10-Q 1 l87964ae10-q.txt LEXINGTON PRECISION 10-Q 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-3252 LEXINGTON PRECISION CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-1830121 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 767 THIRD AVENUE, NEW YORK, NY 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (212) 319-4657 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT DATE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- COMMON STOCK, $0.25 PAR VALUE, 4,828,036 SHARES AS OF MAY 10, 2001 (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 LEXINGTON PRECISION CORPORATION QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements...................................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................14 Item 3. Quantitative and Qualitative Disclosures about Market Risk............25 PART II. OTHER INFORMATION Item 3. Defaults on Senior Securities.........................................26 Item 6. Exhibits and Reports on Form 8-K......................................26
-i- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ------------------------- 2001 2000 ---- ---- Net sales $ 34,581 $ 37,666 Cost of sales 30,162 31,834 -------- -------- Gross profit 4,419 5,832 Selling and administrative expenses 2,475 3,019 -------- -------- Income from operations 1,944 2,813 Interest expense 2,325 2,437 -------- -------- Income (loss) before income taxes (381) 376 Income tax provision - 113 -------- -------- Net income (loss) $ (381) $ 263 ======== ======== Basic and diluted net income (loss) available to common stockholders $ (0.08) $ 0.05 ======== ========
See notes to consolidated financial statements. -1- 4 LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED)
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS: Current assets: Cash $ 60 $ 65 Accounts receivable 21,984 19,912 Inventories 9,722 11,109 Prepaid expenses and other current assets 3,574 3,833 Deferred income taxes 2,049 2,049 --------- --------- Total current assets 37,389 36,968 Property, plant, and equipment, net 60,933 62,778 Excess of cost over net assets of businesses acquired 8,068 8,147 Other assets 2,663 2,396 --------- --------- Total assets $ 109,053 $ 110,289 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable $ 13,919 $ 16,993 Accrued expenses 12,735 11,158 Short-term debt 89,626 88,996 --------- --------- Total current liabilities 116,280 117,147 --------- --------- Long-term debt, excluding current portion 101 104 --------- --------- Deferred income taxes and other long-term liabilities 2,252 2,244 --------- --------- Series B preferred stock 330 330 --------- --------- Stockholders' deficit: Common stock, $0.25 par value, 10,000,000 shares authorized, 4,828,036 shares issued 1,207 1,207 Additional paid-in-capital 12,960 12,960 Accumulated deficit (24,077) (23,703) --------- --------- Total stockholders' deficit (9,910) (9,536) --------- --------- Total liabilities and stockholders' deficit $ 109,053 $ 110,289 ========= =========
See notes to consolidated financial statements -2- 5 LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ---------------------- 2001 2000 ---- ---- OPERATING ACTIVITIES: Net income (loss) $ (381) $ 263 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 3,068 2,874 Amortization included in operating expense 304 394 Amortization included in interest expense 45 49 Changes in operating assets and liabilities that provided (used) cash: Accounts receivable (2,072) 466 Inventories 1,387 (304) Prepaid expenses and other current assets 236 129 Accounts payable (3,074) 4,637 Accrued expenses 1,577 (267) Other 6 (39) ------- ------- Net cash provided by operating activities 1,096 8,202 ------- ------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,226) (6,151) Net decrease (increase) in equipment deposits (181) 156 Expenditures for tooling owned by customers (194) (189) Other 31 29 ------- ------- Net cash used by investing activities (1,570) (6,155) ------- ------- FINANCING ACTIVITIES: Net increase in loans under revolving line of credit 786 66 Proceeds of secured, amortizing term loans 2,000 - Repayment of secured, amortizing term loans (2,159) (1,981) Other (158) (63) ------- ------- Net cash provided (used) by financing activities 469 (1,978) ------- ------- Net increase (decrease) in cash (5) 69 Cash at beginning of period 65 8 ------- ------- Cash at end of period $ 60 $ 77 ======= =======
See notes to consolidated financial statements. -3- 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The unaudited interim consolidated financial statements include the accounts of Lexington Precision Corporation and its subsidiaries (collectively, the "Company"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements do not include all the information and footnotes included in the Company's annual consolidated financial statements. Significant accounting policies followed by the Company are set forth in Note 1 to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2000. Subject to the Company's ability to successfully restructure its indebtedness as discussed below, in the opinion of management, the unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at March 31, 2001, and the Company's results of operations and cash flows for the three-month periods ended March 31, 2001 and 2000. All such adjustments were of a normal, recurring nature. The results of operations for the three-month period ended March 31, 2001, are not necessarily indicative of the results to be expected for the full year or for any succeeding quarter. Certain amounts in the prior year financial statements have been reclassified to conform to the current year's presentation. The Company's consolidated financial statements have been presented on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is in default on its senior subordinated notes because it did not make the payments of principal, in the amount of $27,412,000, and interest, in the amount of $1,748,000, that were due on February 1, 2000. On December 28, 1999, the Company had commenced a consent solicitation seeking consents of the holders of the senior subordinated notes to an extension of the maturity date of the senior subordinated notes to February 1, 2003, and providing for certain increases in the interest rate payable on the notes. The consent solicitation expired on December 29, 2000, without the Company having received the requisite consents. During March 2001, the Company reached an agreement in principle with the four largest holders of the senior subordinated notes on the terms of a restructuring of the senior subordinated notes. The major terms of the agreement in principle are set forth below: - conversion of the accrued and unpaid interest on the senior subordinated notes through the day before the effective date of the proposed restructuring into additional senior subordinated notes; the accrued and unpaid interest on the senior subordinated notes aggregated $5,825,000 at March 31, 2001, - an extension of the maturity date to December 31, 2004, - an increase in the interest rate to 14% for the period from the effective date of the proposed restructuring through December 31, 2001, and to 15% thereafter, -4- 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - a change in the frequency of interest payments from semi-annual to quarterly, and - a number of changes in financial covenants, primarily designed to reduce the Company's ability to incur additional debt, pay cash dividends, and redeem capital stock. If the proposed restructuring becomes effective, the Company will pay a consent fee of 3% of the principal amount of senior subordinated notes in respect of which it receives valid consents and issue warrants to purchase, in the aggregate, approximately 3% of the Company's common stock. Since February 1, 2000, the holders of substantially all of the Company's indebtedness other than the senior subordinated notes have waived cross-default provisions with respect to the default on the senior subordinated notes and have granted extensions of loans that have been scheduled to mature. The Company has made all scheduled payments of interest and principal on all of its indebtedness as extended, other than the senior subordinated notes, since February 1, 2000. The actions of the various lenders are set forth below: - The lenders providing loans under the Company's revolving line of credit and the lenders providing secured, amortizing term loans have waived the cross-default provisions with respect to the