Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

OR

Commission File Number:  1-3574

HASTINGS MANUFACTURING COMPANY
(Exact Name of Registrant as Specified in Its Charter)

Registrant's Telephone Number, Including Area Code: 269-945-2491

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Hastings Manufacturing Company and Subsidiaries

Contents

FORWARD-LOOKING STATEMENTS

With the exception of historical matters, the matters discussed in this Form 10-Q include forward-looking statements that describe plans, objectives, goals, expectations or projections of Hastings Manufacturing Company and subsidiaries (the "Company"). These forward-looking statements are identifiable by words or phrases indicating that the Company or management "expects," "anticipates," "projects," "plans" or "believes" that a particular event or result "may occur," "should occur," "will likely occur" or "may possibly occur" in the future, or that an event or result is "probable," "more likely than not" or "less likely than not," or similar statements. In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Form 10-Q, there are many important factors that could cause actual results to be materially different from the Company's current expectations.

Anticipated future sales are subject to competitive pressures from many sources. As an example, future sales could be affected by consolidation within the automotive replacement parts industry, whereby the Company could lose sales due to a competitor purchasing all of the assets of a current customer of the Company. Future sales could also be affected by current and future political and economic factors in the foreign markets where the Company conducts business.

Cost of sales and operating expenses may be adversely affected by unexpected costs associated with various issues. For example, future cost of sales could be affected by unexpected expenses related to the future maintenance of a lean manufacturing environment. Future operating expenses could also be affected, for example, by such items as unexpected large claims within the Company's self-funded group health insurance plan or bad debt expenses related to deterioration in the credit worthiness of a customer or customers. Furthermore, the economies of scale and operating results actually realized from the Company's March 2003 acquisitions of Ertel and Syzygy may not be at the levels anticipated by the Company.

As discussed elsewhere in this Form 10-Q, at September 30, 2003, the Company was in violation of certain covenants under its term loan agreement with its primary lender. As of the date of this Form 10-Q, the lender has not issued a waiver of the violations, nor has it agreed to amend any of the covenants. As such, the lender has the right to declare all of the Company's obligations immediately due and payable. While management does not believe that this action is likely, there can be no assurance that the Company will obtain necessary waivers of or revisions to such covenants.

As previously reported, in October, the Company filed the appropriate documents to voluntarily delist its common stock from the American Stock Exchange and to terminate its status as a reporting Company with the Securities and Exchange Commission. Upon completion of this process, the Company expects that its common stock should be immediately eligible for trading through the "pink sheets," an electronic quotation service for over-the-counter securities. However, there can be no assurance that an active trading market for the Company's common stock will develop in the pink sheets.

The foregoing is intended to provide meaningful cautionary statements of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The foregoing should not be construed as an exhaustive list of all economic, competitive, governmental and technological factors that could adversely affect the Company's expected consolidated financial position, results of operations or liquidity. The Company disclaims any obligation to update its forward-looking statements to reflect subsequent events or circumstances.

Report on Review by Independent Certified Public Accountants

Board of Directors
Hastings Manufacturing Company
Hastings, Michigan

We have reviewed the accompanying condensed consolidated balance sheets of Hastings Manufacturing Company and subsidiaries as of September 30, 2003, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2003 and 2002, and cash flows for the nine-month periods ended September 30, 2003 and 2002, included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended September 30, 2003. These condensed consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein). In our report dated February 28, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/BDO Seidman, LLP

BDO Seidman, LLP
Grand Rapids, Michigan
October 31, 2003

PART I - FINANCIAL INFORMATION

Item 1.     Financial Statements

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Balance Sheets

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Statements of Income

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See accompanying independent accountants' review report and notes to condensed consolidated financial statements.

Hastings Manufacturing Company and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

In the opinion of the management of Hastings Manufacturing Company and subsidiaries (the "Company"), the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position as of September 30, 2003, and the results of operations for the three months and nine months ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002.

The results of operations for the nine months ended September 30, 2003 are not necessarily indicative of the expected results for all of 2003.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances, transactions and stockholdings have been eliminated.

The accompanying consolidated financial statements are condensed and do not contain all of the information and footnote disclosures required by generally accepted accounting principles in a complete set of financial statements.

Acquisitions

As discussed in Note 2, the accompanying condensed consolidated balance sheet as of September 30, 2003 includes the accounts of acquired businesses. The accompanying condensed consolidated statements of income reflect the results of operations of the acquired businesses beginning with the second quarter of 2003.

Stock Compensation

The Company has decided to continue to account for stock-based employee compensation using the intrinsic value method under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted under Statement of Financial Accounting Standards No. 148, Accounting for Stock Based Compensation -- Transition and Disclosure (SFAS No. 148). Because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized at the date of issuance. Historically, the Company's stock options are 100% vested on the date of grant and, since inception of the plan, have been granted in the fourth quarter of each year. There were no stock option grants in the first nine months of 2003 or the first nine months of 2002 and, therefore, there is no pro forma effect on net income and earnings per share during these periods.

