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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 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 OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 319-4657
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.25 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant's common stock, $0.25 par value per
share, held by non-affiliates of the registrant, as of June 30, 2003, was
approximately $2,897,000.
The number of shares of common stock outstanding as of March 1, 2004, was
4,931,767.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be issued in connection with its
2004 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III. Only those portions of the Proxy Statement which are
specifically incorporated by reference are deemed filed as part of this report
on Form 10-K.
LEXINGTON PRECISION CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 5
Item 3. Legal Proceedings............................................................................ 5
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 5
PART II
Item 5. Market for Our Common Stock and Other Stockholder Matters.................................... 6
Item 6. Selected Financial Data...................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... 26
Item 8. Financial Statements and Supplementary Data.................................................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... 58
Item 9A. Controls and Procedures...................................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 59
Item 11. Executive Compensation....................................................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 59
Item 13. Certain Relationships and Related Transactions............................................... 59
Item 14. Principal Accountant Fees and Services....................................................... 59
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 60
PART I
ITEM 1. BUSINESS
Our company was incorporated in Delaware in 1966. Substantially all of
our business is conducted in the continental United States. Through our two
operating segments, the Rubber Group and the Metals Group, we manufacture rubber
and metal components that are sold to other manufacturers.
In 2003, net sales of the Rubber Group totaled $103,243,000, or 84.9%
of our consolidated net sales. The Rubber Group manufactures connector seals
used in automotive wiring systems and insulators used in automotive ignition
wire sets. We believe that we are the leading manufacturer of these types of
components in North America. During 2003, sales to automotive customers
represented 86.8% of the total net sales of the Rubber Group. The Rubber Group
also manufactures molded rubber components used in a variety of medical devices,
such as drug delivery systems and syringes.
In 2003, net sales of the Metals Group totaled $18,373,000, or 15.1% of
our consolidated net sales. The Metals Group manufactures aluminum die castings
and machines components from aluminum, brass, and steel bars. During 2003, sales
to automotive customers represented 86.2% of the total net sales of the Metals
Group.
Financial data and other information about our operating segments can
be found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II, Item 7, and in Note 9, "Segments," to our
consolidated financial statements in Part II, Item 8.
PRINCIPAL END-USES FOR OUR PRODUCTS
The following table summarizes our net sales during 2003, 2002, and
2001, by the type of product in which our components were utilized (dollar
amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2003 2002 2001
---- ---- ----
Automobiles and trucks $105,471 86.7% $108,752 87.1% $107,818 85.4%
Medical devices 12,334 10.1 11,705 9.4 9,732 7.7
Other 3,811 3.2 4,395 3.5 8,652 6.9
-------- ----- -------- ----- -------- -----
$121,616 100.0% $124,852 100.0% $126,202 100.0%
======== ===== ======== ===== ======== =====
-1-
The following table summarizes net sales of the Rubber Group and the
Metals Group during 2003, 2002, and 2001, by the type of product in which each
segment's components were utilized (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2003 2002 2001
---- ---- ----
Rubber Group:
Automobiles and trucks $ 89,642 86.8% $ 86,345 87.3% $ 81,493 89.0%
Medical devices 12,334 11.9 11,705 11.9 9,732 10.7
Other 1,267 1.3 830 0.8 307 0.3
-------- ----- -------- ----- -------- -----
$103,243 100.0% $ 98,880 100.0% $ 91,532 100.0%
======== ===== ======== ===== ======== =====
Metals Group:
Automobiles and trucks $ 15,829 86.2% $ 22,407 86.3% $ 26,325 75.9%
Industrial equipment 446 2.4 1,104 4.2 4,631 13.4
Other 2,098 11.4 2,461 9.5 3,714 10.7
-------- ----- -------- ----- -------- -----
$ 18,373 100.0% $ 25,972 100.0% $ 34,670 100.0%
======== ===== ======== ===== ======== =====
MAJOR CUSTOMERS
Our largest customer is Delphi Corporation. During 2003, 2002, and
2001, our net sales to Delphi totaled $24,591,000, $25,181,000, and $24,388,000,
which represented 20.2%, 20.2%, and 19.3%, respectively, of our net sales. No
other customer accounted for more than 10% of our net sales during 2003, 2002,
or 2001. Approximately 82% of the products we sell to Delphi are covered by a
supply contract that expires on December 31, 2004. For more information about
the expiration of the supply contract, please refer to "Managements Discussion
and Analysis of Financial Condition and Results of Operations" in Part II, Item
7.
MARKETING AND SALES
Our marketing and sales effort is carried out by management personnel
and account managers.
RAW MATERIALS
Our principal raw materials are silicone and organic rubber compounds,
aluminum ingots, and aluminum, steel, and brass bars. Each of our principal raw
materials has been readily available at competitive prices from several major
manufacturers and we anticipate that those materials will continue to be readily
available at competitive prices for the foreseeable future.
PATENTS AND TRADEMARKS
We do not currently hold any patents, trademarks, or licenses that we
consider to be material to the successful operation of our business.
-2-
SEASONAL VARIATIONS
Our business generally is not subject to significant seasonal
variation; however, we generally experience decreased sales during the third
calendar quarter of each year due to shutdowns of our customers' plants in July
as a result of vacations and model-year changeovers, and during the fourth
calendar quarter of each year due to shutdowns of our customers' plants for
vacations and holidays in December.
BACKLOG
Sales of our products are made pursuant to a variety of arrangements
and practices. Our customers regularly revise release schedules to correspond to
their own production requirements. We believe that the aggregate value of
scheduled releases outstanding on our books at any time cannot be considered
firm backlog because those releases may be revised at any time. We also believe
that increases or decreases in the aggregate value of scheduled releases are not
necessarily indicative of any trend in our net sales.
COMPETITION
The markets we compete in are characterized by intense price
competition and increasing customer requirements for quality and service. We
compete for business primarily on the basis of quality, service, engineering
capability, and price. We encounter substantial competition from a large number
of manufacturing companies. Our competitors range from small and medium-sized
specialized firms to large diversified companies, many of which have resources
substantially greater than ours. Additionally, some of our customers have
internal manufacturing operations that compete with us.
RESEARCH AND DEVELOPMENT
During 2003, 2002, and 2001, we spent approximately $1,168,000,
$924,000, and $890,000, respectively, on our research and development
activities, which are primarily related to improving our manufacturing processes
in order to reduce the cost and increase the quality of our products.
PRODUCT LIABILITY RISKS
We are subject to potential product liability risks inherent in the
manufacture and sale of components. Although there are no claims against us that
we believe will have a material adverse effect upon our business, financial
position, or results of operations, we cannot assure you that any existing or
future claims will not have a material adverse effect on us. Although we
maintain insurance coverage for product liability, we cannot assure you that, in
the event of a claim, the insurance coverage would apply or that, in the event
of an award arising out of a claim, the amount of any applicable insurance
coverage would be sufficient to satisfy the award.
ENVIRONMENTAL COMPLIANCE
Our operations are subject to numerous laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment. Although we make expenditures relating to the
protection of the environment, compliance with environmental laws and
regulations has not had a significant impact on our capital spending
requirements, earnings, or competitive position. We cannot assure you that
changes in environmental laws and regulations, or in the interpretation or
enforcement of those laws and regulations, will not require material
expenditures in the future.
-3-
EMPLOYEES
We believe that our employee relations are generally good. The
following table shows the number of our employees at December 31, 2003, 2002,
and 2001.
DECEMBER 31
-----------
2003 2002 2001
----- ----- -----
Rubber Group 904 876 807
Metals Group 189 260 299
Corporate Office 9 7 7
----- ----- -----
1,102 1,143 1,113
===== ===== =====
At December 31, 2003, 2002 and 2001, employees at the Rubber Group
included 322, 301, and 263 hourly workers at two plant locations that were
subject to collective bargaining agreements, which expire on October 19, 2004,
and December 11, 2004, respectively.
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
We do not currently maintain an internet website and therefore we do
not make available through a website our annual report on Form 10-K, our
quarterly reports on Form 10-Q, or our current reports on Form 8-K and all
amendments to those reports. We will furnish free of charge, upon written
request to our President at 767 Third Avenue, New York, NY 10017, a paper copy
of the reports that we file with the Commission. The reports have been filed
electronically with the Securities and Exchange Commission (the "Commission")
and are accessible on the Commission's website at www.sec.gov.
-4-
ITEM 2. PROPERTIES
The following table shows the location and square footage of our
manufacturing facilities at December 31, 2003:
SQUARE
LOCATION FEET
-------- ----
Rubber Group:
Jasper, Georgia 100,000
LaGrange, Georgia 85,000
North Canton, Ohio 42,000
Vienna, Ohio 64,000
Rock Hill, South Carolina 63,000
-------
Total Rubber Group 354,000
-------
Metals Group:
Casa Grande, Arizona 64,000
Lakewood, New York 103,000
Rochester, New York 60,000
-------
Total Metals Group 227,000
-------
Total Company 581,000
=======
All of our facilities are encumbered by mortgages. All of our plants
are general manufacturing facilities suitable for our operations. We believe
that our facilities are adequate to meet our current operating needs. Our
manufacturing facility in Casa Grande, Arizona, was closed in 2002 and is
currently being offered for sale. For more information about the closing, please
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II, Item 7.
We occupy, in the aggregate, 6,000 square feet of office space for
corporate executive and administrative purposes. We lease an office in
Cleveland, Ohio, and reimburse an affiliate for the cost of leasing an office in
New York City.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of our business activities.
It is our policy to record accruals for claims and legal proceedings when we
consider a loss to be probable and we can reasonably estimate the amount of that
loss. The various actions to which we are or may in the future be a party are at
various stages of completion. Although we cannot assure you as to the outcome of
existing or potential litigation, we currently believe, based upon the
information currently available to us, that the outcome of those actions will
not have a material adverse effect upon our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2003.
-5-
PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND OTHER STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market. At March 19,
2004, there were approximately 751 holders of record of our common stock.
Trading in shares of our common stock is limited. During 2003 and 2002, trading
data for our stock was available on the OTC Bulletin Board operated by the
National Association of Securities Dealers, Inc. (NASD). The following table
sets forth prices at which transactions in our common stock were reported on the
OTC Bulletin Board. Additional trading data can be found at the NASD website,
www.nasdaq.com.
YEARS ENDED DECEMBER 31
-----------------------
2003 2002
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First quarter $1.01 $0.53 $0.32 $0.31
Second quarter $1.01 $0.55 $0.50 $0.32
Third quarter $0.65 $0.40 $0.40 $0.32
Fourth quarter $0.90 $0.50 $0.53 $0.35
We are not able to determine whether retail markups, markdowns, or
commissions were included in the above prices. We believe that eleven brokerage
firms currently make a market in our common stock, although both bid and asked
quotations may be limited.
We have not paid dividends on our common stock since 1979, and we have
no current plans to reinstate the payment of dividends. In addition, agreements
defining the right of holders of our debts currently restrict us from paying
cash dividends on our common stock. We are currently in arrears with respect to
the redemption of 1,800 shares of our $8 Cumulative Convertible Preferred Stock,
Series B (the "Series B Preferred Stock"), that we did not redeem on each of
November 30, 2003, 2002, 2001, and 2000, at an aggregate redemption price of
$360,000.
-6-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data,
including the reconciliation of income from operations to earnings before
interest, taxes, depreciation, and amortization ("EBITDA"), for each of the
years in the five-year period ended December 31, 2003 (dollar amounts in
thousands, except per share amounts). The financial data has been derived from
our consolidated financial statements, which have been audited by Ernst & Young
LLP, independent certified public accountants. This information is not
necessarily indicative of the results of future operations and should be read in
conjunction with, and is qualified by, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7, and our
consolidated financial statements in Part II, Item 8.
YEARS ENDED DECEMBER 31
SUMMARY OF OPERATIONS: 2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Net sales $ 121,616 $ 124,852 $ 126,202 $ 138,302 $ 134,372
Cost of sales 109,526 110,718 109,055 120,726 111,598
--------- --------- --------- --------- ---------
Gross profit 12,090 14,134 17,147 17,576 22,774
Selling and administrative expenses 8,532 8,658 9,911 10,923 12,153
Impairment of goodwill 208 -- -- -- --
Impairment of long-lived assets 2,427 -- 2,047 -- 335
Plant closure costs -- 609 -- -- --
Income from insurance company
demutualization -- -- (1,274) -- --
--------- --------- --------- --------- ---------
Income from operations 923 4,867 6,463 6,653 10,286
Interest expense (7,049) (7,220) (8,534) (9,913) (9,632)
Gain on sale of securities -- 248 -- -- --
Income tax provision (benefit) 76 (538) 80 (161) 133
Cumulative effect of a change in
accounting principle 247 -- -- -- --
Extraordinary gain on repurchase of
debt, net of applicable income taxes -- -- -- -- 1,542
--------- --------- --------- --------- ---------
Net income (loss) $ (6,449) $ (1,567) $ (2,151) $ (3,099) $ 2,063
========= ========= ========= ========= =========
Net income (loss) per diluted common
share $ (1.36) $ (0.32) $ (0.45) $ (0.65) $ 0.46
========= ========= ========= ========= =========
OTHER DATA:
Net cash provided by operating activities $ 11,119 $ 16,231 $ 17,561 $ 22,136 $ 5,624
========= ========= ========= ========= =========
Income from operations $ 923 $ 4,867 $ 6,463 $ 6,653 $ 10,286
Add back: depreciation and amortization
included in income from operations 10,279 11,865 13,103 13,490 12,728
--------- --------- --------- --------- ---------
EBITDA (1) $ 11,202 $ 16,732 $ 19,566 $ 20,143 $ 23,014
============================================== ========= ========= ========= ========= =========
Capital expenditures $ 5,799 $ 5,230 $ 6,408 $ 13,936 $ 10,328
DECEMBER 31
-----------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
FINANCIAL POSITION:
Current assets $ 29,834 $ 32,991 $ 34,146 $ 36,968 $ 37,503
Current liabilities 37,594 101,061 107,074 117,147 116,460
--------- --------- --------- --------- ---------
Net working capital deficit $ (7,760) $ (68,070) $ (72,928) $ (80,179) $ (78,957)
========= ========= ========= ========= =========
Total assets $ 83,687 $ 92,145 $ 99,877 $ 110,289 $ 111,327
Long-term debt, excluding current portion $ 63,861 $ 1,117 $ 2,000 $ 104 $ 116
Total stockholders' deficit $ (19,492) $ (13,199) $ (11,659) $ (9,536) $ (7,463)
-7-
(1) 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-K
because this measure is used by investors, as well as our own management,
to evaluate the operating performance of our business, including its
ability to incur and to service debt. Our definition of EBITDA may not be
the same as the definition of EBITDA used by other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Some of our statements in this Form 10-K, 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,
- changes in the cost of raw materials,
- 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, and
- labor interruptions at our facilities or at our customers'
facilities.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements are
expressly qualified by the discussion above.
-8-
RESULTS OF OPERATIONS -- COMPARISON OF 2003, 2002, AND 2001
The following table sets forth our consolidated operating results for
2003, 2002, and 2001 and the reconciliation of income from operations to
earnings before interest, taxes, depreciation, and amortization ("EBITDA")
(dollar amounts in thousands):
YEARS ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
Net sales $ 121,616 100.0% $ 124,852 100.0% $ 126,202 100.0%
Cost of sales 109,526 90.1 110,718 88.7 109,055 86.4
--------- ----- --------- ----- --------- -----
Gross profit 12,090 9.9 14,134 11.3 17,147 13.6
Selling and administrative expenses 8,532 7.0 8,658 6.9 9,911 7.9
Impairment of goodwill (1) 208 0.2 -- -- -- --
Impairment of long-lived assets (2) 2,427 2.0 -- -- 2,047 1.6
Plant closure costs (3) -- -- 609 0.5 -- --
Income from insurance company demutualization (4) -- -- -- -- (1,274) (1.0)
--------- ----- --------- ----- --------- -----
Income from operations 923 0.8 4,867 3.9 6,463 5.1
Add back: depreciation and amortization (5) 10,279 8.4 11,865 9.5 13,103 10.4
--------- ----- --------- ----- --------- -----
EBITDA (6) $ 11,202 9.2% $ 16,732 13.4% $ 19,566 15.5%
========= ===== ========= ===== ========= =====
Net cash provided by operating activities (7) $ 11,119 9.1% $ 16,231 13.0% $ 17,561 13.9%
========= ===== ========= ===== ========= =====
(1) In 2003, we recorded a provision of $208,000 to write off the unamortized
balance of the Metals Group's goodwill in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." For more information, refer to the discussion of the
results of operations of the Metals Group in this section.
(2) In 2003, we recorded a provision of $2,427,000 to write down to fair value
the long-lived assets of our die casting business in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment of Long-Lived Assets." In 2002, we closed
our metal machining facility in Casa Grande, Arizona. As of December 31,
2001, we recorded a provision of $2,047,000 to write down to fair value
certain of the facility's assets. For more information, refer to the
discussion of the results of operations of the Metals Group in this
section.
(3) During 2002, we incurred costs of $609,000 to close our Casa Grande,
Arizona, facility. For more information, refer to the discussion of the
results of operations of the Metals Group in this section.
(4) In 2001, we received shares of common stock of an insurance company as a
result of the demutualization of the company. For more information, refer
to the discussion of the results of operations of the Corporate Office in
this section.
-9-
(5) Does not include amortization of deferred financing expenses, which totaled
$610,000, $440,000, and $192,000, in 2003, 2002, and 2001, respectively,
and which is included in interest expense in the consolidated financial
statements.
(6) 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-K
because this measure is used by investors, as well as our own management,
to evaluate the operating performance of our business, including its
ability to service debt. Our definition of EBITDA may not be the same as
the definition of EBITDA used by other companies.
