals division included the
closing of its LaGrange, Georgia, manufacturing facility and the consolidation
of all connector seal manufacturing at its facility in Vienna, Ohio. We estimate
that during 2005, the net effect of the Delphi Packard in-sourcing and the price
increases on the remaining connector seals reduced net sales by approximately
$4,370,000, but had a negligible effect on income from operations.
The following table sets forth the operating results of the Rubber Group
for 2005, 2004, and 2003 and the reconciliation of the Rubber Group's income
from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------------------------------------
2005 2004 2003
--------------- --------------- ----------------
Net sales $84,884 100.0% $99,565 100.0% $103,243 100.0%
Cost of sales 74,719 88.0 85,457 85.8 88,667 85.9
------- ----- ------- ----- -------- -----
Gross profit 10,165 12.0 14,108 14.2 14,576 14.1
Selling and administrative expenses 3,702 4.4 4,243 4.3 4,550 4.4
Gain on sale of assets held for sale 571 0.7 -- -- -- --
------- ----- ------- ----- -------- -----
Income from operations 7,034 8.3 9,865 9.9 10,026 9.7
Add back: depreciation and amortization 7,226 8.5 6,929 7.0 7,121 6.9
------- ----- ------- ----- -------- -----
EBITDA $14,260 16.8% $16,794 16.9% $ 17,147 16.6%
======= ===== ======= ===== ======== =====
During 2005, net sales of the Rubber Group decreased by $14,681,000, or
14.7%, compared to 2004. The decrease in net sales was primarily due to (1) the
in-sourcing by Delphi Packard of connector seals that were previously
manufactured by us, (2) decreased net sales of connector seals and insulators
for automotive ignition wire sets due to reduced sales to original equipment
customers, (3) reduced sales of medical components, and (4) contractual price
reductions. The factors reducing sales were partially offset by price increases
negotiated with Delphi Packard and certain other customers.
Cost of sales as a percentage of net sales increased to 88.0% of net sales
during 2005, compared to 85.8% of net sales during 2004, primarily due to (1)
the effect of fixed, or partially fixed, manufacturing expenses during a period
of low sales volume, (2) expenses and production inefficiencies resulting from
the closing of the LaGrange, Georgia, facility and the relocation of tooling and
equipment from the LaGrange facility to our connector seals facility in Vienna,
Ohio, (3) containment costs related to a one-time quality issue on a particular
high-volume connector seal, (4) increased prices for raw materials, (5)
significant operating losses at our captive tool making facility, due to a
reduction in new tool orders, (6) one-time consulting expenses totaling
$304,000, (7) higher workers' compensation expense, and (8) higher depreciation
and amortization expense.
Selling and administrative expenses decreased by $541,000, or 12.8%, during
2005 compared to 2004, primarily because of a reduction in payroll expense and
incentive compensation.
-15-
During 2005, we sold our facility in LaGrange, Georgia, which was part of
our connector seals division, for net proceeds of $1,882,000, and recorded a
pre-tax gain on the sale of $571,000. Excluding the gain on the sale of the
LaGrange facility in 2005, during 2005, 2004, and 2003, losses from operations
of the LaGrange facility totaled $1,667,000, $2,061,000, and $1,071,000,
respectively. The loss from operations in 2005 included $633,000 of expenses
related to the closure of the facility.
During 2005, income from operations totaled $7,034,000, a decrease of
$2,831,000, or 28.7%, compared to 2004. Excluding the gain on the sale of assets
held for sale, income from operations during 2005 totaled $6,463,000, or 7.6%,
of net sales. EBITDA for 2005 was $14,260,000, or 16.8% of net sales, compared
to $16,794,000, or 16.9% of net sales, for 2004. Excluding the gain on the
assets held for sale, EBITDA during 2005 totaled $13,689,000, or 16.1% of net
sales.
During 2004, net sales of the Rubber Group decreased by $3,678,000, or
3.6%, compared to 2003. The decrease in net sales was primarily due to (1)
decreased unit sales of insulators for automotive ignition wire sets due to
reduced sales to original equipment customers, (2) reduced sales of medical
components, and (3) price reductions on certain automotive components, partially
offset by increased net sales of connector seals for automotive wiring systems.
Cost of sales as a percentage of net sales remained essentially unchanged
at 85.8% of net sales during 2004, compared to 85.9% of net sales during 2003.
Selling and administrative expenses as a percentage of net sales decreased
during 2004, compared to 2003, primarily because of reduced salary expense.
During 2004, income from operations totaled $9,865,000, a decrease of
$161,000, or 1.6%, compared to 2003. EBITDA for 2004 was $16,794,000, or 16.9%
of net sales, compared to $17,147,000, or 16.6% of net sales, for 2003.
METALS GROUP
During 2004, we committed to a plan to discontinue the operations of our
die casting division, which had been one of two operating units within our
Metals Group segment. During 2005, we sold or liquidated all of the assets of
the division except its land and buildings. The results of operations, assets,
liabilities, and cash flows of the die casting division have been classified as
discontinued operations in our consolidated financial statements for 2005, 2004,
and 2003. Unless otherwise indicated, the data set forth below relate solely to
our continuing operations.
The Metals Group 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 could have a material adverse
effect on the results of operations of the Metals Group and on our company as a
whole.
The three largest customers of the Metals Group accounted for 61.1%, 61.3%,
and 40.3% of the Metals Group's net sales during 2005, 2004, and 2003,
respectively. Loss of a significant amount of business from any of the Metals
Group's large customers would have a material adverse effect upon the Metals
Group and upon our company as a whole if that business were not substantially
replaced by additional business from existing or new customers.
-16-
The following table sets forth the operating results of the Metals Group
for 2005, 2004, and 2003 and the reconciliation of the Metals Group's loss from
operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
Net sales $11,958 100.0% $10,788 100.0% $ 9,988 100.0%
Cost of sales 12,650 105.8 12,847 119.1 11,106 111.2
------- ----- ------- ----- ------- -----
Gross profit (loss) (692) (5.8) (2,059) (19.1) (1,118) (11.2)
Selling and administrative expenses 723 6.0 729 6.8 675 6.8
Impairment of goodwill -- -- -- -- 47 0.4
Gain on sale of assets held for sale 1,100 9.2 -- -- -- --
------- ----- ------- ----- ------- -----
Loss from operations (315) (2.6) (2,788) (25.9) (1,840) (18.4)
Add back: depreciation and amortization 1,138 9.5 1,476 13.7 1,796 18.0
------- ----- ------- ----- ------- -----
EBITDA $ 823 6.9% $(1,312) (12.2)% $ (44) (0.4)%
======= ===== ======= ===== ======= =====
During 2005, net sales increased by $1,170,000, or 10.8%, compared to 2004.
The increase in net sales resulted from the roll-out of new components
previously awarded to us and increased sales of existing components.
Cost of sales as a percentage of net sales decreased to 105.8% of net sales
during 2005 from 119.1% of net sales during 2004, primarily because of (1)
reduced scrap and improved operating efficiencies on new components that we
began producing during 2003 and 2004, (2) increased selling prices on certain
components to compensate us for earlier increases in metal prices, (3) the
effect of increased sales volume on fixed, or partially fixed, manufacturing
expenses, and (4) lower depreciation expense, offset, in part by $195,000 of
one-time consulting expenses in 2005.
During 2005, 2004, and 2003, the Metals Group's operating results included
losses from operations of $87,000, $334,000, and $559,000, respectively, at our
idle facility in Casa Grande, Arizona, primarily to maintain, insure, protect,
and depreciate the facility.
Selling and administrative expenses were essentially unchanged during 2005.
During the second quarter of 2005, we sold our land and building in Casa
Grande, Arizona, for net proceeds of $2,636,000, and we recorded a pre-tax gain
on the sale of $1,100,000.
During 2005, the loss from operations was $315,000, compared to a loss from
operations of $2,788,000 during 2004. Excluding the gain on the sale of assets
held for sale, the loss from operations for 2005 was $1,415,000.
-17-
EBITDA for 2005 was positive $823,000 compared to negative $1,312,000 for
2004. Excluding the gain on the sale of assets held for sale, EBITDA for 2005
was negative $277,000.
During 2004, net sales of the Metals Group increased by $800,000, or 8.0%,
compared to 2003. The increase in net sales resulted from the roll-out of new
business awarded to us during 2003.
Cost of sales as a percentage of net sales increased to 119.1% of net sales
during 2004 from 111.2% of net sales during 2003, primarily because of increased
metal prices that had not yet been passed through to customers, and higher than
anticipated start-up costs on several components that had recently been awarded
to us, offset, in part, by lower depreciation and amortization expenses. During
2004 and 2003, the loss from operations at the Metals Group included losses from
operations of $334,000 and $559,000, respectively, incurred at the Group's idle
facility in Casa Grande, Arizona, primarily to maintain, insure, protect, and
depreciate the facility.
During 2004, the loss from operations was $2,788,000 compared to a loss
from operations of $1,840,000 during 2003. EBITDA for 2004 was negative
$1,312,000, or negative 12.2% of net sales, a decrease of $1,268,000 compared to
2003.
DISCONTINUED OPERATIONS
During 2004, we committed to a plan to discontinue the operations of our
die casting division and initiated a program to sell it. In August 2005, we sold
substantially all of the die casting division's equipment and remaining
inventory and certain other assets for $2,652,000 and recorded a pretax gain of
$568,000. As a result of the sale and in accordance with the provisions of
Financial Accounting Standard No. 144, during the second quarter of 2005, we
increased the fair value of the die casting equipment by $542,000, which equaled
the previously recognized equipment impairment charge recorded when the die
casting division was classified as discontinued operations. The increase in fair
value is included in income from discontinued operations for 2005.
During 2005, we recorded a $230,000 provision for the projected cost of
certain environmental remediation at the die casting division's manufacturing
facility. The provision is included in income from discontinued operations.
-18-
The following table summarizes certain operating data of the die casting
division for 2005, 2004, and 2003 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
--------------------------
2005 2004 2003
------ ------- -------
Net sales $3,381 $ 9,096 $ 8,385
====== ======= =======
Income (loss) from operations before asset impairment
charge, increase in carrying value of assets held for sale,
gain on sale of assets, and impairment of goodwill $ 130 $(1,372) $(1,996)
Impairment of long-lived assets -- (1,595) (2,427)
Increase in carrying value of assets held for sale 542 -- --
Gain on sale of assets 568 -- --
Impairment of goodwill -- -- (161)
------ ------- -------
Income (loss) from discontinued operations 1,240 (2,967) (4,584)
Allocated interest expense 262 241 69
------ ------- -------
Income (loss) from discontinued operations before
income tax taxes 978 (3,208) (4,653)
Income tax provision (1) 334 -- --
------ ------- -------
Income (loss) from discontinued operations $ 644 $(3,208) $(4,653)
====== ======= =======
(1) The income tax provision in 2005 was offset by an income tax benefit
recorded in continuing operations. Income tax benefits in 2004 and 2003
were offset by provisions for valuation allowances.
-19-
The following table sets forth the assets and liabilities of the die
casting division that are included in the Company's consolidated balance sheets
at December 31, 2005 and 2004 (dollar amounts in thousands); the liabilities
reflected in the table do not include debt that is secured by assets of the
division:
DECEMBER 31
---------------
2005 2004
------ ------
ASSETS:
Current assets:
Cash $ 1 $ --
Accounts receivable, net 47 1,056
Inventories, net -- 695
Prepaid expenses and other current assets 206 271
------ ------
Total current assets 254 2,022
Plant and equipment, net 1,474 2,754
------ ------
Total assets $1,728 $4,776
====== ======
LIABILITIES:
Current liabilities:
Accounts payable $ 194 $ 615
Accrued expenses 291 179
------ ------
Total current liabilities $ 485 $ 794
====== ======
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 2005, 2004, and 2003 and the reconciliation of the Corporate Office's
loss from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
Loss from operations $(2,322) $(2,411) $(2,679)
Add back: depreciation and amortization (1) 10 39 38
------- ------- -------
EBITDA $(2,312) $(2,372) $(2,641)
======= ======= =======
(1) Excludes amortization of deferred financing expenses, which totaled
$1,315,000, $1,098,000, and $610,000, in 2005, 2004, and 2003,
respectively, and which is included in interest expense in the consolidated
financial statements.
-20-
Corporate Office expenses were essentially unchanged in 2005, compared to
2004. Corporate office expenses decreased by $268,000 in 2004 compared to 2003,
primarily because of a reduction in legal fees.
INTEREST EXPENSE
During 2005, 2004, and 2003, interest expense (excluding interest expense
allocated to our discontinued operation of $262,000, $241,000 and $69,000,
respectively) totaled $9,200,000, $8,662,000, and $6,980,000, respectively,
which included amortization of deferred financing expenses of $1,315,000,
$1,098,000 and $610,000, respectively. Interest expense increased in 2005 from
2004, due to higher rates on our floating rate indebtedness and increased
amortization of deferred financing charges. Interest expense increased in 2004
from 2003, primarily due to a $10,900,000 increase in the average amount of
interest-bearing debt. The increase resulted primarily from the exchange of our
12% Senior Subordinated Notes for our 12 3/4% Senior Subordinated Notes, which
effectively converted $15,029,000 of accrued interest into interest bearing
debt.
GAIN ON THE REPURCHASE OF DEBT
During 2005 and 2004, we recognized pre-tax gains of $77,000 and
$8,598,000, respectively, on the repurchase of debt.
In April 2005, we repurchased $133,000 principal amount of 12 3/4% Senior
Subordinated Notes together with accrued interest thereon of $97,000, for
$153,000 and recorded a $77,000 pre-tax gain on the repurchase.
In April 2004, we repurchased our $7,500,000 senior, unsecured note
together with accrued interest thereon for $5,810,000 and recorded a $3,252,000
pre-tax gain.
In October 2004, we repurchased $8,264,000 principal amount of our 12%
Senior Subordinated Notes together with accrued interest thereon for $2,892,000.
After the write-off of deferred financing expenses of $192,000, we recorded a
$5,346,000 pre-tax gain on the repurchase.
