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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act). Yes[ ] No[X]
AS OF MAY 13, 2003, THERE WERE 4,828,036 SHARES OF COMMON STOCK OF THE
REGISTRANT OUTSTANDING.
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 22
Item 4. Controls and Procedures................................................ 23
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities.......................................... 24
Item 6. Exhibits and Reports on Form 8-K....................................... 24
- i -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------
2003 2002
---- ----
Net sales $ 32,383 $ 30,244
Cost of sales 28,653 27,276
--------- --------
Gross profit 3,730 2,968
Selling and administrative expenses 2,092 2,255
Plant closure costs - 522
--------- --------
Income from operations 1,638 191
Interest expense 1,780 1,796
--------- --------
Loss before income taxes (142) (1,605)
Income tax provision 27 21
--------- --------
Net loss $ (169) $ (1,626)
========= ========
Per share data:
Basic and diluted net loss applicable to common stockholders $ (0.04) $ (0.34)
========= ========
See notes to consolidated financial statements.
- 1 -
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
ASSETS:
Current assets:
Cash $ 1,617 $ 1,753
Accounts receivable, net 20,767 16,411
Inventories, net 9,350 8,841
Prepaid expenses and other current assets 2,847 3,682
Deferred income taxes 2,304 2,304
---------- ----------
Total current assets 36,885 32,991
Property, plant, and equipment, net 47,432 49,029
Goodwill 7,831 7,831
Other assets, net 2,320 2,294
---------- ----------
Total assets $ 94,468 $ 92,145
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,674 $ 10,798
Accrued expenses, excluding accrued interest 7,031 6,256
Accrued interest expense 13,988 12,875
Short-term debt 71,018 69,665
Current portion of long-term debt 840 1,467
---------- ----------
Total current liabilities 103,551 101,061
---------- ----------
Long-term debt, excluding current portion 1,048 1,117
---------- ----------
Deferred income taxes and other long-term liabilities 2,900 2,836
---------- ----------
Series B preferred stock 330 330
---------- ----------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,828,036 shares issued 1,207 1,207
Additional paid-in-capital 12,960 12,960
Accumulated deficit (27,528) (27,366)
---------- ----------
Total stockholders' deficit (13,361) (13,199)
---------- ----------
Total liabilities and stockholders' deficit $ 94,468 $ 92,145
========== ==========
See notes to consolidated financial statements.
- 2 -
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
----------------------------
2003 2002
---- ----
OPERATING ACTIVITIES:
Net loss $ (169) $ (1,626)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,606 2,866
Amortization included in operating expense 165 183
Amortization included in interest expense 143 36
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net (4,356) (3,188)
Inventories, net (509) 283
Prepaid expenses and other current assets 695 204
Accounts payable (124) 1,307
Accrued expenses, excluding interest expense 775 636
Accrued interest expense 1,113 879
Other long-term liabilities 64 14
Other (13) 16
---------- ----------
Net cash provided by operating activities 390 1,610
---------- ----------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (899) (778)
Net decrease (increase) in equipment deposits (47) 38
Expenditures for tooling owned by customers (77) (243)
Other 151 3
---------- ----------
Net cash used by investing activities (872) (980)
---------- ----------
FINANCING ACTIVITIES:
Net increase in loans under revolving line of credit 3,142 2,128
Repayment of term notes and other debt (2,591) (2,876)
Deferred financing charges (205) (10)
---------- ----------
Net cash provided (used) by financing activities 346 (758)
---------- ----------
Net decrease in cash (136) (128)
Cash at beginning of period 1,753 189
---------- ----------
Cash at end of period $ 1,617 $ 61
========== ==========
See notes to consolidated financial statements.
- 3 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"). The consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, the consolidated financial statements do not include all the
information and footnotes included in the Company's annual consolidated
financial statements. Significant accounting policies followed by the Company
are set forth in Note 1 to the consolidated financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 2002.
Subject to the Company's ability to successfully restructure its
indebtedness as discussed below, in the opinion of management, the unaudited
interim consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company at March 31, 2003, and the
Company's results of operations and cash flows for the three-month periods ended
March 31, 2003 and 2002. All such adjustments were of a normal, recurring
nature.
The results of operations for the three-month period ended March 31,
2003, are not necessarily indicative of the results to be expected for the full
year or for any succeeding quarter.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company's
ability to refinance, extend, amend, or exchange substantially all of its
outstanding debt, as more fully described below, is subject to risks and
uncertainties. As a result, there is substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments to the amounts or classification of assets or
liabilities to reflect this uncertainty.
The Company has been in default on its 12 3/4% senior subordinated
notes since February 1, 2000, when it did not make the payments of principal, in
the amount of $27,412,000, and interest, in the amount of $1,748,000, that were
due on that date. On July 10, 2002, the Company commenced an exchange offer for
the 12 3/4% senior subordinated notes. The exchange offer was amended on March
7, 2003. If the amended exchange offer is consummated, at least 99% of the
12 3/4% senior subordinated notes will be exchanged for new 11 1/2% senior
subordinated notes due August 1, 2007, in a principal amount equal to the
principal amount of the 12 3/4% senior subordinated notes being exchanged plus
the accrued and unpaid interest thereon through the day before the date the
amended exchange offer is consummated, which accrued interest will total
$499.375 for each $1,000 principal amount of 12 3/4% senior subordinated notes
assuming the amended exchange offer is consummated on July 1, 2003. Interest on
the 11 1/2% senior subordinated notes will accrue from the date the amended
exchange offer is consummated, and will be payable on each February 1, May 1,
August 1, and November 1. Each $1,000 principal amount of 11 1/2% senior
subordinated notes will be issued with warrants to purchase ten shares of common
stock at a price of $3.50 per share at any time from January 1, 2004, through
August 1, 2007. If the amended exchange offer is consummated, the Company will
pay a participation fee of 3% of the principal amount of 12 3/4% senior
subordinated notes that are exchanged. The Company's senior, secured lenders and
the holder of the junior subordinated notes have waived the cross-default
provisions with respect to the default on the senior subordinated notes through
May 19, 2003, and August 1, 2003, respectively. The current expiration date
of the amended exchange offer is May 15, 2003. One of the conditions to the
consummation of the amended exchange offer is the tender for exchange of at
least 99%
- 4 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the senior subordinated notes. As of May 13, 2003, the Company had received
tenders of $27,209,000 principal amount of 12 3/4% senior subordinated notes, or
99.3% of the notes. There are additional conditions to the consummation of the
amended exchange offer that may not be satisfied by the expiration date.