default on the senior subordinated notes through August 1, 2001. Since February 1, 2000, the Company has been permitted to continue borrowing under its revolving line of credit and has received new term loans secured by equipment in the aggregate principal amount of $4,460,000 under two of its equipment lines of credit. - The holder of the Company's 12% secured term note, in the outstanding principal amount of $1,370,000, has extended the maturity date of that note to July 31, 2001; that note has no cross-default provision with respect to the default on the senior subordinated notes. The Company recently reached an agreement in principle with the holder of the 12% secured term note to extend the maturity of the note to the fifth anniversary of the effective date of the restructuring of the senior subordinated notes. If the extension of the note is completed, the principal amount of the note would be payable in sixty equal, monthly installments. - The holder of the Company's senior, unsecured note, in the outstanding principal amount of $7,500,000, has extended the maturity date of that note to August 1, 2001, and has waived the cross-default provisions with respect to the default on the senior subordinated notes. During 2000, the Company reached a non-binding agreement with the holder of the senior, unsecured note on a proposed amendment to the terms of the senior, unsecured note. In connection with that non-binding agreement, the effective interest rate on the note increased to 12 1/2% for the twelve-month period ending August 1, 2001. The Company recently made a revised proposal to amend the terms of the senior, unsecured note. The principal terms of that proposal are the following: - an extension of the maturity date to December 31, 2004, -5- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - an increase in the interest rate to 13% for the period from the effective date of the proposed restructuring through December 31, 2001, with a further increase to 14% thereafter, and - quarterly principal payments of $625,000, commencing on March 31, 2002. The Company has offered to pay an amendment fee of 2% of the principal amount of the senior, unsecured note. The holder of the senior, unsecured note has not yet responded to the Company's proposal. - The holder of the Company's junior subordinated notes, in the outstanding principal amount of $347,000, has extended the maturity date of those notes to August 1, 2001, has deferred six quarterly interest payments on those notes to August 1, 2001, and has waived the cross-default provision with respect to the default on the senior subordinated notes. The Company has reached an agreement in principle with the holder of the junior subordinated notes to extend the maturity date of the junior subordinated notes to March 31, 2005, and to increase the interest rate thereon to 15% for the period from the effective date of the extension through December 31, 2001, and to 16% thereafter. - The holders of the Company's junior subordinated convertible notes, which were outstanding on December 31, 1999, in the aggregate principal amount of $1,000,000, have deferred one quarterly interest payment on those notes to August 1, 2001, and have waived the cross-default provision with respect to the default on the senior subordinated notes. On February 1, 2000, the junior subordinated convertible notes were converted into 440,000 shares of our common stock. The Company has reached an agreement in principle with the holders of the junior subordinated convertible notes to convert the deferred interest to additional junior subordinated notes due March 31, 2005. In order to complete the extensions of its matured and maturing debt, the Company must also renegotiate its senior, secured financing arrangements in order to provide financing for its on-going working capital and capital expenditure requirements and reduce its past-due accounts payable. The Company believes that it will be unable to obtain adequate financing to reduce its accounts payable to levels that are customary for the industries in which it operates. As a result, the Company is negotiating with certain of its trade creditors to further extend the payment dates of its past-due accounts payable and has reached agreements in principle with a number of such trade creditors on such an extension. The Company expects to begin shortly a consent solicitation seeking consent of the holders of the senior subordinated notes to an amendment that reflects the terms of the agreement in principle with the four largest holders of the senior subordinated notes; however, the Company can give no assurance that it will be able to obtain the necessary consents, to reach an agreement for an extension of the senior, unsecured notes, to negotiate an extension of past-due accounts payable, or to renegotiate its senior, secured financing arrangements on satisfactory terms. If the Company is unable to do so, it may be forced to seek relief from its creditors under the Federal bankruptcy code. Any proceeding under the Federal bankruptcy code could have a material adverse effect on the Company's results of operations and financial position. -6- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 -- INVENTORIES Inventories at March 31, 2001, and December 31, 2000, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ Finished goods $ 4,432 $ 5,067 Work in process 2,498 2,677 Raw materials and purchased parts 2,792 3,365 ---------- ---------- $ 9,722 $ 11,109 ========== ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at March 31, 2001, and December 31, 2000, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ Land $ 2,350 $ 2,348 Buildings 24,075 24,022 Equipment 107,117 106,004 ----------- ---------- 133,542 132,374 Accumulated Depreciation 72,609 69,596 ----------- ---------- Property, plant, and equipment, net $ 60,933 $ 62,778 =========== ==========
NOTE 4 -- ACCRUED EXPENSES At March 31, 2001, and December 31, 2000, accrued expenses included accrued interest expense of $6,105,000 and $5,234,000, respectively. -7- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 -- DEBT Debt at March 31, 2001, and December 31, 2000, is set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------ Short-term debt: Revolving line of credit $ 19,963 19,177 Secured, amortizing term loans 33,021 33,178 12% secured term note 1,370 1,370 Senior, unsecured note 7,500 7,500 Senior subordinated notes 27,412 27,412 Junior subordinated notes 347 347 Current portion of long-term debt 13 12 --------- -------- Total short-term debt $ 89,626 $ 88,996 ========= ======== Long-term debt: Other 114 116 Less current portion 13 12 --------- -------- Total long-term debt $ 101 $ 104 ========= ========
REVOLVING LINE OF CREDIT The loans outstanding under the revolving line of credit at March 31, 2001, and December 31, 2000, have been classified as short-term debt because the Company's cash receipts are automatically used to reduce such loans on a daily basis, by means of a lock-box sweep arrangement, and the lender has the ability to modify certain terms of the revolving line of credit without the approval of the Company. The loans are also classified as short-term at March 31, 2001, and December 31, 2000, because at each of those dates the Company's lenders had granted waivers, for a period of less than one year, of the cross-default provisions of the revolving line of credit with respect to the default on the senior subordinated notes. At March 31, 2001, availability under the revolving line of credit totaled $2,265,000, before outstanding checks of $1,071,000 were deducted. At March 31, 2001, the interest rates on loans outstanding under the revolving line of credit were the London Interbank Offered Rate (LIBOR) plus 2 1/2% and the prime rate. The loans outstanding under the Company's revolving line of credit are collateralized by substantially all of the assets of the Company, including accounts receivable, inventories, equipment, certain real estate, and the stock of Lexington Rubber Group, Inc., a subsidiary of the Company. -8- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURED, AMORTIZING TERM LOANS Secured, amortizing term loans outstanding at March 31, 2001, and December 31, 2000, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ----------- ------------- Term loans payable in equal monthly principal installments based on a 180-month amortization schedule, final maturities in 2001, 8.37% $ 2,396 $ 2,454 Term loans payable in equal monthly principal installments, final