INCOME TAX PROVISION
The federal income tax benefit recognized by our continuing operations in
2005, results from the recognition of an offsetting amount of federal income tax
expense by the Company's discontinued operations in 2005. Refer to the
discussion in this Part II, Item 7, under the caption titled "Discontinued
Operations." The income tax benefit recorded during 2004, consisted of a credit
for the adjustment of previously recorded income tax liabilities offset, in
part, by a provision for state income taxes. The income tax provisions recorded
during 2003, consisted of state income taxes.
For additional information concerning income taxes and related matters, see
Note 7, "Income Taxes," in the notes to our consolidated financial statements in
Part II, Item 8.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During 2005, operating activities of our continuing operations provided net
cash of $7,142,000. Accounts receivable decreased by $2,621,000 during 2005,
primarily because we reduced the payment terms extended to our largest customer,
Delphi Corporation, and because net sales during November and
-21-
December of 2005 were lower than our net sales during November and December of
2004, largely due to the in-sourcing of certain high-volume connector seals by
Delphi Packard during 2005. Inventories decreased by $1,007,000, primarily
related to the reduction in net sales. Prepaid expenses and other current assets
decreased by $1,151,000, primarily due to the return of certain funds previously
deposited with an insurance carrier. Trade accounts payable decreased by
$700,000, primarily because purchases of materials and services were reduced to
correspond with lower production levels.
Net cash provided by operating activities of our discontinued operations
totaled $1,023,000.
INVESTING ACTIVITIES
During 2005, investing activities of our continuing operations provided net
cash of $683,000, because proceeds from sales of assets held for sale exceeded
capital expenditures. Capital expenditures during 2005 attributable to the
Rubber Group, the Metals Group, and the Corporate Office totaled $3,034,000,
$292,000, and $4,000, respectively, primarily for the purchase of equipment.
Capital expenditures for the Rubber Group, the Metals Group, and the Corporate
Office are currently projected to total $3,557,000, $392,000, and $25,000,
respectively, for the year ending December 31, 2006. At December 31, 2005, we
had approximately $400,000 of unrecorded commitments outstanding to purchase
equipment.
In May 2005, we sold our land and building in Casa Grande, Arizona, and
received net proceeds of $2,636,000, and, in October 2005, we sold our land and
building in LaGrange, Georgia, and received net proceeds of $1,882,000.
During 2005, net cash provided by investing activities of discontinued
operations totaled $2,360,000, which resulted from the sale of substantially all
of the die casting division's equipment.
FINANCING ACTIVITIES
During 2005, our financing activities used $11,212,000 of cash.
During 2005, we made $3,451,000 of scheduled payments on our equipment term
loans and real estate term loan and $8,197,000 of cash interest payments and
paid $452,000 of financing expenses related to new debt and modifications of
existing debt that were capitalized. In addition, during 2005, we used proceeds
from the sale of facilities and equipment to reduce the outstanding balances on
our secured term loans as follows:
- In May 2005, we sold our land and building in Casa Grande, Arizona,
and received net proceeds of $2,636,000, which were applied to reduce
our real estate term loan.
- In August 2005, we sold substantially all of the die casting
division's equipment and remaining inventory and certain other assets
for $2,452,000 in cash and a 10% unsecured promissory note in the
principal amount of $200,000, payable on April 30, 2008. We used
$888,000 of the net proceeds to reduce our equipment term loans. The
balance of the proceeds was used to reduce the loans outstanding under
our revolving line of credit.
- In October 2005, we sold our land and building in LaGrange, Georgia,
and received net proceeds of $1,882,000, which were applied to reduce
our real estate term loan.
-22-
LIQUIDITY
We operate with substantial financial leverage and limited liquidity. Our
aggregate indebtedness as of December 31, 2005, was $67,549,000 compared to
$78,365,000 at December 31, 2004. We finance our operations with cash from
operating activities and a variety of financing arrangements, including
equipment term loans, a real estate term loan, and loans under a revolving line
of credit, which we refer to collectively as our secured loans. The revolving
line of credit is due to expire on June 30, 2006. If the revolving line of
credit is not renewed, all of our secured loans, which aggregated $25,147,000 at
December 31, 2005, will be due and payable on June 30, 2006. As a result, all of
our secured loans are classified as current liabilities in our December 31,
2005, balance sheet.
The loans outstanding under the revolving line of credit are limited to (a)
the lesser of $20,000,000 or 88% of eligible accounts receivable plus 65% of
eligible inventories, less (b) outstanding letters of credit. At December 31,
2005, and December 31, 2004, the aggregate principal amount of loans outstanding
under the revolving line of credit was $11,954,000 and $14,509,000,
respectively.
At December 30, 2005, and December 31, 2004, net availability under the
revolving line of credit totaled $1,186,000 and $1,224,000, respectively. At
March 29, 2006, net availability under the revolving line of credit totaled
$918,000.
We had a net working capital deficit of $18,696,000 at December 31, 2005,
compared to a net working capital deficit of $6,870,000 at December 31, 2004.
The net working capital deficit increased primarily because of the June 30,
2006, potential maturity date of the secured term loans.
The revolving line of credit and the equipment term loans are secured by
first priority liens on substantially all of our assets other than real estate.
The real estate term loan is secured by first priority liens on all of our real
estate and second priority liens on substantially all of our other assets. All
of our secured loans contain cross-default provisions.
Loans under the revolving line of credit bear interest at the prime rate
plus 1% or LIBOR plus 3 1/4%, at our option. The equipment term loans bear
interest at the prime rate plus 4 3/4%. The real estate term loan bears interest
at the prime rate plus 5%, subject to a minimum rate of 9 1/4%, and requires us
to pay an annual fee of $216,000.
The agreements governing our secured loans contain financial covenants that
require us to maintain specified financial ratios as of the end of specified
periods, including minimum levels of fixed charge coverage, net worth, and
EBITDA, and a maximum ratio of secured debt to EBITDA.
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. The covenants contained in our secured loan agreements were amended
on three separate occasions during 2005. 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.
-23-
The financial covenants, which are set forth in detail in the financing
documents, are summarized below.
- Fixed Charge Coverage Ratio. The fixed charge coverage ratio is
calculated by dividing consolidated EBITDA, less unfinanced capital
expenditures, by specified fixed charges and is required to be not
less than 0.65 for the twelve-month period ended December 31, 2005,
and for the twelve months ended on the last day of each calendar
quarter thereafter. At December 31, 2005, our fixed charge coverage
ratio, as defined in the financing documents, was 0.74.
- Net Worth. Stockholders' deficit, plus specified non-cash write-offs,
must not be less than negative $18,500,000 on the last day of each
month. At December 31, 2005, our net worth, as defined in the
financing documents, was negative $17,720,000.
- Consolidated EBITDA. Consolidated EBITDA must be not less than
$11,000,000 for the twelve-month period ended December 31, 2005, and
for the twelve months ending on the last day of each month thereafter.
For the twelve-month period ended December 31, 2005, our consolidated
EBITDA, as defined in the financing documents, was $11,250,000.
- Rubber Group EBITDA. Rubber Group EBITDA must not be less than
$11,000,000 for the twelve months ending on the last day of each
calendar quarter. For the twelve months ended December 31, 2005, our
Rubber Group EBITDA, as defined in the financing documents, was
$11,948,000.
- Leverage Ratio. The ratio of our secured debt at the end of any month,
plus outstanding letters of credit, to our consolidated EBITDA for the
twelve months then ended must not exceed 2.75. At December 31, 2005,
our leverage ratio, as defined in the financing documents, was 2.44.
The secured loan agreements contain covenants that limit our unfinanced
capital expenditures to $6,250,000 per annum and limit the amount of new secured
financing we can incur for the purchase of plant and equipment to $2,500,000 per
annum. We currently believe that this provision will not limit our planned
capital expenditures during 2006. The secured loan agreements contain other
covenants that place restrictions on our business and operations, including
limitations on the sale of all or substantially all of our assets, the purchase
of common stock, the redemption of preferred stock, and the payment of cash
dividends.
A number of factors may affect our ability to continue to comply with all
of our loan covenants, including our ability to continue to improve operations
and the possible occurrence of any of the risks and uncertainties listed in
"Risk Factors" in Part 1, Item 1A, and in the section captioned "Overview" in
this Item 7, the occurrence of any of which may cause our actual results or
performance to be materially different from our projected results. As a result,
we cannot assure you that we will remain in compliance with our financial
covenants during 2006 or beyond. A default may permit our lenders to accelerate
our debt and seek to foreclose on assets that serve as collateral and could give
rise to cross-defaults under our other indebtedness. Any such action could force
us to seek relief from our creditors under chapter 11 of the federal bankruptcy
code.
Our revolving line of credit matures on June 30, 2006, and it will
automatically be extended for one year unless we are notified by the lender at
least 60 days prior to June 30, 2006 that the line of credit will not be
extended. If the line of credit is not extended, the equipment term loans and
the real estate term loan, which have maturity dates of June 30, 2007, will
instead mature on June 30, 2006.
-24-
We have received proposals from a number of lenders, including our existing
lenders, for new secured financing to replace our existing secured loans. The
Company is discussing a refinancing with two new lenders that would result in
the following:
- A new, $17,000,000 revolving line of credit that expires June 30,
2009;
- A new, $20,000,000 secured term loan;
- The repayment of our existing equipment term loans and real estate
term loan, which were outstanding in the aggregate principal amount of
$13,193,000 and $12,281,000, at December 31, 2005, and March 17, 2006,
respectively; and
- The repayment of all loans outstanding under our existing revolving
line of credit.
The prospective lenders are completing their due diligence investigation
and preparing documentation relating to the proposed refinancing. Accordingly,
the prospective lenders have not yet provided us with binding commitments for
the proposed refinancing. Although we cannot assure you that we will be able to
complete a refinancing of our secured loans as outlined above or otherwise, we
believe that we will be able to refinance our secured loans on or before June
30, 2006. If we are unable to complete a refinancing of our secured loans on or
before June 30, 2006, we may be forced to seek relief from our creditors under
chapter 11 of the federal bankruptcy code.
CONTRACTUAL OBLIGATIONS
The following table summarizes our expected cash outflows from financial
contracts and commitments in effect as of December 31, 2005 (dollar amounts in
thousands). We have not included information on recurring purchases of raw
materials for use in our manufacturing operations; those amounts are normally
consistent from year to year and do not represent a long-term commitment. In
addition, assuming that we refinance our secured loans as discussed above, we
currently project that we will make cash interest payments of $7,900,000 during
2006 and believe that amounts due beyond 2006 are not readily determinable.
Contractual commitments also include $2,093,000 of outstanding letters of
credit, which are not reflected in the table.
PAYMENTS DUE BY PERIOD
-------------------------------------------------
2007 & 2009 & MORE THAN
TOTAL 2006 2008 2010 5 YEARS
------- ------- ------- ------- ---------
Equipment term loans $ 8,512 $ 8,512 $ -- $ -- $--
Real estate term loan 4,681 4,681 -- -- --
Subordinated debt 34,524 -- -- 34,524 --
Increasing Rate Note 7,000 -- 7,000 --
Other long-term debt 793 776 17 -- --
Capital lease obligations 85 81 4 -- --
Operating lease obligations 359 195 118 46 --
Equipment purchase obligations 400 400 -- -- --
Fixed interest payments 16,713 5,184 8,753 2,776 --
------- ------- ------- ------- ---
Total $73,067 $19,829 $15,892 $37,346 $--
======= ======= ======= ======= ===
-25-
INFLATION
We generally attempt to pass through to our customers fluctuations in raw
material costs; however, many of our customers will not accept price increases
from us to compensate for increases in labor and overhead expenses that result
from inflation. To offset inflationary increases in costs that we cannot pass
through to our customers and to maintain or improve our operating margins, we
attempt to improve our production efficiencies and manufacturing processes. We
believe that, over time, prices are affected by many factors, but that the price
we can charge our customers is governed by the competitive pricing set by the
marketplace, rather than by increases or decreases in particular components of
our cost.
ENVIRONMENTAL MATTERS
We have been named from time to time as one of numerous potentially
responsible parties or third-party defendants under applicable environmental
laws for restoration costs at waste-disposal sites, and as a defendant or
potential defendant in various other environmental law matters. It is our policy
to record accruals for matters of these types when we deem a loss to be probable
and we can reasonably estimate the amount of that loss. The various actions to
which we are or may in the future be a party are at various stages of
completion. Although we cannot assure you as to the outcome of existing or
potential environmental litigation, based upon the information currently
available to us, we believe that the outcome thereof will not have a material
adverse effect upon our results of operations or financial condition. You will
find information concerning certain other commitments and contingencies
affecting us in Note 10, "Commitments and Contingencies," in the notes to our
consolidated financial statements in Part II, Item 8.
QUARTERLY FINANCIAL DATA
For quarterly financial data please refer to Note 14, "Quarterly Financial
Data," in the notes to our consolidated financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 1, "Summary of
Significant Accounting Policies," in the notes to our consolidated financial
statements in Part II, Item 8. As set forth in Note 1, the preparation of our
consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during each reporting period. Actual
results could differ from those estimates. The significant estimates included in
the preparation of our financial statements are related to valuation of accounts
receivable, inventories, long-lived assets, and goodwill and estimates related
to the determination of liabilities for environmental matters, litigation,
product liability matters, income taxes, and other contingencies.
We believe that the most critical accounting policies inherent in the
preparation of our consolidated financial statements are the following:
VALUATION OF ACCOUNTS RECEIVABLE
We record accounts receivable due from our customers at the time a sale is
recorded in accordance with our revenue recognition policy. We operate primarily
in the domestic automotive market, which has been characterized by intense price
competition and increasing customer requirements for quality and service. These
factors, among others, may have a sudden and adverse effect on the operating
-26-
results and financial condition of our customers, and, in turn, on the
collectibility of our accounts receivable from those customers. We attempt to
mitigate this risk of loss through ongoing evaluations of automotive market
conditions, examinations of financial statements of our customers, and
discussions with management of our customers, as deemed necessary. Provisions
for credit losses are based upon historical experience and such ongoing
evaluations. We generally do not require collateral from our customers to
support the extension of trade credit.