(7) The calculation of net cash provided by operating activities is detailed in
the consolidated statement of cash flows that is part of our consolidated
financial statements in Part II, Item 8.
Our net sales for 2003 were $121,616,000 compared to net sales of
$124,852,000 for 2002, a decrease of $3,236,000, or 2.6%. The decrease in net
sales was principally the result of decreased net sales of diecast components
and machined metal components, offset, in part, by increased sales of rubber
components. EBITDA for 2003 was $11,202,000, or 9.2% of net sales, compared to
EBITDA of $16,732,000 or 13.4% of net sales, for 2002. The decrease in EBITDA
was the result of a $1,404,000 decrease in EBITDA at the Rubber Group and a
$3,896,000 decrease in EBITDA at the Metals Group, which are discussed in detail
below.
Net cash provided by operating activities during 2003 totaled
$11,119,000, compared to $16,231,000 for 2002. For more information about our
operating activities, please refer to the consolidated statement of cash flows
in Part II, Item 8, and to our discussion of operating activities under the
caption "Liquidity and Capital Resources" in this Part II, Item 7.
The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the Corporate Office for the
years ended December 31, 2003, 2002, and 2001.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. During 2003, 2002, and 2001, sales
to automotive industry customers represented 86.8%, 87.3%, and 89.0%,
respectively, of the Rubber Group's net sales. Any significant reduction in the
level of activity in the automotive industry could have a material adverse
effect on the results of operations of the Rubber Group and on our company as a
whole.
The three largest customers of the Rubber Group accounted for 45.5%,
45.6%, and 46.7% of the Rubber Group's net sales during 2003, 2002, and 2001,
respectively. Loss of a significant amount of business from any of the Rubber
Group's large customers would have a material adverse effect upon the Rubber
Group and upon our company as a whole if that business were not substantially
replaced by additional business from existing or new customers.
Delphi Corporation is the Rubber Group's largest customer. During 2003,
2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000,
$24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and
25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of
connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000,
and $22,295,000 during 2003, 2002, and 2001, respectively. Substantially all of
the connector seals we sell to Delphi are sold pursuant to a supply agreement
that expires on December 31, 2004. We cannot predict whether we and Delphi will
enter into a new agreement for us to supply connector seals to Delphi when
-10-
the current long-term agreement expires on December 31, 2004, or, if we do enter
into an agreement, what the volume, pricing, duration, and other terms of that
agreement will be. Delphi has indicated to us that they currently plan to
in-source, during 2005, approximately 30 connector seals currently manufactured
by us under the long-term agreement. Our aggregate net sales of these parts
during 2003 were $9,319,000. Assuming those connector seals were in-sourced on
the earliest possible date, January 1, 2005, and we were unable to replace the
lost business with new business from Delphi or other customers, we estimate that
the operating profit and EBITDA of the Rubber Group would be reduced by
approximately $2,500,000 per annum. We are currently in discussions with Delphi
regarding our ongoing supply relationship, and we are developing plans to
restructure the operations of our connector seals division to reduce expenses
and mitigate the impact of any lost business. Any such restructuring of our
connector seals business could include, among other things, the closing of one
of our existing manufacturing facilities, which could result in significant cash
and non-cash expenses. Although we can give no assurance, it is also possible
that, if we do continue to sell components to Delphi, the average price for
those components may increase, thereby partially offsetting the negative impact
of lower volume.
The following table sets forth the operating results of the Rubber
Group for 2003, 2002, and 2001 and the reconciliation of the Rubber Group's
income from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2003 2002 2001
---- ---- ----
Net sales $103,243 100.0% $ 98,880 100.0% $ 91,532 100.0%
Cost of sales 88,667 85.9 83,503 84.4 75,949 83.0
-------- ----- -------- ----- -------- -----
Gross profit 14,576 14.1 15,377 15.6 15,583 17.0
Selling and administrative expenses 4,550 4.4 4,612 4.7 5,194 5.7
-------- ----- -------- ----- -------- -----
Income from operations 10,026 9.7 10,765 10.9 10,389 11.3
Add back: depreciation and amortization 7,121 6.9 7,786 7.9 8,484 9.3
-------- ----- -------- ----- -------- -----
EBITDA $ 17,147 16.6% $ 18,551 18.8% $ 18,873 20.6%
======== ===== ======== ===== ======== =====
During 2003, net sales of the Rubber Group increased by $4,363,000, or
4.4%, compared to 2002. The increase in net sales was primarily due to increased
unit sales of insulators for automotive ignition wire sets, which resulted
primarily from an increase in the level of activity in the automotive industry
and an increase in our share of business at certain existing customers, and, to
a lesser extent, increased sales of components for medical devices, offset, in
part, by price reductions on certain automotive components.
Cost of sales as a percentage of net sales increased during 2003 to
85.9% of net sales from 84.4% of net sales during 2002, primarily due to
operational inefficiencies and scrap at our connector seals division, and, to a
lesser extent, because of increased operating losses at our captive tool-making
operation, due primarily to reduced tooling orders from our customers. These
increased costs were offset, in part, by reduced depreciation and amortization
expenses.
-11-
The problems at the connector seals division included:
- increased costs for scrap, sorting, and repair, relating to a
particular type of connector seal,
- increased freight costs, which resulted from delivery issues
related to those quality problems,
- costs related to the rollout of new business at our operations
that mold seals from liquid silicone rubber, and
- costs incurred due to the general disruption to our operations
as we attempted to cope with those problems.
During the third quarter of 2003, we initiated a plan to reduce or eliminate
these operating problems. The plan includes:
- upgrading management and supervisory personnel,
- installing and utilizing improved process controllers and
centralized data collection capabilities on all molding
presses,
- implementing improved manufacturing procedures throughout the
operation,
- installing automated visual inspection and repair equipment,
and
- improving utilization of the division's enterprise resource
planning software system.
Based upon the operating performance of the connector seals division in
the fourth quarter of 2003, we believe that the operations improvement plan has
begun to benefit our operations and will continue to yield improving results
during 2004 as key components of the plan take effect.
Selling and administrative expenses as a percentage of net sales
decreased during 2003 compared to 2002, primarily because these expenses are
fixed, or partially fixed, in nature.
During 2003, income from operations was $10,026,000, a decrease of
$739,000, or 6.9%, compared to 2002. EBITDA for 2003 was $17,147,000, or 16.6%
of net sales, compared to $18,551,000, or 18.8% of net sales, for 2002.
During 2002, net sales of the Rubber Group increased by $7,348,000, or
8.0%, compared to 2001. The increase in net sales was primarily due to increased
unit sales of automotive components, which resulted primarily from an increase
in the level of activity in the automotive industry and an increase in our share
of business at certain existing customers and, to a lesser extent, increased
sales of components for medical devices, offset, in part, by price reductions on
certain automotive components.
Cost of sales as a percentage of net sales increased to 84.4% of net
sales during 2002 from 83.0% of net sales during 2001, primarily because of:
- increased costs for sorting and repair of components, which
were caused by quality problems in manufacturing a certain
type of connector seal,
- underabsorption of overhead at our captive tool-making
operation, which was caused by a reduction in customer tooling
orders for a number of months,
- delays in completing the cost reduction plans that were
initiated in connection with the price reductions granted to
Delphi on July 16, 2001,
-12-
- increased workers' compensation expense, and
- increased maintenance expenses.
The increases in these components of cost of sales were partially offset by
lower depreciation expense.
Selling and administrative expenses as a percentage of net sales
decreased during 2002 compared to 2001, primarily because of reduced European
selling expenses, the elimination of goodwill amortization, as required by
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," which we adopted on January 1, 2002, and a reduction in bad
debt expense. These decreases were partially offset by an increase in management
incentive compensation.
During 2002, income from operations was $10,765,000, an increase of
$376,000, or 3.6%, compared to 2001. EBITDA for 2002 was $18,551,000, or 18.8%
of net sales, compared to $18,873,000, or 20.6% of net sales, for 2001.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars. During 2003, 2002, and 2001,
net sales to automotive industry customers represented 86.2%, 86.3%, and 75.9%,
respectively, of the Metals Group's net sales. Any material reduction in the
level of activity in the automotive industry could have a material adverse
effect on the results of operations of the Metals Group and on our company as a
whole.
The three largest customers of the Metals Group accounted for 51.9%,
57.3%, and 45.9% of the Metals Group's net sales during 2003, 2002, and 2001,
respectively. Loss of a significant amount of business from any of the Metals
Group's large customers would have a material adverse effect upon the Metals
Group and upon our company as a whole if that business were not substantially
replaced by additional business from existing or new customers.
-13-
The following table sets forth the operating results of the Metals
Group for 2003, 2002, and 2001 and the reconciliation of the Metals Group's loss
from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2003 2002 2001
---- ---- ----
Net sales $ 18,373 100.0% $ 25,972 100.0% $ 34,670 100.0%
Cost of sales 20,859 113.5 27,215 104.8 33,106 95.5
-------- ----- -------- ----- -------- -----
Gross profit (loss) (2,486) (13.5) (1,243) (4.8) 1,564 4.5
Selling and administrative expenses 1,303 7.1 1,582 6.1 2,587 7.5
Impairment of goodwill 208 1.1 -- -- -- --
Impairment of long-lived assets 2,427 13.2 -- -- 2,047 5.9
Plant closure costs -- -- 609 2.3 -- --
-------- ----- -------- ----- -------- -----
Loss from operations (6,424) (35.0) (3,434) (13.2) (3,070) (8.9)
Add back: depreciation and amortization 3,120 17.0 4,026 15.5 4,531 13.1
-------- ----- -------- ----- -------- -----
EBITDA $ (3,304) (18.0)% $ 592 2.3% $ 1,461 4.2%
======== ===== ======== ===== ======== =====
During 2003, net sales of the Metals Group decreased by $7,599,000, or
29.3%, compared to 2002. The decrease resulted from reduced sales of diecast and
machined metal components, primarily due to the following:
- a reduction in sales of diecast components to a large customer
resulting from the offshore sourcing of certain diecast
components,
- reduced die casting sales because a major customer lost
certain automotive programs,
- the end of product life for certain components that were not
replaced with sales of new components, and
- the loss of a high-volume, machined metal component because
the customer converted the part to a stamped metal component.
Cost of sales as a percentage of net sales increased during 2003 to
113.5% of net sales from 104.8% of net sales during 2002, primarily due to the
effect of fixed, or partially fixed, manufacturing expenses during a period of
low sales volume, offset, in part, by reduced depreciation and amortization
expenses.
Selling and administrative expenses declined 17.6% during 2003 compared
to 2002, but increased as a percentage of net sales because of the reduced sales
level.
During the fourth quarter of 2003, we performed our annual impairment
test of goodwill, which involves the preparation of a projection of future cash
flow, discounted to present value, and the consideration of other factors and
determined that the unamortized goodwill of the Metals Group was
-14-
impaired. As a result, we recorded a non-cash, pre-tax impairment charge of
$208,000, to write off the unamortized goodwill of the Metals Group. The
write-down resulted from the deteriorating operating results of the Metals Group
in 2002 and 2003 and a consequent reduction in our expectations for the future
performance of this segment. The charge appears as a separate line item in our
consolidated statement of operations in Part II, Item 8.
During 2002 and 2003, our die casting division experienced negative
gross profit margins. In addition, because of the poor operating performance of
this division over the past two calendar years and its projected operating
results for 2004, we have reduced our overall expectations for the division's
future financial performance. As a result, we reviewed the long-lived assets of
the die casting division for impairment as of December 31, 2003, under the
provisions of Statement of Financial Accounting Standards No.144, "Accounting
for Impairment or Disposal of Long-Lived Assets" ("FAS 144"). We determined that
the undiscounted, projected cash flow of the division was less than the carrying
value of the long-lived assets being tested. As a result, we concluded that the
long-lived assets of this division, which had a carrying value of $7,131,000,
were impaired and we wrote them down to their estimated fair value of
$4,704,000, recording a non-cash, pre-tax impairment charge of $2,427,000. Fair
value was based primarily on independent appraisals of the long-lived assets.
The impairment charge appears as a separate line item in our consolidated
statement of operations in Part II, Item 8.
During the fourth quarter of 2001, we were notified that the Metals
Group's largest customer would cease purchasing components from the Metals Group
after December 31, 2001. During 2001, the customer purchased $5,937,000 of
machined metal components that were manufactured primarily at the Metals Group's
Arizona facility. As a result of the reduction in sales at the Arizona facility,
we closed the facility in 2002 and recorded, as of December 31, 2001, an
impairment charge of $2,047,000 to reduce to fair value the carrying value of
the Arizona facility's land and building and certain metal machining equipment
idled by the loss of this business. The idled assets are currently classified in
plant and equipment and are being depreciated at the rate of $127,000 per annum.
These assets will be reclassified as assets held for sale if and when they meet
the criteria set forth in Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"),
which we adopted on January 1, 2002. Although the land and building are
currently offered for sale, they are not categorized on the balance sheet as
assets held for sale. At December 31, 2003, the book value of the assets
remaining to be disposed of at the Arizona facility totaled $1,714,000, which
included $1,576,000 for the land and building and $138,000 for equipment. The
cost to hold the building and the remaining equipment is currently projected to
total approximately $388,000 per annum, which includes $219,000 for building
maintenance, property taxes, insurance, and security services and $127,000 for
depreciation expense.
-15-
The following table sets forth certain operating data of the Arizona
facility for 2003, 2002, and 2001 and the reconciliation of the Arizona
facility's income from operations to its EBITDA (dollar amounts in thousands):
YEAR ENDED
DECEMBER 31
2003 2002 2001
------- ------- -------
Net sales $ -- $ 332 $ 8,954
======= ======= =======
Operating loss before nonrecurring charges $ (559) $(1,290) $ (523)
------- ------- -------
Nonrecurring charges:
Plant closure costs:
Severance and other employee termination costs -- 246 --
Asset relocation costs -- 209 --
Other costs -- 154 --
------- ------- -------
Subtotal -- 609 --
Impairment of long-lived assets -- -- 2,047
------- ------- -------
-- 609 2,047
------- ------- -------
Operating loss (559) (1,899) (2,570)
Add back: depreciation and amortization 200 527 1,658
------- ------- -------
EBITDA $ (359) $(1,372) $ (912)
======= ======= =======
During 2003, the loss from operations for the Metals Group was
$6,424,000, compared to a loss from operations of $3,434,000 during 2002.
Excluding the $208,000 charge for impairment of goodwill in 2003, the $2,427,000
charge for impairment of long-lived assets in 2003, and the $609,000 of plant
closure costs in 2002, the loss from operations during 2003 was $3,789,000,
compared to a loss from operations of $2,825,000 during 2002, and EBITDA was a
negative $669,000, or negative 3.6% of net sales, compared to positive
$1,201,000, or 4.6% of net sales, for 2002.
Cost of sales as a percentage of net sales increased during 2002
to 104.8% of net sales from 95.5% of net sales during 2001, primarily due to the
following:
- minimal sales and operating inefficiencies incurred at the
Arizona facility while the facility was being closed,
- excess costs and production inefficiencies caused by the
transfer of certain business and equipment from Arizona to the
Rochester, New York, facility,
- the cost of maintaining, insuring, protecting, and
depreciating the Arizona facility and the remaining equipment,
- reduced efficiencies on certain high-volume automotive
components due to increased customer quality standards, and
- an adverse change in product mix caused by the start-up of new
products and the loss of certain mature components.
-16-
Selling and administrative expenses as a percentage of net sales
decreased during 2002 compared to 2001, primarily because of the closing of the
Arizona facility, a reduction in bad debt expense, and reduced depreciation
expense.
During 2002, the loss from operations was $3,434,000 compared to a loss
from operations of $3,070,000 during 2001. Excluding the $609,000 of plant
closure costs in 2002 and the $2,047,000 charge for impairment of long-lived
assets in 2001, the loss from operations during 2002 was $2,825,000, compared to
a loss from operations of $1,023,000 during 2001, and EBITDA was $1,201,000, or
4.6% of net sales, compared to $3,508,000, or 10.1% of net sales, during 2001.
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 2003, 2002, and 2001 and the reconciliation of the Corporate Office's
loss from operations to its EBITDA (dollar amounts in thousands):
YEAR ENDED
DECEMBER 31
2003 2002 2001
------- ------- -------
Administrative expenses $ 2,679 $ 2,464 $ 2,130
Income from insurance company demutualization -- -- (1,274)
------- ------- -------
Loss from operations (2,679) (2,464) (856)
Add back: depreciation and amortization (1) 38 53 88
------- ------- -------
EBITDA $(2,641) $(2,411) $ (768)
======= ======= =======
(1) Excludes amortization of deferred financing expenses, which totaled
$610,000, $440,000, and $192,000, in 2003, 2002, and 2001, respectively,
and which is included in interest expense in the consolidated financial
statements.
Corporate Office expenses increased by 8.7% in 2003, primarily because
of increased legal and other professional fees and increased employee benefit
costs.
During 2001, a mutual insurance company of which we were a member
underwent a demutualization and converted to a stock company. In accordance with
Financial Accounting Standards Board Emerging Issue Task Force Bulletin 99-4,
"Accounting for Stock Received from the Demutualization of a Mutual Insurance
Company," we recorded the receipt of shares of the insurance company's common
stock at their fair value of $1,274,000 by using the published closing price for
the stock on December 31, 2001.
-17-
INTEREST EXPENSE
During 2003, 2002, and 2001, interest expense totaled $7,049,000,
$7,220,000, and $8,534,000, respectively. During 2003, 2002, and 2001, interest
expense included amortization of deferred financing expenses of $610,000,
$440,000, and $192,000, respectively. The decrease in interest expense in 2003
was caused primarily by lower rates of interest on our floating rate
indebtedness and a reduction in the amount of borrowings outstanding, offset, in
part, by fees paid during 2003 to the lenders providing loans under our
revolving line of credit to extend the expiration dates of the revolving line of
credit beyond its scheduled due dates.