Maturities in 2002, LIBOR plus 2 3/4% 904 1,091 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9.37% 1,164 1,191 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9% 2,279 2,330 Term loans payable in equal monthly principal installments, final Maturities in 2002, prime rate and LIBOR plus 2 1/2% 993(1) 1,222(1) Term loan payable in equal monthly principal installments, final Maturity in 2003, prime rate 363 409 Term loan payable in equal monthly principal installments, final Maturity in 2003, prime rate and LIBOR plus 2 1/2% 221(1) 251(1) Term loan payable in equal monthly principal installments, final Maturities in 2003, LIBOR plus 2 3/4% 667 747 Term loans payable in equal monthly principal installments, final Maturities in 2004, LIBOR plus 2 3/4% 1,062 1,145 Term loan payable in equal monthly principal installments, final Maturity in 2004, prime rate and LIBOR plus 2 1/2% 860 928 Term loans payable in equal monthly principal installments, final Maturities in 2004, prime rate and LIBOR plus 2 1/2% 8,433(1) 9,136(1) Term loan payable in equal monthly principal installments, final Maturity in 2005, LIBOR plus 2 1/2% 971 1,027 Term loan payable in equal monthly principal installments, final Maturity in 2005, prime rate and LIBOR plus 2 1/2% 1,033(1) 1,094(1) Term loan payable in equal monthly principal installments, final Maturity in 2006, prime rate 414 435 Term loans payable in equal monthly principal installments, final Maturities in 2006, prime rate and LIBOR plus 2 1/2% 5,171(1) 5,422(1) Term loans payable in equal monthly installments, final maturity in 2007, prime rate and LIBOR plus 2 1/2% 4,123(1) 4,296(1) Term loans payable in equal monthly installments, final maturity in 2008, prime rate and LIBOR plus 2 1/2% 1,967(1) - ------- ------- $33,021 $33,178 ======= =======
(1) Maturity date can be accelerated by the lender if the Company's revolving line of credit expires prior to the stated maturity date of the term loan. -9- 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The portions of the secured, amortizing term loans that are 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 cross-default provisions of such term loans with respect to the default on the senior subordinated notes. The secured, amortizing term loans are collateralized by substantially all of the assets of the Company, including accounts receivable, inventories, equipment, certain real estate, and the stock of Lexington Rubber Group, Inc. SENIOR, UNSECURED NOTE The senior, unsecured note, due August 1, 2001, bore interest at 10 1/2% per annum until July 31, 2000. The effective interest rate increased to 12 1/2% on August 1, 2000. The holder of that note has waived, until August 1, 2001, the cross-default provision of the note with respect to the default on the senior subordinated notes. The senior, unsecured note is senior in right of payment to the senior subordinated notes and the junior subordinated notes. SENIOR SUBORDINATED NOTES The senior subordinated notes, which matured on February 1, 2000, are unsecured obligations of the Company that are subordinated in right of payment to all of the Company's existing and future secured debt and to the payment of the senior, unsecured note. The senior subordinated notes currently bear interest at 12 3/4% per annum. On February 1, 2000, the Company failed to make the payments of interest and principal then due on the senior subordinated notes in the amounts of $1,748,000 and $27,412,000, respectively. For a more detailed discussion of the status of the senior subordinated notes, refer to Note 1, "Basis of Presentation." JUNIOR SUBORDINATED NOTES The junior subordinated convertible notes and the junior subordinated nonconvertible notes are unsecured obligations of the Company. The $1,000,000 principal amount of junior subordinated convertible notes were converted into 440,000 shares of common stock on February 1, 2000. The junior subordinated nonconvertible notes are due on August 1, 2001, and are subordinated in right of payment to all existing and future secured debt of the Company, to the senior, unsecured note, and to the senior subordinated notes. The junior subordinated notes currently bear interest at 14% per annum. The holders of the junior subordinated notes have deferred until August 1, 2001, all interest payments that were due on or after February 1, 2000, and have waived their cross-default provisions with respect to the default on the senior subordinated notes. RESTRICTIVE COVENANTS Certain of the Company's financing arrangements contain covenants that set minimum levels of working capital, net worth, and cash flow coverage. The covenants also place certain restrictions and limitations on the Company's business and operations, including the incurrence or assumption of additional debt, the level of past-due accounts payable, the sale of all or substantially all of the Company's assets, the purchase of plant and equipment, the purchase of common stock, the redemption -10- 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) of preferred stock, and the payment of cash dividends. In addition, substantially all of the Company's financing agreements include cross-default provisions. From time to time, the Company's lenders have agreed to waive or amend certain of the financial covenants contained in the Company's various loan agreements in order to maintain or otherwise ensure the Company's current or future compliance. The Company cannot assure you that its lenders will agree to waive or amend these covenants in the future. 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 or waive those covenants, the lenders would have the right to declare the indebtedness under their loan agreements to be immediately due and payable and the violation might trigger cross-default provisions under substantially all of the Company's other indebtedness. In those circumstances, the holders of that indebtedness, would, among other things, have the right to declare the indebtedness to be immediately due and payable, in which event the Company might be required to consider alternatives, including seeking relief from its creditors under the Federal bankruptcy code. Any proceeding under the Federal bankruptcy code could have a material adverse effect upon the Company's results of operations and financial position. For a more detailed discussion of recent amendments to and waivers under the Company's various loan agreements, refer to Note 1, "Basis of Presentation." NOTE 6 -- SERIES B PREFERRED STOCK At March 31, 2001, and December 31, 2000, there were outstanding 3,300 shares of the Company's $8 cumulative convertible preferred stock, series B, par value $100 per share. Each share of series B preferred stock is redeemable at $200 per share. As more fully discussed in Note 1, the Company did not make the payments of interest and principal on the senior subordinated notes that were due on February 1, 2000, in the amounts of $1,748,000 and $27,412,000, respectively. As a result, the Company is prohibited from making any dividend payments on or redemptions of the series B preferred stock until it cures the payment default. At March 31, 2001, the Company was in arrears on the payment of five dividends and the redemption of 450 shares of series B preferred stock in the amount of $33,000 and $90,000, respectively. NOTE 7 -- INCOME TAXES At March 31, 2001, and December 31, 2000, the Company's net deferred income tax assets were fully offset by a valuation allowance. NOTE 8 -- NET INCOME (LOSS) PER COMMON SHARE The calculations of basic and diluted net income or loss per common share for the first three months of 2001 and 2000 are set forth below (in thousands, except per share amounts). The pro forma conversion of the Company's potentially dilutive securities (the 14% junior subordinated convertible notes and the $8 cumulative convertible preferred stock, series B) was not dilutive for the three-month periods ended March 31, 2001 and 2000. As a result, the calculations of diluted net income or loss per common share set forth below do not reflect any pro forma conversion. For purposes of calculating earnings per share, earnings are reduced by (1) preferred stock dividends and (2) the amount by which payments made to redeem preferred stock exceeded the par value -11- 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) of such shares. During the three-month periods ended March 31, 2001 and 2000, the Company did not pay any dividends on, or redeem any shares of, the series B preferred stock.