Reclassification

During preparation of the accompanying condensed consolidated financial statements as of September 30, 2003, it was determined that certain expense items related to the acquired businesses were misclassified in the June 30, 2003 condensed consolidated financial statements. Thus, in preparation of the accompanying condensed consolidated financial statements for the nine months ended September 30, 2003, the following adjustments were made to the June 30, 2003 totals: Net sales decreased $248,649;

Note 2 - Acquisitions

On March 27, 2003, the Company, through its Canadian subsidiary, Hastings, Inc., acquired 100 percent of the outstanding shares of Ertel Manufacturing Corporation of Canada, Ltd. ("Ertel") and Syzygy Auto Distribution Inc. ("Syzygy"), both Canadian corporations. Ertel and Syzygy are referred to below collectively as the "Acquired Companies." The accompanying condensed consolidated balance sheet as of September 30, 2003 includes the accounts of the Acquired Companies. The operating results of the Acquired Companies are included in the accompanying condensed consolidated statements of income beginning in the second quarter of 2003. Prior to being acquired, Ertel's and Syzygy's net sales for the year ended December 31, 2002 were approximately $16,235,000 and $149,000, respectively. (All amounts set forth in this Note 2 are in U.S. dollars.)

Ertel distributes a full line of internal engine parts through a network of distribution centers located throughout Canada. Syzygy is a distributor of consignment aftermarket products in Canada through Ertel's distribution network. As a result of these acquisitions, the Company (through Hastings, Inc.) is expected to be a leading Canadian distributor of internal engine components, including piston rings, pistons, gaskets, bearings, camshafts and other parts. The Company expects to reduce costs of the combined Canadian operations through economies of scale and various operational synergies.

Prior to the acquisitions, the Acquired Companies were closely related parties. For the purpose of this note, the purchase transactions were aggregated. Due to the nature of the distribution operations of the Acquired Companies, the purchase price was primarily determined based on the Acquired Companies' past operating results rather than their tangible assets. The acquisitions were accounted for under the purchase method of accounting with allocated goodwill and other intangible assets of $6,019,855 and $1,937,384, respectively, none of which will be deductible for tax purposes. The purchase price payable to the sellers was $6,944,710, including $4,083,000 of cash and $2,861,710 of secured term notes payable issued to the sellers (see Note 3). The total purchase price, for accounting purposes, including estimated acquisition and restructuring costs, amounted to $8,024,560. Through September 30, 2003, the Company incurred acquisition costs of $590,551. Total acquisition costs increased by $72,532 during t he third quarter of 2003, reflecting additional legal and professional fees associated with the acquisition. Costs related to restructuring efforts, as discussed below, are $489,299. This amount decreased by $86,838 in the third quarter of 2003 in comparison to the original March 31, 2003 estimate of $576,137. This decrease primarily reflects a reduction in the original estimated severance costs. The Company does not anticipate any change to the purchase price, for accounting purposes, in future periods. The following is an allocation of the total estimated purchase price:

Intangible assets of $1,937,384 were independently valued by a third party and include a trademark and a customer contract with estimated fair market values of $1,801,964 and $135,420, respectively. The trademark has an estimated useful life of 20 years. The customer contract is in effect through June 2005.

The above acquisition amounts reflect the U.S. dollar equivalent of the Canadian dollar acquisition costs, translated at the U.S.-Canadian exchange rate in effect as of the March 27, 2003 acquisition date. These amounts differ from the amounts reflected in the September 30, 2003 condensed consolidated balance sheets, as the current balance sheet amounts reflect the U.S.-Canadian exchange rate in effect as of September 30, 2003.

The following unaudited pro forma financial information presents results as if the acquisitions had occurred at the beginning of the respective periods:

These pro forma results have been prepared for comparative purposes only and include certain adjustments such as additional depreciation and amortization expense as a result of adjustments to property and equipment and intangible assets arising from the acquisitions, and from interest expense on acquisition debt. The pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the acquisitions occurred at the beginning of the respective periods or of future results. They do not include adjustments for reduced costs such as duplicative executive salaries in the Company's Canadian operations expected to result from economies of scale and operational synergies.