The Company has reached an agreement with the holders of its 14% junior
subordinated notes on the terms of a restructuring of those notes. If the
restructuring is completed, the Company will exchange new 12 1/2% junior
subordinated notes due November 1, 2007, for the existing 14% junior
subordinated notes, and the accrued interest on the 14% junior subordinated
notes for the period November 1, 1999, through the day before the restructuring
is consummated, which will total $213,000 assuming the restructuring is
consummated on July 1, 2003, will be converted into shares of the Company's
common stock at a price of $2.27 per share. Interest on the 12 1/2% junior
subordinated notes will accrue from the date the restructuring is consummated,
and will be payable on each February 1, May 1, August 1, and November 1. Each
$1,000 principal amount of 12 1/2% junior subordinated notes will be issued with
warrants to purchase ten shares of common stock at a price of $3.50 per share at
any time from January 1, 2004, through November 1, 2007. If the restructuring is
completed, the Company also will pay a participation fee of 3% of the principal
amount of 14% junior subordinated notes.
The Company has been in default on its senior, unsecured note, since
April 30, 2002, when it did not make the payments of principal, in the amount of
$7,500,000, and interest, in the amount of $78,000, that were due on that date.
If the other aspects of the financial restructuring program are completed, the
Company has proposed to repurchase the senior, unsecured note for $5,550,000,
plus interest from November 1, 2002, to the date the amended exchange offer is
consummated, at the prime rate. The Company's senior, secured lenders and the
holders of the junior subordinated notes have waived the cross-default
provisions with respect to the default on the senior, unsecured note through
May 19, 2003, and August 1, 2003, respectively.
The Company is currently in discussions with several lenders regarding
a refinancing of its senior, secured credit facilities.
The Company can give no assurance that it will be able to consummate
the amended exchange offer, restructure the senior, unsecured note, or refinance
its senior, secured credit facilities on satisfactory terms. If the Company is
unable to do so, it may file a petition under the federal bankruptcy code in
order to effect a debt restructuring on terms substantially similar to those
discussed above, or on other terms. Although the Company believes that such a
debt restructuring could be accomplished without material disruption to its
operations, any such proceeding involves considerable risks and uncertainties
and could have a material adverse effect on the Company's operations and
financial position.
- 5 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- INVENTORIES
Inventories at March 31, 2003, and December 31, 2002, are set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- -----------
Finished goods $ 3,179 $ 3,580
Work in process 3,408 2,493
Raw materials and purchased parts 2,763 2,768
---------- ----------
$ 9,350 $ 8,841
========== ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at March 31, 2003, and December 31,
2002, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- -----------
Land $ 2,314 $ 2,314
Buildings 22,945 22,935
Equipment 114,202 113,291
---------- ----------
139,461 138,540
Accumulated depreciation 92,029 89,511
---------- ----------
Property, plant, and equipment, net $ 47,432 $ 49,029
========== ==========
NOTE 4 -- ACCRUED INTEREST EXPENSE
At March 31, 2003, and December 31, 2002, accrued interest expense
included $12,815,000 and $11,941,000, respectively, of accrued interest expense
on the 12 3/4% senior subordinated notes, and $938,000 and $703,000,
respectively, of accrued interest on the senior, unsecured note.
- 6 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- DEBT
Debt at March 31, 2003, and December 31, 2002, is set forth below
(dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Short-term debt:
Revolving line of credit $ 18,577 $ 15,435
Secured, amortizing term notes 17,182 18,971
Senior, unsecured note 7,500 7,500
Senior subordinated notes 27,412 27,412
Junior subordinated notes 347 347
---------- ----------
Subtotal 71,018 69,665
Current portion of long-term debt 840 1,467
---------- ----------
Total short-term debt 71,858 71,132
---------- ----------
Long-term debt:
12% secured term note 1,061 1,119
Unsecured, amortizing term notes 48 643
Other 779 822
---------- ----------
Subtotal 1,888 2,584
Less current portion (840) (1,467)
---------- ----------
Total long-term debt 1,048 1,117
---------- ----------
Total debt $ 72,906 $ 72,249
========== ==========
REVOLVING LINE OF CREDIT
The Company's revolving line of credit is currently scheduled to expire
on May 21, 2003. The Company intends to replace the revolving line of credit
with a revolving line of credit provided by a new lender or to negotiate an
extension of the May 21, 2003, expiration date with its existing lender. The
Company can give no assurance that it will be able to replace or extend the
revolving line of credit.
At March 31, 2003, availability under the revolving line of credit
totaled $1,200,000, before outstanding checks of $952,000 were deducted. At
March 31, 2003, loans outstanding under the revolving line of credit accrued
interest at one percent over the prime rate, which equated to 5.25%.
The loans outstanding under the Company's revolving line of credit are
collateralized by substantially all of the assets of the Company, including
accounts receivable, inventories, equipment, certain real estate, and the stock
of Lexington Rubber Group, Inc., a subsidiary of the Company.
The lenders providing loans under the Company's revolving line of
credit have waived the cross-default provisions with respect to the defaults on
the senior subordinated notes and the senior, unsecured note through May 19,
2003.
- 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM NOTES
Secured, amortizing term notes outstanding at March 31, 2003, and
December 31, 2002, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Term notes payable in equal monthly principal installments based on a 180-month
amortization schedule, final maturities in 2003, prime
rate plus 3/4% $ 1,929 $ 1,988
Term note payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2003, prime
rate plus 3/4% 951 978
Term note payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2003, prime
rate plus 3/4% 1,877 1,927
Term note payable in equal monthly principal installments, final
maturity in 2003, prime rate - 45
Term note payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 1% - 10(1)
Term note payable in equal monthly principal installments, final
maturities in 2003, LIBOR plus 2 3/4% 27 107
Term notes payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 392 476
Term note payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 318 386
Term notes payable in equal monthly principal installments, final
maturities in 2004, prime rate plus 1% 3,144(1) 3,846(1)
Term note payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 1/2% 522 579
Term note payable in equal monthly principal installments, final
maturity in 2005, prime rate plus 1% 549(1) 609(1)
Term note payable in equal monthly principal installments, final
maturity in 2006, prime rate 249 270
Term notes payable in equal monthly principal installments, final
maturities in 2006, prime rate plus 1% 4,494(1) 4,847(1)
Term notes payable in equal monthly installments, final maturity in
2007, prime rate plus 1% 2,730(1) 2,903(1)
--------- ---------
$ 17,182 $ 18,971
========= =========
(1) Maturity date can be accelerated by the lender if the Company's
revolving line of credit expires prior to the stated maturity date
of the term loan. The revolving line of credit is currently
scheduled to mature on May 21, 2003.