THREE MONTHS ENDED MARCH 31 ---------------------- 2001 2000 ---- ---- Numerators: Net income (loss) $ (381) $ 263 Preferred stock dividends - (7) Excess of redemption value over par value of preferred stock redeemed during the year - (11) ------- -------- Numerator for basic net income (loss) per share-- income (loss) available to common stockholders (381) 245 Effect of assumed conversion of dilutive securities: 14% junior subordinated convertible notes - - ------- -------- Numerator for diluted net income (loss) per share-- income (loss) available to common stockholders $ (381) $ 245 ======= ======== Denominators: Denominator for basic net income (loss) per share-- weighted-average common shares 4,828 4,641 Adjustments to derive denominator for diluted net income (loss) per share: Conversion of 14% junior subordinated convertible notes into 440,000 common shares - 150 Issuance of 125,000 shares of restricted common stock - 37 ------- -------- Denominator for diluted net income (loss) per share-- adjusted weighted average common shares 4,828 4,828 ======= ======== Per share data: Basic and diluted net income (loss) available to common stockholders $ (0.08) $ 0.05 ======= ========
-12- 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9 -- SEGMENTS Information relating to the Company's operating segments and its corporate office for the three-month periods ended March 31, 2001 and 2000, is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 -------------------------- 2001 2000 ---- ---- NET SALES: Rubber Group $ 23,939 $ 28,971 Metals Group 10,642 8,695 ---------- ---------- Total net sales $ 34,581 $ 37,666 ========== ========== INCOME (LOSS) FROM OPERATIONS: Rubber Group $ 1,869 $ 3,719 Metals Group 570 (297) ---------- ---------- Subtotal 2,439 3,422 Corporate office (495) (609) ---------- ---------- Total income from operations $ 1,944 $ 2,813 ========== ========== ASSETS: Rubber Group $ 71,637 $ 74,331 Metals Group 34,526 37,225 ---------- ---------- Subtotal 106,163 111,556 Corporate office 2,890 2,494 ---------- ---------- Total assets $ 109,053 $ 114,050 ========== ========== DEPRECIATION AND AMORTIZATION (1): Rubber Group $ 2,201 $ 2,039 Metals Group 1,149 1,210 ---------- ---------- Subtotal 3,350 3,249 Corporate office 22 19 ---------- ---------- Total depreciation and amortization $ 3,372 $ 3,268 ========== ========== CAPITAL EXPENDITURES: Rubber Group $ 1,067 $ 4,067 Metals Group 159 2,083 ---------- ---------- Subtotal 1,226 6,150 Corporate office - 1 ---------- ---------- Total capital expenditures $ 1,226 $ 6,151 ========== ==========
(1) Does not include amortization of deferred financing expenses, which totaled $45,000 and $49,000 during the three-month periods ended March 31, 2001 and 2000, respectively, and which is included in interest expense in the consolidated financial statements. -13- 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Some of our statements in this section are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements usually can be identified by our use of words like "believes," "expects," "may," "will," "should," "anticipates," "estimates," "projects," or the negative thereof. They may be used when we discuss strategy, which typically involves risk and uncertainty, and they generally are based upon projections and estimates rather than historical facts and events. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results or performance to be materially different from the future results or performance expressed in or implied by those statements. Some of those risks and uncertainties are: - increases and decreases in business awarded to us by our customers, - unanticipated price reductions for our products as a result of competition, - unanticipated operating results and cash flows, - increases or decreases in capital expenditures, - changes in economic conditions, - strength or weakness in the North American automotive market, - changes in the competitive environment, - changes in interest rates, - the possibility of product warranty claims, - labor interruptions at our facilities or at our customers' facilities, - the impact on our operations of the defaults on our indebtedness and the delays in paying our accounts payable, and - our inability to obtain additional borrowings or to refinance our existing indebtedness. Because we have substantial borrowings for a company our size and because those borrowings require us to make substantial interest and principal payments, any negative event may have a greater adverse effect upon us than it would have upon a company of the same size 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. -14- 17 All forward-looking statements are expressly qualified by the discussion above. RESULTS OF OPERATIONS-- FIRST QUARTER OF 2001 VERSUS FIRST QUARTER OF 2000 The following table sets forth our consolidated operating results for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2001 2000 ------------------ ------------------ Net sales $ 34,581 100.0% $ 37,666 100.0% Cost of sales 30,162 87.2 31,834 84.5 --------- ------- --------- ------- Gross profit 4,419 12.8 5,832 15.5 Selling and administrative expenses 2,475 7.2 3,019 8.0 --------- ------- --------- ------- Income from operations 1,944 5.6 2,813 7.5 Add back depreciation and amortization (1) 3,372 9.8 3,268 8.6 --------- ------- --------- ------- Earnings before interest, taxes, depreciation, and amortization (2) $ 5,316 15.4% $ 6,081 16.1% ========= ======= ========= ======= Net cash provided by operating activities (3) $ 1,096 3.2% $ 8,202 21.8% ========= ======= ========= =======
(1) Does not include amortization of deferred financing expenses, which totaled $45,000 and $49,000 during the first quarters of 2001 and 2000, respectively, and which is included in interest expense in the consolidated financial statements. (2) Earnings before interest, taxes, depreciation, and amortization, which is commonly referred to as EBITDA, is not a measure of performance under accounting principles generally accepted in the United States and should not be 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 data related to EBITDA because we believe that EBITDA is used by investors as supplemental information to evaluate the operating performance of a business, including its ability to incur and to service debt. In addition, our definition of EBITDA may not be the same as the definition of EBITDA used by other companies. (3) The calculation of net cash provided by operating activities is detailed in the consolidated statement of cash flows that is part of our consolidated financial statements in Part I, Item 1. -15- 18 The discussion that follows sets forth our analysis of the operating results of the Rubber Group, the Metals Group, and the corporate office for the three-month periods ended March 31, 2001 and 2000. RUBBER GROUP The Rubber Group manufactures silicone and organic rubber components primarily for automotive industry customers. Any material reduction in the level of activity in the automotive industry may have a material adverse effect on the results of operations of the Rubber Group and on our company taken as a whole. The following table sets forth the operating results of the Rubber Group for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2001 2000 ------------------ ------------------ Net sales $ 23,939 100.0% $ 28,971 100.0% Cost of sales 20,757 86.7 23,581 81.4 --------- ------- --------- ------- Gross profit 3,182 13.3 5,390 18.6 Selling and administrative expenses 1,313 5.5 1,671 5.8 --------- ------- --------- ------- Income from operations 1,869 7.8 3,719 12.8 Add back depreciation and amortization 2,201 9.2 2,039 7.1 --------- ------- --------- ------- Earnings before interest, taxes, depreciation, and amortization $ 4,070 17.0% $ 5,758 19.9% ========= ======= ========= =======