In connection with the acquisitions, the Company accrued an estimated $489,299 (net of the $86,838 third quarter adjustment discussed above) of restructuring costs, consisting of $330,679 of employee termination benefits for 19 salaried employees and $158,620 related to lease and other contract terminations. Since the acquisition date, $210,045 of the restructuring costs have been paid, leaving a

Note 3 - Short-Term and Long-Term Debt

In connection with the acquisitions discussed in Note 2, the Company restructured its U.S. and Canadian loan agreements. The Company's U.S. secured short-term line with its primary lender was increased from $4,250,000 to $7,000,000. This short-term line increase was the result of a sixth amendment to the Company's loan agreement. In addition to the short-term line increase, this latest amendment resulted in the following changes to the primary terms of the U.S. loan agreement: (1) an adjustment to the maximum limitation on permitted short-term borrowings equal to a "borrowing base" amounting to the sum of 75% of the value of eligible accounts receivable, 35% of the value of eligible finished goods and raw materials inventories and 20% of the inventory LIFO reserve, all related to U.S. accounts receivable and inventory, (2) a revision of the maturity date on the short-term line to April 30, 2004, (3) a revision to the effective interest rates, as discussed below, and (4) the addition of, and adjustment to, certain affirmative and negative covenants contained in the agreement. Required principal payments related to the Company's U.S. term loan remained unchanged. Borrowings under the short-term line and the term loan are secured by all U.S. accounts receivable, inventory, furniture and equipment, personal property, a mortgage lien on the Company's U.S. real property and the pledge of 65% of the capital stock of all foreign subsidiaries and are guaranteed by the Company's domestic subsidiary.

Interest for both the U.S. short-term and long-term borrowings is based on two different pricing options: a Eurodollar rate plus a factor and a floating rate (greater of the federal funds rate plus a factor, or the prime rate). As amended, the effective Eurodollar rate on the short-term line is increased by a margin rate ranging from 2.50% to 3.25%. The effective floating rate on the short-term line is the prime rate adjusted by a margin rate ranging from (.25%) to .25%. The effective Eurodollar rate on the long-term borrowings is increased by a margin rate of 2.65%. The effective floating rate on the long-term borrowings is the prime rate. The margin rates are based upon certain consolidated performance parameters. The Company is also subject to a fee on the unused portion of the short-term line at a rate of .25%.

In Canada, Hastings, Inc.'s secured $700,000 short-term line with its former lender was replaced with a secured $5,784,000 short-term line with the Canadian affiliate of the Company's primary lender. Maximum borrowings under the short-term line are limited to a "borrowing base" computed as described above for the Company's U.S. loan agreement (except for inventory, which is eligible for up to 40% of its value) relating to the U.S. short-term line, as applied to Canadian accounts receivable and inventory. This new line is secured by all Canadian accounts receivable, inventory and equipment and, through an unlimited guarantee of the Company, all other assets of the Company. Hastings, Inc. also borrowed $1,890,000 on a term loan that is secured by a first mortgage on its land and buildings located in Barrie, Ontario. This term loan is payable in 60 equal principal payments through March 2008, plus interest at prime plus 1.75%.

Interest for the Canadian short-term line is based on two different pricing options, a cost of funds rate (the bank's base rate for fixed rate loans) plus a factor and a floating rate (the prime rate) plus a factor. The effective cost of funds rate is increased by a margin rate ranging from 2.50% to 3.25%. The effective floating rate is the prime rate increased by a margin rate ranging from 1.00% to 1.75%. The

With this new borrowing capacity, the Company financed the $4,083,000 of cash paid in the acquisitions described in Note 2. The $2,861,710 secured notes payable to the sellers, as discussed in Note 2, are comprised of two notes. The first note is for $2,215,720 and payable in 16 equal quarterly principal payments through March 2007, plus interest at prime plus 1.5%. The second note is for $645,990 and payable as a balloon payment in June 2005 with monthly interest payments at prime plus 1.5%. The notes payable to the sellers are secured by all assets of Hastings, Inc. and are subordinate to a first position by the Company's primary lender. The Canadian loan agreement and the sellers' term loan require the Company to maintain certain financial balances and ratios consistent with those required by the Company's U.S. loan agreement.

The above debt amounts regarding the acquisition reflect the U.S. dollar equivalent of the Canadian dollar, translated at the U.S.-Canadian exchange rate in effect as of the March 27, 2003 acquisition date.

Of the total $15,270,000 short-term lines available to the Company at September 30, 2003, approximately $1,047,000 was unused.

Effective July 14, 2003, the Company's $1,500,000 unsecured short-term line with its secondary lender was replaced with a secured $2,000,000 short-term line with the same lender. This new line is secured by all U.S. accounts receivable and inventory and is subordinate to a first position by the Company's primary lender. The interest rate on this new short-term line is the prime rate less .50%. The increase of this line was included in the availability amounts discussed above.

In order to improve its short-term cash position, the Company obtained from the sellers of the acquired businesses, a deferral of the scheduled September 30, 2003 note payments. The total of these deferred payments is approximately $150,000, plus interest. The deferred amount will be paid, with interest, in monthly installments beginning on January 31, 2004 and ending on December 31, 2004. All other quarterly payments to the sellers are expected to be made as scheduled.

In accordance with an agreement with the Company's primary lender, the long-term debt payment that was scheduled to be paid on September 30, 2003 was delayed until October 15, 2003. The Company subsequently made the required debt payment, with interest, on the revised date.