At March 31, 2003, and December 31, 2002, the secured, amortizing term
notes were classified as short-term debt because the Company's lenders had
granted waivers, for a period of less than one year,
- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the cross-default provisions of such term notes with respect to the default
on the senior subordinated notes and the senior, unsecured note or because the
revolving line of credit was scheduled to expire in less than one year.
The secured, amortizing term notes are collateralized by substantially
all of the assets of the Company, including accounts receivable, inventories,
equipment, certain real estate, and the stock of Lexington Rubber Group, Inc.
The lenders providing secured, amortizing term notes have waived the
cross-default provisions with respect to the defaults on the senior subordinated
notes and the senior, unsecured note through May 19, 2003, and August 1, 2003.
SENIOR, UNSECURED NOTE
The senior, unsecured note, which matured on April 30, 2002, is senior
in right of payment to the senior subordinated notes and the junior subordinated
notes. The senior, unsecured note currently bears interest at 12 1/2% per annum.
On April 30, 2002, the Company did not make the payments of principal and
interest then due on the senior, unsecured note in the amounts of $7,500,000 and
$78,000, respectively, and the Company has not made any payments on the senior,
unsecured note since that date. At March 31, 2003, the accrued and unpaid
interest on the senior, unsecured note totaled $938,000. For more information
about the senior, unsecured note, refer to Note 1.
SENIOR SUBORDINATED NOTES
The senior subordinated notes, which matured on February 1, 2000, are
unsecured obligations of the Company that are subordinated in right of payment
to all of the Company's existing and future secured debt and to the payment of
the senior, unsecured note. The senior subordinated notes currently bear
interest at 12 3/4% per annum. On February 1, 2000, the Company did not make the
payments of principal and interest then due on the senior subordinated notes in
the amounts of $27,412,000 and $1,748,000, respectively, and the Company has not
made any payments on the senior subordinated notes since that date. At March 31,
2003, the accrued and unpaid interest on the senior subordinated notes totaled
$12,815,000. For more information about the senior subordinated notes, refer to
Note 1.
JUNIOR SUBORDINATED NOTES
The junior subordinated notes are due on August 1, 2003, and are
subordinated in right of payment to all existing and future secured debt of the
Company, the senior, unsecured note, and the senior subordinated notes. The
junior subordinated notes bear interest at 14% per annum. The holders of the
junior subordinated notes have deferred until August 1, 2003, the interest
payments that were due on or after February 1, 2000, and have waived the
cross-default provisions with respect to the default on the senior, unsecured
note and the senior subordinated notes. At March 31, 2003, the accrued and
unpaid interest on the junior subordinated notes totaled $201,000. For more
information on the junior subordinated notes, refer to Note 1.
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12% SECURED TERM NOTE
The 12% secured term note is payable in sixty equal, monthly
installments of principal and interest that commenced on November 30, 2001. The
12% secured term note has no cross-default provision with respect to defaults on
any of the Company's other debt.
RESTRICTIVE COVENANTS
Certain of the Company's financing arrangements contain covenants that
require the Company to maintain minimum levels of working capital, net worth,
and cash flow coverage. The covenants also place certain restrictions and
limitations on the Company's business and operations, including the incurrence
or assumption of additional debt, the level of past-due trade accounts payable,
the sale of all or substantially all of the Company's assets, the purchase of
property, plant, and equipment, the purchase of common stock, the redemption of
preferred stock, and the payment of cash dividends. In addition, most of the
Company's financing agreements include cross-default provisions.
From time to time, the Company's lenders have agreed to waive, amend,
or eliminate certain of the financial covenants contained in its various note
agreements in order to maintain or otherwise ensure the Company's current or
future compliance. In the event that the Company is not in compliance with any
of its covenants in the future and its lenders do not agree to amend, waive, or
eliminate those covenants, the lenders would have the right to declare the
borrowings under their note agreements to be due and payable. For a more
detailed discussion of recent amendments to and waivers under the Company's
various note agreements, refer to Note 1.
NOTE 6 -- SERIES B PREFERRED STOCK
At March 31, 2003, there were outstanding 3,300 shares of the Company's
$8 cumulative convertible preferred stock, series B, par value $100 per share.
As a result of the default on the senior subordinated notes, the Company has
been prohibited from making any dividend payments on, or redemptions of, the
series B preferred stock since February 2000. At March 31, 2003, the Company was
in arrears in the payment of thirteen dividends on the series B preferred stock
in the aggregate amount of $86,000 and in the redemption of 1,350 shares of
series B preferred stock for $270,000.
NOTE 7 -- INCOME TAXES
At March 31, 2003, and December 31, 2002, the Company's net deferred
income tax assets were fully offset by a valuation allowance. The income tax
provisions recorded during the three-month periods ended March 31, 2003 and
2002, consisted of estimated state income taxes payable.
NOTE 8 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common
share for the three-month periods ended March 31, 2003 and 2002, are set forth
below (in thousands, except per share amounts). The pro forma conversion of the
Company's $8 cumulative convertible preferred stock, series B, was not dilutive
for the three-month periods ended March 31, 2003 and 2002. As a result, the
calculations of diluted net income or loss per common share set forth below do
not reflect any pro forma conversion.
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For purposes of calculating earnings per share, earnings are reduced by
(1) preferred stock dividend payments and (2) the amount by which payments made
to redeem preferred stock exceeded the par value of such shares. During the
three-month periods ended March 31, 2003 and 2002, the Company did not pay any
dividends on, or redeem any shares of, the series B preferred stock.