During the first quarter of 2001, net sales of the Rubber Group decreased by $5,032,000, or 17.4%, compared to the first quarter of 2000. This decrease was primarily due to reduced unit sales of connector seals for automotive wiring systems, and, to a lesser extent, reduced sales of insulators for automotive ignition wire sets, which resulted primarily from a reduction in the level of activity in the automotive industry, and price reductions on certain automotive components. During the first quarter of 2001, income from operations totaled $1,869,000, a decrease of $1,850,000, or 49.7%, compared to the first quarter of 2000. Cost of sales as a percentage of net sales increased during the first quarter of 2001 to 86.7% of net sales from 81.4% of net sales during the first quarter of 2000, primarily because certain factory overhead expenses are partially fixed in nature and because depreciation and amortization expenses increased compared to the first quarter of 2000. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 2001 compared to the first quarter of 2000, primarily because wages and employee benefits, incentive compensation, and foreign selling expenses all decreased when compared to the first quarter of 2000. -16- 19 During the first quarter of 2001, EBITDA decreased to $4,070,000, a decrease of $1,688,000, or 29.3%, compared to the first quarter of 2000. Delphi Automotive Systems Corporation is the Rubber Group's largest customer. During the year ended December 31, 2000, the Rubber Group's net sales to Delphi totaled $29,126,000, which represented 27.5% of the Rubber Group's net sales. Substantially all of the Rubber Group's sales to Delphi are connector seals for automotive wiring systems. For the last four years, most of the connector seals that we sold to Delphi were subject to a multi-year agreement that expires on December 31, 2001. During the third quarter of 2000, Delphi requested and we offered a proposal for a multi-year extension of our agreements that would entail substantial price reductions on a number of high-volume components. Although Delphi has not accepted our proposal at this time, we currently believe that: - Delphi will extend the agreements to December 31, 2006, - after December 31, 2001, Delphi will insource approximately $3,600,000 of components that we currently produce, - we will give Delphi approximately $5,500,000 of annual price reductions that will become effective at various times during 2001, - we will achieve annual cost savings of approximately $1,600,000 as a result of reduced material costs and changes in our manufacturing processes, - Delphi will purchase certain new tooling that will permit us to make those changes in our manufacturing processes, and - substantial new business awarded to the connector seals division by Delphi and other customers and scheduled to begin production in 2001 and subsequent years will generate incremental profits that will, in conjunction with the above mentioned cost savings, offset a major portion of the reduction in profitability caused by the proposed price reductions. We cannot assure you that Delphi will accept our proposal or that, if they accept our proposal, the consequences will be as set forth above. METALS GROUP The Metals Group manufactures aluminum die castings and machines aluminum, brass, and steel components, primarily for automotive industry customers. Any material reduction in the level of activity in the automotive industry may have a material adverse effect on the results of operations of the Metals Group and on our company taken as a whole. -17- 20 The following table sets forth the operating results of the Metals Group for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 ------------------------------------------ 2001 2000 ------------------- ------------------ Net sales $ 10,642 100.0% $ 8,695 100.0% Cost of sales 9,405 88.4 8,253 94.9 --------- ------- --------- ------- Gross profit 1,237 11.6 442 5.1 Selling and administrative expenses 667 6.3 739 8.5 --------- ------- --------- ------- Income (loss) from operations 570 5.4 (297) (3.4) Add back depreciation and amortization 1,149 10.8 1,210 13.9 --------- ------- --------- ------- Earnings before interest, taxes, depreciation, and amortization $ 1,719 16.2% $ 913 10.5% ========= ======= ========= =======
During the first quarter of 2001, net sales of the Metals Group increased by $1,947,000, or 22.4%, compared to the first quarter of 2000. The increase resulted primarily from increased sales of high-volume machined metal components. The Metals Group recorded income from operations of $570,000 during the first quarter of 2001, compared to a loss from operations of $297,000 during the first quarter of 2000. Cost of sales, as a percentage of net sales decreased during the first quarter of 2001 to 88.4% of net sales from 94.9% of net sales during the first quarter of 2000, primarily because certain factory overhead expenses are fixed in nature and because depreciation and amortization expense decreased by $51,000 when compared to the first quarter of 2000. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 2001 compared to the first quarter of 2000, primarily due to reduced consulting fees related to the installation of new computer systems. During the first quarter of 2001, EBITDA increased to $1,719,000, an increase of $806,000, or 88.3%, compared to the first quarter of 2000. 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. -18- 21 The following table sets forth the operating results of the corporate office for the first quarters of 2001 and 2000 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 -------------------- 2001 2000 -------- -------- Loss from operations $ (495) $ (609) Add back depreciation and amortization 22 19 ------- ------- Earnings before interest, taxes, depreciation and amortization $ (473) $ (590) ======= =======