GAIN ON SALE OF SECURITIES
During the fourth quarter of 2002, we sold the shares of common stock
of the insurance company that were received during the fourth quarter of 2001
and realized a pre-tax gain of $248,000 on the sale.
INCOME TAX PROVISION (BENEFIT)
During 2003 and 2001, the income tax provision consisted of state
income taxes.
The income tax benefit recorded during 2002 resulted from a $643,000
refund of alternative minimum taxes paid in earlier periods, offset, in part, by
state income tax expense.
For additional information concerning income taxes and related matters,
see Note 8 to our consolidated financial statements in Part II, Item 8.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During 2003, our operating activities provided $11,119,000 of cash.
Accounts receivable increased by $866,000, primarily because product sales
increased during November and December of 2003 compared to November and December
of 2002 and because, in December 2002, a customer paid approximately $450,000 of
invoices in advance of their scheduled due dates. Prepaid expenses and other
current assets decreased by $812,000, primarily because of a reduction in the
amount of unbilled tooling being manufactured or purchased by us for sale to our
customers. Accounts payable decreased by $604,000, because we reduced the
average days that our payables were outstanding.
INVESTING ACTIVITIES
During 2003, our investing activities used $4,853,000 of cash,
primarily for capital expenditures. Capital expenditures attributable to the
Rubber Group, the Metals Group, and the Corporate Office totaled $4,153,000,
$912,000, and $14,000, respectively, primarily for the purchase of equipment. In
addition, during 2003, the Rubber Group acquired $720,000 of production
equipment that was financed under capital lease obligations. Capital
expenditures for the Rubber Group, the Metals Group and the Corporate Office are
projected to total $5,339,000, $1,553,000, and $5,000, respectively, during
2004. We project that approximately $2,167,000 will be expended to rebuild or
replace existing equipment, and approximately $4,730,000 will be expended to
effect cost reductions and expand productive capacity. At December 31, 2003, we
had outstanding commitments to purchase plant and equipment of approximately
$726,000.
-18-
FINANCING ACTIVITIES
During 2003, our financing activities used $7,830,000 of cash. During
2003, we made scheduled monthly payments on our amortizing term notes totaling
$6,770,000. In connection with the restructuring of substantially all of our
indebtedness on December 18, 2003, we paid off $12,200,000 of amortizing term
notes, we repurchased our $7,500,000 senior, unsecured note and all accrued and
unpaid interest thereon for a purchase price of $5,810,000, and we received loan
proceeds from new amortizing term notes in the amount of $25,000,000. We also
capitalized $2,279,000 of financing expenses related to new debt and amortized
and wrote off $610,000 of deferred financing expenses related to refinanced
debt. During 2003, we reduced the net borrowings under our revolving line of
credit by $3,347,000.
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 June 30, 2006. At December 31, 2003, availability under
the revolving line of credit totaled $3,171,000 before outstanding checks of
$1,488,000 were deducted. At March 30, 2004, availability under our revolving
line of credit totaled $3,024,000 before outstanding checks of $1,574,000 were
deducted.
The Company operates with substantial financial leverage and limited
liquidity. Aggregate indebtedness as of December 31, 2003, totaled $81,512,000.
During 2004, interest and scheduled principal payments are projected to be
approximately $6,034,000 and $5,290,000, respectively.
On December 18, 2003, we completed a comprehensive refinancing of
substantially all of our debt. The refinancing involved the following
transactions:
- the completion of a new $23,500,000 revolving line of credit,
- the completion of a new $13,500,000 secured term loan (the
"Equipment Term Loan"),
- the completion of a new $11,500,000 secured term loan (the
"Real Estate Term Loan"),
- the repurchase of our $7,500,000 senior, unsecured note,
- the exchange of our senior subordinated notes, and
- the exchange of our junior subordinated notes.
The $23,500,000 revolving line of credit expires on June 30, 2006.
Loans under the revolving line of credit bear interest at either the prime rate
plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3-1/4%, at our
option. The revolving loans are limited to 88% of eligible accounts receivable
plus 65% of eligible inventories.
The Equipment Term Loan is payable in 45 monthly installments of
$300,000 each, commencing on February 1, 2004, and bears interest at either the
prime rate plus 1-1/2% or LIBOR plus 3-3/4%, at our option. The Equipment Term
Loan matures on the earlier of October 1, 2007, or the date the revolving line
of credit terminates.
-19-
The revolving line of credit and the Equipment Term Loan are secured by
first priority liens on substantially all of our assets other than real
property. Our availability under the revolving line of credit is currently being
reduced by three separate reserves established by the lender, which aggregate
$3,000,000. The elimination of $1,000,000 of these reserves is subject to the
attainment of certain specified financial performance goals and the elimination
of $650,000 of the reserve is subject to our obtaining an appraisal of our
equipment that indicates that the Equipment Term Loan does not exceed 85% of the
net orderly liquidation value of our equipment. We cannot predict at this time
when or whether all or any portion of these reserves will be released.
At December 31, 2003, the loans outstanding under the revolving line of
credit were classified as short-term debt because the revolving line of credit
requires that our cash receipts are automatically used to reduce such loans on a
daily basis, by means of a lock-box sweep arrangement, and the lender has the
ability to modify certain terms of the revolving line of credit without our
approval. At December 31, 2003, and March 30, 2004, the aggregate principal
amount of loans outstanding under the revolving line of credit was $12,140,000
and $15,588,000, respectively.
The Real Estate Term Loan bears interest at the prime rate plus 4%,
subject to a minimum of 8-1/4% and requires us to pay a fee equal to 1.875% of
the outstanding principal amount of the loan on the
closing date and on each anniversary of the closing date. The Real Estate Term
Loan is payable in monthly installments of $96,000 each from January 1, 2004,
through June 1, 2006, with the unpaid balance due on June 30, 2006. We have the
option to extend the loan to June 30, 2007, on the same terms, provided that the
revolving line of credit is also extended from June 30, 2006, to June 30, 2007.
The Real Estate Term Loan is secured by first mortgages on substantially all of
our real property and by second priority liens on substantially all of our other
assets. The Real Estate Term Loan contains a provision that permits the lender
to accelerate the loan if, among other things, there is a material adverse
change in our financial condition, business, or operating performance.
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require us to maintain specified financial ratios as of the end of
specified periods. The covenants, which are set forth in detail in the financing
documents, are summarized below:
- Fixed Charge Coverage Ratio. The fixed charge coverage ratio
is calculated by dividing EBITDA less capital expenditures by
specified fixed charges and is required to be not less than
0.50 for the three-month period ended December 31, 2003, and
not less than 0.85 as of the end of each of the first three
quarters of 2004, increasing each quarter thereafter, to a
maximum of 1.10 at March 31, 2006;
- Net Worth. Stockholders' deficit plus (1) specified non-cash
write-offs and (2) the $3,252,000 deferred pre-tax gain on the
repurchase of our $7,500,000 senior, unsecured note on
December 18, 2003, must not be less than negative $14,500,000
during 2004 and not less than negative $12,000,000 during
2005;
- EBITDA. Must be not less than $10,000,000 for each
twelve-month period ended December 31, 2003, and March 31,
2004, $12,000,000 for the twelve-month period ended June 30,
2004, $14,000,000 for each twelve-month period ended September
30 and December 31, 2004, $15,000,000 for each twelve-month
period ending on the last day of each of the first three
quarters of 2005, and $16,000,000 for each twelve-month period
thereafter. In addition, EBITDA cannot be less than $3,000,000
for the three-month period ended March 31, 2004, cumulating
each month until the end of 2004, at which time EBITDA for the
trailing twelve-month period must not be less than
$14,000,000; and
-20-
- Leverage Ratio. The ratio of secured debt plus letters of
credit to EBITDA must not exceed 3.35 for each twelve-month
period ended December 31, 2003, through May 31, 2004, 3.0 for
each twelve-month period ended June 30, 2004 through August
31, 2004, 2.75 for each twelve-month period ended September
30, 2004, through November 30, 2004, and 2.50 for each
twelve-month period thereafter.
We also have covenants that limit our unfinanced capital expenditures
to $6,250,000 per annum and limit the amount of additional secured financing we
can incur for the purchase of buildings and equipment to $2,500,000 per annum.
Although we do not believe this provision will limit our planned capital
expenditures during 2004, we may be required to obtain new borrowings in order
to complete our planned capital expenditures. We currently believe, although we
can give no assurance, that the necessary borrowings would be available to us
under financing arrangements that we may negotiate. We also have other covenants
that place certain restrictions on our business and operations, including
covenants relating to the sale of all or substantially all of our assets, the
purchase of common stock, the redemption of preferred stock, compliance with
specified laws and regulations, and the payment of cash dividends. In addition,
the revolving line of credit, the Equipment Term Loan and the Real Estate Term
Loan contain cross-default provisions. Although our most recent financial
projections indicate that we will not be in violation of any of our financial
covenants during 2004, our projections are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from our projected results, as a result, we cannot give you
any assurance that we will remain in compliance with our financial covenants
throughout 2004 and beyond.
On December 18, 2003, we repurchased our $7,500,000 senior, unsecured
note, and all accrued and unpaid interest thereon, for a purchase price of
$5,810,000. The pre-tax gain of $3,252,000 on the repurchase of the senior,
unsecured note has been deferred and is reflected in the current liabilities
section of the Company's consolidated balance sheet as "Deferred gain on
repurchase of debt," because the agreement governing the purchase of the senior,
unsecured note provides that the claim may be reinstated upon the occurrence of
certain future events. If such events have not occurred prior to April 20, 2004,
the Company will record the gain during the second quarter of 2004.
We also completed an exchange with the holders of our outstanding
12-3/4% Senior Subordinated Notes (the "Old Notes"), pursuant to which each
tendering holder received units consisting of (1) new 12% Senior Subordinated
Notes due August 1, 2009 (the "New Notes"), in a principal amount equal to the
principal amount of the Old Notes tendered plus all accrued and unpaid interest
on those Old Notes through December 17, 2003, or $1,558.52 for each $1,000 of
Old Notes, and (2) ten warrants to purchase our common stock for each $1,000 of
New Notes issued (the "Warrants"). Approximately $27,254,000 principal amount,
or 99.4%, of the Old Notes outstanding participated in the exchange offer and we
issued 42,441 units consisting of $42,441,000 principal amount of New Notes and
424,410 Warrants in exchange therefore. The New Notes were issued in increments
of $1,000, and exchanging noteholders received cash in lieu of fractional units.
Interest on the New Notes accrues from December 18, 2003, and is payable
quarterly on each February 1, May 1, August 1, and November 1. The New Notes are
redeemable at any time at 100% of principal amount plus accrued and unpaid
interest. Each Warrant entitles the holder to purchase one share of our common
stock at a price of $3.50 per share, at any time from August 1, 2005, through
August 1, 2009. Prior to August 1, 2005, the Warrants will trade only as part of
a unit with the New Notes.
Finally, we exchanged units consisting of $347,000 of new 13% Junior
Subordinated Notes due November 1, 2009, and 3,467 Warrants for our outstanding
14% Junior Subordinated Notes and exchanged 103,731 shares of common stock for
the $235,000 of interest that was accrued and unpaid on junior subordinated
notes.
-21-
From time to time, our secured lenders have agreed to waive, amend, or
eliminate certain of the financial covenants contained in our various financing
agreements in order to maintain or otherwise ensure our current or future
compliance. On March 31, 2004, our two senior, secured lenders amended their
fixed charge coverage ratio and their annual limitation on unfinanced capital
expenditures in order for us to avoid currently projected defaults under these
two covenants during 2004. 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 had a net working capital deficit of $7,760,000 at December 31,
2003, compared to a net working capital deficit of $68,070,000 at December 31,
2002. The net working capital deficit at December 31, 2003, exists primarily
because we are required, by accounting principles generally accepted in the
United States, to classify the loans outstanding under the revolving line of
credit as current liabilities.
Based on our most recent financial projections, we estimate that, in
addition to cash flow from operations and borrowings under our revolving line of
credit, we will require approximately $1,200,000 of new borrowings during 2004
to meet our working capital and debt service requirements and to fund projected
capital expenditures. We currently believe that, although there can be no
assurance, the required new borrowings will be available to us under equipment
lines of credit or under other financing arrangements that we may negotiate.
Although no assurance can be given, we currently believe that cash flows from
operations, borrowings available to us under existing financing arrangements,
and additional borrowings that we believe we will be able to obtain should be
adequate to meet our projected working capital and debt service requirements and
to fund projected capital expenditures through December 31, 2004. If cash flows
from operations or availability under existing and new financing agreements fall
below expectations, we may be forced to delay anticipated capital expenditures,
reduce operating expenses, extend trade accounts payable balances beyond terms
that we believe are customary in the industries in which we operate, or consider
other alternatives designed to improve our liquidity. Certain of such actions
could have a material adverse effect upon the company.
CONTRACTUAL OBLIGATIONS
The following table summarizes our expected cash outflows from
financial contracts and commitments in effect as of December 31, 2003. We have
not included information on recurring purchases of raw materials for use in our
manufacturing operations. Those amounts are normally consistent from year to
year and do not represent a long-term commitment. The dollar amounts set forth
in the table below are in thousands.
PAYMENTS DUE BY PERIOD
----------------------
2005 & 2007 & MORE THAN
CONTRACTUAL OBLIGATIONS (1) (2) TOTAL 2004 2006 2008 5 YEARS
-------- -------- --------- --------- ---------
Equipment Term Loan $ 13,500 $ 3,300 $ 10,200 $ - $ -
Real Estate Term Loan 11,500 1,150 10,350 - -
Subordinated debt 42,788 - - - 42,788
Other long-term debt 905 693 175 37 -
Capital lease obligations 573 442 127 4 -
Operating lease obligations 410 230 180 - -
Purchase obligations (3) 726 726 - - -
-------- -------- --------- --------- ---------
Total $ 70,402 $ 6,541 $ 21,032 $ 41 $ 42,788
======== ======== ========= ========= =========
-22-
(1) In addition, the Company projects that it will make cash interest payments
of $6,034,000 during 2004. Amounts due beyond 2004 are not readily
determinable.
(2) Commercial commitments also include $1,518,000 of outstanding letters of
credit, which are not reflected in this chart.
(3) Represents commitments for the purchase of equipment.
INFLATION
We generally attempt to pass through to our customers fluctuations in
raw material costs; however, many of our customers will not accept price
increases from us to compensate for increases in labor and overhead expenses
that result from inflation. To offset inflationary increases in costs that we
cannot pass through to our customers and to maintain or improve our operating
margins, we attempt to improve our production efficiencies and manufacturing
processes. We believe that, over time, prices are affected by many factors in
the market, but that the price we can charge our customers will be governed by
the competitive pricing set by the marketplace, rather than by the increase or
decrease in any particular component of our cost.
ENVIRONMENTAL MATTERS
We have been named from time to time as one of numerous potentially
responsible parties or third-party defendants under applicable environmental
laws for restoration costs at waste-disposal sites, and as a defendant or
potential defendant in various other environmental law matters. It is our policy
to record accruals for matters of these types when we deem a loss to be probable
and we can reasonably estimate the amount of that loss. The various actions to
which we are or may in the future be a party are at various stages of
completion. Although we can give no assurance as to the outcome of existing or
potential environmental litigation, based upon the information currently
available to us, we believe that the outcome thereof will not have a material
adverse effect upon our results of operations or cash flow. You will find
information concerning certain other commitments and contingencies affecting us
in Note 11 to our consolidated financial statements in Part II, Item 8.
QUARTERLY FINANCIAL DATA
For quarterly financial data please refer to Note 14 to our
consolidated financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 1, "Summary of
Significant Accounting Policies," to our consolidated financial statements in
Part II, Item 8. As set forth in Note 1, the preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during each reporting period. The
accuracy of our estimates is subject to an inherent amount of risk. Future
events and their impact on our results of operations or financial position
cannot be determined with absolute certainty. Although we strive to use our best
judgment in making estimates, actual results could vary materially from our
estimates.
As a manufacturer of rubber and metal components, we believe that the
most critical accounting policies inherent in the preparation of our
consolidated financial statements are the following:
-23-
REVENUE RECOGNITION
All of our revenues result from the sale of rubber and metal
components. We recognize revenue from the sale of components upon the passage of
title and risk of loss to the customers according to shipping schedules and
terms of sale mutually agreed to by us and our customers.
VALUATION OF TRADE RECEIVABLES
We record trade receivables due from our customers at the time a sale
is recorded in accordance with our revenue recognition policy. We operate
primarily in the domestic automotive market, which has been characterized by
intense price competition and increasing customer requirements for quality and
service. These factors, among others, may have a sudden and adverse effect on
the operating results and financial condition of our customers, and, in turn, on
the collectibility of our accounts receivable from those customers. We attempt
to mitigate this risk of loss through ongoing evaluations of automotive market
conditions, examinations of financial statements of our customers, and
discussions with management of our customers, as deemed necessary. Provisions
for credit losses are based upon historical experience and such ongoing
evaluations of the financial condition of our customers. We generally do not
require collateral from our customers to support the extension of trade credit.
INVENTORY VALUATION
Inventories are valued at the lower of cost (first-in, first-out
method) or market. Where appropriate, standard cost systems are used to
determine cost and the standards are adjusted as necessary to ensure that
standard cost approximates actual cost. We evaluate our inventory on a quarterly
and annual basis to assess its proper valuation. We write down our inventory
where appropriate to provide for losses due to obsolescence, lower of cost or
market valuations, excess quantities on hand, and certain other factors. In
doing so, we apply consistent practices, which include the identification of
potentially unmarketable inventory based on assumptions about future demand and
usage rates, specific identification of components that are being replaced with
new generation components, actual margins generated from the sales of our
component parts, and historical unit sales volumes.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets consist primarily of plant and equipment. We evaluate
long-lived assets, such as plant and equipment and other long-term amortizable
assets, for impairment when events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. Changes in technology
or in our intended use of these assets, including changes in the primary markets
in which we operate, among other things, may cause the original estimated useful
lives of these assets to change and result in the impairment of these assets.
To perform our impairment evaluation we compare the undiscounted
projected cash flow before interest and taxes of an asset or group of assets to
the carrying value of that asset or asset group. If the projected cash flow is
less than the carrying value of the asset or asset group, an impairment loss is
recognized for the difference between the estimated fair value and the carrying
value of the asset or asset group. Although we believe that our estimates of
future cash flows are reasonable, changes in assumptions regarding future unit
volumes, pricing, operating efficiencies, material, labor, and overhead costs,
and other factors could significantly affect our cash flow projections.
-24-
VALUATION OF GOODWILL
Prior to 2002, we amortized purchased goodwill using the straight-line
method principally over 40 years. Effective January 1, 2002, we adopted
Statement of Financial Accounting Standards No.142, "Goodwill and Other
Intangible Assets" ("FAS 142"), which eliminated the amortization of goodwill,
but requires that goodwill be tested for impairment annually using a fair value
approach. Goodwill is tested annually during the fourth quarter of each year,
unless a change in circumstances or adverse events arise that would require a
more frequent valuation. To assess the recoverability of goodwill, estimates of
discounted, future cash flow and other factors are considered in order to
determine the fair value of the respective assets. If the cash flow estimates or
other factors change in the future, we may be required to record charges for
impairment of goodwill at that time.
OTHER
Other critical accounting policies include estimates used to determine
liabilities related to environmental matters, litigation, income taxes,
restructuring reserves, and other contingencies.
The process of making estimates takes into account historical
experience, specific facts and circumstances, present and projected economic and
business conditions, projected unit volumes, projected operating efficiencies,
and any other relevant factors and assumptions. We reevaluate our estimates
whenever factors relevant to the making of a critical estimate change.
RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 150, "ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY"
On July 1, 2003, we adopted Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("FAS 150"). FAS 150 establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity. In connection with the adoption of FAS 150, during 2003, we
recognized a pre-tax charge of $247,000 to increase the carrying value of our $8
Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock"), from $330,000 to its estimated fair value of $577,000. The charge is
shown in our consolidated statement of operations on the line entitled
"Cumulative effect of change in accounting principle." If FAS 150 had been in
effect for the twelve-month periods ended December 31, 2001 and 2002, the
interest expense that would have been recorded during those periods and the
related increase in the carrying value of the Series B Preferred Stock would
have totaled $47,000 and $36,000, respectively. At December 31, 2003, the Series
B Preferred Stock was classified as debt on our consolidated balance sheet. For
more information about the Series B Preferred Stock, refer to Note 5 to our
consolidated financial statements in Part II, Item 8.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146, "ACCOUNTING FOR
COST ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES"
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS 146"), which is effective for all
restructuring, exit, or disposal activities that are initiated after December
31, 2002. FAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred rather than at
the date on which an entity commits to a plan to restructure, exit, or dispose
of a facility. This statement applies, but is not limited to, termination
benefits
-25-
provided to current employees, contract termination costs, and costs incurred to
consolidate facilities or relocate employees. The adoption of FAS 146 during the
first quarter of 2003 did not affect our results of operations or financial
position, although FAS 146 may change the time period in which we recognize
costs associated with any future restructuring, exit, or disposal activities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is minimal.
At December 31, 2003, we had $37,192,000 of outstanding floating rate
debt at interest rates equal to either LIBOR plus 3-1/4%, LIBOR plus 3-3/4%, the
prime rate plus 1%, the prime rate plus 1-1/2%, the prime rate plus 4%, or the
prime rate. Currently, we do not purchase derivative financial instruments to
hedge or reduce our interest rate risk. As a result, changes in either LIBOR or
the prime rate affect the rates at which we borrow funds under these agreements.
At December 31, 2003, we had outstanding $44,320,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 11.9%, of which $158,000
had matured.
We currently estimate that our monthly cash interest expense during
2004 will be approximately $570,000 and that a one percentage point increase or
decrease in short-term rates would increase or decrease our monthly interest
expense by approximately $35,000.
For further information about our indebtedness, we recommend that you
also read Note 5 to our consolidated financial statements in Part II, Item 8.
-26-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors............... 28
Consolidated Statement of Operations for the Years Ended
December 31, 2003, 2002, and 2001............................ 29
Consolidated Balance Sheet at December 31, 2003 and 2002........ 30
Consolidated Statement of Stockholders' Deficit for
the Years Ended December 31, 2003, 2002, and 2001............. 32
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2003, 2002, and 2001............................. 33
Notes to Consolidated Financial Statements...................... 34
-27-
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lexington Precision Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Lexington Precision Corporation and its subsidiaries at December 31, 2003 and
2002, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 2003. Our audits also included the financial statement schedule contained in
Part IV, Item 14, of the Company's report on Form 10-K. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lexington Precision Corporation and its subsidiaries at December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Notes 1 and 16 to the consolidated financial
statements, effective July 1, 2003, the Company changed its method of accounting
for its $8 Cumulative Convertible Preferred Stock, Series B, in accordance with
the adoption of Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity," and, effective January 1, 2002, the Company changed its method of
accounting for goodwill in accordance with the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
Cleveland, Ohio
April 14, 2004
-28-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31
2003 2002 2001
--------- --------- ---------
Net sales $ 121,616 $ 124,852 $ 126,202
Cost of sales 109,526 110,718 109,055
--------- --------- ---------
Gross profit 12,090 14,134 17,147
Selling and administrative expenses 8,532 8,658 9,911
Impairment of goodwill 208 -- --
Impairment of long-lived assets 2,427 -- 2,047
Plant closure costs -- 609 --
Income from insurance company demutualization -- -- (1,274)
--------- --------- ---------
Income from operations 923 4,867 6,463
Interest expense (7,049) (7,220) (8,534)
Gain on sale of securities -- 248 --
--------- --------- ---------
Loss before income taxes (6,126) (2,105) (2,071)
Income tax provision (benefit) 76 (538) 80
--------- --------- ---------
Net loss before cumulative effect of a change in
accounting principle (6,202) (1,567) (2,151)
Cumulative effect of a change in accounting principle 247 -- --
--------- --------- ---------
Net loss $ (6,449) $ (1,567) $ (2,151)
========= ========= =========
Per share data:
Basic and diluted net loss applicable to common
stockholders before cumulative effect of a change in
accounting principle $ (1.31) $ (0.32) $ (0.45)
Cumulative effect of a change in accounting principle (0.05) -- --
--------- --------- ---------
Basic and diluted net loss applicable to common
stockholders after cumulative effect of a change in
accounting principle $ (1.36) $ (0.32) $ (0.45)
========= ========= =========
See notes to consolidated financial statements.
-29-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
DECEMBER 31
2003 2002
-------- --------
ASSETS:
Current assets:
Cash $ 189 $ 1,753
Accounts receivable, net 17,277 16,411
Inventories, net 8,527 8,841
Prepaid expenses and other current assets 2,481 3,682
Deferred income taxes 1,360 2,304
-------- --------
Total current assets 29,834 32,991
-------- --------
Plant and equipment:
Land 2,350 2,314
Buildings 22,863 22,935
Equipment 116,557 113,291
-------- --------
141,770 138,540
Accumulated depreciation 99,138 89,511
-------- --------
Plant and equipment, net 42,632 49,029
-------- --------
Goodwill, net 7,623 7,831
-------- --------
Other assets, net 3,598 2,294
-------- --------
$ 83,687 $ 92,145
======== ========
See notes to consolidated financial statements. (continued on next page)
-30-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
DECEMBER 31
2003 2002
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,038 $ 10,798
Accrued expenses, excluding accrued interest 6,159 6,256
Accrued interest expense 314 12,875
Deferred gain on repurchase of debt 3,252 --
Short-term debt 12,246 69,665
Current portion of long-term debt 5,585 1,467
--------- ---------
Total current liabilities 37,594 101,061
--------- ---------
Long-term debt, excluding current portion 63,681 1,117
--------- ---------
Deferred income taxes and other long-term liabilities 1,904 2,836
--------- ---------
Series B Preferred Stock, $100 par value, at
redemption value -- 660
Excess of redemption value over par value -- (330)
--------- ---------
Series B Preferred Stock at par value -- 330
--------- ---------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares authorized, 4,931,767
shares issued at December 31, 2003,
and 4,828,036 shares issues at December 31, 2002 1,233 1,207
Additional paid-in-capital 13,169 12,960
Accumulated deficit (33,894) (27,366)
--------- ---------
Total stockholders' deficit (19,492) (13,199)
--------- ---------
$ 83,687 $ 92,145
========= =========
See notes to consolidated financial statements.
-31-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(THOUSANDS OF DOLLARS)
ADDITIONAL TOTAL
COMMON PAID-IN- ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT DEFICIT
----- ------- ------- -------
Balance at December 31, 2000 $ 1,207 $ 12,960 $(23,703) $ (9,536)
Net loss -- -- (2,151) (2,151)
Amortization of restricted stock grants -- -- 28 28
-------- -------- -------- --------
Balance at December 31, 2001 1,207 12,960 (25,826) (11,659)
Net loss -- -- (1,567) (1,567)
Amortization of restricted stock grants -- -- 27 27
-------- -------- -------- --------
Balance at December 31, 2002 1,207 12,960 (27,366) $(13,199)
Net loss -- -- (6,449) (6,449)
Amortization of restricted stock grants -- -- 27 27
Conversion of interest payable on
junior subordinated notes into
103,731 shares of common stock 26 209 -- 235
Dividends on preferred stock -- -- (106) (106)
-------- -------- -------- --------
Balance at December 31, 2003 $ 1,233 $ 13,169 $(33,894) $(19,492)
======== ======== ======== ========
See notes to consolidated financial statements
-32-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES:
Net loss $ (6,449) $ (1,567) $ (2,151)
Cumulative effect of a change in accounting principle 247 -- --
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 9,856 11,047 11,923
Amortization included in operating expense 423 818 1,180
Amortization included in interest expense 610 440 192
Impairment of goodwill 208 -- --
Impairment loss on long-lived assets 2,427 -- 2,047
Income from insurance company demutualization -- -- (1,274)
Gain on sales of marketable securities -- (248) --
Current year interest expense converted to debt 3,953 -- --
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net (866) 2,342 1,159
Inventories, net 314 (348) 2,616
Prepaid expenses and other assets 812 (278) (31)
Accounts payable (604) (866) (1,677)
Accrued expenses, excluding interest expense (97) 408 (76)
Accrued interest expense 164 4,137 3,504
Other long term liabilities 12 314 23
Other 109 32 126
-------- -------- --------
Net cash provided by operating
activities 11,119 16,231 17,561
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (5,079) (4,618) (6,081)
Proceeds from sales of marketable securities -- 1,522 --
Decrease in equipment deposits (61) 205 56
Proceeds from sales of equipment 123 147 195
Expenditures for tooling owned by customers (225) (688) (646)
Other 389 328 (241)
-------- -------- --------
Net cash used by investing activities (4,853) (3,104) (6,717)
-------- -------- --------
FINANCING ACTIVITIES:
Net decrease in revolving line of credit (3,347) (750) (2,992)
Proceeds from issuance of amortizing term notes 25,000 -- 2,000
Repayment of amortizing term notes (21,548) (10,194) (9,263)
Repurchase of $7,500,000 senior, unsecured note (5,550) -- --
Payment of deferred financing expenses (2,279) -- --
Other (106) (619) (465)
-------- -------- --------
Net cash used by financing activities (7,830) (11,563) (10,720)
-------- -------- --------
Net increase (decrease) in cash (1,564) 1,564 124
Cash at beginning of year 1,753 189 65
-------- -------- --------
Cash at end of year $ 189 $ 1,753 $ 189
======== ======== ========
See notes to consolidated financial statements
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexington
Precision Corporation and its subsidiaries (the "Company"). All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
MARKETABLE SECURITIES
Marketable securities held by the Company are classified as assets
available for sale and consist of equity securities, which are stated at fair
value as determined by quoted market prices. Unrealized holding gains or losses
on marketable securities, net of applicable income taxes, are reported as a
separate component of comprehensive income and included as part of the Company's
accumulated deficit until realized. During 2002, realized gains from the sales
of marketable securities totaled $248,000.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market. Inventory levels by principal classification are set forth
below (dollar amounts in thousands):
DECEMBER 31
2003 2002
---- ----
Finished goods $ 3,793 $ 3,580
Work in process 2,018 2,493
Raw materials 2,716 2,768
------- -------
$ 8,527 $ 8,841
======= =======
PLANT AND EQUIPMENT
Plant and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated principally on the straight-line method over the
estimated useful lives of the various assets (15 to 32 years for buildings and 3
to 8 years for equipment). When an asset is retired or otherwise disposed of,
the related cost and accumulated depreciation are eliminated. Maintenance and
repair expenses are charged against income as incurred, while major improvements
that increase the useful life of plant and equipment are capitalized.
Maintenance and repair expenses were $6,556,000, $7,409,000, and $6,405,000 for
2003, 2002, and 2001, respectively.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION OF LONG-LIVED ASSETS
The Company evaluates long-lived assets, such as plant and equipment
and other long-term amortizable assets, for impairment when events or changes in
circumstances indicate that the carrying value of the assets may not be fully
recoverable. When performing this evaluation, the Company compares the
undiscounted, projected cash flow of an asset or group of assets to the carrying
value of such asset or asset group. If such cash flow is less than the carrying
value of the asset or asset group, an impairment loss is recognized for the
difference between the estimated fair value of the asset or asset group and the
carrying value thereof. Although the Company believes that its projections of
future cash flows are reasonable, changes in assumptions regarding future unit
volumes, pricing, operating efficiencies, material, labor, and overhead costs,
and other factors could significantly affect the Company's cash flow
projections. During the fourth quarter of 2003, the Company tested the
long-lived assets of its die casting division for impairment and, as a result
thereof, recorded an impairment charge of $2,427,000 to reduce the carrying
value of the long-lived assets of this division to estimated fair value. For
additional information, see Note 17.
GOODWILL
Prior to 2002, the Company amortized purchased goodwill using the
straight-line method over 40 years. Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards No.142, "Goodwill and Other
Intangible Assets" ("FAS 142"), which eliminated the amortization of goodwill,
but requires that goodwill be tested for impairment at least annually using a
fair value approach. Goodwill is tested annually during the fourth quarter of
each year, unless a change in circumstances or adverse events arise that would
indicate impairment. To assess the recoverability of goodwill, an estimate of
future cash flow and other factors are considered in order to determine the fair
value of the respective assets. If these cash flow projections or other factors
change in the future, the Company may be required to record impairment charges
for goodwill at that time. The Company performed its annual impairment test as
of October 1, 2003, and determined that the goodwill associated with the Metals
Group was impaired. To record the impairment, the Company recorded a provision
of $208,000 to write off all of the unamortized goodwill of the Metals Group. At
December 31, 2003 and 2002, writedowns and accumulated amortization of goodwill
totaled $4,158,000. For additional information, see Note 16.
DEFERRED FINANCING EXPENSES
Deferred financing expenses are amortized over the lives of the related
debt instruments.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are recorded as expenses as incurred.
These costs totaled $1,168,000, $924,000, and $890,000 during 2003, 2002, and
2001, respectively.
NET INCOME OR LOSS PER COMMON SHARE
Basic net income or loss per common share is computed using the
weighted-average number of common shares outstanding. Diluted net income or loss
per share is calculated after giving effect to all potential common shares that
were dilutive, using the treasury stock method. Potential common shares are
securities (convertible preferred stock and warrants to purchase common stock)
that do not have a current right to participate in earnings but could in the
future by virtue of their terms.
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
All of the Company's revenues result from the sale of rubber and metal
components. The Company recognizes revenue from the sale of components when
title and risk of loss pass to the customer according to shipping schedules and
terms of sale mutually agreed to by the Company and its customers. Shipping and
handling costs are typically paid by the customer. If paid by the Company,
shipping and handling costs are included in cost of sales.
RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 150, "ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY"
On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150 establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. In connection with the adoption of FAS 150, during
2003, the Company recognized a pre-tax charge of $247,000 to increase the
carrying value of its $8 Cumulative Convertible Preferred Stock, Series B (the
"Series B Preferred Stock"), from $330,000 to its estimated fair value of
$577,000. The charge is shown in the Company's consolidated statement of
operations on the line entitled "Cumulative effect of change in accounting
principle." If FAS 150 had been in effect for the twelve-month periods ended
December 31, 2001 and 2002, the interest expense that would have been recorded
during each of those periods and the related increase in the carrying value of
the Series B Preferred Stock would have totaled $47,000 and $36,000,
respectively. At December 31, 2003, the Series B Preferred Stock was classified
as debt on the Company's consolidated balance sheet. For additional information
about the Series B Preferred Stock, see Note 5.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146, "ACCOUNTING FOR
COST ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES"
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("FAS 146"), which is effective for all
restructuring, exit, or disposal activities that are initiated after December
31, 2002. FAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred rather than at
the date on which an entity commits to a plan to restructure, exit, or dispose
of an asset. This statement applies, but is not limited to, termination benefits
provided to current employees, contract termination costs, and costs incurred to
consolidate facilities or relocate employees. The Company's adoption of FAS 146
during the first quarter of 2003 did not adversely affect its results of
operations or financial position.
NOTE 2 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2003 and 2002, other current assets included $715,000
and $2,092,000, respectively, of tooling manufactured or purchased by the
Company pursuant to purchase orders issued by its customers. Upon customer
approval of the components produced by such tooling, which normally takes less
than 90 days, the customer is obligated to pay for the tooling in accordance
with previously agreed-upon terms.
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- OTHER NONCURRENT ASSETS
The Company has paid for a portion of the cost of certain tooling that
was purchased by customers and is being used by the Company to produce
components under long-term supply arrangements. The payments have been recorded
as a noncurrent asset and are being amortized on a straight-line basis over
three years or, if shorter, the period during which the tooling is expected to
produce components. At December 31, 2003 and 2002, other noncurrent assets
included $728,000 and $991,000, respectively, representing the unamortized
portion of such capitalized payments. During 2003, 2002, and 2001, the Company
amortized $396,000, $791,000, and $836,000, respectively, of such capitalized
payments.
NOTE 4 -- ACCRUED EXPENSES, EXCLUDING INTEREST EXPENSE
Accrued expenses, excluding interest expense, at December 31, 2003 and
2002, are summarized below (dollar amounts in thousands):
DECEMBER 31
2003 2002
---- ----
Employee fringe benefits $ 3,877 $ 3,682
Salaries and wages 965 1,031
Taxes 446 665
Other 871 878
-------- -------
$ 6,159 $ 6,256
======== =======
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- DEBT
Debt at December 31, 2003 and 2002, is set forth below (dollar amounts
in thousands):
DECEMBER 31
2003 2002
-------- --------
Short-term debt:
Revolving line of credit $ 12,088 $ 15,435
Secured, amortizing term notes -- 18,971
Senior, unsecured note -- 7,500
12-3/4% Senior Subordinated Notes 158 27,412
14% Junior Subordinated Notes -- 347
-------- --------
Subtotal 12,246 69,665
Current portion of long-term debt 5,585 1,467
-------- --------
Total short-term debt 17,831 71,132
-------- --------
Long-term debt:
Equipment Term Loan 13,500 --
Real Estate Term Loan 11,500 --
12% Senior Subordinated Notes 42,441 --
13% Junior Subordinated Notes 347 --
12% secured term note -- 1,119
Unsecured, amortizing term notes 104 643
Capital lease obligations 573 485
Series B Preferred Stock 594 --
Other 207 337
-------- --------
69,266 2,584
Less current portion (5,585) (1,467)
-------- --------
Total long-term debt 63,681 1,117
-------- --------
Total Debt $ 81,512 $ 72,249
======== ========
On December 18, 2003, the Company completed a comprehensive refinancing
of substantially all of its debt. The refinancing involved (1) the completion of
a new $23,500,000 secured, revolving line of credit, (2) the completion of a new
$13,500,000 secured, amortizing term loan (the "Equipment Term Loan"), (3) the
completion of a new $11,500,000 secured, amortizing term loan (the "Real Estate
Term Loan"), (4) the repurchase of the Company's $7,500,000 senior, unsecured
note, (5) the repayment of the !2% secured term note, (6) the exchange of the
Company's senior subordinated notes, and (7) the exchange of the Company's
junior subordinated notes.
REVOLVING LINE OF CREDIT
The revolving line of credit expires on June 30, 2006. Loans under the
revolving line of credit bear interest at either the prime rate plus 1% or the
London Interbank Offered Rate ("LIBOR") plus 3-1/4%, at the Company's option.
Loans under the revolving line of credit are limited to 88% of eligible accounts
receivable plus 65% of eligible inventories. All loans under the revolving line
of credit are secured by first priority liens on substantially all of the
Company's assets other than real property. Availability under
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the revolving line of credit is currently being reduced by three separate
reserves established by the lender, which total $3,000,000. The elimination of
$1,000,000 of these reserves is subject to the attainment of certain specified
financial performance goals and the elimination of $650,000 of the reserve is
conditioned on the results of an appraisal of the machinery and equipment that
secures the Equipment Term Loan. The Company cannot predict at this time when or
whether all or any portion of these reserves will be released.
At December 31, 2003, the aggregate principal amount of loans
outstanding under the revolving line of credit was $12,140,000 and unused
availability totaled $3,171,000, before outstanding checks of $1,488,000 were
deducted.
At December 31, 2003, the loans outstanding under the revolving line of
credit were classified as short-term debt because the revolving line of credit
provides that our cash receipts are automatically used to reduce such loans on a
daily basis, by means of a lock-box sweep arrangement, and the lender has the
ability to modify certain terms of the revolving line of credit without the
Company's approval. At December 31, 2003, 2002, and 2001, the weighted-average
interest rates on borrowings under the revolving line of credit were 5%, 5-1/4%,
and 4.49%, respectively.
EQUIPMENT TERM LOAN
The $13,500,000 Equipment Term Loan is payable in 45 monthly
installments of $300,000 each, commencing on February 1, 2004, and bears
interest at either the prime rate plus 1-1/2% or LIBOR plus 3-3/4%, at the
Company's option. At December 31, 2003, the Equipment Term Loan bore interest at
the rate of 5-1/2%. The unpaid balance of the Equipment Term Loan is payable on
June 30, 2006, if the revolving line of credit is not extended. The Equipment
Term Loan is secured by first priority liens on substantially all of the
Company's assets other than real property.
REAL ESTATE TERM LOAN
The $11,500,000 Real Estate Term Loan is payable in monthly
installments of $96,000 each from January 1, 2004, through June 1, 2006, with
the unpaid balance due on June 30, 2006. The Company has the option to extend
the loan to June 30, 2007, on the same terms, provided that the revolving line
of credit is also extended from June 30, 2006, to June 30, 2007. The Real Estate
Term Loan bears interest at the prime rate plus 4%, subject to a minimum of
8-1/4%, and requires the Company to pay a fee equal to 1.875% of the outstanding
principal amount of the loan on the closing date and on each anniversary of the
closing date. The Real Estate Term Loan is secured by first mortgages on
substantially all of the Company's real property and by second priority liens on
substantially all of the Company's other assets. The Real Estate Term Loan
contains a provision that permits the lender to accelerate the loan if there is
a material adverse change in the Company's financial condition, business, or
operating performance.
The loans outstanding under the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan are collateralized by the stock of
Lexington Rubber Group, Inc., a subsidiary of the Company.
SECURED, AMORTIZING TERM NOTES
At December 31, 2002, the portions of the secured, amortizing term
loans that were due more than one year after the date of the consolidated
financial statements were classified as short-term debt because the Company's
lenders had granted waivers, for a period of less than one year, of the
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cross-default provisions of such term notes with respect to the default that
previously existed on the senior subordinated notes or because the revolving
line of credit was scheduled to expire in less than one year. The secured,
amortizing term notes were collateralized by substantially all of the assets of
the Company, including accounts receivable, inventories, equipment, real estate,
and the stock of Lexington Rubber Group, Inc.
$7,500,000 SENIOR, UNSECURED NOTE
The Company repurchased its $7,500,000 senior, unsecured note, and all
accrued and unpaid interest thereon, for a purchase price of $5,810,000. The
pre-tax gain of $3,252,000 on the repurchase of the senior, unsecured note has
been deferred and is reflected in the current liabilities section of the
Company's consolidated balance sheet as "Deferred gain on repurchase of debt"
because the agreement governing the purchase of the senior, unsecured note
provides that the claim may be reinstated upon the occurrence of certain future
events. If such events have not occurred prior to April 20, 2004, the Company
will record the gain during the second quarter of 2004.
SENIOR SUBORDINATED NOTES
The Company completed an exchange offer with the holders of its
outstanding 12-3/4% Senior Subordinated Notes (the "Old Notes"), pursuant to
which each tendering holder received units consisting of (1) new 12% Senior
Subordinated Notes due August 1, 2009 (the "New Notes"), in a principal amount
equal to the principal amount of Old Notes tendered plus all accrued and unpaid
interest on those Old Notes through December 17, 2003, or $1,558.52 for each
$1,000 principal amount of Old Notes, and (2) ten warrants (the "Warrants") to
purchase common stock of the Company for each $1,000 principal amount of New
Notes issued. Approximately $27,254,000 principal amount, or 99.4% of the Old
Notes outstanding, participated in the exchange offer. The Company issued units
consisting of $42,441,000 principal amount of New Notes, cash of $35,000 to
eliminate that portion of the New Notes not in equal $1,000 denominations, and
424,410 Warrants. Interest on the New Notes accrues from December 18, 2003, and
is payable quarterly on each February 1, May 1, August 1, and November 1. The
New Notes are redeemable at any time at 100% of principal amount plus accrued
and unpaid interest. Each Warrant entitles the holder to purchase one share of
the Company's common stock at a price of $3.50 per share, at any time from
August 1, 2005, through August 1, 2009. Prior to August 1, 2005, the Warrants
will trade only as a unit with the New Notes. At December 31, 2003, $158,000 of
the 12-3/4% Senior Subordinated Notes remained outstanding and in default. The
12% Senior Subordinated Notes are unsecured obligations of the Company that are
subordinated in right of payment to all of the Company's existing and future
senior debt.
JUNIOR SUBORDINATED NOTES
The Company exchanged units consisting of $347,000 principal of new 13%
Junior Subordinated Notes due November 1, 2009, and 3,467 Warrants for its
outstanding 14% Junior Subordinated Notes and exchanged 103,731 shares of its
common stock for the $235,000 of interest that was accrued and unpaid on the
junior subordinated notes. The 13% Junior Subordinated Notes are unsecured
obligations of the Company that are subordinated in right of payment to all
existing and future secured and senior, unsecured debt of the Company, the 12%
Senior Subordinated Notes, and the 12-3/4% Senior Subordinated Notes.
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNSECURED, AMORTIZING TERM NOTES
The unsecured, amortizing term notes mature in 2004 and 2005, and bear
interest at the prime rate in effect on the date each note was issued. At
December 31, 2003, the weighted average interest rate on the notes was 4%.
CAPITAL LEASE OBLIGATIONS
Capital lease obligations relate to the purchase of equipment used in
the Company's manufacturing operations. During 2003, the Company entered into
capital leases totaling $720,000. At December 31, 2003, the Company's
consolidated balance sheet included equipment held under capital leases with a
cost of $912,000 and related accumulated depreciation of $118,000. The future
minimum lease payments under the terms of the various capital leases are as set
forth below in the section entitled "Scheduled Maturities of Long-Term Debt."
Amortization of assets recorded as capital leases is included in depreciation
expense.
SERIES B PREFERRED STOCK
At December 31, 2003, there were outstanding 3,300 shares of the
Company's $8 Cumulative Convertible Preferred Stock, Series B (the "Series B
Preferred Stock"), par value $100 per share, with a carrying value of $594,000.
Each share of Series B Preferred Stock is (1) entitled to one vote, (2)
redeemable for $200 plus accumulated and unpaid dividends, (3) convertible into
14.8148 shares of common stock (subject to adjustment), and (4) entitled, upon
voluntary or involuntary liquidation and after payment of the debts and other
liabilities of the Company, to a liquidation preference of $200 plus accumulated
and unpaid dividends. Redemptions of $90,000 are scheduled on November 30 of
each year in order to retire 450 shares of Series B Preferred Stock annually.
The Company failed to make scheduled redemptions in the aggregate amount of
$360,000 on November 30, 2000, 2001, 2002, and 2003.
During 2003, the Company adopted FAS 150, which established standards
for classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer that have characteristics of both liabilities
and equity. As a result of the adoption of FAS 150, the Company began to
classify the Series B Preferred Stock as debt in the consolidated financial
statements and recognized a pre-tax charge of $247,000 to increase the carrying
value of the Series B Preferred Stock to its fair value. Subsequent to adoption,
increases in the fair value of the Series B Preferred Stock and payments of
quarterly dividends have been recorded by monthly charges to interest expense.
NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company purchased equipment under capitalized lease obligations in
the amount of $720,000 and $365,000, during 2003 and 2002, respectively, and
obtained seller financing for the purchase of equipment in the aggregate amount
of $247,000 in 2002.
LETTERS OF CREDIT
At December 31, 2003 and 2002, the Company had outstanding irrevocable
letters of credit totaling $1,518,000 and $1,341,000, respectively. The letters
of credit guaranteed certain payments that may be required under the Company's
self-insured workers' compensation program.
-41-
RESTRICTIVE COVENANTS
The agreements governing the revolving line of credit, the Equipment
Term Loan, and the Real Estate Term Loan contain certain financial covenants
that require the Company to maintain specified financial ratios as of the end of
specified periods, including the maintenance of a minimum fixed charge coverage
ratio, minimum levels of net worth and earnings before interest, taxes,
depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. The
Company also has other covenants that place certain restrictions on its business
and operations, including covenants relating to the sale of all or substantially
all of its assets, the purchase of common stock, the redemption of preferred
stock, compliance with specified laws and regulations, the purchase of plant and
equipment, and the payment of cash dividends.
From time to time, the Company's secured lenders have agreed to waive,
amend, or eliminate certain of the financial covenants contained in the
Company's various financing agreements in order to maintain or otherwise ensure
the Company's current or future compliance. On March 31, 2004, the Company's two
senior, secured lenders amended their fixed charge coverage ratio and their
annual limitation on unfinanced capital expenditures in order for the Company to
avoid currently projected defaults under these two covenants during 2004. In the
event that the Company is not in compliance with any of its covenants in the
future and its lenders do not agree to amend, waive, or eliminate those
covenants, the lenders would have the right to declare the borrowings under
their financing agreements to be due and payable.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that, at December 31, 2003, the fair values of the
loans outstanding under the revolving line of credit, the Equipment Term Loan,
and the Real Estate Term Loan approximated the principal amounts of such loans.
Since January 1, 2001, the Company is unaware of any trading activity
in the 12-3/4% Senior Subordinated Notes or in the 12% Senior Subordinated
Notes. The Company has no basis to express an opinion as to the fair market
value of the 12% Senior Subordinated Notes, the 12-3/4% Senior Subordinated
Notes, or the 13% Junior Subordinated Notes.
FINANCIAL LEVERAGE AND LIQUIDITY
The Company operates with substantial financial leverage and limited
liquidity. Aggregate indebtedness as of December 31, 2003, totaled $81,512,000.
During 2004, interest and scheduled principal payments are projected to be
approximately $6,034,000 and $5,290,000, respectively.
CASH INTEREST PAID
Cash interest paid during 2003, 2002, and 2001 totaled $2,122,000,
$2,644,000, and $4,838,000, respectively.
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULED MATURITIES OF LONG-TERM DEBT
Scheduled maturities of long-term debt and capital lease obligations for
the years ending December 31 are listed below (dollar amounts in thousands):
CAPITAL
LONG TERM LEASE
DEBT OBLIGATIONS TOTAL
--------- ----------- -------
2004 $ 5,143 $ 442 $ 5,585
2005 4,841 115 4,956
2006 15,885 12 15,897
2007 30 4 34
2008 and future years 6 -- 6
Thereafter 42,788 -- 42,788
------- ------- -------
$68,693 $ 573 $69,266
======= ======= =======
NOTE 6 -- COMMON STOCK, WARRANTS, AND OTHER EQUITY SECURITIES
COMMON STOCK, $.25 PAR VALUE
At December 31, 2003, 2002, and 2001, there were 4,931,767, 4,828,036, and
4,828,036 shares of the Company's common stock outstanding, respectively, and
48,889 shares were reserved for issuance on the conversion of the Series B
Preferred Stock. In connection with the completion of the Company's debt
refinancing on December 18, 2003, the Company exchanged 103,731 shares of its
common stock for the $235,000 of interest that was accrued and unpaid on its
junior subordinated notes.
WARRANTS
At December 31, 2003, there were outstanding 427,877 Warrants, each of
which entitles the holder to purchase one share of the Company's common stock at
$3.50 per share from August 1, 2005, through August 1, 2009. The Company issued
424,410 of the Warrants in connection with the exchange of its 12-3/4% Senior
Subordinated Notes due February 1, 2000, for units consisting of 12% Senior
Subordinated Notes due August 1, 2009, and 3,467 Warrants in connection with the
exchange of its 14% Junior Subordinated Notes for new 13% Junior Subordinated
Notes due November 1, 2009. The Warrants will trade only as part of a unit with
the 12% Senior Subordinated Notes or the 13% Junior Subordinated Notes, as the
case maybe. Because the exercise price of the Warrants substantially exceeded
the market price of the Company's common stock at the date of issuance, the
Company concluded that the Warrants did not have any value.
OTHER AUTHORIZED PREFERRED STOCK
The Company's restated certificate of incorporation provides that the
Company is authorized to issue 2,500 shares of 6% Cumulative Convertible
Preferred Stock, Series A, par value $100 per share. No shares of this preferred
stock have been issued.
- 43 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's restated certificate of incorporation also provides that the
Company is authorized to issue 2,500,000 shares of other preferred stock having
a par value of $1 per share. No shares of this preferred stock have been issued.
NOTE 7 -- EMPLOYEE BENEFIT PLANS
RETIREMENT AND SAVINGS PLAN
The Company maintains a retirement and savings plan pursuant to Section
401 of the Internal Revenue Code (a "401(k) plan"). All employees of the Company
are entitled to participate in the 401(k) plan after meeting the eligibility
requirements. Effective January 1, 2003, employees may generally contribute up
to 60% of their annual compensation but not more than prescribed dollar amounts
established by the United States Secretary of the Treasury. Employee
contributions, up to a maximum of 6% of an employee's compensation, are matched
50% by the Company. During 2003, 2002, and 2001, matching contributions made by
the Company totaled $554,000, $591,000, and $637,000, respectively. Company
contributions to the 401(k) plan vest at a rate of 20% per year commencing after
the participant's second year of service until the participant becomes fully
vested after six years of service.
INCENTIVE COMPENSATION PLAN
The Company has an incentive compensation plan that provides for the
payment of annual cash bonus awards to certain officers and key employees of the
Company. The Compensation Committee of the Company's Board of Directors, which
consists of two directors who are not employees of the Company, oversees the
administration of the incentive compensation plan and approves the cash bonus
awards. Bonus awards for eligible divisional employees are typically based upon
the attainment of predetermined targets for earnings before interest, taxes,
depreciation, and amortization ("EBITDA") at each division. Bonus awards for
corporate officers are typically based upon the attainment of predetermined
consolidated EBITDA targets. The consolidated financial statements included
provisions for bonuses totaling $569,000, $623,000, and $243,000 for 2003, 2002,
and 2001, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company maintains programs to fund certain costs related to a
prescription drug card program for retirees of one of its former divisions and
to fund insurance premiums for certain retirees of one of its divisions. At
December 31, 2003, the Company's accumulated postretirement benefit obligation
totaled $332,000. Prior to January 1, 2004, the Company amortized its transition
obligation over the remaining life expectancy of the participants, which equated
to an annual rate of $23,000. Effective January 1, 2004, the Company revised the
life expectancy of the participants in the prescription drug program and, as a
result, the Company will begin to amortize its unamortized transition obligation
at the rate of $20,000 per year during 2004. The Company measures its
post-retirement benefit obligation on January 1 of each year.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(the "Act") became law on December 8, 2003. The Act provides for prescription
drug benefits under Medicare Part D and contains a subsidy to plan sponsors who
provide actuarial equivalent medical plans. Financial Accounting Standards Board
Staff Position No. 106-1, "Accounting and Disclosure Requirements Related to the
Prescription Drug, Improvement, and Modernization Act of 2003," requires the
Company to make a one-time election to either defer or recognize the possible
accounting effects of the Act before the first interim period in 2004. The
Company has elected to defer possible accounting effects of the Act and, as a
- 44 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result, the possible effects of the Act are not reflected in the obligations or
net annual postretirement benefit cost set forth below. Specific authoritative
guidance on accounting for the federal subsidy is pending and when such guidance
is issued, it could require the Company to change previously reported
information.
A reconciliation of the changes in the Company's post-retirement
obligations at December 31, 2003 and 2002, is set forth below (dollar amounts in
thousands):
DECEMBER 31
---------------------
2003 2002
----- -----
Accumulated postretirement benefit obligation at
beginning of year $ 411 $ 413
Interest cost 26 28
Benefits paid (43) (47)
Actuarial loss (gain) (62) 17
----- -----
Accumulated postretirement benefit obligation at
end of year 332 411
Plan assets at fair market value -- --
----- -----
Unfunded accumulated postretirement benefit obligation
at end of year 332 411
Unrecognized transition obligation (99) (122)
Unrecognized net gain 64 2
----- -----
Accrued benefit cost $ 297 $ 291
===== =====
Net annual postretirement benefit costs for 2003, 2002, and 2001, are
summarized below (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
------------------------------
2003 2002 2001
---- ---- ----
Interest cost $26 $28 $26
Net amortization and deferral 22 54 48
---- ---- ----
Net annual postretirement benefit cost $48 $82 $74
==== ==== ====
The weighted-average annual rate of increase in the per capita cost of
covered benefits for the prescription drug card program is assumed to be 11% in
2003 and is projected to decrease gradually thereafter until it reaches 5% in
2011. Changing the assumed rate of increase in the prescription drug cost by one
percentage point in each year would not have a significant effect on the
accumulated postretirement benefit obligation. The Company's program to fund
certain insurance premiums for retirees of one of its divisions has a defined
dollar benefit and is therefore unaffected by increases in health care costs.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 2003 and 2002, was 6-1/4% and
6-3/4%, respectively.
- 45 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- INCOME TAXES
The components of the provisions for income taxes related to operations in
2003, 2002, and 2001, are set forth below (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
------------------------------------
2003 2002 2001
----- ----- -----
Current:
Federal $ -- $(643) $--
State 76 105 80
----- ----- ---
76 (538) 80
Deferred:
Federal -- -- --
----- ----- ---
Income tax provision (benefit) $ 76 $(538) $80
===== ===== ===
The federal income tax benefit recorded during 2002 resulted from a refund
of alternative minimum taxes totaling $643,000 that were paid in earlier
periods.
Excluding the receipt of refunds of prior years' income taxes, income
taxes paid during 2003, 2002, and 2001 totaled $103,000, $80,000, and $125,000,
respectively.
The difference between the Company's income tax provision (benefit) in
2003, 2002, and 2001 and the income taxes that would have been payable at the
federal statutory rate is reconciled as follows (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
---------------------------------------
2003 2002 2001
------- ----- -----
Federal statutory income tax provision $(2,083) $(719) $(704)
Change in valuation allowance 2,245 69 588
Nondeductible goodwill 71 -- 107
State income taxes, net of federal benefit 50 78 53
Other (207) 34 36
------- ----- -----
Income tax provision (benefit) $ 76 $(538) $ 80
======= ===== =====
- 46 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the deferred tax assets and the deferred
tax liabilities of the Company at December 31, 2003 and 2002 (dollar amounts in
thousands):
DECEMBER 31
---------------------------
2003 2002
-------- --------
Deferred tax assets:
Net operating losses and tax credit carryforwards:
Federal net operating losses $ 6,714 $ 5,934
State net operating losses 1,942 1,779
Federal alternative minimum taxes 864 864
Investment tax credit 100 100
Other tax credit 81 81
-------- --------
Total tax carryforwards 9,701 8,758
Deductible temporary differences:
Impairment of long-lived assets 1,518 693
Accounts receivable and inventory reserves 378 414
Tax inventory over book 540 305
Deferred compensation liabilities 26 31
Vacation accruals 313 318
Other accruals 394 231
Deferred financing costs and other 28 27
-------- --------
Total deferred tax assets 12,898 10,777
Valuation allowance (9,030) (6,785)
-------- --------
Net deferred tax assets 3,868 3,992
Deferred tax liabilities:
Tax over book depreciation 3,868 3,992
-------- --------
Net deferred taxes $ -- $ --
======== ========
During 2003, the Company's valuation allowance increased by $2,245,000,
primarily due to the net loss incurred by the Company during 2003.
At December 31, 2003, the Company had net operating loss carryforwards for
federal income tax purposes of $19,747,000, which expire in the years 2005
through 2017, and alternative minimum tax credit carryforwards of $864,000,
which can be used to offset future payments of regular federal income taxes, if
any, without any time limitation.
The expiration of the Company's federal net operating loss carryforwards
by year of expiration is set forth in the table below (dollar amounts in
thousands):
2004 $ --
2005 319
2006 3,473
2007 1,246
2008 --
Thereafter 14,709
--------
Total federal net operating loss
carryforwards $ 19,747
========
- 47 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- SEGMENTS
DESCRIPTION OF SEGMENTS AND PRODUCTS
The Company has two operating segments, the Rubber Group and the Metals
Group. The Rubber Group produces seals used in automotive wiring systems,
insulators for automotive ignition wire sets, and components for medical
devices. The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars for sale primarily to automotive
suppliers. The Rubber Group and the Metals Group conduct substantially all of
their business in the continental United States. At December 31, 2003,
approximately 29% of the Company's employees were subject to collective
bargaining agreements that expire in 2004.
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Company evaluates its performance based upon several measures,
including income from operations, earnings before interest, taxes, depreciation,
and amortization, and asset utilization.
The accounting policies of the Company's operating segments are the same
as those described in Note 1, "Summary of Significant Accounting Policies,"
except that debt, deferred financing expenses, interest expense, and income tax
expense are recorded at the Corporate Office. Also, Corporate Office expenses
that are not considered direct expenses of the Rubber Group or the Metals Group
are not allocated to those segments.
FACTORS MANAGEMENT USED TO IDENTIFY REPORTABLE SEGMENTS
Although all of the Company's production facilities are similar
manufacturing operations, selling to similar customers, the Company presents
financial data for the Rubber Group and the Metals Group because of the
significant difference in financial performance between those businesses.
INDUSTRY CONCENTRATION; RELIANCE ON LARGE CUSTOMERS AND CREDIT RISK
During 2003, 2002, and 2001, net sales to customers in the automotive
industry totaled $105,471,000, $108,752,000, and $107,818,000, respectively,
which represented 86.7%, 87.1%, and 85.4%, respectively, of the Company's net
sales. At December 31, 2003 and 2002, accounts receivable from automotive
industry customers totaled $16,719,000 and $15,205,000, respectively. The
Company operates primarily in the domestic automotive market, which has been
characterized by intense price competition and increasing customer requirements
for quality and service. These factors, among others, may have a sudden and an
adverse affect on the operating results and financial condition of the Company's
customers, and, in turn, the collectibility of the Company's accounts receivable
from those customers. The Company attempts to mitigate this risk of loss through
ongoing evaluations of automotive market conditions, examinations of customer
financial statements, and discussions with customer management as deemed
necessary. Provisions for credit losses are based upon historical experience and
such ongoing evaluations of the financial condition of the Company's customers.
The Company generally does not require collateral from its customers to support
the extension of trade credit. At December 31, 2003 and 2002, the Company had
reserves for credit losses of $665,000 and $662,000, respectively.
During 2001, two automotive customers of the Company filed petitions for
protection from creditors under Chapter 11 of the federal bankruptcy code. The
unpaid, outstanding pre-petition accounts
- 48 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable from the two customers totaled $1,068,000. During 2002, one of the
companies that was indebted to the Company in the amount of $727,000 on the date
of their filing paid the Company $679,000 in full settlement of all claims. The
second company has not yet consummated its plan of reorganization.
During 2003, 2002, and 2001, the Company's net sales to Delphi
Corporation, totaled $24,591,000, $25,181,000, and $24,388,000. Sales to Delphi
in 2003, 2002, and 2001, which represented 20.2%, 20.2%, and 19.3%,
respectively, of the Company's net sales and 23.4%, 25.1%, and 25.8%,
respectively, of the Rubber Group's net sales. As of December 31, 2003, 2002,
and 2001, accounts receivable due from Delphi represented 21.4%, 25.3%, and
22.7% of the Company's total trade receivable balances. No other customer
accounted for more than 10% of the Company's net sales during 2003, 2002, or
2001. In 2003, the three largest customers of the Rubber Group, including
Delphi, accounted for 45.5% of the Rubber Group's net sales and, as of December
31, 2003, 38.2% of the Company's total trade receivable balances. In 2003, the
three largest customers of the Metals Group accounted for 51.9% of the Metals
Group's net sales and, as of December 31, 2003, 10.6% of the Company's total
trade receivable balances. Loss of a significant amount of business from Delphi
or any of the Company's other large customers would have a material adverse
effect on the Company if such business were not substantially replaced by
additional business from existing or new customers.
Net sales to Delphi of connector seals for automotive wiring harnesses
totaled $20,227,000, $21,147,000, and $22,295,000 during 2003, 2002, and 2001,
respectively. Substantially all of the connector seals the Company sells to
Delphi are sold pursuant to a supply agreement that expires on December 31,
2004. The Company cannot predict whether the Company and Delphi will enter into
a new agreement for the Company to supply connector seals to Delphi when the
current long-term agreement expires on December 31, 2004, or, if the Company
does enter into an agreement, what the volume, pricing, duration, and other
terms of that agreement will be. Delphi has indicated to the Company that they
currently plan to in-source, during 2005, approximately 30 connector seals
currently manufactured by the Company under the long-term agreement. The
Company's aggregate net sales of these parts during 2003 were $9,319,000.
Assuming those connector seals were in-sourced on the earliest possible date,
January 1, 2005, and the Company were unable to replace the lost business with
new business from Delphi or other customers, the Company estimates that the
operating profit and EBITDA of the Rubber Group would be reduced by
approximately $2,500,000 per annum. The Company is currently in discussions with
Delphi regarding its ongoing supply relationship, and is developing plans to
restructure the operations of its connector seals division to reduce expenses
and mitigate the impact of any lost business. Any such restructuring of the
Company's connector seals business could include, among other things, the
closing of one of the Company's existing manufacturing facilities, which could
result in significant cash and non-cash expenses. Although the Company can give
no assurance, it is possible that, if the Company does continue to sell
components to Delphi, the average price for those components may increase,
thereby partially offsetting the negative impact of lower volume.
CORPORATE OFFICE
The net loss from operations at the Corporate Office consists primarily of
general administrative expenses that are not a result of any activity carried on
by either the Rubber Group or the Metals Group. Corporate Office expenses
include the compensation and benefits of the Company's executive officers and
corporate staff, rent on the office space occupied by these individuals, general
corporate legal fees, including fees related to financings, and certain
insurance expenses. Assets of the Corporate Office include primarily cash,
marketable securities, certain prepaid expenses and other miscellaneous current
assets, deferred tax assets, and deferred financing expenses.
- 49 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT FINANCIAL DATA
Information relating to the Company's operating segments and the Corporate
Office for 2003, 2002, and 2001 is summarized below (dollar amounts in
thousands):
YEARS ENDED DECEMBER 31
-------------------------------------------------
2003 2002 2001
--------- --------- ---------
NET SALES:
Rubber Group $ 103,243 $ 98,880 $ 91,532
Metals Group 18,373 25,972 34,670
--------- --------- ---------
Total net sales $ 121,616 $ 124,852 $ 126,202
========= ========= =========
INCOME (LOSS) FROM OPERATIONS (1):
Rubber Group $ 10,026 $ 10,765 $ 10,389
Metals Group (6,424) (3,434) (3,070)
--------- --------- ---------
Subtotal 3,602 7,331 7,319
Corporate Office (2,679) (2,464) (856)
--------- --------- ---------
Total income from operations $ 923 $ 4,867 $ 6,463
========= ========= =========
DEPRECIATION AND AMORTIZATION (2):
Rubber Group $ 7,121 $ 7,786 $ 8,484
Metals Group 3,120 4,026 4,531
--------- --------- ---------
Subtotal 10,241 11,812 13,015
Corporate Office 38 53 88
--------- --------- ---------
Total depreciation and amortization $ 10,279 $ 11,865 $ 13,103
========= ========= =========
ASSET IMPAIRMENT CHARGES (NON-CASH):
Rubber Group $ -- $ -- $ --
Metals Group 2,635 -- 2,047
--------- --------- ---------
Subtotal 2,635 2,047
Corporate Office -- -- --
--------- --------- ---------
Total asset impairment charges $ 2,635 $ -- $ 2,047
========= ========= =========
CAPITAL EXPENDITURES (3):
Rubber Group $ 4,873 $ 3,690 $ 5,116
Metals Group 912 1,536 1,281
--------- --------- ---------
Subtotal 5,785 5,226 6,397
Corporate Office 14 4 11
--------- --------- ---------
Total capital expenditures $ 5,799 $ 5,230 $ 6,408
========= ========= =========
ASSETS:
Rubber Group $ 61,953 $ 64,439 $ 68,823
Metals Group 17,623 22,454 27,287
Subtotal 79,576 86,893 96,110
--------- --------- ---------
Corporate Office 4,111 5,252 3,767
--------- --------- ---------
Total assets $ 83,687 $ 92,145 $ 99,877
========= ========= =========
(1) During 2003, the loss from operations at the Metals Group includes a
provision of $208,000 to write off goodwill and a provision for asset
impairment of $2,427,000 to write down the long-lived assets of the
Group's die casting division. During 2002, the loss from operations at the
Metals Group includes costs of $609,000 incurred to close the Group's
metal machining facility in Arizona, and $1,290,000 of other losses
related to the Arizona facility. During 2001, the loss from operations at
the Metals Group includes a provision for asset impairment of $2,047,000,
related to the planned closure of the Arizona facility. During 2001, the
loss from operations at the Corporate Office was reduced by $1,274,000 as
a result of the demutualization of an insurance company.
- 50 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Excludes amortization of deferred financing expenses, which totaled
$610,000, $440,000, and $192,000, during 2003, 2002, and 2001,
respectively, and which is included in interest expense in the
consolidated financial statements.
(3) Capital expenditures for 2003 includes $720,000 of equipment purchased
under capital lease obligations. Capital expenditures for 2002 includes
$365,000 of equipment purchased under capitalized lease obligations and
$247,000 of equipment obtained with seller-provided financing. Capital
expenditures for 2001, includes $327,000 of equipment purchased under
capitalized lease obligations.
NOTE 10 -- NET LOSS PER COMMON SHARE
The calculations of basic and diluted net loss per common share for 2003,
2002, and 2001, are set forth below (in thousands, except per share amounts).
The pro forma conversion of the Series B Preferred Stock and the pro forma
exercise of the Warrants were not dilutive. As a result, the calculation of
diluted net loss per common share set forth below does not reflect the pro forma
conversion of the Series B Preferred Stock or the proforma exercise of the
Warrants.
During 2003, the Company's loss per share calculations reflected dividends
on the Series B Preferred Stock totaling $106,000. The Company failed to pay
dividends on the Series B Preferred Stock during 2002 and 2001, and to redeem
any shares of Series B Preferred Stock during 2003, 2002, and 2001, which
reduced the Company's net loss per share by one cent per share during 2002 and
2001.
YEARS ENDED DECEMBER 31
-------------------------------------------
2003 2002 2001
------- ------- -------
Net loss before cumulative effect of a change in accounting
principle $(6,202) $(1,567) $(2,151)
Less: preferred dividends 106 -- --
------- ------- -------
Numerator - net loss applicable to common stockholders
before cumulative effect of a change in accounting principle (6,308) (1,567) (2,151)
Cumulative effect of a change in accounting principle (247) -- --
------- ------- -------
Numerator - net loss applicable to common stockholders
after cumulative effect of a change in accounting principle $(6,555) $(1,567) $(2,151)
======= ======= =======
Denominator - weighted average shares 4,832 4,828 4,828
======= ======= =======
- 51 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31
----------------------------------------
2003 2002 2001
-------- -------- --------
Basis and diluted net loss per common share:
Basic and diluted net loss applicable to common
stockholders before cumulative effect of a
change in accounting principle $ (1.31) $ (0.32) $ (0.45)
Cumulative effect of a change in accounting principle (0.05) -- --
-------- -------- --------
Basic and diluted net loss applicable to common
stockholders after cumulative effect of a
change in accounting principle $ (1.36) $ (0.32) $ (0.45)
======== ======== ========
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
At December 31, 2003, the Company had outstanding commitments to purchase
equipment of $726,000.
LEASES
The Company is lessee under various operating leases relating to storage
and office space, temporary office units, and equipment. Total rent expense
under operating leases aggregated $402,000, $436,000, and $410,000 for 2003,
2002, and 2001, respectively. At December 31, 2003, future minimum lease
commitments under noncancelable operating leases totaled $230,000, $126,000, and
$54,000 for 2004, 2005, and 2006, respectively. Commitments subsequent to 2006
are not significant.
LEGAL ACTIONS
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. It is the Company's policy to record accruals for such matters when
a loss is deemed probable and the amount of such loss can be reasonably
estimated. The various actions to which the Company is or may in the future be a
party are at various stages of completion. Although there can be no assurance as
to the outcome of existing or potential litigation, the Company believes, based
upon the information currently available to it, that the outcome of such actions
will not have a material adverse effect upon its financial position.
OTHER
The Company maintains insurance coverage for certain aspects of its
business and operations. Based on the Company's evaluation of the various risks
to which it may be exposed, the Company has elected to retain a portion of the
potential losses that it could experience in the future through the use of
various deductibles, limits, and retentions. These forms of self-insurance
subject the Company to possible future liability for which it is partially or
completely uninsured. Although there can be no assurance that it will be
successful in its efforts, the Company attempts to limit future liability
through, among other things, the ongoing training and education of its
employees, the use of safety programs, the ongoing
- 52 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
testing and evaluation of the safety and suitability of its workplace
environments, the development of sound business practices, and the exercise of
care and judgment in the negotiation of contracts.
NOTE 12 -- RELATED PARTIES
The Chairman of the Board and the President of the Company are the two
largest holders of the Company's common stock. They are also the holders of the
13% Junior Subordinated Notes, and, together with affiliates and associates, the
holders of $2,831,000 principal amount of the 12% Senior Subordinated Notes. In
December 2003, the Chairman of the Board and the President of the Company
converted accrued interest of $235,000 on the Company's junior subordinated
notes into 103,731 shares of common stock.
The Chairman of the Board and the President of the Company are partners of
an investment banking firm that is retained by the Company to provide management
and investment banking services. The annual fee for such services for 2004 has
not yet been set. Additionally, the firm may receive incentive compensation tied
to the Company's operating performance and other compensation for specific
transactions completed by the Company with the assistance of the firm. The
Company also has agreed to reimburse the firm for certain expenses. During each
of 2003, 2002, and 2001, the Company paid the firm fees of $500,000. During
2003, 2002, and 2001, the Company reimbursed the firm for expenses of $200,000,
$196,000, and $223,000, respectively.
NOTE 13 -- PLANT CLOSURE AND RELATED ASSET IMPAIRMENT CHARGE
During the fourth quarter of 2001, the Company was notified that the
Metals Group's largest customer would cease purchasing components from the
Metals Group after December 31, 2001. During 2001, the customer purchased
$5,937,000 of machined metal components that were manufactured primarily at the
Metals Group's Arizona facility. As a result of the reduction in sales at the
Arizona facility, the Company closed the facility in 2002 and recorded, as of
December 31, 2001, an impairment charge of $2,047,000 to reduce to fair value
the carrying value of the Arizona facility's land and building and certain metal
machining equipment idled by the loss of this business. The Company's estimate
of fair value was based primarily on independent appraisals of the assets. The
idled assets are currently classified in plant and equipment and are being
depreciated at the rate of $11,000 per month. These assets will be reclassified
as assets held for sale if and when they meet the criteria set forth in
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which we adopted on
January 1, 2002. Although the land and building are currently offered for sale,
they are not categorized on the consolidated balance sheet as assets held for
sale. At December 31, 2002, the book value of the assets remaining to be
disposed of at the Arizona facility totaled $1,714,000, which includes
$1,576,000 for the land and building and $138,000 for equipment. The cost to
hold the building and the remaining equipment is projected to total
approximately $388,000 per annum, which includes approximately $219,000 for
building maintenance, property taxes, insurance, and security services and
$127,000 for depreciation expense.
- 53 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth certain operating data of the Arizona
facility for 2003, 2002, and 2001 (dollar amounts in thousands):
YEAR ENDED
DECEMBER 31
-----------------------------------------
2003 2002 2001
----- ------- -------
Net sales $ -- $ 332 $ 8,954
===== ======= =======
Operating loss before nonrecurring charges $(559) $(1,290) $ (523)
----- ------- -------
Nonrecurring charges:
Plant closure costs:
Severance and other employee termination costs -- 246 --
Asset relocation costs -- 209 --
Other costs -- 154 --
----- ------- -------
Subtotal -- 609 --
Impairment of long-lived assets -- -- 2,047
----- ------- -------
-- 609 2,047
----- ------- -------
Operating loss (559) (1,899) (2,570)
Add back: depreciation and amortization 200 527 1,658
----- ------- -------
EBITDA $(359) $(1,372) $ (912)
===== ======= =======
During 2003, operating losses resulted primarily from the cost of
maintaining, insuring, protecting, and depreciating the building and the
remaining equipment in the facility.
- 54 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the eight quarters ended December 31, 2003,
is set forth below (dollar amounts in thousands, except per share amounts).
QUARTERS ENDED 2003
-----------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
Net sales $ 32,383 $ 30,873 $ 28,294 $ 30,066
Gross profit 3,730 3,286 2,016 3,058
Net loss before cumulative effect of a change in
accounting principle (169) (674) (1,716) (3,643)
Net loss (169) (674) (1,963) (3,643)
Per share data:
Basic and diluted net loss applicable to common
stockholders before cumulative effect of a change
in accounting principle $ (0.04) $ (0.14) $ (0.36) $ (0.77)
Basic and diluted net loss applicable to common
stockholders (0.04) (0.14) (0.41) (0.77)
QUARTERS ENDED 2002
-------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- ------- --------
Net sales $ 30,244 $32,996 $32,342 $ 29,270
Gross profit 2,968 4,640 4,212 2,314
Net profit (loss) (1,626) 207 227 (375)
Per share data:
Basic and diluted net profit (loss) applicable to
common stockholders $ (0.34) $ 0.04 $ 0.05 $ (0.08)
Results of operations for the fourth quarter of 2003, include a non-cash,
pre-tax impairment charge of $208,000 to write off the unamortized goodwill of
the Metals Group and a non-cash, pre-tax charge of $2,427,000 to write down to
fair value the long-lived assets of the Metals Group's die casting division.
Results of operations for the first quarter of 2002 included a pre-tax
charge of $522,000, or $0.11 per share, for costs incurred to close the
Company's facility in Casa Grande, Arizona. Results of operations for the fourth
quarter of 2002 included a pre-tax gain of $248,000, or $0.05 per share,
resulting from the sale of marketable securities.
NOTE 15 -- INCOME FROM INSURANCE COMPANY DEMUTUALIZATION
During December 2001, a mutual insurance company of which the Company was
a member underwent a demutualization and converted to a stock company. In
accordance with Financial Accounting Standards Board Emerging Issue Task Force
Bulletin 99-4, "Accounting For Stock Received from the Demutualization of a
Mutual Insurance Company," the Company recorded the receipt of shares of the
- 55 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
insurance company's common stock at their fair value of $1,274,000 by using the
published closing price for the stock on December 31, 2001. The income resulting
from the demutualization and the receipt of shares of common stock is presented
in the Company's consolidated statement of operations for 2001 as a separate
line item. During 2002, the Company sold all of the shares of common stock and
realized a pre-tax gain of $248,000.
NOTE 16 -- GOODWILL
On January 1, 2002, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). The standard, among other things, prohibits the
amortization of goodwill and other intangible assets with indefinite useful
lives, and requires that goodwill be reviewed for impairment at least annually
and written down to fair value if found to be impaired. Prior to the adoption of
FAS No. 142, the Company amortized goodwill over forty years.
At December 31, 2003, there was $7,623,000 of unamortized goodwill
recorded as an asset in the Company's consolidated balance sheet, which all
related to the Rubber Group.
The following table shows the pro forma effect on net income and net
income per share for 2003, 2002, and 2001, if FAS 142 had been effective for
those periods and goodwill had not been amortized.
YEARS ENDED DECEMBER 31
-------------------------------------------------
2003 2002 2001
--------- --------- ---------
Net loss, as reported $ (6,449) $ (1,567) $ (2,151)
Add back: amortization of goodwill, net of
applicable income taxes -- -- 316
--------- --------- ---------
Adjusted net loss $ (6,449) $ (1,567) $ (1,835)
========= ========= =========
Per share data:
Net loss per common share, as reported $ (1.33) $ (0.32) $ (0.45)
Add back: amortization of goodwill, net of
applicable income taxes -- -- 0.07
--------- --------- ---------
Adjusted net loss per common share $ (1.33) $ (0.32) $ (0.38)
========= ========= =========
The Company performed its annual impairment test of goodwill as of October
1, 2003, which involved the preparation of a projection of cash flow, discounted
to present value, and the consideration of other factors, and determined that
the unamortized goodwill of the Metals Group was impaired. As a result, the
Company recorded a non-cash, pre-tax impairment charge of $208,000 to write off
the unamortized goodwill of the Metals Group. The non-cash charge is
attributable to the 2002 and 2003 operating results of the Metals Group and a
consequent reduction of expectations for the future performance of this segment.
The charge appears as a separate line item in the Company's consolidated
statement of operations.
NOTE 17 -- IMPAIRMENT OF LONG-LIVED ASSETS
During 2002 and 2003, the Company's die casting division, which is
included in the Metals Group operating segment, experienced negative gross
profit margins. Because of the poor operating
- 56 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performance of this division over the past two years and its projected operating
results for 2004, the Company has reduced its overall expectations for the
division's future financial performance. As a result, the Company reviewed the
long-lived assets of the die casting division for impairment as of December 31,
2003, under the provisions of Statement of Financial Accounting Standards
No.144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("FAS
144"). The Company determined that the undiscounted, projected cash flow of the
division was less than the carrying value of the long-lived assets being tested.
As a result, the Company concluded that the long-lived assets of this division,
which had a carrying value of $7,131,000, were impaired and the Company wrote
them down to their estimated fair value of $4,704,000, recording a non-cash,
pre-tax impairment charge of $2,427,000. Fair value was based primarily on
independent appraisals of the long-lived assets. The impairment charge appears
as a separate line item in the Company's consolidated statement of operations.
-57-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision, and with the
participation, of our management, including our co-principal executive officers
and our chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2003.
Based on that evaluation, the co-principal executive officers and our chief
financial officer concluded that our disclosure controls and procedures provide
management with timely notice of material information that is 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.
-58-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 is incorporated by reference to the
sections entitled "Election of Directors" and "Executive Officers" in the
Company's proxy statement to be issued in connection with its 2004 Annual
Meeting of Stockholders and to be filed with the Securities and Exchange
Commission (the Commission) not later than 120 days after December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" in the Company's proxy statement to be
issued in connection with its 2004 Annual Meeting of Stockholders and to be
filed with the Commission not later than 120 days after December 31, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference to the
section entitled "Security Ownership" and "Equity Compensation Plan Information"
in the Company's proxy statement to be issued in connection with its 2004 Annual
Meeting of Stockholders and to be filed with the Commission not later than 120
days after December 31, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated by reference to the
section entitled "Certain Relationships and Transactions" in the Company's proxy
statement to be issued in connection with its 2004 Annual Meeting of
Stockholders and to be filed with the Commission not later than 120 days after
December 31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 is incorporated by reference to the
section entitled "Ratification of Appointment of Independent Auditors" in the
Company's proxy statement to be issued in connection with its 2004 Annual
Meeting of Stockholders and to be filed with the Commission not later than 120
days after December 31, 2003.
-59-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Lexington Precision
Corporation and its wholly owned subsidiaries, Lexington Rubber
Group, Inc. and Lexington Precision GmbH, are included in Part II,
Item 8.
2. FINANCIAL STATEMENT SCHEDULE
Schedule II, "Valuation and Qualifying Accounts and Reserves," is
included in this Part IV, Item 14, on page 65. All other schedules
are omitted because the required information is not applicable, not
material, or included in the consolidated financial statements or
the notes thereto.
3. EXHIBITS
3-1 Articles of Incorporation and Restatement thereof
3-2 By-laws, as amended
3-3 Certificate of Correction dated September 21, 1976
3-4 Certificate of Ownership and Merger dated May 24, 1977
3-5 Certificate of Ownership and Merger dated May 31, 1977
3-6 Certificate of Reduction of Capital dated December 30,
1977
3-7 Certificate of Retirement of Preferred Shares dated
December 30, 1977
3-8 Certificate of Reduction of Capital dated December 28,
1978
3-9 Certificate of Retirement of Preferred Shares dated
December 28, 1978
3-10 Certificate of Reduction of Capital dated January 9,
1979
3-11 Certificate of Reduction of Capital dated December 20,
1979
3-12 Certificate of Retirement of Preferred Shares dated
December 20, 1979
3-13 Certificate of Reduction of Capital dated December 16,
1982
3-14 Certificate of Reduction of Capital dated December 17,
1982
3-15 Certificate of Amendment of Restated Certificate of
Incorporation dated September 26, 1984
3-16 Certificate of Retirement of Stock dated September 24,
1986
-60-
3-17 Certificate of Amendment of Restated Certificate of
Incorporation dated November 21, 1986
3-18 Certificate of Retirement of Stock dated January 15,
1987
3-19 Certificate of Retirement of Stock dated February 22,
1988 3-20 Certificate of Amendment of Restated
Certificate of Incorporation dated January 6, 1989
3-21 Certificate of Retirement of Stock dated August 17, 1989
3-22 Certificate of Retirement of Stock dated January 9, 1990
3-23 Certificate of the Designations, Preferences and
Relative Participating, Optional and Other Special
Rights of 12% Cumulative Convertible Exchangeable
Preferred Stock, Series C, and the Qualifications,
Limitations and Restrictions thereof dated January 10,
1990
3-24 Certificate of Ownership and Merger dated April 25, 1990
3-25 Certificate of Elimination of 12% Cumulative Convertible
Exchangeable Preferred Stock, Series C, dated June 4,
1990
3-26 Certificate of Retirement of Stock dated March 6, 1991
3-27 Certificate of Retirement of Stock dated April 29, 1994
3-28 Certificate of Retirement of Stock dated January 6, 1995
3-29 Certificate of Retirement of Stock dated January 5, 1996
3-30 Certificate of Retirement of Stock dated January 6, 1997
3-31 Certificate of Retirement of Stock dated January 9, 1998
3-32 Certificate of Retirement of Stock dated January 13,
1999
3-33 Certificate of Retirement of Stock dated January 26,
2000
4-1 Certificate of Designations, Preferences, Rights and
Number of Shares of Redeemable Preferred Stock, Series B
4-2 Purchase Agreement dated as of February 7, 1985, between
Lexington Precision Corporation ("LPC") and L&D
Precision Limited Partnership ("L&D Precision") and
exhibits thereto
4-3 Amendment Agreement dated as of April 27, 1990, between
LPC and L&D Precision with respect to Purchase Agreement
dated as of February 7, 1985
-61-
4-4 Recapitalization Agreement dated as of April 27, 1990,
between LPC and L&D Woolens Limited Partnership ("L&D
Woolens") and exhibits thereto
4-5 Indenture dated as of August 1, 1993, between LPC and
IBJ Schroder Bank & Trust Company, as Trustee
4-6 Specimen of 12-3/4% Senior Subordinated Note, due
February 1, 2000 4-7 Indenture, dated as of December 18,
2003, between LPC and Wilmington Trust Company, as
Trustee
4-8 Registration Rights Agreement, dated as of December 18,
2003, between LPC and Purchasers listed therein
4-9 Form of Unit
4-10 Form of Warrant
4-11 Form of 12% Senior Subordinated Note due August 1, 2003
4-12 Form of 13% Junior Subordinated Note due November 1,
2009
4-13 Warrant Agent Agreement, Dated as of December 18, 2003,
between LPC and Wilmington Trust Company, as Warrant
Agent
10-1 Purchase Agreement dated as of February 7, 1985, between
LPC and L&D Precision and exhibits thereto
10-2 Amendment Agreement dated as of April 27, 1990, between
LPC and L&D Precision with respect to Purchase Agreement
dated as of February 7, 1985
10-3 Lexington Precision Corporation Flexible Compensation
Plan, as amended
10-4 1986 Restricted Stock Award Plan, as amended
10-5 Lexington Precision Corporation Retirement and Savings
Plan, as amended
10-6 Description of 2002 Compensation Arrangements with
Lubin, Delano, & Company
10-7 Corporate Office 2002 Management Cash Bonus Plan
10-8 Recapitalization Agreement dated as of April 27, 1990,
between LPC and L&D Woolens and exhibits thereto
10-9 Long term contract between Delphi Automotive Systems LLC
and Lexington Connector Seals
-62-
10-10 Exchange Agreement, dated as of December 18, 2003,
between LPC and each of Michael A. Lubin and Warren
Delano
10-11 Amended and Restated Loan and Security Agreement, dated
as of December 18, 2003, by and among LPC and Lexington
Rubber Group, Inc. ("LRGI"), as borrowers, and Congress
Financial Corporation ("Congress"), as Agent, The CIT
Group/Commercial Financing, Inc., as Co-Agent, and the
lenders from time to time party thereto
10-12 Pledge and Security Agreement, dated as of December 18,
2003, made by LPC in favor of Congress, as agent
10-13 Amended and Restated Term Promissory Note, dated
December 18, 2003, made by LPC in favor of Congress, as
agent, in the original principal amount of $4,000,000
10-14 Amended and Restated Term Promissory Note, dated as of
December 18, 2003, made by LRGI in favor of Congress, as
agent, in the original principal amount of $9,500,000
10-15 Loan and Security Agreement, dated December 18, 2003, by
and among LPC and LRGI, as Borrowers, Ableco Finance LLC
("Ableco"), as Agent, and the lenders from time to time
party thereto
10-16 Pledge and Security Agreement, dated December 18, 2003,
made by LPC in favor of Ableco, as agent
10-17 Intercreditor Agreement, dated as of December 18, 2003,
among Congress, the Working Capital Lenders, Ableco and
the Term Loan Lenders with the consent and
Acknowledgement of LPC and LRGI
10-18 Payoff Agreement, dated as of December 18, 2003, by and
between Nomura Special Situations Investment Trust and
LPC
10-19 Amendment No. 1 to Loan and Security Agreement dated as
of March 31, 2004, by and among LPC, LRGI, and Ableco
10-20 Amendment No. 1 to Amended and Restated Loan and
Security Agreement dated as of March 31, 2004, by
and among LPC, LRGI, and Congress
21-1 Significant Subsidiary of Registrant
31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Michael A. Lubin, Chairman of the Board and Co-Principal
Executive Officer of the registrant
31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Warren Delano, President and Co-Principal Executive
Officer of the registrant
-63-
31-3 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of
Dennis J. Welhouse, Chief Financial Officer and
Principal Financial Officer of the registrant
32-1 Certification of Michael A. Lubin, Chairman of the Board
and Co-Principal Executive Officer of the registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32-2 Certification of Warren Delano, President and
Co-Principal Executive Officer of the registrant,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32-3 Certification of Dennis J. Welhouse, Chief Financial
Officer and Principal Financial Officer of the
registrant, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) REPORTS ON FORM 8-K
On October 7, 2003, we filed a report on Form 8-K that included
a press release dated October 7, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
October 7, 2003, to October 21, 2003.
On October 21, 2003, we filed a report on Form 8-K that included
a press release dated October 21, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
October 21, 2003, to November 4, 2003.
On November 4, 2003, we filed a report on Form 8-K that included
a press release dated November 4, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
November 4, 2003, to November 11, 2003.
On November 11, 2003, we filed a report on Form 8-K that
included a press release dated November 11, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
November 11, 2003, to November 18, 2003.
On November 17, 2003, we filed a report on Form 8-K that
included a press release dated November 17, 2003, announcing our financial
results for the quarter ended September 30, 2003.
On November 18, 2003, we filed a report on Form 8-K that
included a press release dated November 18, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
November 18, 2003, to November 25, 2003.
On November 25, 2003, we filed a report on Form 8-K that
included a press release dated November 25, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
November 25, 2003, to December 2, 2003.
On December 2, 2003, we filed a report on Form 8-K that included
a press release dated December 2, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
December 2, 2003, to December 9, 2003.
-64-
On December 9, 2003, we filed a report on Form 8-K that included
a press release dated December 9, 2003, stating that we were extending the
expiration date of our offer to exchange our senior subordinated notes from
December 9, 2003, to December 12, 2003.
On December 12, 2003, we filed a report on Form 8-K that
included a press release dated December 12, 2003, stating that we were extending
the expiration date of our offer to exchange our senior subordinated notes from
December 12, 2003, to December 15, 2003.
On December 18, 2003, we filed a report on Form 8-K that
included a press release dated December 18, 2003, stating that we had completed
the refinancing of substantially all of our outstanding debt.
-65-
LEXINGTON PRECISION CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND FROM AT END
OF PERIOD EXPENSES RESERVES OF PERIOD
--------- -------- -------- ---------
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
Year ended December 31, 2003 $ 662 $ 148 $ 145 $ 665
Year ended December 31, 2002 669 211 218 662
Year ended December 31, 2001 181 523 35 669
INVENTORY RESERVE
Year ended December 31, 2003 $ 1,062 $ 891 $ 972 $ 981
Year ended December 31, 2002 1,370 558 866 1,062
Year ended December 31, 2001 872 1,135 637 1,370
-66-
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
By: /s/ Warren Delano
---------------------------
Warren Delano, President
April 14, 2004
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 14, 2004:
PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:
/s/ Michael A. Lubin
- ------------------------------------------------
Michael A. Lubin, Chairman of the Board
/s/ Warren Delano
Warren Delano, President and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Dennis J. Welhouse
- ------------------------------------------------
Dennis J. Welhouse, Senior Vice President
and Chief Financial Officer
DIRECTORS:
/s/ William B. Conner
- ------------------------------------------------
William B. Conner, Director
/s/ Kenneth I. Greenstein
- ------------------------------------------------
Kenneth I. Greenstein, Secretary and
Director
/s/ Joseph A. Pardo
- ------------------------------------------------
Joseph A. Pardo, Director
/s/ Elizabeth H. Ruml
- -----------------------------------------------
Elizabeth H. Ruml, Director
-67-
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
3-1 Articles of Incorporation and Restatement Incorporated by reference from Exhibit 3-1 Lexington
thereof Precision Corporation's (the "Company") to the Company's
Form 10-K for the year ended May 31, 1981 located under
Securities and Exchange Commission File No. 0-3252 ("1981
10-K")
3-2 By-laws, as amended Incorporated by reference from Exhibit 3-2 to 1998 10-K
3-3 Certificate of Correction dated September 21, Incorporated by reference from Exhibit 3-3 to the
1976 Company's Form 10-K for the year ended May 31, 1983
located under Securities and Exchange Commission File No.
0-3252 ("1983 10-K")
3-4 Certificate of Ownership and Merger dated May Incorporated by reference from Exhibit 3-4 to 1983 10-K
24, 1977
3-5 Certificate of Ownership and Merger dated May Incorporated by reference from Exhibit 3-5 to 1983 10-K
31, 1977
3-6 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-6 to 1983 10-K
December 30, 1977
3-7 Certificate of Retirement of Preferred Shares Incorporated by reference from Exhibit 3-7 to 1983 10-K
dated December 30, 1977
3-8 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-8 to 1983 10-K
December 28, 1978
3-9 Certificate of Retirement of Preferred Shares Incorporated by reference from Exhibit 3-9 to 1983 10-K
dated December 28, 1978
3-10 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-10 to 1983 10-K
January 9, 1979
3-11 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-11 to 1983 10-K
December 20, 1979
3-12 Certificate of Retirement of Preferred Shares Incorporated by reference from Exhibit 3-12 to 1983 10-K
dated December 20, 1979
3-13 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-13 to 1983 10-K
December 16, 1982
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
3-14 Certificate of Reduction of Capital dated Incorporated by reference from Exhibit 3-14 to 1983 10-K
December 17, 1982
3-15 Certificate of Amendment of Restated Incorporated by reference from Exhibit 3-15 to the
Certificate of Incorporation dated Company's Form 10-K for the year ended May 31, 1985
September 26, 1984 located under Securities and Exchange Commission File No.
0-3252
3-16 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 4-3 to the
September 24, 1986 Company's Registration Statement on Form S-2 located under
Securities and Exchange Commission File No. 33-9380 ("1933
Act Registration Statement")
3-17 Certificate of Amendment of Restated Incorporated by reference from Exhibit 3-17 to the
Certificate of Incorporation dated Company's Form 10-K for the year ended May 31, 1987
November 21, 1986 located under Securities and Exchange Commission File No.
0-3252
3-18 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 4-5 to Amendment
January 15, 1987 No. 1 to 1933 Act Registration Statement
3-19 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-19 to the
February 22, 1988 Company's Form 10-K for the year ended May 31, 1989
located under Securities and Exchange Commission File No.
0-3252 ("May 31, 1989 10-K")
3-20 Certificate of Amendment of Restated Incorporated by reference from Exhibit 3-20 to May 31,
Certificate of Incorporation dated January 6, 1989 10-K
1989
3-21 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-21 to May 31,
August 17, 1989 1989 10-K
3-22 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-22 to the
January 9, 1990 Company's Form 10-K for the seven months ended December
31, 1989 located under Securities and Exchange Commission
File No. 0-3252 ("December 31, 1989 10-K")
3-23 Certificate of the Designations, Preferences Incorporated by reference from Exhibit 3-1 to the
and Relative Participating, Optional and Other Company's Form 10-Q for the quarter ended November 30,
Special Rights of 12% Cumulative Convertible 1989 located under Securities and Exchange Commission File
Exchangeable Preferred Stock, Series C, and No. 0-3252 ("November 30, 1989 10-Q")
the Qualifications, Limitations and
Restrictions thereof dated January 10, 1990
- 2 -
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
3-24 Certificate of Ownership and Merger dated Incorporated by reference from Exhibit 3-24 to December
April 25, 1990 31, 1989 10-K
3-25 Certificate of Elimination of 12% Incorporated by reference from Exhibit 3-25 to the
Cumulative Convertible Exchangeable Company's Form 10-K for the year ended December 31, 1990
Preferred Stock, Series C, dated located under Securities and Exchange Commission File No.
June 4, 1990 0-3252 ("1990 10-K")
3-26 Certificate of Retirement of Stock dated March Incorporated by reference from Exhibit 3-26 to 1990 10-K
6, 1991
3-27 Certificate of Retirement of Stock dated April Incorporated by reference from Exhibit 3-27 to 1994 10-K
29, 1994
3-28 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-28 to 1994 10-K
January 6, 1995
3-29 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-29 to 1995 10-K
January 5, 1996
3-30 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-30 to 1996 10-K
January 6, 1997
3-31 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-31 to 1997 10-K
January 9, 1998
3-32 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-32 to 1998 10-K
January 13, 1999
3-33 Certificate of Retirement of Stock dated Incorporated by reference from Exhibit 3-33 to 1999 10-K
January 26, 2000
4-1 Certificate of Designations, Preferences, Incorporated by reference from Exhibit 3-3 to 1981 10-K
Rights and Number of Shares of Redeemable
Preferred Stock, Series B
4-2 Purchase Agreement dated as of February 7, Incorporated by reference from Exhibit 4-1 to the
1985, between LPC and L&D Precision Limited Company's Form 8-K dated February 7, 1985 (date of
Partnership ("L&D Precision") and exhibits earliest event reported) located under Securities and
thereto Exchange Commission File No. 0-3252
4-3 Amendment Agreement dated as of April 27, Incorporated by reference from Exhibit 10-2 to
1990, between LPC and L&D Precision with 1990 10-K
respect to Purchase Agreement dated as of
February 7, 1985
- 3 -
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
4-4 Recapitalization Agreement dated as of April Incorporated by reference from Exhibit 4-10 to December
27, 1990, between LPC and L&D Woolens Limited 31, 1989 10-K
Partnership ("L&D Woolens") and exhibits
thereto
4-5 Indenture dated as of August 1, 1993, between Incorporated by reference from Exhibit 4-2 to the
LPC and IBJ Schroder Bank & Trust Company, as Company's Form 8-K dated January 18, 1994 (date of
Trustee earliest event reported) located under Securities and
Exchange Commission File No. 0-3252.
4-6 Specimen of 12.75% Senior Subordinated Note, Included in Exhibit 4-7 hereto
due February 1, 2000
4-7 Indenture, dated as of December 18, 2003, Incorporated by reference from Exhibit 4-1 to
between Lexington Precision Corporation and Form 8-K filed December 18, 2003 located under Securities
and Wilmington Trust Company, as Trustee and Exchange Commission File No. 0-3252 ("December 18,
2003 8-K")
4-8 Registration Rights Agreement, dated as of Incorporated by reference from Exhibit 4-2 to December 18,
December 18, 2003,between Lexington Precision 2003 8-K
Corporation and Purchasers listed therein
4-9 Form of Unit Incorporated by reference from Exhibit 4-3 to
December 18, 2003 8-K
4-10 Form of Warrant Incorporated by reference from Exhibit 4-4 to
December 18, 2003 8-K
4-11 Form of 12% Senior Subordinated Note due Incorporated by reference from Exhibit 4-5 to
August 1, 2003 December 18, 2003 8-K
4-12 Form of 13% Junior Subordinated Note due Incorporated by reference from Exhibit 4-6 to
November 1, 2009 December 18, 2003 8-K
10-1 Purchase Agreement dated as of February 7, See Exhibit 4-2 hereto
1985, between LPC and L&D Precision and
exhibits thereto
- 4 -
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
10-2 Amendment Agreement dated as of April 27, See Exhibit 4-3 hereto
1990, between LPC and L&D Precision with
respect to Purchase Agreement dated as of
February 7, 1985
10-3 Lexington Precision Corporation Flexible Incorporated by reference from Exhibit 10-3 to the
Compensation Plan, as amended Company's Form 10-K for the year ended December 31, 1991
located under Securities and Exchange Commission File No.
0-3252 ("1991 10-K")
10-4 1986 Restricted Stock Award Plan, as amended Incorporated by reference from Exhibit 10-38 to December
31, 1989 10-K
10-5 Lexington Precision Corporation Retirement and Incorporated by reference from Exhibit 10-5 to December
Savings Plan, as amended 31, 1998 10-K
10-6 Description of 2003 Compensation Arrangements Filed with this Form 10-K
with Lubin, Delano, & Company
10-7 Corporate Office 2002 Management Cash Bonus Incorporated by reference from Exhibit 10-7 to the
Plan Company's Form 10-K for the year ended December 31, 2002
located under Securities and Exchange Commission File No.
0-3252 ("2002 10-K")
10-8 Recapitalization Agreement dated as of April See Exhibit 4-4 hereto
27, 1990, between LPC and L&D Woolens and
exhibits thereto
10-9 Long term contract between Delphi Automotive Incorporated by reference from Exhibit 10-12 to the
Systems LLC and Lexington connector Seals Company's Form 10-Q for the quarter ended June 30, 2001
located under Securities and Exchange Commission File No.
0-3252 ("June 30, 2001 Form 10-Q")
10-10 Exchange Agreement, dated as of December 18, Incorporated by reference from Exhibit 10-1 to
2003, between Lexington Precision Corporation December 18, 2003 8-K
and each of Michael A. Lubin and Warren Delano
10-11 Warrant Agent Agreement, Dated as of December Incorporated by reference from Exhibit 10-2 to
18, 2003,between Lexington Precision December 18, 2003 8-K
Corporation and Wilmington Trust Company, as
Warrant Agent
- 5 -
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
10-12 Amended and Restated Loan and Security Incorporated by reference from Exhibit 10-3 to
Agreement, dated as of December 18, 2003, by December 18, 2003 8-K
and among Lexington Precision Corporation and
Lexington Rubber Group, Inc., as borrowers,
and Congress Financial Corporation, as Agent,
The CIT Group/Commercial Financing, Inc., as
Co-Agent and the Lenders from time to time
party thereto.
10-13 Pledge and Security Agreement, dated as of Incorporated by reference from Exhibit 10-4 to
December 18, 2003, made by Lexington Precision December 18, 2003 8-K
Corporation in favor of Congress Financial
Corporation, as agent
10-14 Amended and Restated Term Promissory Note, Incorporated by reference from Exhibit 10-5 to
dated as of December 18, 2003, made by December 18, 2003 8-K
Lexington Precision Corporation in favor of
Congress Financial Corporation, as agent, in
the original principal amount of $4,000,000
10-15 Amended and Restated Term Promissory Note, Incorporated by reference from Exhibit 10-6 to
dated as of December 18, 2003, made by December 18, 2003 8-K
Lexington Rubber Group, Inc. in favor of
Congress Financial Corporation, as agent, in
the original principal amount of $9,500,000
10-16 Loan and Security Agreement, dated December Incorporated by reference from Exhibit 10-7 to
18, 2003, by and among Lexington Precision December 18, 2003 8-K
Corporation and Lexington Rubber Group, Inc.,
as Borrowers, Ableco Finance LLC, as Agent,
and the lenders from time to time party thereto
10-17 Pledge and Security Agreement, dated December Incorporated by reference from Exhibit 10-8 to
18, 2003, made by Lexington Precision December 18, 2003 8-K
Corporation in favor of Ableco Finance LLC, as
agent
10-18 Payoff Agreement, dated as of December 18, Incorporated by reference from Exhibit 10-9 to
2003, by and between Nomura Special Situations December 18, 2003 8-K
Investment Trust and Lexington Precision
Corporation
- 6 -
EXHIBIT
NUMBER EXHIBIT LOCATION
- ------ ------- --------
10-19 Amendment No. 1 to Loan and Security Agreement Filed with this Form 10-K
dated as of March 31, 2004, by and among
Lexington Precision Corporation, Lexington
Rubber Group, Inc., and Ableco Finance LLC
10-20 Amendment No. 1 to Amended and Restated Loan Filed with this Form 10-K
and Security Agreement dated as of March 19,
2004, by and among Lexington Precision
Corporation, Lexington Rubber Group, Inc.
and Congress Financial Corporation
21-1 Significant Subsidiary of Registrant Filed with this Form 10-K
31-1 Rule 13a-14a/15(d)-14(a) Certification of Filed with this Form 10-K
Michael A. Lubin, Chairman of the Board and
Co-Principal Executive Officer of the
registrant
31-2 Rule 13a-14a/15(d)-14(a) Certification of Filed with this Form 10-K
Warren Delano, President and Co-Principal
Executive Officer of the registrant
31-3 Rule 13a-14a/15(d)-14(a) Certification of Filed with this Form 10K
Dennis J. Welhouse, Chief Financial Officer
and Principal Financial Officer of the
registrant
32-1 Certification of Michael A. Lubin, Chairman of Furnished with this Form 10-K
the Board and Co-Principal Executive Officer
of the registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32-2 Certification of Warren Delano, President and Furnished with this Form 10-K
Co-Principal Executive Officer of the
registrant, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32-3 Certification of Dennis J. Welhouse, Chief Furnished with this Form 10-K
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.
- 7 -