The term loan agreement requires the Company to maintain certain financial balances and ratios. At September 30, 2003, the Company was in violation of certain covenants. As of the date of this Form 10-Q, the lender has not issued a waiver of the violations, nor has it agreed to amend any of the covenants. The lender has the right to declare all of the Company's obligations immediately due and payable, although this action is not anticipated. However, there can be no assurance that the Company will obtain necessary waivers of or revisions to such covenants. As a result of the covenant violations, the related long-term portion of the debt outstanding under the agreement, amounting to $535,000, has been reclassified as current at September 30, 2003.

Note 4 - Earnings (Loss) Per Share

A reconciliation of the numerators and denominators used in the "basic" and "diluted" earnings (loss) per share (EPS) calculations follows:

Note 5 - Comprehensive Income

Comprehensive income and its components consist of the following:

The above $0 and $7,526 other comprehensive income, net of tax related to the derivative adjustment for the three months and nine months ended September 30, 2003 are made up of the following components:

The above $7,216 and $25,288 other comprehensive income, net of tax related to the derivative adjustment for the three months and nine months ended September 30, 2002, are made up of the following components:

Hastings Manufacturing Company and Subsidiaries

Review by Independent Certified Public Accountants

The September 30, 2003 and 2002 condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been reviewed by BDO Seidman, LLP, Independent Certified Public Accountants, in accordance with established professional standards and procedures for such a review.

RESULTS OF OPERATIONS

NET SALES

2003 Compared to 2002

Net sales in the third quarter of 2003 increased $2,135,565, or 24.7%, from $8,650,938 in the third quarter of 2002, to $10,786,503. This increase reflects the inclusion of $2,847,467 in sales of acquired businesses in the third quarter of 2003, offset by decreases in sales of products manufactured by the Company and commission revenues of $676,194 and $35,708, respectively. Net sales for the first nine months of 2003 increased $3,474,036, or 12.5%, from $27,874,118 in the first nine months of 2002, to $31,348,154. This increase reflects the inclusion of $7,045,236 of sales of acquired businesses (results of operations of the acquired businesses are reflected in consolidated results beginning in the second quarter), combined with a slight increase in commission revenue of $18,389, offset by a decrease in sales of products manufactured by the Company of $3,589,589.

The net sales increase pertaining to acquired businesses in the third quarter of 2003 reflects the net sales acquired through the Company's purchase of Ertel and Syzygy, as described in Note 2 to the accompanying condensed consolidated financial statements. The net sales decrease in manufactured products in the third quarter of 2003 reflects volume decreases in the original equipment, private brand and domestic aftermarket, slightly offset by a volume increase in the export market. Net sales of manufactured products in the Canadian aftermarket were relatively flat for the third quarter of 2003 in comparison to the same period in 2002. The decrease in the original equipment volume reflects the decreased production volume of the domestic and light-duty truck manufacturers during the third quarter of 2003. The decrease in the private brand volume reflects decreases in sales to specific customers in that market. The decrease in the domestic aftermarket reflects a prolonged industry-wide softness in the automo tive replacement parts industry, combined with a loss of $78,000 of sales in the third quarter of 2003 as compared to the third quarter of 2002, from several production engine rebuilders who went out of business in the fourth quarter of 2002. The increase in the export volume reflects sales increases in various foreign markets, reflecting slightly improved economic conditions in those markets. In response to the prolonged industry-wide softness in the domestic automotive replacement parts industry, the Company implemented cost-containment measures in March 2003. These cost-containment measures are described in "Liquidity and Capital Resources" below, and have remained in effect through the third quarter of 2003. The slight decrease in commission revenues, which the Company earns in exchange for providing marketing and distribution services for various engine component manufacturers, primarily reflects the industry-wide softness described earlier.

For the first nine months of 2003, the net sales pertaining to acquired businesses are described above. The slight increase in commission revenues for the first nine months of 2003 reflects volume growth in the first quarter of 2003, partially offset by volume decreases in the second and third quarters of 2003 resulting from the industry-wide softness noted above. For the first nine months of 2003, net sales of manufactured products decreased in the original equipment, private brand and domestic aftermarket, as a result of the items noted above. For the first nine months of 2003, net sales of manufactured products also decreased in the Canadian aftermarket and the export market. The decrease in the Canadian aftermarket volume reflects the same industry-wide softness observed in the domestic aftermarket,

2002 Compared to 2001

Net sales in the third quarter of 2002 increased $423,001, or 5.1%, from $8,227,937 in the third quarter of 2001, to $8,650,938. Included in these net sales were commission revenues of $428,674 in the third quarter of 2002 and $110,148 in the third quarter of 2001, which the Company earned in exchange for providing marketing and distribution services for various engine and component manufacturers. Excluding these commission revenues, net sales of products manufactured by the Company increased $104,475, or 1.3%, from $8,117,789 in the third quarter of 2001, to $8,222,264. Net sales for the first nine months of 2002 increased $1,079,164, or 4.0%, from $26,794,954 in the first nine months of 2001, to $27,874,118. Included in these net sales were commission revenues of $301,215 and $1,204,619, respectively. Excluding these commission revenues, net sales of products manufactured by the Company increased $175,760, or 0.7%, from $26,493,739 in the first nine months of 2001, to $26,669,499.