INTEREST EXPENSE During the first quarters of 2001 and 2000, interest expense totaled $2,325,000 and $2,437,000, respectively. During the first quarter of 2001 and 2000, interest expense included amortization of deferred financing expenses of $45,000 and $49,000, respectively. The decrease in interest expense was caused primarily by lower rates of interest on our floating rate indebtedness and a reduction in the average amount of outstanding indebtedness. INCOME TAX PROVISION At March 31, 2001, and December 31, 2000, our net deferred income tax assets were fully offset by a valuation allowance. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first quarter of 2001, our operating activities provided $1,096,000 of cash. Accounts receivable increased by $2,072,000. The increase was caused primarily by an increase in net sales during March 2001 compared to December 2000. Accounts payable decreased by $3,074,000, primarily as a result of our efforts to reduce the amount of past-due accounts payable. Although we made significant reductions in our past-due accounts payable during the first quarter of 2001, a significant amount of accounts payable remain outstanding beyond normal industry terms at March 31, 2001. Our ability to continue to delay the payment of accounts payable is dependent upon the continued forbearance of numerous vendors and the willingness of certain vendors to continue to provide us with goods and services despite delays in payment. We currently do not have funds available to make further significant reductions in the level of accounts payable. Any effort by significant trade creditors to collect past due accounts payable could force us to seek relief from our creditors under the Federal bankruptcy code. Any unwillingness of significant vendors to continue to provide us with goods and services could cause us to be unable to meet the requirements of our customers. Either of the foregoing events could have a material adverse effect on our results of operations and financial position. -19- 22 INVESTING ACTIVITIES During the first quarter of 2001, our investing activities used $1,570,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group and the Metals Group totaled $1,067,000 and $159,000, respectively. Capital expenditures for the first quarter of 2001 included $1,171,000 for equipment and $55,000 for land and building improvements. We presently project that capital expenditures during 2001 will total approximately $7,300,000, substantially all of which will be for the purchase of equipment. Capital expenditures for the Rubber Group and the Metals Group are projected to total approximately $5,200,000 and $2,100,000, respectively. At March 31, 2001, we had outstanding commitments to purchase plant and equipment of approximately $4,336,000, of which approximately $2,867,000 is expected to be purchased during 2001 and approximately $1,469,000 is expected to be purchased in 2002. See also "Liquidity," below. FINANCING ACTIVITIES During the first quarter of 2001, our financing activities provided $469,000 of cash. During the first quarter of 2001, we obtained a new term loan in the amount of $2,000,000, which is being used for the purchase of certain equipment for the Rubber Group. Net borrowings under our revolving line of credit, which are classified as short-term debt, increased by $786,000 during the first quarter of 2001; the proceeds of these borrowings were used primarily to reduce accounts payable. 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, which expires on April 1, 2002, is subject to covenant compliance and certain availability formulas based on the levels of our accounts receivable and inventories. At May 10, 2001, availability under our revolving line of credit totaled $1,672,000 before outstanding checks of $640,000 were deducted. We have substantial borrowings for a company our size. Because those borrowings require us to make substantial interest and principal payments, any negative event may have a greater adverse effect upon us than if we had less debt. We are in default in the payment of our senior subordinated notes, which have a principal amount of $27,412,000 and accrued interest, as of March 31, 2001, of $5,825,000. In addition, we have $11,543,000 of notes that are scheduled to mature during the last nine months of 2001 and $6,208,000 of principal payments that are scheduled to be made on our secured, amortizing term loans during the last nine months of 2001 . We estimate that, if our debt is not restructured or refinanced, the interest expense on all of our debt during 2001, at existing contractual rates, would be approximately $9,400,000. As discussed in more detail below, we are in the process of negotiating extensions of all of our matured and maturing debt. Although there can be no assurance that we will be successful in this effort, if we were to complete these extensions on the proposed terms, which are set forth below, we estimate that our monthly interest expense would increase by approximately $160,000. Based upon our current business plan, even if we are unable to complete the proposed extensions of our matured and maturing debt, we believe that we will have adequate financing to meet our working -20- 23 capital and capital expenditure requirements and the scheduled payments on our secured, amortizing term loans through the end of 2001, and to make gradual reductions in our past-due accounts payable, without the need for additional borrowings, if: - the holders of our senior subordinated notes do not take action to enforce their rights against us, - none of our significant trade creditors take action to collect past-due accounts payable or refuse to continue to provide us with goods and services, - the holders of our 12% secured term note, our senior, unsecured note, and our junior subordinated notes are willing to continue to grant waivers and extensions similar to those granted previously, - the holders of our secured, amortizing term loans are willing to continue to grant waivers similar to those granted previously and to extend the scheduled balloon maturities during 2001, and - the lenders under our revolving line of credit are willing to continue to grant waivers similar to those granted previously and to continue to provide revolving loans in accordance with the availability formulas presently in effect. We had a net working capital deficit of $78,891,000 at March 31, 2001, compared to a net working capital deficit of $80,179,000 at December 31, 2000. The net working capital deficit exists primarily because: - our senior subordinated notes, which have an aggregate principal balance of $27,412,000, matured during the first half of 2000 and our 12% secured term note, our senior, unsecured note, and our junior subordinated note, which have an aggregate principal balance of $9,217,000, are scheduled to mature during 2001; consequently, all of this indebtedness was classified as current liabilities in our consolidated financial statements at March 31, 2001, and December 31, 2000; and - the long-term portions of our secured, amortizing term loans were classified as current liabilities at March 31, 2001, and December 31, 2000, because at each of those dates, the lenders had granted waivers, for a period of less than one year, of defaults on those term loans related to the payment default on the senior subordinated notes. Substantially all of our assets are pledged as collateral for certain of our indebtedness. Certain of our financing arrangements contain covenants with respect to the maintenance of minimum levels of working capital, net worth, and cash flow coverage and other covenants that place certain restrictions on our business and operations, including covenants relating to the incurrence or assumption of additional debt, the level of past-due trade accounts payable, the sale of all or substantially all of our assets, the purchase of plant and equipment, the purchase of common stock, the redemption of preferred stock, and the payment of cash dividends. In addition, substantially all of our financing arrangements include cross-default provisions. -21- 24 From time to time, our lenders have agreed to waive or amend certain of the financial covenants contained in our various loan agreements in order to maintain or otherwise ensure our current or future compliance. We cannot assure you that our lenders will agree to waive or amend these covenants in the future. 