INVENTORY VALUATION
Inventories are valued at the lower of cost (first-in, first-out method) or
market. We evaluate our inventory on a quarterly basis to ensure that it is
properly valued. We record allowances against inventory where appropriate to
provide for losses due to obsolescence, lower of cost or market valuations,
excess quantities on hand, and certain other factors. In doing so, we apply
consistent practices, which include the identification of potentially
unmarketable inventory based on assumptions about future demand and historical
usage rates, specific identification of components that are being replaced with
new generation components, actual margins generated from the sales of our
components, and historical unit sales volumes.
VALUATION OF LONG-LIVED ASSETS
We evaluate for impairment our plant and equipment and other long-term,
amortizable assets when events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. Changes in technology
or in our intended use of these assets, including changes in the primary markets
in which we operate, may cause the original estimated useful lives of these
assets to change and result in the impairment of these assets.
To perform our impairment evaluation, we compare the undiscounted projected
cash flow of an asset or group of assets to the carrying value thereof. If the
projected cash flow is less than the carrying value of the asset or asset group,
we recognize an impairment loss equal to the excess, if any, of the carrying
value of the asset or asset group over its appraised fair value, net of
estimated disposal costs. Although we believe that our estimates of future cash
flows are reasonable, changes in assumptions regarding future unit volumes,
pricing, operating efficiencies, material, labor, and overhead costs, and other
factors could significantly affect our cash flow projections.
VALUATION OF GOODWILL
Tests for impairment of goodwill are performed, using a fair value approach
as of October 1 of each year and at other times when there is a change in
circumstances or an adverse event that would indicate possible impairment. To
assess the fair value of goodwill, we consider a number of factors, including an
estimate of future cash flows.
REVENUE RECOGNITION
All of our revenues result from the sale of rubber and metal components and
mixed rubber compounds. We recognize revenue from the sale of these items when
title and risk of loss pass to our customers according to shipping schedules and
terms of sale mutually agreed to by us and our customers. Shipping and handling
costs are typically paid by the customer. If paid by us, shipping and handling
costs are included in cost of sales. Accruals for sales returns and certain
other sales allowances are recorded at the time of shipment based primarily on
historical experience; these accruals may be adjusted subsequent to the date of
shipment as new information becomes available.
-27-
OTHER
Other critical accounting policies include estimates used to determine
liabilities related to environmental matters, litigation, product liability
matters, income taxes, and other contingencies. The process of making estimates
takes into account historical experience, specific facts and circumstances,
present and projected economic and business conditions, projected unit volumes,
projected operating efficiencies, and other relevant factors and assumptions. We
reevaluate our estimates whenever factors relevant to the making of the
estimates change.
RECENTLY ISSUED ACCOUNTING STANDARDS
Listed below are recently issued accounting standards and a discussion of
how they have affected or will affect our consolidated financial statements:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 154, "ACCOUNTING CHANGES
AND ERROR CORRECTION - A REPLACEMENT OF APB OPINION NO. 20, ACCOUNTING
CHANGES, AND FASB STATEMENT NO. 3, REPORTING ACCOUNTING CHANGES IN INTERIM
FINANCIAL STATEMENTS."
In May 2005, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error Correction
- - a Replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements," ("FAS
154"). FAS 154 changes the requirements for the accounting and reporting of a
change in accounting principle. Prior to the issuance of FAS 154, APB Opinion
No. 20 required that most voluntary changes in accounting principles be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. FAS 154 requires retroactive
application to prior periods' financial statements of changes in accounting
principle, unless it is impractical to determine either the period-specific
effects or the cumulative effect of the change. FAS 154 also requires
retrospective application as the transition method for newly-issued accounting
pronouncements that do not provide for any specific transition guidance. FAS 154
is effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The impact of the adoption of FAS 154
cannot be determined at this time.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 151, "INVENTORY COSTS - AN
AMENDMENT OF ARB NO. 43, CHAPTER 4"
In November 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 151, "Inventory Costs - an Amendment of
ARB No. 43, Chapter 4" ("FAS 151"), which is effective for our fiscal years
beginning after June 15, 2005. FAS 151 amends ARB No. 43, Chapter 4, to clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
waste materials (spoilage) should be recognized as current-period charges. FAS
151 also requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of FAS 151 is not expected to have a material impact on our results of
operations or financial condition.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004), "SHARE
BASED PAYMENT"
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("FAS 123R"). FAS 123R is a revision to Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," and supercedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and effectively eliminates the intrinsic value method of accounting
for stock
-28-
options that was available in FAS 123R as originally issued. FAS 123R requires
entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the fair value of those awards at the date
of grant. This statement is effective for fiscal years beginning after December
15, 2005, and applies to all awards granted after that date. The adoption of FAS
123R is not expected to have a material impact on our results of operations or
financial condition.
ITEM 7A. 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 December 31, 2005, we had $25,147,000 of outstanding floating rate debt
at interest rates equal to either LIBOR plus 3 1/4%, the prime rate plus 1%, the
prime rate plus 4 3/4%, or the prime rate plus 5%.
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 December 31, 2005, we had outstanding $42,402,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.3%.
Assuming that we refinance our secured loans as discussed above, we
currently estimate that our monthly cash interest expense during 2006 will be
approximately $650,000 and that a one percentage point increase or decrease in
short-term interest rates would increase or decrease our monthly interest
expense by approximately $25,000.
For further information about our indebtedness, we recommend that you also
read Note 4, "Debt," in the notes to our consolidated financial statements in
Part II, Item 8.
-29-
THIS PAGE INTENTIONALLY LEFT BLANK.
-30-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm ...................................................... 32
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2004, and 2003 .................................... 33
Consolidated Balance Sheets at December 31, 2005 and 2004 ............... 34
Consolidated Statements of Stockholders' Deficit for
the Years Ended December 31, 2005, 2004, and 2003 .................... 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004, and 2003 .................................... 37
Notes to Consolidated Financial Statements .............................. 38
-31-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lexington Precision Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Lexington
Precision Corporation and subsidiaries at December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in the Index at
Item 15 (a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lexington Precision Corporation and subsidiaries at December 31, 2005 and 2004,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Lexington Precision Corporation and subsidiaries will continue as
a going concern. As more fully described in Notes 1 and 4, the Company has
borrowings of approximately $12.0 million under a secured revolving line of
credit that expires on June 30, 2006. If the revolving line of credit is not
extended, the Company has borrowings of approximately $13.2 million under other
secured loans that would also be due on June 30, 2006. Further, the Company has
a working capital deficiency and a stockholders' deficit. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Notes 1 and
4. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in Note 4 to the consolidated financial statements, effective
July 1, 2003, the Company changed its method of accounting for its $8 Cumulative
Convertible Preferred Stock, Series B, in accordance with the adoption of
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
/s/ Ernst &Young LLP
Cleveland, Ohio
March 28, 2006
-32-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31
-----------------------------
2005 2004 2003
------- -------- --------
Net sales $96,842 $110,353 $113,231
Cost of sales 87,369 98,304 99,773
------- -------- --------
Gross profit 9,473 12,049 13,458
Selling and administrative expenses 6,747 7,383 7,904
Gain on the sale of assets held for sale 1,671 -- --
Impairment of goodwill -- -- 47
------- -------- --------
Income from operations 4,397 4,666 5,507
Other income (expense):
Interest expense (9,200) (8,662) (6,980)
Gain on repurchase of debt 77 8,598 --
------- -------- --------
Income (loss) from continuing operations before
income taxes (4,726) 4,602 (1,473)
Income tax provision (benefit) (299) (196) 76
------- -------- --------
Income (loss) from continuing operations (4,427) 4,798 (1,549)
Income (loss) from discontinued operations net of
income taxes of $334 in 2005 644 (3,208) (4,653)
------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle (3,783) 1,590 (6,202)
Cumulative effect of change in accounting principle -- -- (247)
------- -------- --------
Net income (loss) $(3,783) $ 1,590 $ (6,449)
======= ======== ========
Basic and diluted income (loss) per share of common stock:
Continuing operations $ (0.90) $ 0.97 $ (0.35)
Discontinued operations 0.13 (0.65) (0.96)
Cumulative effect of change in accounting principle -- -- (0.05)
------- -------- --------
Net income (loss) $ (0.77) $ 0.32 $ (1.36)
======= ======== ========
See notes to consolidated financial statements
-33-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31
-------------------
2005 2004
-------- --------
ASSETS:
Current assets:
Cash $ 13 $ 17
Accounts receivable, net of allowances of $697,000
and $537,000, respectively 12,701 15,322
Inventories, net of allowances of $435,000
and $845,000, respectively 7,784 8,791
Prepaid expenses and other current assets 616 1,665
Deferred income taxes 1,028 1,090
Current assets of discontinued operations 254 2,022
-------- --------
Total current assets 22,396 28,907
-------- --------
Plant and equipment:
Land 1,759 2,074
Buildings 13,318 19,450
Equipment 109,244 107,961
-------- --------
124,321 129,485
Accumulated depreciation 95,834 93,428
-------- --------
Plant & equipment, net 28,487 36,057
-------- --------
Plant and equipment of discontinued operations, net 1,474 2,754
-------- --------
Goodwill, net 7,623 7,623
-------- --------
Other assets, net 2,363 3,036
-------- --------
$ 62,343 $ 78,377
======== ========
See notes to consolidated financial statements (continued on next page)
-34-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31
-------------------
2005 2004
-------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 9,053 $ 9,753
Accrued expenses, excluding interest 4,701 4,839
Accrued interest expense 849 975
Short-term debt 11,979 14,667
Current portion of long-term debt 14,025 4,749
Current liabilities of discontinued operations 485 794
-------- --------
Total current liabilities 41,092 35,777
-------- --------
Long-term debt, excluding current portion 41,545 58,949
-------- --------
Deferred income taxes 1,028 1,090
-------- --------
Other long-term liabilities 334 436
-------- --------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,931,767 shares issued at December 31, 2005
and 2004 1,233 1,233
Additional paid-in-capital 13,169 13,169
Accumulated deficit (36,058) (32,277)
-------- --------
Total stockholders' deficit (21,656) (17,875)
-------- --------
$ 62,343 $ 78,377
======== ========
See notes to consolidated financial statements
-35-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(THOUSANDS OF DOLLARS)
ADDITIONAL TOTAL
COMMON PAID-IN- ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIT
------ ---------- ----------- -------------
Balance at January 1, 2003 $1,207 $12,960 $(27,366) $(13,199)
Net loss -- -- (6,449) (6,449)
Amortization of restricted stock grants -- -- 27 27
Conversion of interest payable on
junior subordinated notes into
103,731 shares of common stock 26 209 -- 235
Dividends on preferred stock -- -- (106) (106)
------ ------- -------- --------
Balance at December 31, 2003 1,233 13,169 (33,894) (19,492)
Net income -- -- 1,590 1,590
Amortization of restricted stock grants -- -- 27 27
------ ------- -------- --------
Balance at December 31, 2004 1,233 13,169 (32,277) (17,875)
Net loss -- -- (3,783) (3,783)
Amortization of restricted stock grants -- -- 2 2
------ ------- -------- --------
Balance at December 31, 2005 $1,233 $13,169 $(36,058) $(21,656)
====== ======= ======== ========
See notes to consolidated financial statements
-36-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31
-----------------------------
2005 2004 2003
-------- ------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (3,783) $ 1,590 $ (6,449)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities - continuing operations:
Cumulative effect of change in accounting principle -- -- 247
Net (income) loss from discontinued operations (644) 3,208 4,653
Depreciation 8,012 8,140 8,573
Amortization included in operating expense 362 304 382
Amortization included in interest expense 1,315 1,098 610
Impairment of goodwill -- -- 47
Gain on repurchase of debt (77) (8,598) --
Gain on sale of assets held for sale (1,671) -- --
Interest expense converted to debt -- 3,953
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net 2,621 561 (376)
Inventories, net 1,007 (1,158) 301
Prepaid expenses and other assets 1,151 310 850
Accounts payable (700) 1,920 413
Accrued expenses, excluding interest (138) (1,154) 67
Accrued interest expense (126) 827 164
Other long term liabilities (31) 104 (33)
Other (156) (84) 68
-------- ------- --------
Net cash provided by continuing operations 7,142 7,068 13,470
Net cash provided (used) by discontinued operations 1,023 (135) (2,351)
-------- ------- --------
Net cash provided by operating activities 8,165 6,933 11,119
-------- ------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (3,330) (5,715) (4,966)
Proceeds from sales of assets held for sale 4,518 271 23
Expenditures for tooling owned by customers (544) (650) (148)
Other 39 9 313
-------- ------- --------
Net cash provided (used) by continuing operations 683 (6,085) (4,778)
Net cash provided (used) by discontinued operations 2,360 (440) (75)
-------- ------- --------
Net cash provided (used) by investing activities 3,043 (6,525) (4,853)
-------- ------- --------
FINANCING ACTIVITIES:
Net increase (decrease), in borrowings under revolving
line of credit (2,555) 2,421 (3,347)
Proceeds from issuance of debt 1,500 7,000 25,000
Repayment of long-term debt (9,705) (6,364) (21,548)
Repurchase of debt -- (2,892) (5,550)
Payment of deferred financing expenses (452) (745) (2,279)
Other -- -- (106)
-------- ------- --------
Net cash used by financing activities (11,212) (580) (7,830)
-------- ------- --------
Net decrease in cash (4) (172) (1,564)
Cash at beginning of year 17 189 1,753
-------- ------- --------
Cash at end of year $ 13 $ 17 $ 189
======== ======= ========
See notes to consolidated financial statements
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexington
Precision Corporation and its subsidiaries, all of which are wholly-owned (the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
Unless otherwise indicated all disclosures and amounts relate solely to the
continuing operations of the Company.
Certain reclassifications have been made to the financial statements for
prior years in order to conform to the current year's presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expenses during each reporting period. Actual results could differ from those
estimates. Future events and their impact on the Company's results of operations
or financial condition cannot be determined with any certainty. Although the
Company strives to use its best judgment in making estimates, actual results
could vary materially from the Company's estimates.