The net sales increase on manufactured products in the third quarter of 2002 reflected a volume increase in the original equipment market, partially offset by volume decreases in the domestic and Canadian aftermarkets. Net sales in the private brand and export markets were relatively flat in the third quarter of 2002 in comparison to the same period in 2001. The increase in the original equipment volume reflected the improved production volume experienced by domestic automotive and light-duty manufacturers. The net sales decreases in the domestic and Canadian aftermarkets reflected continued industry-wide softness in the automotive replacement parts industry. The increase in commission revenues reflected the volume growth observed in marketing and distributing engine component products for other companies.

For the first nine months of 2002, net sales of manufactured products increased in the original equipment and export markets. However, these sales were substantially offset by net sales decreases in the domestic and Canadian aftermarkets. Net sales in the private brand market were relatively flat for the first nine months of 2002, in comparison to the same period in 2001. The increase in the original equipment volume was due to the improved production volume noted above. The increase in the export volume reflected the continued broadening of the Company's customer base into new export markets. The decreases in the domestic and Canadian aftermarket volumes were partially due to the industry-wide softness described above. In addition, the decrease in the domestic aftermarket volume reflected significant net sales, in the first nine months of 2001, to a major customer when that customer expanded the line of products that it offers to its customers. Commission revenues for the first nine months of 2002 increa sed in comparison to the first nine months of 2001, as detailed above.

COST OF SALES AND GROSS PROFIT

2003 Compared to 2002

Cost of sales for the third quarter of 2003 increased $2,256,273, or 38.1%, from $5,926,189 in the third quarter of 2002, to $8,182,462. For the first nine months of 2003, cost of sales increased $4,289,997, or 22.6%, from $18,986,410 for the first nine months of 2002, to $23,276,407. The gross profit margin on net sales decreased in the third quarter of 2003, from 31.5% in the third quarter of 2002, to 24.1%. For the first nine months of 2003, the gross profit margin on net sales also decreased from 31.9% for the first nine months of 2002, to 25.7%. The increase in cost of sales and the corresponding decrease in the gross

2002 Compared to 2001

Cost of sales for the third quarter of 2002 increased $77,528, or 1.3%, from $5,848,661 in the third quarter of 2001, to $5,926,189. For the first nine months of 2002, cost of sales increased $248,402, or 1.3%, from $18,738,008 for the first nine months of 2001, to $18,986,410. The gross profit margin on net sales increased for the third quarter of 2002, from 28.9% for the third quarter of 2001, to 31.5%. For the first nine months of 2002, the gross profit margin on net sales also increased, from 30.1% for the first nine months of 2001, to 31.9%. The increase in cost of sales for the third quarter and for the first nine months of 2002 reflected the increase in net sales of manufactured products noted earlier, combined with increased shipping and distribution costs that were incurred in distributing other manufacturers' engine component products. The effect of these additional costs, however, were more than offset by the commission revenue generated from the distribution of these products, and thus contrib uted to the increased gross profit margin. There was minimal effect on the gross profit margin from changes made to the Company's individual inventory factors (material, labor and overhead) during the first nine months of 2002.

OPERATING EXPENSES

2003 Compared to 2002

Total operating expenses for the third quarter of 2003 increased $170,197, or 7.1%, from the third quarter of 2002. For the first nine months of 2003, total operating expenses increased $566,980, or 7.9%, from the first nine months of 2002. Advertising costs for the third quarter of 2003 decreased $7,372, or 14.5%, from the third quarter of 2002. For the first nine months of 2003, advertising costs decreased $39,783, or 24.9%, from the first nine months of 2002. These decreases primarily reflect decreases in printed material and advertising support costs. There were no significant advertising costs related to the acquired businesses in the third quarter and first nine months of 2003. Selling costs for the third quarter of 2003 increased $40,215, or 5.1%, from the third quarter of 2002. For the first nine months of 2003, selling costs increased $240,688, or 10.5%, from the first nine months of 2002. These increases reflect increased agents' commissions, sales personnel and sales support costs related to th e acquired businesses, slightly offset by decreases in these same costs associated with the Company's other operations. The increase in selling costs for the third quarter and first nine months of 2003 also reflect the inclusion of approximately $15,000 and $30,000, respectively, of amortization expense related to the Company's customer contract associated with the acquired businesses. General and administrative costs for the third quarter of 2003 increased $137,354, or 8.8%, from the third quarter of 2002. For the first nine months of