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 or waive those covenants, the lenders would have the right to declare the indebtedness under their loan agreements to be immediately due and payable and the violation might trigger cross-default provisions under substantially all of our other indebtedness. In those circumstances, the holders of that indebtedness, would have, among other things, the right to declare the indebtedness to be immediately due and payable, in which event, we might be required to consider alternatives, including seeking relief from our creditors under the Federal bankruptcy code. Any proceeding under the Federal bankruptcy code could have a material adverse effect on our results of operations and financial position. On December 28, 1999, we commenced a consent solicitation seeking consents of the holders of our senior subordinated notes to an extension of the maturity date of the notes from February 1, 2000, to February 1, 2003, and providing for certain increases in the interest rate payable on the notes. The consent solicitation expired on December 29, 2000, without our having received the requisite consents. In March 2001, we reached an agreement in principle with the four largest holders of the senior subordinated notes on the terms of a restructuring of the senior subordinated notes. The major terms of the agreement in principle are set forth below: - conversion of the accrued and unpaid interest on the senior subordinated notes through the day before the effective date of the proposed restructuring into additional senior subordinated notes; the accrued and unpaid interest on the senior subordinated notes aggregated $5,825,000 at March 31, 2001, - an extension of the maturity date to December 31, 2004, - an increase in the interest rate to 14% for the period from the effective date of the proposed restructuring through December 31, 2001, and to 15% thereafter, - a change in the frequency of interest payments from semi-annual to quarterly, and - a number of changes in financial covenants, primarily designed to reduce our ability to incur additional debt, pay cash dividends, and redeem capital stock. If the proposed restructuring becomes effective, we will pay a consent fee of 3% of the principal amount of senior subordinated notes in respect of which we receive valid consents and issue warrants to purchase, in the aggregate, approximately 3% of our outstanding common stock. Since February 1, 2000, the holders of substantially all of our indebtedness other than the senior subordinated notes have waived cross-default provisions with respect to the default on the senior subordinated notes and have granted extensions of loans that have been scheduled to mature. We have made all scheduled payments of interest and principal on all of our indebtedness as extended, other than the senior subordinated notes, since February 1, 2000. The actions of the various lenders are set forth below: - The lenders providing loans under our revolving line of credit and the lenders providing secured, amortizing term loans have waived the cross-default provisions with respect to -22- 25 the default on the senior subordinated notes through August 1, 2001, and have amended certain covenants to eliminate defaults that would otherwise have occurred because all of our secured, amortizing term loans were classified as current liabilities in our consolidated financial statements. Since February 1, 2000, we have been permitted to continue borrowing under our revolving line of credit and have received new term loans secured by equipment in the aggregate principal amount of $4,460,000 under two of our equipment lines of credit. - The holder of our 12% secured term note, in the outstanding principal amount of $1,370,000, has extended the maturity date of that note to July 31, 2001; that note has no cross-default provision with respect to the default on the senior subordinated notes. We recently reached an agreement in principle with the holder of our 12% secured term note to extend the maturity of that note to the fifth anniversary of the effective date of the restructuring of the senior subordinated notes. If the extension of the note is completed, the principal amount of the note would be payable in sixty equal, monthly installments. - The holder of our senior, unsecured note, in the outstanding principal amount of $7,500,000, has extended the maturity date of that note to August 1, 2001, and has waived the cross-default provisions with respect to the default on the senior subordinated notes. During 2000, we reached a non-binding agreement with the holder of our senior, unsecured note on a proposed amendment to the terms of the senior, unsecured note. In connection with that non-binding agreement, the effective interest rate on the note increased to 12 1/2% for the nine-month period ending August 1, 2001. We have recently made a revised proposal to amend the terms of the senior unsecured note. The principal terms of that proposal are the following: - an extension of the maturity date to December 31, 2004, - an increase in the interest rate to 13% for the period from the effective date of the proposed restructuring through December 31, 2001, with a further increase to 14% thereafter, and - quarterly principal payments of $625,000, commencing on March 31, 2002. We have offered to pay an amendment fee of 2% of the principal amount of the senior, unsecured note. The holder of the senior, unsecured note has not yet responded to our proposal. - The holder of our junior subordinated notes, in the outstanding principal amount of $347,000, has extended the maturity date of those notes to August 1, 2001, has deferred six quarterly interest payments on those notes to August 1, 2001, and has waived the cross-default provision with respect to the default on the senior subordinated notes. We have reached an agreement in principle with the holder of the junior subordinated notes to extend the maturity date of the junior subordinated notes to March 31, 2005, and to increase the interest rate thereon to 15% for the period from the effective date of the extension through December 31, 2001, and to 16% thereafter. - The holders of our junior subordinated convertible notes, which were outstanding on December 31, 1999, in the aggregate principal amount of $1,000,000, have deferred one -23- 26 quarterly interest payment on those notes to August 1, 2001, and have waived the cross-default provision with respect to the default on the senior subordinated notes. On February 1, 2000, the junior subordinated convertible notes were converted into 440,000 shares of our common stock. We have reached an agreement in principle with the holders of the junior subordinated convertible notes to convert the deferred interest to additional junior subordinated notes due March 31, 2005. In order to complete the extensions of our matured and maturing debt, we must also renegotiate our senior, secured financing arrangements in order to provide financing for our on-going working capital and capital expenditure requirements and reduce our past-due accounts payable. We believe that we will be unable to obtain adequate financing to reduce our accounts payable to levels that are customary in the industries in which we operate. As a result, we are negotiating with certain of our trade creditors to further extend the payment dates of our past-due accounts payable and have reached agreements in principle with a number of those trade creditors on such an extension. We can give you no assurance that we will be able to obtain the necessary financing or extensions of past-due accounts payable. If we are unable to do so, we may be forced to seek relief from our creditors under the Federal bankruptcy code. Any proceeding under the Federal bankruptcy code could have a material adverse effect on our results of operations and financial position. We expect to begin shortly a consent solicitation seeking consent of the holders of the senior subordinated notes to amendments that reflect the terms of our agreement in principle with the four largest holders of the senior subordinated notes; however, we can give you no assurance that we will be able to obtain the necessary consents, to reach an agreement for an extension of our senior, unsecured note, to negotiate extensions of our past-due accounts payable, or to renegotiate our senior secured financing arrangements on terms satisfactory to us. If we are unable to do so, we may be forced to seek relief from our creditors under the Federal bankruptcy code. Any proceeding under the Federal bankruptcy code could have a material adverse effect on our results of operations and financial position. -24- 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not invest in or trade market risk sensitive instruments. We also do not have any foreign operations or any significant amount of foreign sales and, therefore, we believe that our exposure to foreign currency exchange rate risk is minimal. At March 31, 2001, we had $47,145,000 of outstanding floating-rate debt at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%, or the prime rate. Currently we do not purchase derivative financial instruments to hedge or reduce our interest rate risk. As a result, changes in either LIBOR or the prime rate affect the rates at which we borrow funds under these agreements. At March 31, 2001, we had outstanding $42,582,000 of fixed-rate, long-term debt with a weighted-average interest rate of 12.1%, of which $38,955,000 has matured or is scheduled to mature during the remainder of 2001. If we are able to refinance or extend the matured or maturing debt, it will be at interest rates that are significantly higher than the weighted-average interest rate on the matured or maturing debt. We have reached an agreement in principle with the holders of approximately 75% of our $27,412,000 of outstanding senior subordinated notes to extend the maturity date of those notes from February 1, 2000, to December 31, 2004, to issue additional senior subordinated notes in payment of accrued and unpaid interest on the notes through the effective date of the proposed amendment, and to increase the interest rate on the senior subordinated notes to 14% for the period from the effective date of the proposed amendment through December 31, 2001, and to 15% thereafter. We have also proposed to extend the maturity date of our $7,500,000 senior, unsecured note from May 1, 2001, to December 31, 2004, and to increase the interest rate thereon to 13% from the effective date of the amendment through December 31, 2001, and to 14% thereafter. If we are successful in our effort to negotiate extensions of our matured and maturing debt on the proposed terms discussed above and in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity" in Part I, Item 2, we estimate that our monthly interest expense would increase by approximately $160,000. We recommend that you also read "Note 5 - Debt" in the notes to our consolidated financial statements in Part I, Item 1. -25- 28 PART II. OTHER INFORMATION ITEM 3. DEFAULTS ON SENIOR SECURITIES (a) We are in default in respect of our 12 3/4% senior subordinated notes because we did not make the payments of principal, in the amount of $27,412,000, and interest, in the amount of $1,748,000, that were due on February 1, 2000. For more information regarding the default in respect of the 12 3/4% senior subordinated notes, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity," in Part I, Item 2, which is incorporated by reference herein. (b) We did not pay dividends on our $8 cumulative convertible preferred stock, series B, during the three-month period ended March 31, 2001, in the aggregate amount of $6,600. As of March 31, 2001, we were in arrears in the payment of dividends in the amount of $33,000 and in the making of mandatory redemptions in the amount of $90,000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed herewith: 10-1 Agreement relating to 14% Junior Subordinated Notes dated as of April 30, 2001, between Lexington Precision Corporation ("LPC") and Michael A. Lubin 10-2 Agreement relating to Junior Subordinated Convertible Increasing Rate Note dated as of April 30, 2001, among LPC, Michael A. Lubin, and Warren Delano 10-3 Amendment No. 6 to Note dated as of April 30, 2001, between LPC and Tri-Links Investment Trust, as successor to Nomura Holding America, Inc. 10-4 Eighth Amendment Agreement dated April 30, 2001, between Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell 10-5 Agreement dated as of April 30, 2001, among LPC, LRGI, and Congress Financial Corporation 10-6 Agreement dated as of April 30, 2001, between LPC and CIT Group/Equipment Financing, Inc. 10-7 Agreement dated as of April 30, 2001, among LPC, LRGI, and Bank One, NA (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the first quarter of 2001. -26- 29 LEXINGTON PRECISION CORPORATION FORM 10-Q MARCH 31, 2001 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEXINGTON PRECISION CORPORATION (Registrant) May 14, 2001 By: /s/ Michael A. Lubin ------------ ------------------------------ Date Michael A. Lubin Chairman of the Board May 14, 2001 By: /s/ Warren Delano ------------ ------------------------------- Date Warren Delano President May 14, 2001 By: /s/ Dennis J. Welhouse ------------ ------------------------------- Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -27- 30 EXHIBIT INDEX
Exhibit Number Exhibit Location ------ ------- -------- 10-1 Agreement relating to 14% Junior Subordinated Filed with this Form 10-Q Notes dated April 30, 2001, between Lexington Precision Corporation ("LPC") and Michael A. Lubin 10-2 Agreement relating to Junior Subordinated Filed with this Form 10-Q Convertible Increasing Rate Note dated April 30, 2001, among LPC, Michael A. Lubin, and Warren Delano 10-3 Amendment No. 6 to Note dated as of Filed with this Form 10-Q April 30, 2001, between LPC and Tri-Links Investment Trust, as successor to Nomura Holding America, Inc. 10-4 Eighth Amendment Agreement dated Filed with this Form 10-Q April 30, 2001, between Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell 10-5 Agreement dated as of April 30, 2001, among Filed with this Form 10-Q LPC, LRGI, and Congress Financial Corporation 10-6 Agreement dated as of April 30, 2001, Filed with this Form 10-Q between LPC and The CIT Group/Equipment Financing, Inc. 10-7 Agreement dated as of April 30, 2001, among Filed with this Form 10-Q LPC, LRGI, and Bank One, NA