ACCOUNTS RECEIVABLE AND PROVISION FOR CREDIT LOSSES
The Company records accounts receivable due from its customers at the time
a sale is recorded in accordance with its revenue recognition policy. The
Company operates primarily in the domestic automotive market, which has been
characterized by intense price competition and increasing customer requirements
for quality and service. These factors, among others, may have a sudden and
adverse effect on the operating results and financial condition of the Company's
customers, and, in turn, on the collectibility of its accounts receivable from
those customers. The Company attempts to mitigate this risk of loss through
ongoing evaluations of automotive market conditions, examinations of financial
statements of its customers, and discussions with management of its customers,
as deemed necessary. Provisions for credit losses are based upon historical
experience and such ongoing evaluations. The Company generally does not require
collateral from its customers to support the extension of trade credit.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. The Company evaluates its inventory on a quarterly basis to ensure that
it is properly valued. The Company records allowances against inventory where
appropriate to provide for losses due to obsolescence, lower of cost or market
valuations, excess quantities on hand, and certain other factors. In doing so,
the Company applies consistent practices, which include the identification of
potentially unmarketable inventory based on assumptions about future demand and
historical usage rates, specific identification of components that are being
replaced with new generation components, actual margins generated from the sales
of its components, and historical unit sales volumes.
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory levels by principal classification are set forth below (dollar
amounts in thousands):
DECEMBER 31
---------------
2005 2004
------ ------
Finished goods $3,845 $4,142
Work in process 2,114 2,372
Raw materials 1,825 2,277
------ ------
$7,784 $8,791
====== ======
PLANT AND EQUIPMENT
Plant and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated principally on the straight-line method over the
estimated useful lives of the various assets (3 to 8 years for equipment and 15
to 32 years for buildings). When an asset is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the Company's
records. Maintenance and repair expenses are expensed as incurred, while major
improvements that increase the useful life of plant and equipment are
capitalized. Maintenance and repair expenses were $4,483,000, $5,552,000, and
$5,733,000 for 2005, 2004, and 2003, respectively.
VALUATION OF LONG-LIVED ASSETS
The Company evaluates for impairment its plant and equipment and other
long-term, amortizable assets when events or changes in circumstances indicate
that the carrying value of the assets may not be fully recoverable. Changes in
technology or in the Company's intended use of these assets, including changes
in the primary markets in which it operates, may cause the original estimated
useful lives of these assets to change and result in the impairment of these
assets.
When performing this evaluation, the Company compares the undiscounted,
projected cash flow of an asset or group of assets to the carrying value
thereof. If such cash flow is less than the carrying value of the asset or asset
group, the Company recognizes an impairment loss equal to the excess, if any, of
the carrying value of the asset or asset group over its appraised fair value,
net of estimated disposal costs. Although the Company believes that its
projections of future cash flows are reasonable, changes in assumptions
regarding future unit volumes, pricing, operating efficiencies, material, labor,
and overhead costs, and other factors could significantly affect the Company's
cash flow projections.
GOODWILL
Goodwill represents the excess of the purchase price of acquired businesses
over the fair value of the identifiable assets acquired, net of the fair value
of liabilities assumed, less amortization recorded prior to the Company's
adoption of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangibles," in 2002. Tests
for impairment of goodwill are performed, using a fair value approach during the
fourth quarter of each year and at other times when there is a change in
circumstances or an adverse event that would indicate possible impairment. To
assess the fair value of goodwill, the Company considers a number of factors,
including an estimate of future cash flows. During 2003, the Company performed
its annual impairment test and determined that goodwill associated with the
Metals Group was impaired; as a result, the Company
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded a provision of $208,000 to write off all of the goodwill of the Metals
Group, of which $161,000 was classified in discontinued operations. At December
31, 2005 and 2004, goodwill of $7,623,000 relates entirely to the Rubber Group.
DEFERRED FINANCING EXPENSES
Deferred financing expenses are amortized over the lives of the related
debt instruments.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred. These costs
totaled $931,000, $991,000, and $1,168,000 in 2005, 2004, and 2003,
respectively.
INTEREST EXPENSE
Interest expense recorded in the consolidated statements of operations for
the years ended December 31, 2005, 2004, and 2003 is as follows (dollar amounts
in thousands):
YEARS ENDED DECEMBER 31
------------------------
2005 2004 2003
------ ------ ------
Interest expense $9,200 $8,662 $6,980
Interest expense allocated to discontinued operations 262 241 69
------ ------ ------
Total interest expense $9,462 $8,903 $7,049
====== ====== ======
NET INCOME OR LOSS PER COMMON SHARE
Basic net income or loss per common share is computed using the
weighted-average number of common shares outstanding. Diluted net income or loss
per share is calculated after giving effect to all potential common shares that
were dilutive, using the treasury stock method. Potential common shares are
securities (convertible preferred stock, restricted stock, and warrants to
purchase common stock) that do not have a current right to participate in
earnings but could in the future by virtue of their terms.
REVENUE RECOGNITION
All of the Company's revenues result from the sale of rubber and metal
components and mixed rubber compounds. The Company recognizes revenue from the
sale of these items when title and risk of loss pass to its customers according
to shipping schedules and terms of sale mutually agreed to by the Company and
its customers. Shipping and handling costs are typically paid by the customer.
If paid by the Company, shipping and handling costs are included in cost of
sales. Accruals for sales returns and certain other sales allowances are
recorded at the time of shipment based primarily on historical experience. These
accruals may be adjusted subsequent to the date of shipment as new information
becomes available.
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS
Listed below are recently issued accounting standards and a discussion of
how they have affected the Company's consolidated financial statements:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 154, "ACCOUNTING CHANGES
AND ERROR CORRECTION - A REPLACEMENT OF APB OPINION NO. 20, ACCOUNTING
CHANGES, AND FASB STATEMENT NO. 3, REPORTING ACCOUNTING CHANGES IN INTERIM
FINANCIAL STATEMENTS."
In May 2005, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error Correction
- - a Replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements," ("FAS
154"). FAS 154 changes the requirements for the accounting and reporting of a
change in accounting principle. Prior to the issuance of FAS 154, APB Opinion
No. 20 required that most voluntary changes in accounting principles be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. FAS 154 requires retroactive
application to prior periods' financial statements of changes in accounting
principle, unless it is impractical to determine either the period-specific
effects or the cumulative effect of the change. FAS 154 also requires
retrospective application as the transition method for newly-issued accounting
pronouncements that do not provide for any specific transition guidance. FAS 154
is effective for accounting changes and corrections of errors made in fiscal
periods beginning after December 15, 2005. The impact of the adoption of FAS 154
can not be determined at this time.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 151, "INVENTORY COSTS - AN
AMENDMENT OF ARB NO. 43, CHAPTER 4"
In November 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 151, "Inventory Costs - an Amendment of
ARB No. 43, Chapter 4" ("FAS 151"), which is effective for fiscal years
beginning after June 15, 2005. FAS 151 amends ARB No. 43, Chapter 4, to clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
waste materials (spoilage) should be recognized as current-period charges. FAS
151 also requires that the allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. The
adoption of FAS 151 is not expected to have a material impact on the Company's
results of operations or financial condition.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (REVISED 2004), "SHARE
BASED PAYMENT"
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("FAS 123R"). FAS 123R is a revision to Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation." FAS 123R
supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and effectively eliminates the intrinsic value method of
accounting for stock options that was available under FAS 123R as originally
issued. FAS 123R requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the fair value of
those awards at the date of grant. This statement is effective for the fiscal
years beginning after December 15, 2005 and applies to all awards granted after
the effective date. The adoption of FAS 123R is not expected to have a material
impact on the Company's results of operations or financial condition.
-41-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company's
ability to extend the maturity or refinance the revolving line of credit that
matures on June 30, 2006, and the equipment term loans and real estate term loan
that are due on June 30, 2006, if the revolving line of credit is not extended,
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 is discussing the refinancing of its revolving line of credit,
equipment term loans, and real estate term loan ("secured loans") with two
lenders that would result in the following transactions:
- A new $17,000,000 revolving line of credit that would expire on June
30, 2009;
- A new $20,000,000 secured term loan;
- The repayment of the existing equipment term loans and the real estate
term loan, which were outstanding in the aggregate principal amount of
$13,193,000 at December 31, 2005; and
- The repayment of all outstanding loans under the existing revolving
line of credit.
Although the Company cannot assure you that it will be able to complete a
refinancing of its secured loans, management believes that the Company will be
able to refinance its secured loans on or before June 30, 2006. If the Company
is unable to complete the refinancing of its secured loans on or before June 30,
2006, it may be forced to seek relief from its creditors under chapter 11 of the
federal bankruptcy code.
NOTE 2 -- OTHER NONCURRENT ASSETS
The Company has paid a portion of the cost of certain tooling that was
purchased by customers and is being used by the Company to produce components
under long-term supply arrangements. The payments have been recorded as a
noncurrent asset and are being amortized on a straight-line basis over three
years or, if shorter, the period during which the tooling is expected to produce
components. At December 31, 2005 and 2004, other noncurrent assets included
$749,000 and $715,000, respectively, representing the unamortized portion of
such capitalized payments. During 2005, 2004, and 2003, the Company amortized
$476,000, $396,000, and $437,000, respectively, of such capitalized payments.
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- ACCRUED EXPENSES, EXCLUDING INTEREST EXPENSE
Accrued expenses, excluding interest, at December 31, 2005 and 2004, are
summarized below (dollar amounts in thousands):
DECEMBER 31
---------------
2005 2004
------ ------
Employee fringe benefits $2,701 $2,762
Salaries and wages 877 1,065
Taxes 142 195
Other 981 817
------ ------
$4,701 $4,839
====== ======
NOTE 4 -- DEBT
Debt at December 31, 2005 and 2004, is set forth below (dollar amounts in
thousands):
DECEMBER 31
-------------------
2005 2004
-------- --------
Short-term debt:
Revolving line of credit $ 11,954 $14,509
12 3/4% Senior Subordinated Notes 25 158
-------- -------
Subtotal 11,979 14,667
Current portion of long-term debt 14,025 4,749
-------- -------
Total short-term debt 26,004 19,416
-------- -------
Long-term debt:
Equipment term loans 8,512 10,200
Real estate term loan 4,681 10,350
Capital leases 85 275
Increasing Rate Note 7,000 7,000
Unsecured, amortizing term notes -- 482
12% Senior Subordinated Notes 34,177 34,177
13% Junior Subordinated Note 347 347
Series B Preferred Stock 644 623
Other 124 244
-------- -------
Subtotal 55,570 63,698
Less current portion (14,025) (4,749)
-------- -------
Total long-term debt 41,545 58,949
-------- -------
Total Debt $ 67,549 $78,365
======== =======
The revolving line of credit matures on June 30, 2006, and it will
automatically be extended for one year unless we are notified by the lender at
least 60 days prior to June 30, 2006, that the line of credit will not be
extended. If the line of credit is not extended, the equipment term loans and
the real estate term loan, which have maturity dates of June 30, 2007, will
instead mature on June 30, 2006.
-43-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has received proposals from a number of lenders, including its
existing lenders, for new secured financing to replace its existing secured
loans. The Company has chosen to move forward with two new, prospective lenders
who are completing their due diligence investigation and preparing documentation
relating to the proposed refinancing. Accordingly, the prospective lenders have
not yet provided the Company with binding commitments for the proposed
refinancing. Although the Company cannot assure you that it will be able to
complete a refinancing of its secured loans, the management of the Company
believes that the Company will be able to refinance its secured loans on or
before June 30, 2006. If the Company is unable to complete the refinancing of
its secured loans on or before June 30, 2006, it may be forced to seek relief
from its creditors under chapter 11 of the federal bankruptcy code.
REVOLVING LINE OF CREDIT
At December 31, 2005, the Company had outstanding loans of $11,954,000,
outstanding letters of credit of $2,093,000, and net unused availability of
$1,186,000 under its revolving line of credit, which expires on June 30, 2006.
At December 31, 2005 and 2004, the weighted-average interest rates on borrowings
under the revolving line of credit were 7.85% and 6 1/4 %, respectively. The
interest rates result from a combination of borrowings based on LIBOR and the
prime rate as set forth in the loan documents. At December 31, 2005 and 2004,
the loans outstanding under the revolving line of credit were classified as
short-term debt because the revolving line of credit required that the Company's
cash receipts be automatically used to reduce loans outstanding under the
revolving line of credit on a daily basis, by means of a lock-box sweep
arrangement, and the lender had the ability to modify certain terms of the
revolving line of credit without the Company's approval. All loans and
reimbursement obligations with respect to letters of credit under the revolving
line of credit are secured by first priority liens on substantially all of the
Company's assets other than real estate.
EQUIPMENT TERM LOANS
The equipment term loans are payable in aggregate monthly installments of
$200,000, with interest at the prime rate plus 4 3/4%. At December 31, 2005, the
interest rate on the equipment term loans was 12.0%. The unpaid balance of the
equipment term loans is payable on June 30, 2006, unless the revolving line of
credit is extended. As a result, the Company has classified the equipment term
loans as current liabilities in its consolidated balance sheet at December 31,
2005. The equipment term loans are secured by first priority liens on
substantially all of the Company's assets other than real estate.
REAL ESTATE TERM LOAN
The real estate term loan is payable in monthly installments of $108,000
through June 1, 2006, with the remaining balance due on June 30, 2006. The
Company has the option to extend the loan to June 30, 2007, on the same terms,
provided that the revolving line of credit is also extended from June 30, 2006,
to June 30, 2007. The Company has classified the real estate term loan as a
current liability in its consolidated balance sheet at December 31, 2005. The
real estate term loan bears interest at the prime rate plus 5%, subject to a
minimum rate of 9 1/4%, and requires the Company to pay a fee of $216,000 on
each anniversary of the closing date. At December 31, 2005, the interest rate on
the real estate term loan was 12.25%. The real estate term loan is secured by
first mortgages on substantially all of the Company's real estate and by second
priority liens on substantially all of the Company's other assets. The real
estate term loan contains a provision that permits the lender to accelerate the
loan if there is a material adverse change in the Company's financial condition,
business, or operating performance. On October 28, 2005,
-44-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company sold its land and building in LaGrange, Georgia, and received net
proceeds of $1,882,000, which were used to reduce the real estate term loan.