2002 Compared to 2001

Total operating expenses for the third quarter of 2002 increased $256,551, or 12.0%, from the third quarter of 2001. For the first nine months of 2002, total operating expenses increased $573,960, or 8.7%, from the first nine months of 2001. Advertising costs for the third quarter of 2002 decreased $7,977, or 13.6%, from the third quarter of 2001. For the first nine months of 2002, advertising costs decreased $3,684, or 2.3%, from the first nine months of 2001. These decreases reflected a decline in printed material costs related to the inclusion, in 2001, of a one-time charge for the start-up of the marketing and distribution of Zollner brand pistons, partially offset by an increase in advertising support costs. Selling costs for the third quarter of 2002 increased $61,224, or 8.4%, from the third quarter of 2001. This increase reflected increases in costs associated with sales personnel, sales support and industry trade shows. For the first nine months of 2002, selling costs decreased $31,415, or 1.3%, from the first nine months of 2001. This decrease reflected declines in agents commissions, sales promotion and sales support costs, partially offset by increases in sales personnel costs and industry trade show expenses as discussed above. General and administrative costs for the third quarter of 2002 increased $203,304, or 15.1%, from the third quarter of 2001. For the first nine months of 2002, general and administrative costs increased $609,059, or 14.8%, from the first nine months of 2001. These increases primarily reflected increases in general personnel and personnel support costs, combined with a smaller increase in property insurance costs. These increases were offset slightly by decreases in group health insurance costs and the provision for doubtful accounts receivable. The increase for the first nine months of 2002 also reflected $122,000 of severance payments to terminated employees.

OTHER EXPENSES

2003 Compared to 2002

Other expenses netted to $253,121 for the third quarter of 2003, compared to a net expense of $92,152 for the third quarter of 2002. For the first nine months of 2003, other expenses netted to $469,949 compared to a net expense of $290,634 for the first nine months of 2002. These increases reflect a significantly higher interest expense and increased other, net expenses, partially offset by a higher gain on foreign currency transactions. The increases in interest expense reflect the increased short-term and long-term debt obligations that the Company utilized to finance the purchase of Ertel and Syzygy, as discussed in Notes 2 and 3 to the accompanying condensed consolidated financial statements. The increases in the gain on foreign currency transactions reflect the Company's increased exposure to Canadian currency fluctuations, relative to the U.S. dollar, associated with the acquired businesses, combined with the effect of the strengthening Canadian dollar compared to the U.S. dollar in 2003. These item s are discussed in Item 3 below. The other, net items primarily reflect the loss derived from the Company's investment in its Casite joint venture.

2002 Compared to 2001

Other expenses netted to $92,152 for the third quarter of 2002, compared to a net expense of $171,488 for the third quarter of 2001. This decrease reflected a significantly lower interest expense, combined with a lower other, net expense (income) in 2002. The decrease in interest expense reflected the reduced short-term interest rates in effect in 2002 compared to 2001, combined with reduced interest expense on the amortization of the Company's long-term debt. The other, net item primarily reflected the income derived for the Company's investment in its Casite joint venture. For the first nine months of 2002, other expenses netted to $290,634 versus a net expense of $468,053 in the first nine months of 2001. The decrease in interest expense reflected the items discussed above. The other, net item reflected the income derived from the Casite joint venture, combined with the inclusion, in 2001, of a gain recognized on the sale of stock holdings received from one of the Company's pension fund administrators. These holdings were received when the administrator converted from a mutual structure to a stock-based structure.

TAXES ON INCOME

The 2003 and 2002 effective tax rates of 37.4% and 39.8%, respectively, are higher than the domestic statutory federal tax rate of 34.0% due primarily to the impact of various state income taxes and the impact of a higher statutory rate applicable to the earnings of the Canadian subsidiary.

As of September 30, 2003, the Company recorded net deferred income tax assets of $7,521,454. The major components of those assets are the tax effects of the net operating loss carryforwards and net accrued retirement and postretirement benefit obligations. The realization of these recorded benefits is dependent upon the generation of future taxable income. Management believes that it is more likely than not that adequate levels of future taxable income will be generated to absorb the net operating loss carryforwards, the deductible amounts related to the retirement and postretirement benefit obligations and the remaining net deductible temporary differences. However, based on the net operating loss carryforwards at September 30, 2003 (which must be utilized before foreign tax credit carryforwards can be utilized), management believes that it is more likely than not that the foreign tax credit carryforwards will go unutilized prior to their expiration. As a result, a valuation allowance has been recorded f or the total foreign tax credits of $45,576 at September 30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

In March 2003, the Company implemented cost-containment measures in response to a prolonged volume decrease in the domestic and Canadian piston ring aftermarkets. The Company has observed a decline in net piston ring sales volume in the domestic and Canadian aftermarkets since the third quarter of 2000. This aftermarket volume decrease, combined with an early 2001 decline in original equipment volume, resulted in earlier cost-containment measures implemented in February 2001, as described in the Company's Form 10-K for the year ended December 31, 2000. Since that time, the domestic and Canadian aftermarket volumes have continued to decline. Therefore, in March 2003 the Company determined that additional cost-containment measures were necessary in order to align its operating expenses with current market conditions and improve its profitability and cash position. The cost-containment measures consist of voluntary and involuntary layoffs in the salaried and hourly work forces, salaried payroll reductions an d identification of reductions in various non-payroll expenses. In April 2003, the Company recognized approximately $62,000 of severance costs related to additional cost-containment measures implemented during the second quarter of 2003.