THREE MONTHS ENDED
MARCH 31
------------------------
2003 2002
---- ----
Numerator-- loss applicable to common stockholders $ (169) $ (1,626)
========= =========
Denominator-- weighted average common shares 4,828 4,828
========= =========
Basic and diluted net loss applicable to common
stockholders $ (0.04) $ (0.34)
========= =========
- 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month periods ended March 31, 2003 and 2002, is
summarized below (dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
-------------------------
2003 2002
---- ----
NET SALES:
Rubber Group $ 26,722 $ 23,953
Metals Group 5,661 6,291
---------- ----------
Total net sales $ 32,383 $ 30,244
========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,812 $ 2,490
Metals Group (583) (1,716)
---------- ----------
Subtotal 2,229 774
Corporate Office (591) (583)
---------- ----------
Total income from operations $ 1,638 $ 191
========== ==========
ASSETS:
Rubber Group $ 65,645 $ 70,656
Metals Group 23,239 25,675
---------- ----------
Subtotal 88,884 96,331
Corporate Office 5,584 4,085
---------- ----------
Total assets $ 94,468 $ 100,416
========== ==========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 1,875 $ 2,000
Metals Group 887 1,028
---------- ----------
Subtotal 2,762 3,028
Corporate Office 9 21
---------- ----------
Total depreciation and amortization $ 2,771 $ 3,049
========== ==========
CAPITAL EXPENDITURES (2):
Rubber Group $ 827 $ 663
Metals Group 176 115
---------- ----------
Subtotal 1,003 778
Corporate Office 2 -
---------- ----------
Total capital expenditures $ 1,005 $ 778
========== ==========
(1) Does not include amortization of deferred financing expenses, which
totaled $143,000 and $36,000 during the three-month periods ended
March 31, 2003 and 2002, respectively, and which is included in
interest expense in the consolidated financial statements.
(2) Capital expenditures for the three-month period ended March 31,
2003, include $106,000 of equipment purchased under a capital lease
obligation.
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10 -- PLANT CLOSURE
During the fourth quarter of 2001, the Company was notified that the
Metal Group's largest customer would cease purchasing components from the Metals
Group after December 31, 2001. As a result of the subsequent reduction in sales
at the Arizona facility, the Company closed the facility in 2002. At March 31,
2003, the book value of the remaining Arizona assets totaled $2,046,000, which
included $1,696,000 for the land and building and $341,000 for equipment.
The following table sets forth certain operating data of the Arizona
facility for the three-month periods ended March 31, 2003 and 2002 (dollar
amounts in thousands):
THREE MONTHS ENDED
MARCH 31
------------------------
2003 2002
---- ----
Net sales $ - $ 332
========= =========
Operating loss before nonrecurring costs $ (155) $ (701)
--------- ---------
Nonrecurring plant closure costs:
Severance and other employee termination costs - 246
Asset relocation costs - 166
Other costs - 110
--------- ---------
Subtotal - 522
--------- ---------
Operating loss $ (155) $ (1,233)
========= =========
Depreciation included in operating loss $ 54 $ 265
========= =========
The operating loss recorded during the first quarter of 2003 resulted
primarily from the cost of maintaining, insuring, protecting, and depreciating
the building and the remaining equipment in the facility.
NOTE 11 -- OTHER COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2003
and 2002, net of applicable income tax, if any, is set forth below:
THREE MONTHS ENDED
MARCH 31
----------------------
2003 2002
---- ----
Net loss $ (169) $ (1,626)
Other comprehensive income:
Unrealized gain on marketable securities - 70
---------- ---------
Comprehensive income $ (169) $ (1,556)
========== =========
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-Q, including this item, are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements usually can be
identified by our use of words like "believes," "expects," "may," "will,"
"should," "anticipates," "estimates," "projects," or the negative thereof. They
may be used when we discuss strategy, which typically involves risk and
uncertainty, and they generally are based upon projections and estimates rather
than historical facts and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- unanticipated operating results and cash flows,
- increases or decreases in capital expenditures,
- changes in economic conditions,
- strength or weakness in the North American automotive market,
- changes in the competitive environment,
- changes in interest rates and the credit and securities
markets,
- product warranty claims,
- labor interruptions at our facilities or at our customers'
facilities,
- the impact on our operations of the defaults on our
indebtedness, and
- our inability to obtain additional borrowings or to refinance
our existing indebtedness.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size with less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements are
expressly qualified by the discussion above.
- 14 -
RESULTS OF OPERATIONS-- FIRST QUARTER OF 2003 VERSUS FIRST QUARTER OF 2002
The following table sets forth our consolidated operating results for
the three-month periods ended March 31, 2003 and 2002, and the reconciliation of
income from operations to earnings before interest, taxes, depreciation, and
amortization, which is commonly referred to as EBITDA (dollar amounts in
thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2003 2002
------------------ ------------------
Net sales $ 32,383 100.0% $ 30,244 100.0%
Cost of sales 28,653 88.5 27,276 90.2
--------- ------- --------- -----
Gross profit 3,730 11.5 2,968 9.8
Selling and administrative expenses 2,092 6.5 2,255 7.5
Plant closure costs(1) - - 522 1.7
--------- ------- --------- ----
Income from operations 1,638 5.0 191 0.6
Add back: depreciation and amortization(2) 2,771 8.6 3,049 10.1
--------- ------- --------- -----
EBITDA(3) $ 4,409 13.6% $ 3,240 10.7%
========= ======= ========= =====
Net cash provided by operating activities (4) $ 390 1.2% $ 1,610 5.3%
========= ======= ========= =====
(1) In 2002, we closed our metal machining facility in Casa Grande,
Arizona. In connection with the closing, we recorded plant closing
costs of $522,000 during the first quarter of 2002. For more
information, refer to the discussion of the results of operations
of the Metals Group in this section.
(2) Does not include amortization of deferred financing expenses, which
totaled $143,000 and $36,000 during the first quarters of 2003 and
2002, respectively, and which is included in interest expense in
the consolidated financial statements.
(3) EBITDA is not a measure of performance under accounting principles
generally accepted in the United States and should not be
considered in isolation or used as a substitute for income from
operations, net income, net cash provided by operating activities,
or other operating or cash flow statement data prepared in
accordance with generally accepted accounting principles. We have
presented EBITDA here and elsewhere in this Form 10-Q because this
measure is used by investors, as well as our own management, to
evaluate the operating performance of our business, including its
ability to incur and to service debt. Our definition of EBITDA may
not be the same as the definition of EBITDA used by other
companies.
(4) The calculation of net cash provided by operating activities is
detailed in the consolidated statement of cash flows that is part
of our consolidated financial statements in Part I, Item 1.
- 15 -
Our net sales for the first quarter of 2003 were $32,383,000, compared
to net sales of $30,244,000 for the first quarter of 2002, an increase of
$2,139,000, or 7.1%. The increase in net sales was principally a result of
increased net sales of rubber components and machined metal components, offset,
in part, by reduced sales of diecast components. EBITDA for the first quarter of
2003 was $4,409,000, or 13.6% of net sales, compared to EBITDA of $3,240,000, or
10.7% of net sales, for 2002. The increase in EBITDA was primarily a result of a
$992,000 increase in EBITDA at our Metals Group.
Cash flows from operations for the first quarter of 2003 totaled
$390,000, compared to $1,610,000 for the first quarter of 2002. Please refer to
the Consolidated Statement of Cash Flows in Part I, Item 1 for a comparison of
the quarter to quarter changes in our individual operating activities and to our
discussion of operating activities under the caption "Liquidity and Capital
Resources" in this Part I, Item 2.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the corporate office for the
three-month periods ended March 31, 2003 and 2002.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any significant reduction in the
level of activity in the automotive industry may have a material adverse effect
on the results of operations of the Rubber Group and on our company taken as a
whole.
The following table sets forth the operating results of the Rubber
Group for the three-month periods ended March 31, 2003 and 2002, and the
reconciliation of the Rubber Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
2003 2002
------------------ ------------------
Net sales $ 26,722 100.0% $ 23,953 100.0%
Cost of sales 22,769 85.2 20,336 84.9
-------- ------- -------- -------
Gross profit 3,953 14.8 3,617 15.1
Selling and administrative expenses 1,141 4.3 1,127 4.7
-------- ------- -------- -------
Income from operations 2,812 10.5 2,490 10.4
Add back: depreciation and amortization 1,875 7.0 2,000 8.3
-------- ------- -------- -------
EBITDA $ 4,687 17.5% $ 4,490 18.7%
======== ======= ======== =======
During the first quarter of 2003, net sales of the Rubber Group
increased by $2,769,000, or 11.6%, compared to the first quarter of 2002. This
increase was primarily due to increased unit sales of all three of the Rubber
Groups main product lines: connector seals for automotive wiring systems,
insulators for automotive ignition wire sets, and medical components. The
increase in first quarter net sales was offset, in part, by price reductions on
certain automotive components.
- 16 -
Cost of sales as a percentage of net sales increased slightly during
the first quarter of 2003 to 85.2% of net sales from 84.9% of net sales during
the first quarter of 2002, primarily because of increased costs for sorting and
repair, which were caused by quality problems encountered in the manufacture of
a certain type of connector seal. We believe that these additional sorting and
repair costs will start to abate in the third quarter of 2003 as we start to
implement improved manufacturing processes and automated inspection and repair
equipment. These increased costs were offset, in part, by reduced depreciation
and amortization expenses.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2003, compared to the first quarter of
2002, primarily because certain of our selling and administrative expenses are
fixed, or partially fixed, in nature.
During the first quarter of 2003, income from operations totaled
$2,812,000, an increase of $322,000, or 12.9%, compared to the first quarter of
2002. EBITDA for the first quarter of 2003 was $4,687,000, or 17.5% of net
sales, compared to $4,490,000, or 18.7% of net sales, during the first quarter
of 2002.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars, primarily for automotive
industry customers. Any significant reduction in the level of activity in the
automotive industry may have a material adverse effect on the results of
operations of the Metals Group and on our company taken as a whole.
The following table sets forth the operating results of the Metals
Group for the three-month periods ended March 31, 2003 and 2002, and the
reconciliation of the Metals Group's income from operations to its EBITDA
(dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
----------------------------------------
2003 2002
----------------- -----------------
Net sales $ 5,661 100.0% $ 6,291 100.0%
Cost of sales 5,884 103.9 6,940 110.3
-------- ------ -------- ------
Gross profit (223) (3.9) (649) (10.3)
Selling and administrative expenses 360 6.4 545 8.7
Plant closure costs - - 522 8.3
-------- ------ -------- ------
Income from operations (583) (10.3) (1,716) (27.3)
Add back: depreciation and amortization 887 15.7 1,028 16.3
-------- ------ -------- ------
EBITDA $ 304 5.4% $ (688) (10.9)%
======== ====== ======== ======
During the fourth quarter of 2001, we were notified that the Metal
Group's largest customer would cease purchasing components from the Metals Group
after December 31, 2001. As a result of the
- 17 -
reduction in sales at the Arizona facility, we closed the facility in 2002. At
March 31, 2003, the book value of the remaining Arizona assets totaled
$2,046,000, which included $1,696,000 for the land and building and $341,000 for
equipment.
The following table sets forth certain operating data of the Arizona
facility for the three-month periods ended March 31, 2003 and 2002 (dollar
amounts in thousands):
THREE MONTHS ENDED
MARCH 31
----------------------
2003 2002
---- ----
Net sales $ - $ 332
========= =========
Operating loss before nonrecurring costs $ (155) $ (701)
--------- ---------
Nonrecurring plant closure costs:
Severance and other employee termination costs - 246
Asset relocation costs - 166
Other costs - 110
--------- ---------
Subtotal - 522
--------- ---------
Operating loss $ (155) $ (1,233)
========= =========
Depreciation included in operating loss $ 54 $ 265
========= =========
During the first quarter of 2002, the operating loss, excluding the
plant closure costs, resulted primarily from the underabsorption of operating
costs due to minimal sales and poor operating efficiencies while the facility
was being shut down, and, to a lesser extent, from the cost of maintaining,
insuring, protecting, and depreciating the facility and the remaining equipment.
The operating loss during the first quarter of 2003 resulted primarily from the
ongoing cost to maintain, insure, protect, and depreciate the building and the
remaining equipment in the facility.
During the first quarter of 2003, net sales of the Metals Group
decreased by $630,000, or 10.0%, compared to the first quarter of 2002. The
decrease resulted from reduced sales of diecast components, primarily due to the
off-shore sourcing of certain components, offset, in part, by increased sales of
machined metal components resulting primarily from the roll out of certain new
business obtained from existing customers.
Cost of sales, as a percentage of net sales decreased to 103.9% of net
sales during the first quarter of 2003 from 110.3% of net sales during the first
quarter of 2002, primarily because the gross profit at the Arizona facility
improved to negative $125,000 from negative $897,000 in the first quarter of
2002. The Metals Group continued to be negatively affected by relatively high
fixed, or partially fixed, operating expenses in a period of low to moderate
sales volume.
Selling and administrative expenses as a percentage of net sales
decreased during the first quarter of 2003 compared to the first quarter of
2002, primarily because of the closing of the Arizona facility, which resulted
in a reduction in selling and administrative expenses to $30,000 from $326,000
during the first quarter of 2002.
- 18 -
During the first quarter of 2003, the loss from operations was $583,000
compared to a loss from operations of $1,716,000 during the first quarter of
2002. Excluding the $522,000 of plant closure costs, the loss from operations
during the first quarter of 2002, was $1,194,000. EBITDA for the first quarter
of 2003 was $304,000, or 5.4% of net sales, an increase of $992,000, compared to
the first quarter of 2002.
PLANT CLOSURE COSTS
For a discussion of plant closure costs please refer to our discussion
of the Metals Group above.
CORPORATE OFFICE
Corporate office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our consolidated financial statements.
The following table sets forth the operating results of the corporate
office for the three-month periods ended March 31, 2003 and 2002, and the
reconciliation of the loss from operations to EBITDA (dollar amounts in
thousands):
THREE MONTHS ENDED
MARCH 31
------------------
2003 2002
---- ----
Loss from operations $ (591) $ (583)
Add back: depreciation and amortization 9 21
------ ------
EBITDA $ (582) $ (562)
====== ======
INTEREST EXPENSE
During the first quarters of 2003 and 2002, interest expense totaled
$1,780,000 and $1,796,000, respectively, which included amortization of deferred
financing expenses of $143,000 and $36,000, respectively.
INCOME TAX PROVISION
At March 31, 2003, and December 31, 2002, our net deferred income tax
assets were fully offset by a valuation allowance. The income tax provisions
recorded during the three-month periods ended March 31, 2003 and 2002, consisted
of estimated state income taxes payable.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 2003, our operating activities provided
$390,000 of cash. Accounts receivable increased by $4,356,000. The increase was
caused primarily by an increase in net sales during March 2003 compared to
December 2002, an increase in accounts receivable related to sales of tooling,
- 19 -
and, at December 31, 2002, a payment by one customer of approximately $450,000
of invoices in advance of their scheduled due dates. Inventories increased by
$509,000, or 5.8%, primarily because of the production of safety stocks in order
to satisfy customer requirements during periods of high demand. Prepaid expenses
and other current assets decreased by $695,000, primarily because of a reduction
in the amount of unbilled tooling being manufactured or purchased by us for sale
to our customers. Accrued interest expense increased by $1,113,000, reflecting
additional interest accrued during the quarter on our senior, unsecured note,
our senior subordinated notes, and our junior subordinated notes.
INVESTING ACTIVITIES
During the first quarter of 2003, our investing activities used
$872,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the corporate office
totaled $721,000, $176,000, and $2,000, respectively, primarily for the purchase
of equipment. In addition, during the first quarter of 2003, the Rubber Group
acquired another $106,000 of production equipment, which was financed under a
capital lease obligation. We presently project that capital expenditures during
2003 will total approximately $7,353,000, substantially all of which will be for
the purchase of equipment. Capital expenditures for the Rubber Group, the Metals
Group, and the corporate office are projected to total approximately $6,285,000,
$1,046,000, and $22,000, respectively, during 2003. At March 31, 2003, we had
outstanding commitments to purchase property, plant, and equipment of
approximately $2,659,000.
FINANCING ACTIVITIES
During the first quarter of 2003, our financing activities provided
$346,000 of cash. During the first quarter of 2003, we made payments on our
amortizing term notes totaling $2,591,000, and we increased the net borrowings
under our revolving line of credit by $3,142,000.
LIQUIDITY
We finance our operations with cash from operating activities and a
variety of financing arrangements, including term loans and loans under our
revolving line of credit. Our ability to borrow under our revolving line of
credit is subject to certain availability formulas based on the levels of our
accounts receivable and inventories. Our revolving line of credit is currently
scheduled to expire on May 21, 2003. At May 13, 2003 the aggregate principal
amount outstanding under our revolving line of credit was $18,007,000. We intend
to replace the revolving line of credit with a revolving line of credit provided
by a new lender or to negotiate an extension of the May 21, 2003, expiration
date with our existing lender. We can give no assurance, however, that we will
be able to replace or extend the revolving line of credit on favorable terms, or
at all. At March 31, 2003, availability under our revolving line of credit
totaled $1,200,000 before outstanding checks of $952,000 were deducted.
Substantially all of our assets are pledged as collateral for various
of our borrowings. A number of our financing arrangements contain covenants that
require us to maintain minimum levels of working capital, net worth, and cash
flow coverage and other covenants that place certain restrictions on our
business and operations, including covenants relating to the incurrence or
assumption of additional debt, the level of past-due trade accounts payable, the
sale of all or substantially all of our assets, the purchase property, plant,
and equipment, the purchase of common stock, the redemption of preferred stock,
and the payment of cash dividends. In addition, substantially all of our
financing arrangements include cross-default provisions.
- 20 -
From time to time, our lenders have agreed to waive, amend, or
eliminate certain of the financial covenants contained in our various financing
agreements in order to maintain or otherwise ensure our current or future
compliance. In the event that we are not in compliance with any of our covenants
in the future and our lenders do not agree to amend, waive, or eliminate those
covenants, the lenders would have the right to declare the borrowings under
their financing agreements to be due and payable.
We are in default in the payment of our senior subordinated notes and
our senior, unsecured note, which have outstanding principal amounts of
$27,412,000 and $7,500,000, respectively, and accrued interest, as of March 31,
2003, of $12,815,000 and $938,000, respectively. In addition, our revolving line
of credit is currently scheduled to expire on May 21, 2003, we have $347,000 of
junior subordinated notes that are scheduled to mature during 2003, and we have
$9,335,000 of scheduled principal payments on our secured, amortizing term notes
during the last nine months of 2003. We estimate that, at existing contractual
and market rates, the interest expense on all of our debt during 2003 will be
approximately $7,000,000. Interest paid during the first quarters of 2003 and
2002 totaled $524,000 and $881,000, respectively.
We had a net working capital deficit of $66,666,000 at March 31, 2003,
compared to a net working capital deficit of $68,070,000 at December 31, 2002.
The net working capital deficit exists primarily because the majority of our
debt is in default or subject to short-term waivers of cross defaults. As
discussed in more detail below, we are in the process of negotiating extensions
or refinancings of all of our matured and maturing debt, although there can be
no assurance that we will be successful in this effort. If our debt were
refinanced on the terms that are set forth below, we estimate that our monthly
interest expense would be approximately $670,000.
We have been in default on our 12 3/4% senior subordinated notes since
February 1, 2000, when we did not make the payments of principal, in the amount
of $27,412,000, and interest, in the amount of $1,748,000, that were due on that
date. On July 10, 2002, we commenced an exchange offer for the 12 3/4% senior
subordinated notes. The exchange offer was amended on March 7, 2003. If the
amended exchange offer is consummated, at least 99% of the 12 3/4% senior
subordinated notes will be exchanged for new 11 1/2% senior subordinated notes
due August 1, 2007, in a principal amount equal to the principal amount of the
12 3/4% senior subordinated notes being exchanged plus the accrued and unpaid
interest thereon through the day before the date the amended exchange offer is
consummated, which accrued interest will total $499.375 for each $1,000
principal amount of 12 3/4% senior subordinated notes, assuming the amended
exchange offer is consummated on July 1, 2003. Interest on the 11 1/2% senior
subordinated notes will accrue from the date the amended exchange offer is
consummated, and will be payable on each February 1, May 1, August 1, and
November 1. Each $1,000 principal amount of 11 1/2% senior subordinated notes
will be issued together with warrants to purchase ten shares of common stock at
a price of $3.50 per share at any time from January 1, 2004, through August 1,
2007. If the amended exchange offer is consummated, we will pay a participation
fee of 3% of the principal amount of 12 3/4% senior subordinated notes that are
exchanged. Our senior, secured lenders and the holders of the junior
subordinated notes have waived the cross-default provisions with respect to the
default on the senior subordinated notes through May 19, 2003, and August 1,
2003, respectively. The current expiration date of the amended exchange offer is
May 15, 2003. One of the conditions to the consummation of the amended exchange
offer is the tender for exchange of at least 99% of the senior subordinated
notes. As of May 13, 2003, we had received tenders of $27,209,000 principal
amount of 12 3/4% senior subordinated notes, or 99.3% of the notes. There are
additional conditions to the consummation of the amended exchange offer that may
not be satisfied by the expiration date.
- 21 -
We have reached an agreement with the holders of our 14% junior
subordinated notes on the terms of a restructuring of those notes. If the
restructuring is completed, we will exchange new 12 1/2% junior subordinated
notes due November 1, 2007, for the existing 14% junior subordinated notes, and
the accrued interest on the 14% junior subordinated notes for the period
November 1, 1999, through the day before the restructuring is consummated, which
will total $213,000, assuming the restructuring is consummated on July 1, 2003,
will be converted into shares of our common stock at a price of $2.27 per share.
Interest on the 12 1/2% junior subordinated notes will accrue from the date the
restructuring is consummated, and will be payable on each February 1, May 1,
August 1, and November 1. Each $1,000 principal amount of 12 1/2% junior
subordinated notes will be issued with warrants to purchase ten shares of common
stock at a price of $3.50 per share at any time from January 1, 2004, through
November 1, 2007. If the restructuring is completed, we will also pay a
participation fee of 3% of the principal amount of 14% junior subordinated
notes.
We have been in default on our senior, unsecured note since April 30,
2002, when we did not make the payments of principal, in the amount of
$7,500,000, and the interest, in the amount of $78,000, that were due on that
date. If the other aspects of the financial restructuring program are completed,
we have proposed to repurchase the senior, unsecured note for $5,550,000 in cash
plus interest on that amount from November 1, 2002, to the date the amended
exchange offer is consummated, at the prime rate. Our senior, secured lenders
and the holders of the junior subordinated notes have waived the cross-default
provisions with respect to the default on the senior, unsecured note through
May 19, 2003, and August 1, 2003, respectively.
We are currently in discussions with several lenders regarding a
refinancing of our senior, secured credit facilities.
We can give no assurance that we will be able to consummate the amended
exchange offer, restructure the senior, unsecured note, or refinance our senior,
secured credit facilities on satisfactory terms. If we are unable to do so, we
may file a petition under the federal bankruptcy code in order to effect a debt
restructuring on terms substantially similar to those discussed above, or on
other terms. Although we believe that such a debt restructuring could be
accomplished without material disruption to our operations, any such proceeding
involves considerable risks and uncertainties and could have a material adverse
effect on our business, results of operations, cash flows, and financial
position. The consolidated financial statements do not include any adjustments
to the amounts or classifications of assets or liabilities to reflect those
risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is minimal.
At March 31, 2003, we had $35,908,000 of outstanding floating-rate debt
at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%, the
prime rate plus 1%, the prime rate plus 3/4%, or the prime rate. Currently we do
not purchase derivative financial instruments to hedge or reduce our interest
rate risk. As a result, changes in either LIBOR or the prime rate affect the
rates at which we borrow funds under these agreements.
At March 31, 2003, we had $36,998,000 of outstanding fixed-rate,
long-term debt with a weighted-average interest rate of 12.7%, of which
$34,912,000 has matured. We have received tenders of
- 22 -
over 99% of our 12 3/4% senior subordinated notes in exchange for new 11 1/2%
senior subordinated notes due August 1, 2007, in a principal amount equal to the
principal amount of the existing 12 3/4% senior subordinated notes being
exchanged plus the accrued and unpaid interest thereon through the day before
the date the exchange is effected, which accrued interest will total $499.375
for each $1,000 principal amount of 12 3/4% senior subordinated notes exchanged,
if the exchange offer is consummated on July 1, 2003. The holders of our 14%
junior subordinated notes have agreed to exchange the $347,000 principal amount
of those notes for new 12 1/2% junior subordinated notes due November 1, 2007,
and to convert the accrued interest on the notes into shares of common stock. If
the other aspects of the financial restructuring are completed, we have proposed
to repurchase our $7,500,000 senior, unsecured note for $5,550,000 plus interest
on that amount from November 1, 2002, to the date of repurchase, at the prime
rate.
If the financial restructuring is completed on the terms currently
negotiated, we estimate that our monthly interest expense would be approximately
$670,000 and that a one percentage point increase or decrease in the applicable
short-term rate would increase or decrease our monthly interest expense by
approximately $34,000.
For further information about our indebtedness, we recommend that you
also read Notes 1 and 5 of our consolidated financial statements in Part I, Item
1.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the date of this report, an
evaluation was performed under the supervision, and with the participation, of
our management, including our principal executive officers and our chief
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our principal
executive officers and our chief financial officer concluded that our disclosure
controls and procedures are effective to provide us with timely notice of
material information required to be disclosed in periodic reports filed with the
U.S. Securities and Exchange Commission. We also reviewed our internal controls,
and there have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date of our previous evaluation.
- 23 -
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS ON SENIOR SECURITIES
(a) We are in default in respect of our 12 3/4% senior subordinated
notes because we did not make the payments of principal, in the amount of
$27,412,000, and interest, in the amount of $1,748,000, that were due on
February 1, 2000. For more information regarding the default in respect of the
12 3/4% senior subordinated notes, refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity," in Part
I, Item 2, which is incorporated by reference herein.
We are in default in respect of our senior, unsecured note because we
did not make the payments of principal, in the amount of $7,500,000, and
interest, in the amount of $78,000, that were due on April 30, 2002. For more
information regarding the default in respect of the senior, unsecured note,
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity," in Part I, Item 2, which is incorporated by
reference herein.
(b) We did not pay dividends on our $8 cumulative convertible preferred
stock, series B, during the three-month period ended March 31, 2003, in the
aggregate amount of $7,000. As of May 13, 2003, we were in arrears in the
payment of dividends in the amount of $86,000 and in the making of mandatory
redemptions in the amount of $270,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Agreement relating to 14% Junior Subordinated Notes
dated as of April 30, 2003, between Lexington
Precision Corporation ("LPC") and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated as of April 30, 2003,
among LPC, Michael A. Lubin, and Warren Delano
10-3 Agreement dated as of April 4, 2003, between LPC and
Congress Financial Corporation ("Congress")
10-4 Agreement dated as of April 4, 2003, between
Lexington Rubber Group, Inc. ("LRGI") and Congress
10-5 Agreement dated as of April 4, 2003, among LPC, LRGI,
and Congress
10-6 Agreement dated as of April 30, 2003, between LPC and
CIT Group/Equipment Financing, Inc.
10-7 Twelfth Amendment Agreement dated as of April 4,
2003, between LPC, LRGI, and Bank One, NA
10-8 Agreement dated as of April 4, 2003, among LPC, LRGI,
and Bank One, NA
- 24 -
99-1 Certification of Michael A. Lubin, Chairman of the
Board and Co-Principal Executive Officer of the
registrant, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99-2 Certification of Warren Delano, President and
Co-Principal Executive Officer of the registrant,
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99-3 Certification of Dennis J. Welhouse, Chief Financial
Officer and Principal Financial Officer of the
registrant, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) REPORTS ON FORM 8-K
On January 10, 2003, we filed a report on Form 8-K that
included a press release dated January 10, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
January 10, 2003, to 12 midnight, New York City Time on January 31, 2003, unless
further extended.
On January 31, 2003, we filed a report on Form 8-K that
included a press release dated January 31, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
January 31, 2003, to 12 midnight, New York City Time on February 7, 2003, unless
further extended.
On February 7, 2003, we filed a report on Form 8-K that
included a press release dated February 7, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
February 7, 2003, to 12 midnight, New York City Time on February 12, 2003,
unless further extended.
On February 12, 2003, we filed a report on Form 8-K that
included a press release dated February 12, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
February 12, 2003, to 12 midnight, New York City Time on February 18, 2003,
unless further extended.
On February 18, 2003, we filed a report on Form 8-K that
included a press release dated February 18, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
February 18, 2003, to 12 midnight, New York City Time on February 24, 2003,
unless further extended.
On February 24, 2003, we filed a report on Form 8-K that
included a press release dated February 24, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
February 24, 2003, to 12 midnight, New York City Time on February 28, 2003,
unless further extended.
On February 28, 2003, we filed a report on Form 8-K that
included a press release dated February 28, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
February 28, 2003, to 12 midnight, New York City Time on March 7, 2003, unless
further extended.
- 25 -
On March 7, 2003, we filed a report on Form 8-K that included
a press release dated March 7, 2003, stating that we were amending the terms of
our exchange offer with respect to our 12 3/4% Senior Subordinated Notes Due
February 1, 2000, and extending the expiration date of our offer to exchange our
senior subordinated notes from March 7, 2003, to 12 midnight, New York City Time
on March 20, 2003, unless further extended.
On March 20, 2003, we filed a report on Form 8-K that included
a press release dated March 20, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
March 20, 2003, to 12 midnight, New York City Time on April 3, 2003, unless
further extended.
- 26 -
LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 14, 2003 By: /s/ Michael A. Lubin
Date ----------------------------
Michael A. Lubin
Chairman of the Board
May 14, 2003 By: /s/ Warren Delano
Date ----------------------------
Warren Delano
President
May 14, 2003 By: /s/ Dennis J. Welhouse
Date ----------------------------
Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
- 27 -
CERTIFICATIONS
I, Michael A. Lubin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Lexington Precision Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Michael A. Lubin
-------------------------------
Michael A. Lubin
Chairman of the Board
(Co-Principal Executive Officer)
- 28 -
I, Warren Delano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Lexington Precision Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c. presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Warren Delano
--------------------------------
Warren Delano
President
(Co-Principal Executive Officer)
- 29 -
I, Dennis J. Welhouse, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Lexington Precision Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b. evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c. presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a. all significant deficiencies in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Dennis J. Welhouse
----------------------------
Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
- 30 -