CAPITAL LEASES
Capital leases relate to the purchase of equipment used in the Company's
manufacturing operations. At December 31, 2005, the Company's consolidated
balance sheet included equipment held under capital leases with a cost of
$196,000 and related accumulated amortization of $58,000. The future minimum
lease payments under the capital leases are set forth below under the heading
"Scheduled Maturities of Long-Term Debt." Amortization of assets recorded as
capital leases is included in depreciation expense.
INCREASING RATE NOTE
The Increasing Rate Note is an unsecured obligation of the Company that is
senior in right of payment to the 12% Senior Subordinated Notes, the 12 3/4%
Senior Subordinated Notes, and the 13% Junior Subordinated Notes. The Increasing
Rate Note matures on June 30, 2007. Interest is payable monthly at the rate of
14.4% per annum (the "Cash Rate"). In lieu of paying the Cash Rate, the Company
has the option to pay interest at the rate of 12% in cash and an additional 4.8%
in additional Increasing Rate Notes (the "PIK Rate"). On September 1, 2006, the
Cash Rate and the PIK Rate will increase by up to 0.6 percentage points and 1.2
percentage points, respectively. The exact amount of the increase will depend
upon the principal amount of the Increasing Rate Note then outstanding.
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 12
3/4% Senior Subordinated Notes then outstanding were exchanged for units
consisting of 12% Senior Subordinated Notes and warrants to purchase common
stock. The remaining $158,000 of 12 3/4% Senior Subordinated Notes that did not
participate in the exchange remained outstanding. In April 2005, the Company
repurchased $133,000 principal amount of the 12 3/4% Senior Subordinated Notes,
together with accrued interest thereon of $97,000, for $153,000. As a result,
the Company recorded a pre-tax gain on the repurchase of $77,000. On March 3,
2006, the Company repurchased the remaining $25,000 principal amount of its 12
3/4% Senior Subordinated Notes together with accrued interest thereon for
$48,000 resulting in a loss of $3,000.
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.
13% JUNIOR SUBORDINATED NOTE
The 13% Junior Subordinated Note matures on November 1, 2009, and is an
unsecured obligation of the Company that is subordinated in right of payment to
all existing and future secured and senior, unsecured debt of the Company, the
12 3/4% Senior Subordinated Notes, and the 12% Senior Subordinated
-45-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes. Interest on the 13% Junior Subordinated Note is payable quarterly on
February 1, May 1, August 1, and November 1.
SERIES B PREFERRED STOCK
At December 31, 2005, 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 $644,000. Each share
of Series B Preferred Stock is (1) entitled to one vote, (2) redeemable for $200
plus accumulated and unpaid dividends, (3) convertible into 14.8148 shares of
common stock (subject to adjustment), and (4) entitled, upon voluntary or
involuntary liquidation and after payment of the debts and other liabilities of
the Company, to a liquidation preference of $200 plus accumulated and unpaid
dividends. 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 $540,000 on
November 30 in each of the years 2000 through 2005.
During 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
began to classify the Series B Preferred Stock as debt in the consolidated
financial statements and recognized a charge of $247,000 to increase the
carrying value of the Series B Preferred Stock to its fair value. Subsequent to
adoption, increases in the fair value of the Series B Preferred Stock and
payments of quarterly dividends have been recorded by monthly charges to
interest expense.
NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company did not purchase equipment under capitalized lease obligations
during 2005 but did make such purchases in the amounts of $144,000 and $720,000,
during 2004 and 2003, respectively, and obtained seller financing for the
purchase of equipment in the aggregate amount of $198,000 in 2004.
RESTRICTIVE COVENANTS
The agreements governing the revolving line of credit, equipment term
loans, and real estate term loan contain financial covenants that require the
Company to maintain specified financial ratios as of the end of specified
periods, including minimum levels of fixed charge coverage, net worth, and
earnings before interest, taxes, depreciation and amortization ("EBITDA"), and a
maximum ratio of secured debt to EBITDA. The agreements also contain covenants
that limit the Company's unfinanced capital expenditures to $6,250,000 per annum
and limit the amount of new secured financing that it can incur for the purchase
of plant and equipment to $2,500,000 per annum. The agreements also contain
covenants that place restrictions on its business and operations, including
limitations on the sale of all or substantially all of its assets, the
repurchase of common stock for treasury, the redemption of preferred stock, and
the payment of cash dividends.
From time to time, the Company's secured lenders have agreed to waive,
amend, or eliminate certain of the financial covenants contained in its various
financing agreements in order to maintain or otherwise ensure the Company's
current or future compliance. The covenants contained in the Company's
-46-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
secured financing agreements were amended on three separate occasions during
2005. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that, at December 31, 2005, the fair values of the
loans outstanding under the revolving line of credit, the equipment term loans,
and the real estate term loan approximated the principal amounts of such loans.
In October 2004, the Company repurchased a total of $8,264,000 principal
amount of its 12% Senior Subordinated Notes plus interest accrued thereon at an
aggregate cost of $2,892,000. In April 2005, the Company repurchased $133,000
principal amount of its 12 3/4% Senior Subordinated Notes plus accrued interest
thereon at an aggregate cost of $153,000. In April 2005, the Chairman of the
Board of the Company purchased, for his own account, $2,096,000 principal amount
of the Company's 12% Senior Subordinated Notes plus accrued interest thereon at
an aggregate cost of $629,000. The Company is aware of other trading activity in
the 12% Senior Subordinated Notes during 2005, but it does not know the details
of those trades. Because of the limited trading in the Company's debt
securities, the Company is unable to express an opinion as to the current fair
market value of the 12% Senior Subordinated Notes, the 12 3/4% Senior
Subordinated Notes, the 13% Junior Subordinated Note, the Increasing Rate Note,
or the Series B Preferred Stock.
FINANCIAL LEVERAGE AND LIQUIDITY
The Company operates with substantial financial leverage and limited
liquidity. Aggregate indebtedness as of December 31, 2005 and 2004, totaled
$67,549,000 and $78,365,000, respectively. Assuming that the company refinances
its secured loans on the terms set forth in Note 1, under the caption titled
"Basis of Presentation," the Company estimates that during 2006, interest and
scheduled principal payments would be approximately $7,900,000 and $1,750,000,
respectively.
CASH INTEREST PAID
Cash interest paid, including interest expense allocated to discontinued
operations, during 2005, 2004, and 2003 totaled $8,196,000, $7,144,000, and
$2,122,000, respectively.
-47-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULED MATURITIES OF LONG-TERM DEBT
Scheduled maturities of long-term debt and capital lease obligations for
the years ending December 31 are listed below (dollar amounts in thousands):
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- -------
2006 $13,944 $81 $14,025
2007 7,011 4 7,015
2008 6 -- 6
2009 34,524 -- 34,524
------- --- -------
$55,485 $85 $55,570
======= === =======
NOTE 5 -- COMMON STOCK, WARRANTS, AND OTHER EQUITY SECURITIES
COMMON STOCK, $.25 PAR VALUE
At each of December 31, 2005, 2004, and 2003, there were 4,931,767 shares
of the Company's common stock outstanding and 48,889 shares reserved for
issuance on the conversion of the Series B Preferred Stock.
On January 26, 2006, the Compensation Committee of the Company's Board of
Directors awarded to a key employee of the Company, under the 2005 Stock Award
Plan, 50,000 shares of restricted common stock, all of which represented
authorized but previously unissued shares.
WARRANTS
At each of December 31, 2005 and 2004, there were 345,237 warrants
outstanding, each of which entitles the holder to purchase one share of the
Company's common stock for $3.50 from August 1, 2005, through August 1, 2009.
Because the exercise price of the warrants substantially exceeded the market
price of the Company's common stock at the date of issuance, the Company
concluded that the warrants had negligible value.
OTHER AUTHORIZED PREFERRED STOCK
The Company's restated certificate of incorporation provides that the
Company is authorized to issue 2,500 shares of 6% Cumulative Convertible
Preferred Stock, Series A, par value $100 per share, and 2,500,000 shares of
other preferred stock having a par value of $1 per share. No shares of either of
these classes of preferred stock have been issued.
NOTE 6 -- EMPLOYEE BENEFIT PLANS
RETIREMENT AND SAVINGS PLAN
The Company maintains a retirement and savings plan pursuant to Section 401
of the Internal Revenue Code (a "401(k) plan"). All employees of the Company are
entitled to participate in the 401(k)
-48-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plan after meeting the eligibility requirements. Effective January 1, 2003,
employees may generally contribute up to 60% of their annual compensation but
not more than prescribed dollar amounts established by the United States
Secretary of the Treasury. Employee contributions, up to a maximum of 6% of an
employee's compensation, are matched 50% by the Company. During 2005, 2004, and
2003, matching contributions made by the Company totaled $456,000, $507,000, and
$504,000, respectively. Company contributions to the 401(k) plan vest at a rate
of 20% per year commencing after the participant's second year of service; the
participant becomes fully vested after six years of service.
INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan that provides for the
payment of annual cash bonus awards to certain officers and key employees of the
Company if specified targets are met. The Compensation Committee of the
Company's Board of Directors, which consists of two directors who are not
employees of the Company, oversees the administration of the incentive
compensation plan and approves the cash bonus awards. Bonus awards for eligible
divisional employees are typically based upon the attainment of predetermined
targets for earnings before interest, taxes, depreciation, and amortization
("EBITDA") at each division. Bonus awards for corporate officers are typically
based upon the attainment of predetermined consolidated EBITDA targets. The
consolidated financial statements do not include a provision for bonuses in 2005
but do include provisions for bonuses totaling $641,000 and $569,000 in 2004 and
2003, respectively.
2005 STOCK AWARD PLAN
The Company also has a plan that permits it to award incentive stock
options, nonqualified stock options, stock appreciation rights, awards of
nontransferable shares of restricted common stock, performance shares, and
performance units to directors, employees, or consultants of the Company (the
"2005 Stock Award Plan" or the "Plan"). Under the Plan, the maximum number of
shares of Common Stock that may be granted or optioned to eligible participants
is 400,000 and the maximum aggregate grant to any eligible participant in a
fiscal year is as follows:
Stock options: 50,000 shares
Stock appreciation rights: 50,000 shares
Restricted stock: 50,000 shares
Performance shares: fair market value of 50,000 shares
Performance units: fair market value up to $100,000
In January 2006, the Compensation Committee awarded 50,000 nontransferable
shares of restricted common stock of the Company to a key employee of the
Company, under the 2005 Stock Award Plan. The price per common share on the date
the shares were granted was $0.75 per share. Compensation expense equal to the
market value of the shares on the date of grant will be charged to earnings over
the vesting period of the shares.
-49-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company maintains programs to fund certain costs related to a
prescription drug card program for a closed group of retirees of one of its
former divisions and to fund limited medical costs for certain retirees of one
of its divisions. At December 31, 2005, the Company's accumulated postretirement
benefit obligation totaled $307,000. Prior to January 1, 2004, the Company
amortized its transition obligation over the remaining life expectancy of the
participants, which equated to an annual rate of $23,000. Effective January 1,
2004, the Company revised the life expectancy of the participants in the
prescription drug program and, as a result, began to amortize its unamortized
transition obligation at the rate of $20,000 per year. The Company measures its
post-retirement benefit obligation on January 1 of each year.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(the "Act") became law on December 8, 2003. The Act provides for prescription
drug benefits under Medicare Part D and contains a federal subsidy, effective
January 1, 2006, to plan sponsors who provide actuarially equivalent
prescription drug benefits to retirees. Although the Company has determined that
the prescription drug benefits it offers to a closed group of retirees is
actuarially equivalent to the prescription drug benefit offered under Medicare
Part D, because of the limited size of the group eligible to receive the
Company's prescription drug benefits (16 as of December 31, 2005), the Company
has determined that it is not economical to apply for the Medicare Part D
subsidy. During 2005 and 2004, the Company paid $13,000 and $14,000,
respectively, for retiree prescription drug benefits.
A reconciliation of the changes in the Company's post-retirement benefit
obligations at December 31, 2005 and 2004, is set forth below (dollar amounts in
thousands):
DECEMBER 31
-----------
2005 2004
---- ----
Accumulated postretirement benefit obligation at beginning of year $322 $332
Interest cost 18 19
Benefits paid (33) (36)
Actuarial loss -- 7
---- ----
Accumulated postretirement benefit obligation at end of year 307 322
Plan assets at fair market value -- --
---- ----
Unfunded accumulated postretirement benefit obligation at end of year 307 322
Unrecognized transition obligation (59) (79)
Unrecognized net gain 48 52
---- ----
Accrued benefit cost $296 $295
==== ====
-50-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net annual postretirement benefit costs for 2005, 2004, and 2003, are
summarized below (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2005 2004 2003
---- ---- ----
Interest cost $18 $19 $26
Net amortization and deferral 15 15 22
--- --- ---
Net annual postretirement benefit cost $33 $34 $48
=== === ===
The weighted-average annual rate of increase in the per capita cost of
covered benefits for the prescription drug card program is assumed to be 10% in
2006 and is projected to decrease gradually to 5% in 2013. Changing the assumed
rate of increase in the prescription drug cost by one percentage point in each
year would not have a significant effect on the accumulated postretirement
benefit obligation. The Company's program to fund certain insurance premiums for
retirees of one of its divisions has a defined dollar benefit and is therefore
unaffected by increases in health care costs. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation at
December 31, 2005 and 2004, was 5.75% and 6%, respectively.
NOTE 7 -- INCOME TAXES
Income taxes are accounted for in accordance with Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred tax assets are reduced by a valuation allowance if,
based upon the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The components of the provisions for income taxes related to continuing
operations in 2005, 2004, and 2003, are set forth below (dollar amounts in
thousands):
YEARS ENDED DECEMBER 31
-----------------------
2005 2004 2003
----- ----- ----
Current:
Federal $(334) $(328) $--
State 35 132 76
----- ----- ---
(299) (196) 76
Deferred:
Federal -- -- --
----- ----- ---
Income tax provision (benefit) $(299) $(196) $76
===== ===== ===
The federal income tax benefit recognized by the Company's continuing
operations in 2005, results from the recognition of an offsetting amount of
federal income tax expense by the Company's discontinued operations in 2005. See
Note 13, "Discontinued Operations." The federal income tax benefit recorded
during 2004, consisted of an adjustment of previously recorded federal income
tax liabilities.
Income taxes paid during 2005, 2004, and 2003 totaled $75,000, $84,000, and
$103,000, respectively.
-51-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between the Company's income tax provision (benefit) for
income (loss) from continuing operations in 2005, 2004, and 2003 and the income
taxes that would have been payable at the federal statutory rate for income
(loss) from continuing operations is reconciled as follows (dollar amounts in
thousands):
YEARS ENDED DECEMBER 31
-------------------------
2005 2004 2003
------- ------- -----
Federal statutory income tax provision $(1,607) $ 1,564 $(501)
Change in valuation allowance 1,265 (1,542) 718
Adjustment of tax liabilities -- (328) --
Nondeductible goodwill -- -- 16
State income taxes, net of federal benefit 23 87 50
Other 20 23 (207)
------- ------- -----
Income tax provision (benefit) $ (299) $ (196) $ 76
======= ======= =====
The following table sets forth the Company's deferred tax assets and
deferred tax liabilities at December 31, 2005 and 2004 (dollar amounts in
thousands):
DECEMBER 31
------------------
2005 2004
-------- -------
Deferred tax assets:
Net operating losses and tax credit carryforwards:
Federal net operating losses $ 7,475 $ 5,566
State net operating losses 1,915 1,852
Federal alternative minimum taxes 864 864
Investment tax credit 100 100
Other tax credit 81 81
-------- -------
Total tax carryforwards 10,435 8,463
Deductible temporary differences:
Impairment of long-lived assets 175 693
Accounts receivable and inventory reserves 385 470
Tax inventory over book 220 193
Compensation accruals 531 542
Other accruals 434 398
Other 139 129
-------- -------
Total deferred tax assets 12,319 10,888
Valuation allowance (10,139) (8,121)
-------- -------
Net deferred tax assets 2,180 2,767
Deferred tax liabilities: Tax over book depreciation (2,180) 2,767
-------- -------
Net deferred taxes $ -- $ --
======== =======
During 2005, the Company's valuation allowance increased by $2,018,000,
primarily due to the net loss reported by the Company for 2005.
-52-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2005, the Company had (1) net operating loss carryforwards
for federal income tax purposes of $21,986,000, which expire in the years 2006
through 2015, (2) alternative minimum tax net operating loss carryforwards of
$17,319,000, which can be used to reduce future taxable income for purposes of
calculating alternative minimum taxable income, if any, without any time
limitation, and (3) alternative minimum tax credit carryforwards of $864,000,
which can be used to offset future payments of regular federal income taxes, if
any, without any time limitation. During 2005, none of the Company's net
operating loss carryforwards expired.
The expiration of the Company's federal net operating loss carryforwards by
year of expiration is set forth in the table below (dollar amounts in
thousands):
2006 $ 478
2007 1,246
2008 --
2009 --
2010 --
Thereafter 20,262
-------
Total federal net operating loss
carryforwards $21,986
=======
NOTE 8 -- SEGMENTS
DESCRIPTION OF SEGMENTS AND PRODUCTS
The Company has two operating segments, the Rubber Group and the Metals
Group. The Rubber Group produces seals used in automotive wiring systems,
insulators for automotive ignition wire sets, and components for medical
devices. The Metals Group machines components from aluminum, brass, and steel
bars for sale primarily to automotive suppliers. The Rubber Group and the Metals
Group conduct substantially all of their business in the continental United
States.
The Corporate Office consists primarily of general administrative expenses
that are not a result of any activity carried on by either the Rubber Group or
the Metals Group. Corporate Office expenses include the compensation and
benefits of the Company's executive officers and corporate staff, rent on the
office space occupied by these individuals, general corporate legal fees,
including fees related to financings, and certain insurance expenses. Assets of
the Corporate Office are primarily cash, certain prepaid expenses and other
miscellaneous current assets, deferred tax assets, and deferred financing
expenses.
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Company evaluates its performance based upon several measures,
including income from operations, EBITDA, and asset utilization.
The accounting policies of the Company's operating segments are the same as
those described in Note 1, "Summary of Significant Accounting Policies," except
that debt, deferred financing expenses, interest expense, and income tax expense
are excluded from segment reporting. Also, expenses that are
-53-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
not considered direct expenses of the Rubber Group or the Metals Group are not
allocated to those segments.
FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS
Although all of the Company's production facilities are similar
manufacturing operations, selling to similar customers, the Company presents
financial data for the Rubber Group and the Metals Group because of the
significant difference in financial performance between those businesses.
INDUSTRY CONCENTRATION; RELIANCE ON LARGE CUSTOMERS AND CREDIT RISK
During 2005, 2004, and 2003, net sales from continuing operations to
customers in the automotive industry totaled $83,577,000, $97,902,000, and
$97,146,000, respectively, which represented 86.3%, 88.7%, and 85.8%,
respectively, of the Company's net sales. At December 31, 2005 and 2004,
accounts receivable from automotive industry customers totaled $11,568,000 and
$15,248,000, respectively. The Company operates primarily in the domestic
automotive market, which has been characterized by intense price competition and
increasing customer requirements for quality and service. These factors, among
others, may have a sudden and adverse effect on the operating results and
financial condition of the Company's customers, and, in turn, on the
collectibility of the Company's accounts receivable from those customers. The
Company attempts to mitigate this risk of loss through ongoing evaluations of
automotive market conditions, examinations of customer financial statements, and
discussions with customer management as deemed necessary. Provisions for credit
losses are based upon historical experience and such ongoing evaluations. The
Company generally does not require collateral from its customers to support the
extension of trade credit. At December 31, 2005 and 2004, the Company had
reserves for credit losses of $697,000 and $537,000, respectively. At December
31, 2005 and 2004, accounts receivable from automotive industry customers of
discontinued operations totaled $47,000 and $1,227,000, respectively.
During 2005, 2004, and 2003, the Company's net sales to Delphi Corporation,
totaled $17,426,000, $23,413,000, and $24,591,000. Substantially all of the
Company's net sales to Delphi during the three years ended December 31, 2005,
were made by the Rubber Group. Sales to Delphi in 2005, 2004, and 2003,
represented 18.0%, 21.2%, and 21.7%, respectively, of the Company's consolidated
net sales and 20.5%, 23.5%, and 23.8%, respectively, of the Rubber Group's net
sales. At December 31, 2005, 2004, and 2003, accounts receivable due from Delphi
represented 5.2%, 23.8%, and 23.3% of the Company's accounts receivable,
respectively. During 2005, 2004, and 2003 net sales to General Cable Corporation
totaled $10,971,000, $11,636,000, and $11,802,000, which represented 11.3%,
10.5%, and 10.4%, respectively, of the Company's consolidated net sales and
12.9%, 11.7%, and 11.4%, respectively, of the Rubber Group's net sales. No other
customer accounted for more than 10% of the Company's net sales during 2005,
2004, or 2003. The three largest customers of the Rubber Group accounted for
42.9% of the Rubber Group's net sales and 29.0% of the Company's accounts
receivable at December 31, 2005. The three largest customers of the Metals Group
accounted for 61.1% of the Metals Group's net sales and 11.7% of the Company's
accounts receivable at December 31, 2005. Loss of a significant amount of
business from Delphi, General Cable, or any of the Company's other large
customers would have a material adverse effect on the Company if such business
were not substantially replaced by additional business from existing or new
customers.
In October 2005, Delphi filed for protection from its creditors under
chapter 11 of the federal bankruptcy code. The unpaid, outstanding pre-petition
accounts receivable from Delphi totaled
-54-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $300,000. The Company believes that these claims will qualify as
reclamation claims that should be accorded priority ahead of general unsecured
claims. The Company believes that its reserve for uncollectible accounts
receivable is adequate; however, the Company's results of operations could be
materially adversely affected if any of the Company's other large customers
experience financial difficulties that cause them to delay or fail to make
payments for goods sold to them.
Net sales to Delphi Packard Electric Systems, a business unit of Delphi
Corporation, of connector seals for automotive wiring harnesses totaled
$11,527,000, $19,802,000, and $20,227,000 during 2005, 2004, and 2003,
respectively. For 2004 and 2003, substantially all of the connector seals that
the Company sold to Delphi were sold pursuant to a supply agreement that was
scheduled to expire on December 31, 2004. During 2005, Delphi Packard in-sourced
34 high-volume connector seals that had been produced by the Company's connector
seals division. The majority of in-sourced parts were taken over by Delphi
Packard on January 1, 2005, although several parts were taken over at various
times during the first half of 2005. Effective January 1, 2005, Delphi Packard
and the connector seals division entered into an agreement pursuant to which
Delphi Packard agreed to purchase from the division 100% of its requirements
through December 31, 2009, for all connector seals not designated to be
in-sourced. Pursuant to the agreement, the connector seals division received
price increases on a majority of the connector seals covered by the new
agreement, which offset a substantial portion of the profit lost due to the
in-sourcing. The Company has restructured the operations of the connector seals
division to reduce expenses and further mitigate the impact of the reduced
volume. The restructuring of the connector seals division included the closing
of its LaGrange, Georgia, manufacturing facility and the consolidation of all
connector seal manufacturing at its facility in Vienna, Ohio. The Company
estimates that during 2005, the net effect of the Delphi Packard in-sourcing and
the price increases on the remaining connector seals reduced net sales by
approximately $4,370,000, but had a negligible effect on income from operations.
-55-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT FINANCIAL DATA
Information relating to the Company's operating segments and the Corporate
Office at December 31, 2005, 2004, and 2003 is summarized below (dollar amounts
in thousands):
YEARS ENDED DECEMBER 31
-----------------------------
2005 2004 2003
------- -------- --------
NET SALES:
Rubber Group $84,884 $ 99,565 $103,243
Metals Group 11,958 10,788 9,988
------- -------- --------
Total net sales $96,842 $110,353 $113,231
======= ======== ========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 7,034 $ 9,865 $ 10,026
Metals Group (315) (2,788) (1,840)
------- -------- --------
Subtotal 6,719 7,077 8,186
Corporate Office (2,322) (2,411) (2,679)
------- -------- --------
Total income from operations $ 4,397 $ 4,666 $ 5,507
======= ======== ========
DEPRECIATION AND AMORTIZATION(1):
Rubber Group $ 7,226 $ 6,929 $ 7,121
Metals Group 1,138 1,476 1,796
------- -------- --------
Subtotal 8,364 8,405 8,917
Corporate Office 10 39 38
------- -------- --------
Total depreciation and amortization $ 8,374 $ 8,444 $ 8,955
======= ======== ========
CAPITAL EXPENDITURES(2):
Rubber Group $ 3,034 $ 5,277 $ 4,873
Metals Group 292 773 799
------- -------- --------
Subtotal 3,326 6,050 5,672
Corporate Office 4 7 14
------- -------- --------
Total capital expenditures $ 3,330 $ 6,057 $ 5,686
======= ======== ========
DEC. 31, DEC. 31, DEC. 31,
2005 2004 2003
-------- -------- --------
ASSETS:
Rubber Group $50,412 $60,377 $61,953
Metals Group 7,692 9,872 10,231
------- ------- -------
Subtotal 58,104 70,249 72,184
Corporate Office 2,511 3,352 4,111
------- ------- -------
Total assets(3) $60,615 $73,601 $76,295
======= ======= =======
(1) Excludes amortization of deferred financing expenses, which totaled
$1,315,000, $1,098,000, and $610,000, during 2005, 2004, and 2003,
respectively, and which is included in interest expense in the consolidated
financial statements.
(2) Capital expenditures for 2004 included $144,000 of equipment purchased
under capitalized lease obligations and $198,000 of equipment acquired with
seller-provided financing. Capital expenditures for 2003 included $720,000
of equipment purchased under capitalized lease obligations.
(3) At December 31, 2005, 2004, and 2003 the assets of discontinued operations
totaled $1,728,000, $4,776,000, and $7,392,000, respectively.
-56-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common share
for 2005, 2004, and 2003, are set forth below (in thousands, except per share
amounts). The assumed conversion of the Series B Preferred Stock and the assumed
exercise of outstanding warrants to purchase the Company's common stock were not
dilutive. As a result, the weighted average number of outstanding common shares
used in the calculation of net income (loss) per common share set forth below
does not reflect the assumed conversion of the Series B Preferred Stock or the
assumed exercise of the warrants.
During 2003, the Company's loss per share calculation reflected $106,000 of
dividends on the Series B Preferred Stock. Dividends on and increases in fair
value of the Series B preferred stock subsequent to the adoption of FAS 150 by
the Company on July 1, 2003, are classified as interest expense in the Company's
consolidated statements of operations.
YEARS ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
Numerator for basic and diluted earnings per share:
Income (loss) from continuing operations before
deducting preferred stock dividends $(4,427) $ 4,798 $(1,549)
Less: Preferred stock dividends -- -- 106
------- ------- -------
Income (loss) from continuing operations after
deducting preferred stock dividends (4,427) 4,798 (1,655)
Income (loss) from discontinued operations 644 (3,208) (4,653)
Cumulative effect of change in accounting principle -- -- (247)
------- ------- -------
Net income (loss) applicable to common stockholders (3,783) 1,590 (6,555)
======= ======= =======
Denominator: Weighted average shares outstanding $ 4,932 $ 4,932 $ 4,832
======= ======= =======
Basic and diluted income (loss) per share of common stock:
Continuing operations $ (0.90) $ 0.97 $ (0.35)
Discontinued operations 0.13 (0.65) (0.96)
Cumulative effect of change in accounting principle -- -- (0.05)
------- ------- -------
Net income (loss) $ (0.77) $ 0.32 $ (1.36)
======= ======= =======
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
At December 31, 2005, the Company had $400,000 of unrecorded commitments
outstanding to purchase equipment.
-57-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASES
The Company is lessee under various operating leases relating to storage
and office space, temporary office units, and equipment. Total rent expense
under operating leases from continuing operations aggregated $438,000, $440,000,
and $395,000 for 2005, 2004, and 2003, respectively. At December 31, 2005,
future minimum lease commitments under noncancelable operating leases of
continuing operations totaled $195,000, $64,000, and $54,000 for 2006, 2007, and
2008, respectively. Commitments subsequent to 2008 are not significant.
LEGAL ACTIONS
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. It is the Company's policy to record accruals for such matters when
a loss is deemed probable and the amount of such loss can be reasonably
estimated. The various actions to which the Company is or may in the future be a
party are at various stages of completion. Although there can be no assurance as
to the outcome of existing or potential litigation, the Company believes, based
upon the information currently available to it, that the outcome of such actions
will not have a material adverse effect upon its results of operations or
financial condition.
OTHER
The Company maintains insurance coverage for certain aspects of its
business and operations. Based on the Company's evaluation of the various risks
to which it may be exposed, the Company has elected to retain a portion of the
potential losses that it could experience in the future through the use of
various deductibles, limits, and retentions. These forms of self-insurance
subject the Company to possible future liability for which it is partially or
completely uninsured. Although there can be no assurance that it will be
successful in its efforts, the Company attempts to limit future liability
through, among other things, the ongoing training and education of its
employees, the implementation of safety programs, the ongoing testing and
evaluation of the safety and suitability of its workplace environments, the
development of sound business practices, and the exercise of care and judgment
in the negotiation of contracts.
NOTE 11 -- RELATED PARTIES
The Chairman of the Board and the President of the Company are the
Company's two largest stockholders, with beneficial ownership of 33.0% and
28.0%, respectively, of the Company's common stock. They are also the holders of
the 13% Junior Subordinated Note, and, together with affiliates and associates,
the holders of $4,927,000 principal amount of 12% Senior Subordinated Notes and
49,270 warrants to purchase common stock. In December 2003, they converted
accrued interest of $235,000 on the Company's junior subordinated notes into
103,731 shares of common stock.
In 2005 and 2004, the Chairman of the Board and the President of the
Company, through an investment banking firm of which they are the only partners,
were paid $700,000 to provide management and investment banking services. During
2003, the Company paid them fees of $500,000. Additionally, Messrs. Delano and
Lubin may receive incentive compensation tied to the Company's operating
performance and other compensation for specific transactions completed by the
Company with their assistance. The Company also reimburses their firm for
certain out-of-pocket expenses. During 2005,
-58-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004, and 2003, the Company reimbursed their firm for expenses of $110,000,
$163,000, and $200,000, respectively.
For more information on the compensation of the Company's executive
officers, refer to the Company's proxy statement to be issued and filed during
April, 2006 in connection with the Company's Annual Meeting of Stockholders.
NOTE 12 -- GAIN ON THE REPURCHASE OF DEBT
During 2005 and 2004, the Company recognized $77,000 and $8,598,000,
respectively, of pre-tax gains on the repurchase of its debt.
REPURCHASE OF 12 3/4% SENIOR SUBORDINATED NOTES
During 2005, the Company repurchased $133,000 principal amount of 12 3/4%
Senior Subordinated Notes, together with accrued interest thereon of $97,000,
for $153,000, and recorded a $77,000 pre-tax gain.
REPURCHASE OF 10 1/2% SENIOR, UNSECURED NOTE
During 2004, the Company repurchased its $7,500,000 10 1/2% senior,
unsecured note together with accrued interest thereon for $5,810,000 and
recorded a $3,252,000 pre-tax gain.
REPURCHASE OF 12% SENIOR SUBORDINATED NOTES
During 2004, the Company repurchased $8,264,000 principal amount of its 12%
Senior Subordinated Notes together with accrued interest thereon at an aggregate
cost of $2,892,000. After the write-off of deferred financing expenses of
$192,000, the Company recorded a $5,346,000 pre-tax gain.
NOTE 13 -- DISCONTINUED OPERATIONS
During 2004, the Company committed to a plan to discontinue the operations
of its die casting division and initiated a program to sell the division.
Accordingly, the results of operations, assets, liabilities, and cash flows of
the die casting division have been classified as discontinued operations in the
consolidated financial statements.
In August, 2005, the Company sold substantially all of the die casting
division's equipment and remaining inventory and certain other assets for
$2,452,000 in cash and a 10% unsecured promissory note in the principal amount
of $200,000, payable on April 30, 2008. As a result, the Company recorded a
pretax gain on the sale of the division's assets of $568,000. The net proceeds
of the sale were used to pay down the equipment term loans and the loans under
the revolving line of credit. As a result of the sale and in accordance with the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," during 2005, the Company
increased the fair value of the die casting equipment by $542,000, which equaled
the previously recognized equipment impairment charge recorded when the die
casting division was reclassified as discontinued operations. The increase in
fair value is included in income from discontinued operations for 2005.
-59-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with Financial Accounting Standards Board Emerging Issue Task
force Abstract No. 87-24, "Allocation of Interest to Discontinued Operations"
("EITF 87-24"), the Company has allocated interest to the discontinued
operations based on the amount and the terms of the debt that was or will be
required to be repaid using management's estimate of the proceeds realized or to
be realized on the actual or possible sale of the die casting assets. No
allocation was made to the die casting division for any other interest or for
any corporate office expenses. Interest expense allocated to the die casting
division totaled $262,000, $241,000, and $69,000 for 2005, 2004, and 2003,
respectively.
In connection with the sale, the purchaser has signed an agreement to lease
the die casting facility from the Company for $150,000 per year. Under the lease
agreement, the purchaser has an option to purchase the land and building for
$1,500,000. During 2005, the Company recorded a $230,000 provision for the
projected cost of certain environmental remediation at the die casting
division's manufacturing facility. The provision is included in income from
discontinued operations.
The following table summarizes certain operating data of the die casting
division for 2005, 2004, and 2003 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
--------------------------
2005 2004 2003
------ ------- -------
Net sales $3,381 $ 9,096 $ 8,385
====== ======= =======
Income (loss) from operations before asset impairment
charge, increase in carrying value of assets held for sale,
gain on the sale of assets, and impairment of goodwill $ 130 $(1,372) $(1,996)
Impairment of long-lived assets -- (1,595) (2,427)
Increase in carrying value of assets held for sale 542 -- --
Gain on sale of assets 568 -- --
Impairment of goodwill -- -- (161)
------ ------- -------
Income (loss) from discontinued operations 1,240 (2,967) (4,584)
Allocated interest expense 262 241 69
------ ------- -------
Income (loss) from discontinued operations before
income taxes 978 (3,208) (4,653)
Income tax provision (1) 334 -- --
------ ------- -------
Income (loss) from discontinued operations $ 644 $(3,208) $(4,653)
====== ======= =======
(1) The income tax provision in 2005 was offset by an income tax benefit
recorded in continuing operations. Income tax benefits in 2004 and 2003
were offset by provisions for valuation allowances.
-60-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the assets and liabilities of the die
casting division in the Company's consolidated balance sheets at December 31,
2005 and 2004 (dollar amounts in thousands); the liabilities reflected in the
table do not include debt that is secured by assets of the division:
DECEMBER 31
---------------
2005 2004
------ ------
ASSETS:
Current assets:
Cash $ 1 $ --
Accounts receivable, net 47 1,056
Inventories, net -- 695
Prepaid expenses and other current assets 206 271
------ ------
Total current assets 254 2,022
Plant and equipment, net 1,474 2,754
------ ------
Total assets $1,728 $4,776
====== ======
LIABILITIES:
Current liabilities:
Accounts payable $ 194 $ 615
Accrued expenses 291 179
------ ------
Total liabilities $ 485 $ 794
====== ======
-61-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly unaudited financial data for the eight fiscal quarters ended
December 31, 2005, is set forth below (dollar amounts in thousands, except per
share amounts).
QUARTERS ENDED 2005
--------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
Net sales $26,284 $25,294 $23,502 $21,762
======= ======= ======= =======
Gross profit $ 3,122 $ 2,741 $ 1,978 $ 1,632
======= ======= ======= =======
Loss from continuing operations $ (994) $ (150) $(1,857) $(1,426)
Income (loss) from discontinued operations 294 167 411 (228)
------- ------- ------- -------
Net income (loss) $ (700) $ 17 $(1,446) $(1,654)
======= ======= ======= =======
Basic and diluted income (loss) per share
of common stock:
Continuing operations $ (0.20) $ (0.03) $ (0.37) $ (0.29)
Discontinued operations 0.06 0.03 0.08 (0.05)
------- ------- ------- -------
Net income (loss) $ (0.14) $ -- $ (0.29) $ (0.34)
======= ======= ======= =======
QUARTERS ENDED 2004
--------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- -------
Net sales $30,607 $29,474 $25,880 $24,392
======= ======= ======= =======
Gross profit $ 4,146 $ 3,093 $ 2,817 $ 1,993
======= ======= ======= =======
Income (loss) from continuing operations $ 103 $ 2,139 $(1,194) $ 3,750
Loss from discontinued operations (259) (857) (1,525) (567)
------- ------- ------- -------
Net income (loss) $ (156) $ 1,282 $(2,719) $ 3,183
======= ======= ======= =======
Basic and diluted income (loss) per share
of common stock
Continuing operations $ 0.02 $ 0.42 $ (0.25) $ 0.76
Discontinued operations (0.05) (0.16) (0.30) (0.11)
------- ------- ------- -------
Net income (loss) $ (0.03) $ 0.26 $ (0.55) $ 0.65
======= ======= ======= =======
Results of operations for the second and fourth quarters of 2005 include
gains on the sale of assets held for sale of $1,100,000 and $571,000,
respectively. Results of discontinued operations include an increase in the
carrying value of assets held for sale in the amount of $542,000 for the second
quarter of 2005, and a gain on the sale of assets held for sale in the amount of
$568,000 for the third quarter of 2005.
Results of the discontinued operations for the third and fourth quarters of
2004, included non-cash, pre-tax impairment charges of $928,000 and $667,000,
respectively, to reduce the carrying value of the assets of the discontinued die
casting division to management's estimate of the then-current fair value of such
assets, which approximated the then projected proceeds to be realized on the
disposition of the assets, net of selling costs.
-62-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 -- PLANT CLOSINGS AND SALES OF LAND AND BUILDINGS
In May 2005, the Metals Group sold its land and building in Casa Grande,
Arizona, and received net proceeds of $2,636,000, which were applied to reduce
the Company's real estate term loan. As a result, the Company recorded a pre-tax
gain of $1,100,000 during the second quarter of 2005. At March 31, 2005, the
property was categorized as an asset held for sale but not as part of
discontinued operations. During 2005, 2004, and 2003, the operating results of
the Metals Group included operating losses of $87,000, $334,000, and $559,000,
respectively, incurred at the Casa Grande facility, excluding the gain on the
sale of the land and building. The losses incurred at the Casa Grande facility
resulted primarily from expenditures to maintain, insure, protect, and
depreciate the facility.
In October 2005, the Rubber Group sold its land and building in LaGrange,
Georgia, and received net proceeds of $1,882,000, which were applied to reduce
the Company's real estate term loan. As a result, the Company recorded a pre-tax
gain of $571,000 on the sale of the land and building during the fourth quarter
of 2005. At September 30, 2005, the land and building in LaGrange were
classified as assets held for sale in the Company's consolidated balance sheet.
During 2005, the Company incurred costs of $633,000 related to the closing of
the facility, which are included in cost of sales on the consolidated statement
of operations.
-63-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 our disclosure controls and procedures as of December 31, 2005.
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, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's 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.
ITEM 9B. OTHER INFORMATION
None.
-64-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 is incorporated by reference to the
sections entitled "Election of Directors" and "Executive Officers" in the
Company's proxy statement to be issued in connection with its 2006 Annual
Meeting of Stockholders and to be filed with the Securities and Exchange
Commission (the Commission) not later than 120 days after December 31, 2005.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference to the section
entitled "Executive Compensation" in the Company's proxy statement to be issued
in connection with its 2006 Annual Meeting of Stockholders and to be filed with
the Commission not later than 120 days after December 31, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by Item 12 is incorporated by reference to the
sections entitled "Security Ownership" and "Equity Compensation Plan
Information" in the Company's proxy statement to be issued in connection with
its 2006 Annual Meeting of Stockholders and to be filed with the Commission not
later than 120 days after December 31, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated by reference to the section
entitled "Certain Relationships and Transactions" in the Company's proxy
statement to be issued in connection with its 2006 Annual Meeting of
Stockholders and to be filed with the Commission not later than 120 days after
December 31, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 is incorporated by reference to the section
entitled "Ratification of Appointment of Independent Auditors" in the Company's
proxy statement to be issued in connection with its 2006 Annual Meeting of
Stockholders and to be filed with the Commission not later than 120 days after
December 31, 2005.
-65-
PART IV
ITEM 15. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Lexington Precision
Corporation and its wholly owned subsidiaries, Lexington Rubber Group,
Inc. and Lexington Precision GmbH, are included in Part II, Item 8.
2. FINANCIAL STATEMENT SCHEDULE
Schedule II, "Valuation and Qualifying Accounts and Reserves," is
included in this Part IV, Item 15, on page 74. All other schedules are
omitted because the required information is not applicable, not
material, or included in the consolidated financial statements or the
notes thereto.
3. EXHIBITS
3-1 Articles of Incorporation and Restatement thereof
3-2 By-laws, as amended
3-3 Certificate of Correction dated September 21, 1976
3-4 Certificate of Ownership and Merger dated May 24, 1977
3-5 Certificate of Ownership and Merger dated May 31, 1977
3-6 Certificate of Reduction of Capital dated December 30, 1977
3-7 Certificate of Retirement of Preferred Shares dated December 30,
1977
3-8 Certificate of Reduction of Capital dated December 28, 1978
3-9 Certificate of Retirement of Preferred Shares dated December 28,
1978
3-10 Certificate of Reduction of Capital dated January 9, 1979
3-11 Certificate of Reduction of Capital dated December 20, 1979
3-12 Certificate of Retirement of Preferred Shares dated December 20,
1979
3-13 Certificate of Reduction of Capital dated December 16, 1982
3-14 Certificate of Reduction of Capital dated December 17, 1982
3-15 Certificate of Amendment of Restated Certificate of Incorporation
dated September 26, 1984
-66-
3-16 Certificate of Retirement of Stock dated September 24, 1986
3-17 Certificate of Amendment of Restated Certificate of Incorporation
dated November 21, 1986
3-18 Certificate of Retirement of Stock dated January 15, 1987
3-19 Certificate of Retirement of Stock dated February 22, 1988
3-20 Certificate of Amendment of Restated Certificate of Incorporation
dated January 6, 1989
3-21 Certificate of Retirement of Stock dated August 17, 1989
3-22 Certificate of Retirement of Stock dated January 9, 1990
3-23 Certificate of the Designations, Preferences and Relative
Participating, Optional and Other Special Rights of 12%
Cumulative Convertible Exchangeable Preferred Stock, Series C,
and the Qualifications, Limitations and Restrictions thereof
dated January 10, 1990
3-24 Certificate of Ownership and Merger dated April 25, 1990
3-25 Certificate of Elimination of 12% Cumulative Convertible
Exchangeable Preferred Stock, Series C, dated June 4, 1990
3-26 Certificate of Retirement of Stock dated March 6, 1991
3-27 Certificate of Retirement of Stock dated April 29, 1994
3-28 Certificate of Retirement of Stock dated January 6, 1995
3-29 Certificate of Retirement of Stock dated January 5, 1996
3-30 Certificate of Retirement of Stock dated January 6, 1997
3-31 Certificate of Retirement of Stock dated January 9, 1998
3-32 Certificate of Retirement of Stock dated January 13, 1999
3-33 Certificate of Retirement of Stock dated January 26, 2000
4-1 Certificate of Designations, Preferences, Rights and Number of
Shares of Redeemable Preferred Stock, Series B
4-2 Purchase Agreement dated as of February 7, 1985, between
Lexington Precision Corporation ("LPC") and L&D Precision Limited
Partnership ("L&D Precision") and exhibits thereto
-67-
4-3 Amendment Agreement dated as of April 27, 1990, between LPC and
L&D Precision with respect to Purchase Agreement dated as of
February 7, 1985
4-4 Recapitalization Agreement dated as of April 27, 1990, between
LPC and L&D Woolens Limited Partnership ("L&D Woolens") and
exhibits thereto
4-5 Indenture dated as of August 1, 1993, between LPC and IBJ
Schroder Bank & Trust Company, as Trustee
4-6 Specimen of 12 3/4% Senior Subordinated Note, due February 1,
2000
4-7 Indenture, dated as of December 18, 2003, between the Company and
Wilmington Trust Company, as Trustee
4-8 Registration Rights Agreement, dated as of December 18, 2003,
between the Company and Purchasers listed therein
4-9 Form of Unit
4-10 Form of Warrant
4-11 Form of 12% Senior Subordinated Note due August 1, 2009
4-12 Form of 13% Junior Subordinated Note due November 1, 2009
10-1 Purchase Agreement dated as of February 7, 1985, between LPC and
L&D Precision and exhibits thereto
10-2 Amendment Agreement dated as of April 27, 1990, between LPC and
L&D Precision with respect to Purchase Agreement dated as of
February 7, 1985
10-3 Lexington Precision Corporation Flexible Compensation Plan, as
amended
10-4 1986 Restricted Stock Award Plan, as amended
10-5 Lexington Precision Corporation Retirement and Savings Plan, as
amended
10-6 Description of 2005 Compensation Arrangements with Lubin, Delano,
& Company - filed herewith
10-7 Corporate Office 2002 Management Cash Bonus Plan
10-8 Recapitalization Agreement dated as of April 27, 1990, between
LPC and L&D Woolens and exhibits thereto
10-9 Exchange Agreement, dated as of December 18, 2003, between the
Company and each of Michael A. Lubin and Warren Delano
10-10 Warrant Agent Agreement, Dated as of December 18, 2003, between
the Company and Wilmington Trust Company, as Warrant Agent
-68-
10-11 Amended and Restated Loan and Security Agreement, dated as of
December 18, 2003, by and among the Company and Lexington Rubber
Group, Inc., as borrowers, and Congress Financial Corporation, as
Agent, The CIT Group/Commercial Financing, Inc., as Co-Agent, and
the lenders from time to time party thereto
10-12 Pledge and Security Agreement, dated as of December 18, 2003,
made by the Company in favor of Congress, as agent
10-13 Amended and Restated Term Promissory Note, dated December 18,
2003, made by the Company in favor of Congress Financial
Corporation, as agent, in the original principal amount of
$4,000,000
10-14 Amended and Restated Term Promissory Note, dated as of December
18, 2003, made by Lexington Rubber Group, Inc. in favor of
Congress Financial Corporation, as agent, in the original
principal amount of $9,500,000
10-15 Loan and Security Agreement, dated December 18, 2003, by and
among the Company and Lexington Rubber Group, Inc., as Borrowers,
Ableco Finance LLC, as Agent, and the lenders from time to time
party thereto
10-16 Pledge and Security Agreement, dated December 18, 2003, made by
the Company in favor of Ableco Finance LLC, as agent
10-17 Payoff Agreement, dated as of December 18, 2003, by and between
Nomura Special Situations Investment Trust and the Company
10-18 Amendment No. 1 to Loan and Security Agreement dated as of March
31, 2004, by and among the Company, Lexington Rubber Group, Inc.,
and Ableco Finance LLC
10-19 Amendment No. 1 to Amended and Restated Loan and Security
Agreement dated as of March 19, 2004, by and among the Company,
Lexington Rubber Group, Inc. and Congress Financial Corporation
10-20 Amendment No. 2 to Amended and Restated Loan and Security
Agreement dated as of August 16, 2004, by and among the Company,
Lexington Rubber Group, Inc. and Congress Financial Corporation
10-21 Amendment No. 3 to Loan and Security Agreement dated as of
August 16, 2004, by and among the Company, Lexington Rubber
Group, Inc. and Ableco Finance LLC
10-22 Loan Agreement, dated as of September 3, 2004, by and among the
Company, Lexington Rubber Group, Inc., and Cohanzick High Yield
Partners, L.P.
10-23 Term Note, dated as of September 7, 2004, made by the Company
and Lexington Rubber Group, Inc., in favor of Cohanzick High
Yield Partners, L.P., in the original principal amount of
$7,000,000
-69-
10-24 Waiver and consent, dated as of September 3, 2004, by Ableco
Finance LLC in favor of the Company and Lexington Rubber Group,
Inc.
10-25 Amendment No. 3 to Amended and Restated Loan and Security
Agreement dated as of September 3, 2004, by and among the
Company, Lexington Rubber Group, Inc. and Congress Financial
Corporation
10-26* Delphi Corporation Lifetime Contract, dated as of November 22,
2004, by and between Delphi Automotive Systems LLC and Lexington
Connector Seals
10-27 Amendment No. 4 to Amended and Restated Loan and Security
Agreement, dated as of January 27, 2005, by and among the
Company, Lexington Rubber Group, Inc. and Wachovia Bank, National
Association
10-28 Second Amended and Restated Term Promissory Note, dated January
27, 2005, made by the Company in favor of Wachovia Bank, National
Association in the principal amount of $2,944,000
10-29 Second Amended and Restated Term Promissory Note, dated January
27, 2005, made by Lexington Rubber Group, Inc. in favor of
Wachovia Bank, National Association in the principal amount of
$8,456,000
10-30 Amendment No. 4 to Loan and Security Agreement, dated as of
January 27, 2005, by and among the Company, Lexington Rubber
Group, Inc. and Ableco Finance LLC
10-31 Amendment No. 1 to Intercreditor Agreement, dated as of January
27, 2005, by and between Wachovia Bank, National Association and
Ableco Finance LLC
10-32 Amendment No. 4 to Amended and Restated Loan and Security
Agreement, dated as of January 27, 2005, by and among Lexington
Precision Corporation, Lexington Rubber Group, Inc., the lenders
party to the Amended and Restated Loan and Security Agreement and
Wachovia Bank, National Association, as agent for the lenders
10-33 Second Amended and Restated Term Promissory Note, dated as of
January 27, 2005, by Lexington Precision Corporation, as debtor,
payable to the order of Wachovia Bank, National Association, as
agent for the lenders under the Amended and Restated Loan and
Security Agreement
10-34 Second Amended and Restated Term Promissory Note, dated as of
January 27, 2005, by Lexington Rubber Group, Inc., as debtor,
payable to the order of Wachovia Bank, National Association, as
agent for the lenders under the Amended and Restated Loan and
Security Agreement
10-35 Amendment No. 4 to Loan and Security Agreement, dated as of
January 27, 2005, by and among Lexington Precision Corporation,
Lexington Rubber Group, Inc., the lenders party to the Loan and
Security Agreement and Ableco Finance LLC as agent for the
lenders
-70-
10-36 Amendment No. 1 to Intercreditor Agreement, dated as of January
27, 2005, by Wachovia Bank, National Association, as agent for
the lenders under the Working Capital Loan and Security
Agreement, and Ableco Finance LLC, as agent for the lenders under
the Term Loan and Security Agreement
10-37 Purchase Agreement, dated as of February 22, 2005, by and
between Lexington Precision Corporation and City of Casa Grande
10-38 Lexington Precision Corporation 2005 Stock Award Plan -
incorporated by reference from Exhibit A to the Proxy Statement
on Schedule 14A of Lexington Precision Corporation filed with the
Securities and Exchange Commission on April 22, 2005
10-39 Form of the Incentive Stock Option Award Agreement Pursuant to
the Lexington Precision Corporation 2005 Stock Award Plan
10-40 Form of the Non-Qualified Stock Option Award Agreement Pursuant
to the Lexington Precision Corporation 2005 Stock Award Plan
10-41 Form of the Restricted Stock Award Agreement Pursuant to the
Lexington Precision Corporation 2005 Stock Award Plan
10-42 Equipment Purchase Agreement dated as of August 2, 2005, between
Lexington Precision Corporation and Premier Tool & Die Cast Corp.
10-43 Bailment Agreement dated as of August 2, 2005, between Lexington
Precision Corporation and Premier Tool & Die Cast Corp.
10-44 Indemnity Agreement dated as of August 2, 2005, between
Lexington Precision Corporation and Premier Tool & Die Cast Corp.
10-45 Amendment No. 5 to the Loan and Security Agreement, dated as of
June 30,, 2005, by and among the Company, Lexington Rubber Group,
Inc., the lenders a party to the Loan and Security Agreement and
Ableco Finance LLC, as Agent
10-46 Amendment No. 5 to the Amended and Restated Loan and Security
Agreement, dated as of June 30, 2005, by and among the Company,
Lexington Rubber Group, Inc., the lenders a party to the Amended
and Restated Loan and Security Agreement and Wachovia Bank,
National Association, as Agent
10-47 Waiver and Consent, dated as of August 2, 2005, among the
Company, Lexington Rubber Group, Inc., and Ableco Finance LLC, as
Lender and Agent
10-48 Waiver and Consent, dated as of August 2, 2005, among the
Company, Lexington Rubber Group, Inc, the Lenders and Wachovia
Bank, National Association, as Agent
10-49 Amendment No. 6 to the Amended and Restated Loan and Security
Agreement, dated as of September 30, 2005, by and among the
Company, Lexington Rubber
-71-
Group, Inc, the lenders a party to the Amended and Restated Loan
and Security Agreement and Wachovia Bank, National Association,
as Agent
10-50 Amendment No. 6 to Loan and Security Agreement, dated as of
September 30, 2005, by and among the Company, Lexington Rubber
Group, Inc., the lenders a party to the Loan and Security
Agreement and Ableco Finance LLC, as Agent
10-51 Amendment No. 7 to the Amended and Restated Loan and Security
Agreement, dated as of November 3, 2005, between the Company,
Lexington Rubber Group, Inc, the lenders a party to the Amended
and Restated Loan and Security Agreement and Wachovia Bank,
National Association, as Agent
10-52 Lease Agreement dated as of December 31, 2005, between the
Company and Premier Lakewood, Inc.
10-53 Indemnity Agreement, dated as of December 31, 2005, between the
Company and Premier Lakewood, Inc.
10-54 Guarantee, dated as of December 31, 2005, by Premier Tool & Die
Cast Corp. in favor of the Company
21-1 Significant Subsidiary of Registrant - filed herewith
31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Michael A.
Lubin, Chairman of the Board and Co-Principal Executive Officer
of the registrant - filed herewith
31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Warren
Delano, President and Co-Principal Executive Officer of the
registrant - filed herewith
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 - filed herewith
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 - filed herewith
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 - filed herewith
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 - filed herewith
* Portions of this exhibit have been omitted pursuant to a request
for confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended, and the omitted material has
been separately filed with the Securities and Exchange
Commission.
-72-
(b) REPORTS ON FORM 8-K
On November 17, 2005, we filed a report on Form 8-K that included a press
release dated November 17, 2005, announcing our financial results for the
quarter ended September 30, 2005.
On February 1, 2006, we filed a report on Form 8-K stating that on January
26, 2006, the Company granted 50,000 restricted shares of its common stock,
$0.25 par value per share, to an employee of the Company under the terms of
the Company's 2005 Stock Award Plan.
-73-
LEXINGTON PRECISION CORPORATION
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
OF CONTINUING OPERATIONS
(THOUSANDS OF DOLLARS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END
OF PERIOD EXPENSES RESERVES OF PERIOD
---------- ---------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 2005 $ 537 $170 $ 10 $697
Year ended December 31, 2004 545 380 388 537
Year ended December 31, 2003 542 148 145 545
INVENTORY RESERVE
Year ended December 31, 2005 $ 845 $ 11 $421 $435
Year ended December 31, 2004 931 110 196 845
Year ended December 31, 2003 1,002 732 803 931
-74-
SIGNATURES
Pursuant to the requirements of Section 13 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)
By: /s/ Warren Delano
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Warren Delano, President
March 30, 2006
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2006:
PRINCIPAL EXECUTIVE OFFICERS AND
DIRECTORS:
/s/ Michael A. Lubin
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Michael A. Lubin, Chairman of the
Board
/s/ Warren Delano
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Warren Delano, President and Director
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
/s/ Dennis J. Welhouse
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Dennis J. Welhouse, Senior Vice
President, Chief Financial Officer,
and Secretary
DIRECTORS:
/s/ William B. Conner
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William B. Conner, Director
/s/ Kenneth I. Greenstein
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Kenneth I. Greenstein, Director
/s/ Joseph A. Pardo
- -------------------------------------
Joseph A. Pardo, Director
/s/ Elizabeth H. Ruml
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Elizabeth H. Ruml, Director
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