The Company's primary cash requirements continue to be for operating expenses such as labor costs and for funding inventory, accounts receivable and long-term debt service, including the additional debt service relating to the Company's March 2003 acquisitions of Ertel and Syzygy, as discussed below. Historically, the Company's primary sources of cash have been from operations and from bank borrowings. These sources of cash depend on attaining future positive financial results. In March and April 2003, in response to a prolonged volume decrease in the domestic and Canadian piston ring aftermarkets, the Company implemented cost-containment measures, as described above. The Company believes that these cost-containment measures, combined with the income derived from the sale of manufactured products, the anticipated future positive financial impact of the Ertel and Syzygy acquisitions and the Company's marketing and distribution agreements with various engine component manufacturers, should allow it to gener ate sufficient cash from operations to assist it in satisfying the Company's future cash requirements.

The additional funding provided under the Company's U.S. and Canadian loan agreements, restructured in March 2003 in connection with the Ertel and Syzygy acquisitions, combined with the additional funding obtained from the restructuring of the Company's short-term line with its secondary U.S. lender on July 14, 2003, both of which are discussed in Note 3 to the accompanying condensed consolidated financial statements, should also assist the Company in satisfying its future cash requirements.

The Company's short-term and long-term debt represents its primary contractual obligation as of September 30, 2003. The Company is also a party to various lease commitments and other contractual obligations. The Company has no off-balance sheet arrangements. Total short-term lines available to the Company as of September 30, 2003 totaled $15,270,000, of which approximately $1,047,000 was unused. A significant portion of the Ertel and Syzygy acquisitions was funded with short-term debt established for the sole purpose of the acquisition. Additional economies of scale are anticipated as the Company continues to integrate the acquired operations. As those economies of scale mature, the Company intends to address its current financing arrangements, with the possibility of converting certain of those obligations into long-term financing vehicles.

In order to improve its short-term cash position, the Company obtained from the sellers of the acquired businesses, a deferral of the scheduled September 30, 2003 note payments. The total of these deferred payments is approximately $150,000, plus interest. The deferred amount will be paid, with interest, in monthly installments beginning on January 31, 2004 and ending on December 31, 2004. All other quarterly payments to the sellers are expected to be made as scheduled.

In accordance with an agreement with the Company's primary lender, the long-term debt payment that was scheduled to be paid on September 30, 2003 was delayed until October 15, 2003. The Company subsequently made the required debt payment, with interest, on the revised date.

The term loan agreement requires the Company to maintain certain financial balances and ratios. At September 30, 2003, the Company was in violation of certain covenants. As of the date of this Form 10-Q, the lender has not issued a waiver of the violations, nor has it agreed to amend any of the covenants. The lender has the right to declare all of the Company's obligations immediately due and payable, although this action is not anticipated. However, there can be no assurance that the Company will obtain necessary waivers of or revisions to such covenants. As a result of the covenant violations, the related long-term portion of the debt outstanding under the agreement, amounting to $535,000, has been reclassified as current at September 30, 2003.

The following commentary is based on the condensed consolidated statements of cash flows, which reflect the changes in operating assets and liabilities net of amounts acquired from business acquisitions. During the first nine months of 2003, the Company used $1,112,263 of cash for operating activities. The realized net loss and increases in accounts receivable and inventories, combined with a decrease in the net retirement and postretirement benefit obligations and the net gain on foreign currency transactions, were partially offset by realized depreciation and amortization and an increase in accounts payable and accruals. The increase in accounts receivable primarily reflects the increased exposure relating to the credit terms associated with the acquired businesses. The increase in inventories reflects the Company's efforts to align inventory levels with customer demand. The decrease in the net retirement and postretirement benefit obligations reflects the excess of actual postretirement benefit claims paid over the actuarially determined annual expense, combined with the effect of the required quarterly funding of one of the Company's retirement plans to certain limits. The net gain on foreign currency transactions reflects the Company's increased exposure to Canadian currency fluctuations relative to the U.S. dollar, associated with the acquired businesses, combined with the effect of the strengthening Canadian dollar compared to the U.S. dollar in 2003, as discussed in Item 3 below. The increase in accounts payable and accruals primarily reflects the increased exposure relating to the additional volume of purchases, and the related payment terms on those purchases, associated with the acquired businesses. The investing activities for the first nine months of 2003 primarily reflect the cash used for the acquisition of Ertel and Syzygy, as discussed in Note 2 to the accompanying condensed consolidated financial statements. The financing activities for the first nine months of 2003 reflect the working capi tal requirements that were needed to fund the operating activities noted above, combined with the financing utilized to purchase Ertel and Syzygy. The financing activities also reflect the principal payments required under the Company's various long-term debt agreements.

During the first nine months of 2002, the Company generated $646,153 of net cash from operating activities. The realized net income and depreciation and amortization, combined with a decrease in deferred income taxes and an increase in accounts payable and accruals, were partially offset by increases in accounts receivable and inventories, and a decrease in the net retirement and postretirement benefit obligations. The decrease in deferred income taxes reflected the utilization of a portion of the net operating loss carryforward based on earnings for the first nine months. The increase in accounts payable and accruals and the increase in accounts receivable primarily reflected the terms associated with the Company's marketing and distribution agreements. Under the terms of the agreements, the Company bills the customer and records a receivable for the gross sales amount of the products covered under the agreement. The Company is responsible for collecting the gross sales amount. The Company then nets the gross sales amount down to the earned commission amount that it receives for performing the marketing and distribution services by recording a payable to the engine component manufacturers that are parties to those agreements. The change in the accounts payable and accruals also included an increase in the compensation accrual, partially offset by a decrease in the miscellaneous accrual. The increase in the compensation accrual primarily reflected additional accrued general personnel costs. The decrease in the miscellaneous accrual reflected a large payment made during the first half of the year for the December 31, 2001 workers' compensation liability, slightly offset by the recognition, through the first nine months of 2002, of the expected workers' compensation liability for 2002. The decrease in the miscellaneous accrual was partially offset by the reclassification of the fair value of the Company's interest rate swap agreement. The increase in inventories represented a planned increase in the Company's inventories to certain levels. The decrease in the net retirement and postretirement benefit obligation reflected the excess of actual postretirement benefit claims paid over the actuarially determined annual expense and the funding of the Company's defined benefit pension plan to certain actuarial levels. The investing activities for the first nine months of 2002 reflected the Company's continued support of its lean manufacturing environment, combined with capital expenditures for the modernization of the Company's main distribution center. The investing activities also reflected

OTHER EVENTS

As previously reported, in October, the Company filed the appropriate documents to voluntarily delist its common stock from the American Stock Exchange and to terminate its status as a reporting Company with the Securities and Exchange Commission. The Company expects to complete this process in mid-November 2003 and that its common stock should be immediately eligible for trading through the "pink sheets," an electronic quotation service for over-the-counter securities. However, there can be no assurance that an active trading market for the Company's common stock will develop in the pink sheets.

The Company is exposed to market risks, which include changes in interest rates and changes in the foreign currency exchange rate as measured against the U.S. dollar.

The Company's interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company is exposed to interest rate changes primarily as a result of its variable rate lines of credit and its variable rate long-term borrowings. Of the $15,270,000 total short-term lines available to the Company at September 30, 2003, approximately $14,223,000 was outstanding. The Company was previously a party to an interest rate swap agreement that expired on June 30, 2003. As of September 30, 2003, however, the Company is not a party to any derivative financial instrument agreements, nor does it use such instruments for trading purposes. As described in the "Liquidity and Capital Resources" section of Item 2 above, management is currently reviewing its short-term and long-term financing options. As a part of this review, management will review the Company's anticipated future interest rate exposure to determine if the Company will utilize interest rate swap agreements in the future. Management believes that it is not likely that fluctuations in interest rates in the near future will have a material impact on the Company's consolidated financial statements taken as a whole. However, the possibility for such impacts has increased recently with the significant addition of variable rate borrowings.

The Company has a manufacturing/distribution facility in Canada and, as previously discussed, acquired Ertel and Syzygy, two Canadian distribution companies, in March 2003. These entities' sales are denominated in Canadian dollars, thereby creating exposures to changes in exchange rates. Due to the strengthening of the Canadian dollar versus the U.S. dollar during the second and third quarters of 2003, the Company's Canadian subsidiary recorded a $224,284 net gain on foreign currency transactions for the nine months ended September 30, 2003, as detailed in the accompanying condensed consolidated statements of operations. With the acquisition of Ertel and Syzygy, the Company is now exposed to increased Canadian-originated third party and intercompany transactions that settle in U.S. dollars. In addition, the Company's $2,375,000 intercompany term note related to the acquisitions, which is eliminated upon consolidation, further exposes the Company to Canadian/U.S. dollar currency fluctuations. Future change s in the Canadian/U.S. exchange rate may positively or negatively affect the Company' sales, gross margins and net income. The Company attempts to minimize foreign currency

The Company's Chief Executive Officer and its Vice-President, Finance, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003, have concluded that, as of September 30, 2003, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

There were no significant changes in the Company's internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

          (a)     Exhibits

          (b)     The Company furnished the following Current Report on Form 8-K during the quarter ended September 30, 2003. This Form 8-K is considered to have been "furnished" but not "filed" with the Securities and Exchange Commission.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX