10-Q 1 l95285ae10vq.txt LEXINGTON PRECISION CORPORATION 10-Q 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 JUNE 30, 2002 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 AUGUST 12, 2002 (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) 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..................................................................... 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 31 PART II. OTHER INFORMATION Item 3. Defaults on Senior Securities.................................................................. 33 Item 4. Submission of Matters to a Vote of Security Holders............................................ 33 Item 6. Exhibits and Reports on Form 8-K............................................................... 34
-i- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------------------------------------- 2002 2001 2002 2001 ---------------------- ----------------------- Net sales $ 32,996 $ 33,831 $ 63,240 $ 66,799 Cost of sales 28,356 28,193 55,632 56,742 --------- -------- --------- --------- Gross profit 4,640 5,638 7,608 10,057 Selling and administrative expenses 2,349 2,651 4,604 5,126 Plant closure costs 87 - 609 - --------- -------- --------- --------- Income from operations 2,204 2,987 2,395 4,931 Interest expense 1,967 2,152 3,763 4,477 --------- -------- --------- --------- Income (loss) before income taxes 237 835 (1,368) 454 Income tax provision 30 80 51 80 --------- -------- --------- --------- Net income (loss) $ 207 $ 755 $ (1,419) $ 374 ========= ======== ========= ========= Per share data: Basic and diluted net income (loss) applicable to common stockholders $ 0.04 $ 0.16 $ (0.29) $ 0.08 ========= ======== ========= =========
See notes to consolidated financial statements. -1- LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED)
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- ASSETS: Current assets: Cash $ 82 $ 189 Marketable securities 1,647 1,274 Accounts receivable 21,440 18,753 Inventories 8,779 8,493 Prepaid expenses and other current assets 2,714 3,523 Deferred income taxes 1,914 1,914 ----------- ----------- Total current assets 36,576 34,146 Property, plant, and equipment, net 51,148 55,324 Excess of cost over net assets of businesses acquired 7,831 7,831 Other assets 2,750 2,576 ----------- ----------- Total assets $ 98,305 $ 99,877 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable $ 10,542 $ 12,077 Accrued expenses 17,972 14,586 Short-term debt 76,517 77,794 Current portion of long-term debt 2,181 2,617 ----------- ----------- Total current liabilities 107,212 107,074 ----------- ----------- Long-term debt, excluding current portion 1,294 2,000 ----------- ----------- Deferred income taxes and other long-term liabilities 2,160 2,132 ----------- ----------- Series B preferred stock 330 330 ----------- ----------- Stockholders' deficit: Common stock, $0.25 par value, 10,000,000 shares authorized, 4,828,036 shares issued 1,207 1,207 Additional paid-in-capital 12,960 12,960 Accumulated deficit (27,231) (25,826) Accumulated other comprehensive income 373 - ----------- ----------- Total stockholders' deficit (12,691) (11,659) ----------- ----------- Total liabilities and stockholders' deficit $ 98,305 $ 99,877 =========== ===========
See notes to consolidated financial statements -2- LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30 --------------------------- 2002 2001 --------- --------- OPERATING ACTIVITIES: Net income (loss) $ (1,419) $ 374 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 5,635 6,031 Amortization included in operating expense 394 600 Amortization included in interest expense 161 94 Changes in operating assets and liabilities that provided (used) cash: Accounts receivable (2,687) (4,602) Inventories (286) 1,138 Prepaid expenses and other current assets 819 (76) Accounts payable (1,368) (3,398) Accrued expenses 3,386 2,583 Other 497 (13) --------- --------- Net cash provided by operating activities 5,132 2,731 --------- --------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,873) (2,001) Net decrease (increase) in equipment deposits 39 (593) Expenditures for tooling owned by customers (518) (242) Other (10) 44 --------- --------- Net cash used by investing activities (2,362) (2,792) --------- --------- FINANCING ACTIVITIES: Net increase in loans under revolving line of credit 2,431 2,646 Proceeds from issuance of long-term debt - 2,000 Repayment of long-term debt (5,069) (4,386) Other (239) (123) --------- --------- Net cash provided (used) by financing activities (2,877) 137 --------- --------- Net increase (decrease) in cash (107) 76 Cash at beginning of period 189 65 --------- --------- Cash at end of period $ 82 $ 141 ========= =========
See notes to consolidated financial statements. -3- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The unaudited interim consolidated financial statements include the accounts of Lexington Precision Corporation and its subsidiaries (collectively, the "Company"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements do not include all the information and footnotes included in the Company's annual consolidated financial statements. Significant accounting policies followed by the Company are set forth in Note 1 to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2001. 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 June 30, 2002, and the Company's results of operations and cash flows for the three-month and six-month periods ended June 30, 2002 and 2001. All such adjustments were of a normal, recurring nature. The results of operations for the three-month and six-month periods ended June, 2002, 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's ability to refinance, extend, amend, or exchange approximately $80,000,000 of short-term debt, as more fully described below, is subject to risks and uncertainties. As a result, there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments to the amounts or classification of assets or liabilities to reflect this uncertainty. The Company has been in default on its 12-3/4% senior subordinated notes since February 1, 2000, when it did not make the payments of principal, in the amount of $27,412,000, and interest, in the amount of $1,748,000, that were due on that date. On July 10, 2002, the Company commenced an exchange offer for the 12-3/4% senior subordinated notes. If the exchange offer is consummated, at least 99% of the 12-3/4% senior subordinated notes will be exchanged for new 11-1/2% senior subordinated notes due August 1, 2007, in a principal amount equal to the principal amount of the 12-3/4% senior subordinated notes being exchanged plus the accrued and unpaid interest thereon through April 30, 2002, which accrued interest totals $350.625 for each $1,000 principal amount of 12-3/4% senior subordinated notes. Interest on the 11-1/2% senior subordinated notes will accrue from May 1, 2002, and will be payable on each August 1, November 1, February 1, and May 1. Each $1,000 principal amount of 11-1/2% senior subordinated notes will be issued with warrants to purchase ten shares of common stock at a price of $3.50 per share at any time from January 1, 2004, through August 1, 2007. If the exchange offer is consummated, the Company will pay a participation fee of 3% of the principal amount of 12-3/4% senior subordinated notes that are exchanged. The consummation of the exchange offer is conditioned upon, among other things, the valid tender for exchange of at least 99% of the senior subordinated notes. The company's senior, secured lenders have waived the cross-default provisions with respect to the default on the senior subordinated notes through September 2 or October 31, 2002, and the holder of the junior subordinated notes has -4- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) waived the cross-default provisions with respect to the default on the senior subordinated notes through November 1, 2002. The current expiration date of the exchange offer is August 30, 2002. As of August 9, 2002, the Company had received valid tenders of 12-3/4% senior subordinated notes in the principal amount of $27,098,000 or 98.9% of the notes. The Company has also reached an agreement with the holders of its 14% junior subordinated notes on the terms of a restructuring of those notes. If the restructuring is completed, the Company will exchange new 12-1/2% junior subordinated notes due November 1, 2007, for the $347,000 principal amount of existing 14% junior subordinated notes and the accrued interest thereon for the period November 1, 1999, through April 30, 2002, which totals $156,000. Interest on the 12-1/2% junior subordinated notes will accrue from May 1, 2002, and will be payable on each August 1, November 1, February 1, and May 1. Each $1,000 principal amount of 12-1/2% junior subordinated notes will be issued together with warrants to purchase ten shares of common stock at a price of $3.50 per share at any time from January 1, 2004, through November 1, 2007. If the restructuring is completed, the Company also will pay a participation fee of 3% of the principal amount of 14% junior subordinated notes. The completion of the proposed restructuring of the 12-3/4% senior subordinated notes and the 14% junior subordinated notes is subject to a number of conditions precedent, including the restructuring of the Company's outstanding $7,500,000 senior, unsecured note on satisfactory terms. The Company has proposed that the senior, unsecured note be restructured to provide for twenty quarterly principal payments of $375,000 beginning on November 1, 2002, with a final maturity date of August 1, 2007, interest at the rate of 10-1/2% per annum, payable quarterly, and a 2% participation fee. On April 30, 2002, the maturity date of the senior, unsecured note, the holder of the note rejected the Company's proposal for a restructuring and the Company's request for an interim, three-month extension. The Company did not pay the principal of the note or the monthly interest payment of $78,000 on April 30, 2002, and the Company has not made any interest payments on the note since that date. The Company's senior, secured lenders have waived the cross-default provisions with respect to the default on the senior, unsecured note through September 2 or October 31, 2002, and the holder of the junior subordinated notes has waived the cross-default provisions with respect to the default on the senior, unsecured note through November 1, 2002. Another condition of the proposed restructuring of the 12-3/4% senior subordinated notes and the 14% junior subordinated notes is the refinancing of the Company's senior, secured debt on satisfactory terms. The Company is currently in discussions with several lenders regarding a refinancing of its senior, secured credit facilities. The Company can give no assurance that it will be able to consummate the exchange offer, restructure the senior, unsecured note, or refinance its senior, secured financing arrangements on terms satisfactory to the Company. If the Company is unable to do so, it may file a petition under the federal bankruptcy code in order to carry out a debt restructuring plan on terms substantially similar to those discussed above or on other terms. Although the Company believes that such a restructuring could be accomplished without material disruption to its operations, any such proceeding involves considerable risks and uncertainties and could have a material adverse effect on the Company's operations and financial position. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 2 -- INVENTORIES Inventories at June 30, 2002, and December 31, 2001, are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 ---------- ---------- Finished goods $ 2,923 $ 3,727 Work in process 2,908 2,060 Raw materials and purchased parts 2,948 2,706 ---------- ---------- $ 8,779 $ 8,493 ========== ==========
NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at June 30, 2002, and December 31, 2001, are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 Land $ 2,309 $ 2,309 Buildings 22,745 22,601 Equipment 110,260 111,206 ---------- ---------- 135,314 136,116 Accumulated depreciation 84,166 80,792 ---------- ---------- Property, plant, and equipment, net $ 51,148 $ 55,324 ========== ==========
NOTE 4 -- ACCRUED EXPENSES At June 30, 2002, and December 31, 2001, accrued expenses included accrued interest expense of $10,771,000 and $8,738,000, respectively. Of those amounts, $10,321,000 and $8,446,000, respectively, was accrued interest on the 12-3/4% senior subordinated notes. -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 5 -- DEBT Debt at June 30, 2002, and December 31, 2001, is set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 -------- --------- Short-term debt: Revolving line of credit $ 18,616 $ 16,185 Secured, amortizing term loans 22,642 26,350 Senior, unsecured note 7,500 7,500 Senior subordinated notes 27,412 27,412 Junior subordinated notes 347 347 -------- --------- Subtotal 76,517 77,794 Current portion of long-term debt 2,181 2,617 -------- --------- Total short-term debt $ 78,698 $ 80,411 ======== ========= Long-term debt: 12% secured term note $ 1,231 $ 1,336 Unsecured, amortizing term notes 1,839 2,868 Other 405 413 -------- --------- Subtotal 3,475 4,617 Less current portion (2,181) (2,617) -------- --------- Total long-term debt $ 1,294 $ 2,000 ======== =========
REVOLVING LINE OF CREDIT On June 28, 2002, the Company and the lenders providing loans under the Company's revolving line of credit agreed to extend the expiration date of the revolving line of credit from July 1, 2002, to September 2, 2002. The Company intends to replace the revolving line of credit with a line of credit provided by a new lender or to negotiate an extension of the September 2 expiration date with its existing lender. The Company can give no assurance that it will be able to replace or extend the line of credit. At June 30, 2002, availability under the revolving line of credit totaled $1,197,000, before outstanding checks of $1,083,000 were deducted. At June 30, 2002, the interest rates on loans outstanding under the revolving line of credit were the London Interbank Offered Rate (LIBOR) plus 2.5% 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. 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 defaults on the senior subordinated notes and the senior, unsecured note through September 2 or October 31, 2002. -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SECURED, AMORTIZING TERM LOANS Secured, amortizing term loans outstanding at June 30, 2002, and December 31, 2001, are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 2002 2001 --------- ---------- Term loans payable in equal monthly principal installments based on a 180-month amortization schedule, final maturities in 2002, 8.37% $ 2,104 $ 2,221 Term loans payable in equal monthly principal installments, final maturities in 2002, LIBOR plus 2-3/4% 56 344 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9.37% 1,031 1,084 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9.0% 2,028 2,128 Term loans payable in equal monthly principal installments, final maturities in 2002, prime rate and LIBOR plus 2-1/2% -0-(1) 305(1) Term loan payable in equal monthly principal installments, final maturity in 2003, prime rate 136 227 Term loans payable in equal monthly principal installments, final maturities in 2003, prime rate and LIBOR plus 2-1/2% 71(1) 131(1) Term loan payable in equal monthly principal installments, final maturity in 2003, LIBOR plus 2-3/4% 267 427 Term loans payable in equal monthly principal installments, final maturities in 2004, LIBOR plus 2-3/4% 643 810 Term loan payable in equal monthly principal installments, final maturity in 2004, prime rate and LIBOR plus 2-1/2% 521 657 Term loans payable in equal monthly principal installments, final maturities in 2004, prime rate and LIBOR plus 2-1/2% 5,252(1) 6,325(1) Term loan payable in equal monthly principal installments, final maturity in 2005, LIBOR plus 2-1/2% 691 802 Term loan payable in equal monthly principal installments, final maturity in 2005, prime rate and LIBOR plus 2-1/2% 730(1) 852(1) Term loan payable in equal monthly principal installments, final maturity in 2006, prime rate 311 352 Term loans payable in equal monthly principal installments, final maturities in 2006, prime rate and LIBOR plus 2-1/2% 5,550(1) 6,086(1) Term loans payable in equal monthly installments, final maturities in 2007, prime rate and LIBOR plus 2-1/2% 3,251(1) 3,599(1) --------- ---------- $ 22,642 $ 26,350 ========= ==========
(1) Maturity date can be accelerated by the lender if the Company's revolving line of credit expires prior to the stated maturity date of the term loan. The revolving line of credit is currently scheduled to mature on September 2, 2002. -8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Those portions of the secured, amortizing term loans that are due more than one year after the date of the consolidated financial statements have been classified as short-term debt at June 30, 2002, and December 31, 2002, because the Company's lenders granted waivers, for periods of less than one year, of the cross-default provisions of such term loans with respect to the default on the senior subordinated notes and, as of June 30, 2002, the senior, unsecured note, and because the revolving line of credit was scheduled to expire in less than one year. 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, which matured on April 30, 2002, is senior in right of payment to the senior subordinated notes and the junior subordinated notes. The senior, unsecured note bore interest at 10-1/2% per annum until August 1, 2000, when the effective interest rate increased to 12-1/2%. The Company did not pay the principal of the note or the monthly interest payment of $78,000 on April 30, 2002, and the Company has not made any interest payments since that date. For a more detailed discussion of the status of the senior, unsecured note, refer to Note 1, "Basis of Presentation." SENIOR SUBORDINATED NOTES The senior subordinated notes, which matured on February 1, 2000, are unsecured obligations of the Company that are subordinated in right of payment to all of the Company's existing and future secured debt and to the payment of the senior, unsecured note. The senior subordinated notes currently bear interest at 12-3/4% per annum. On February 1, 2000, the Company did not make the payments of 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 notes are unsecured obligations of the Company. The junior subordinated notes are due on November 1, 2002, 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 holder of the junior subordinated notes has deferred until November 1, 2002, all interest payments that were due on or after February 1, 2000, and has waived the cross-default provisions with respect to the defaults on the senior subordinated notes and the senior, unsecured note through November 1, 2002. 12% SECURED TERM NOTE The 12% secured term note is payable in sixty equal, monthly installments of principal and interest that commenced on November 30, 2001. The 12% secured term note has no cross-default provision with respect to the default on the senior subordinated notes or the senior, unsecured note. -9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) UNSECURED, AMORTIZING TERM NOTES The unsecured, amortizing term notes mature in 2003, and are a series of notes that are payable in seventeen equal monthly principal installments, with interest at the prime rate in effect on the day each note was issued. 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 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 its various note agreements in order to maintain or otherwise ensure the Company's current or future compliance. In the event that the Company is not in compliance with any of its covenants in the future and its lenders do not agree to amend or waive those covenants, the lenders would have the right to declare the borrowings under their note agreements to be due and payable. NOTE 6 -- SERIES B PREFERRED STOCK At June 30, 2002, there were outstanding 3,300 shares of the Company's $8 cumulative convertible preferred stock, series B, par value $100 per share. As a result of the default on the senior subordinated notes, the Company has been prohibited from making any dividend payments on, or redemptions of, the series B preferred stock since February 2000. At June 30, 2002, the Company was in arrears in the payment of ten dividends on the series B preferred stock in the aggregate amount of $66,000 and in the redemption of 900 shares of series B preferred stock for $180,000. NOTE 7 -- INCOME TAXES At June 30, 2002, and December 31, 2001, the Company's net deferred income tax assets were fully offset by a valuation allowance. -10- NOTE 8 -- NET INCOME (LOSS) PER COMMON SHARE The calculations of basic and diluted net income or loss per common share for the three-month and six-month periods ended June 30, 2002 and 2001, are set forth below (in thousands, except per share amounts). The calculations of diluted net income or loss per common share do not reflect any pro forma conversion of the Company's $8 cumulative convertible preferred stock, series B, because the conversion would not have been dilutive for any of the periods.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------------------------- 2002 2001 2002 2001 -------------------- --------------------- Numerator -- income (loss) applicable to common stockholders $ 207 $ 755 $ (1,419) $ 374 ======== ======== ======== ========= Denominator -- weighted average common shares 4,828 4,828 4,828 4,828 ======== ======== ======== ========= Basic and diluted net income (loss) per common share $ 0.04 $ 0.16 $ (0.29) $ 0.08 ======== ======== ======== =========
-11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9 -- SEGMENTS Information relating to the Company's operating segments and its corporate office for the three-month and six-month periods ended June 30, 2002 and 2001, is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------- 2002 2001 2002 2001 ---------- ----------- ----------- ---------- < NET SALES: Rubber Group $ 26,161 $ 24,923 $ 50,114 $ 47,855 Metals Group 6,835 8,908 13,126 18,944 ---------- ----------- ----------- ---------- Total net sales $ 32,996 $ 33,831 $ 63,240 $ 66,799 ========== =========== =========== ========== INCOME (LOSS) FROM OPERATIONS: Rubber Group $ 3,449 $ 3,321 $ 5,939 $ 5,190 Metals Group (492) 328 (2,208) 898 ---------- ----------- ----------- ---------- Subtotal 2,957 3,649 3,731 6,088 Corporate office (753) (662) (1,336) (1,157) ---------- ----------- ----------- ---------- Total income from operations $ 2,204 $ 2,987 $ 2,395 $ 4,931 ========== =========== =========== ========== ASSETs: Rubber Group $ 68,723 $ 74,859 $ 68,723 $ 74,859 Metals Group 24,843 31,894 24,843 31,894 ---------- ----------- ----------- ---------- Subtotal 93,566 106,753 93,566 106,753 Corporate office 4,739 3,392 4,739 3,392 ---------- ----------- ----------- ---------- Total assets $ 98,305 $ 110,145 $ 98,305 $ 110,145 ========== =========== =========== ========== DEPRECIATION AND AMORTIZATION: Rubber Group $ 1,947 $ 2,103 $ 3,947 $ 4,304 Metals Group 1,022 1,135 2,050 2,284 ---------- ----------- ----------- ---------- Subtotal 2,969 3,238 5,997 6,588 Corporate office 11 21 32 43 ---------- ----------- ----------- ---------- Total depreciation and amortization $ 2,980 $ 3,259 $ 6,029 $ 6,631 ========== =========== =========== ========== CAPITAL EXPENDITURES: Rubber Group $ 903 $ 709 $ 1,566 $ 1,776 Metals Group 244 63 359 222 ---------- ----------- ----------- ---------- Subtotal 1,147 772 1,925 1,998 Corporate office - 3 - 3 ---------- ----------- ----------- ---------- Total capital expenditures $ 1,147 $ 775 $ 1,925 $ 2,001 ========== =========== =========== ==========
The amortization and depreciation set forth in the preceding table does not include amortization of deferred financing expenses, which totaled $125,000 and $49,000 during the three-month periods ended June 30, 2002 and 2001, respectively, and $161,000 and $94,000 during the six-month periods ended June 30, 2002 and 2001, respectively. Amortization of deferred financing expense is included in interest expense in the consolidated financial statements. -12- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 10 -- PLANT CLOSURE During the fourth quarter of 2001, the Company was notified that the Metal Group's largest customer would cease purchasing components from the Metals Group after December 31, 2001. During 2001, the customer purchased $5,937,000 of machined metal components that were manufactured primarily at the Company's Casa Grande, Arizona, facility. As a result of the reduction in sales at the Arizona facility, the Company closed the facility during the first quarter of 2002 and recorded, as of December 31, 2001, an impairment charge of $2,047,000 to reduce to fair market value the carrying value of the Arizona facility's land and building and certain metal machining equipment currently idled by the loss of this business. The idled assets are currently classified in property, plant, and equipment and are being depreciated at the rate of approximately $36,000 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," which the Company adopted on January 1, 2002. At June 30, 2002, the Company had a reserve of $43,000 for the closure of the Arizona facility, primarily for unpaid severance benefits. The following table sets forth certain operating data of the Arizona facility for the three-month and six-month periods ended June 30, 2002 and 2001 (dollar amounts in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------- -------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net sales $ - $ 2,320 $ 332 $ 5,178 ======== ======== ======== ======== Operating profit (loss) before plant closure costs $ (235) $ 66 $ (936) $ 318 -------- -------- -------- -------- Plant closure costs: Severance and other employee termination costs - - 246 - Asset relocation costs 43 - 209 - Other costs 44 - 154 - -------- -------- -------- -------- 87 - 609 - -------- -------- -------- -------- Operating profit (loss) $ (322) $ 66 $ (1,545) $ 318 ======== ======== ======== ========
During 2002, operating losses other than plant closure costs resulted primarily from the underabsorption of operating costs incurred due to minimal sales and poor operating efficiencies while the facility was being shut down, and, to a lesser extent, from the cost of maintaining, insuring, protecting, and depreciating the facility and the equipment remaining in the facility. -13- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 11 -- COMPREHENSIVE INCOME During the three-month and six-month periods ended June 30, 2002, the Company's comprehensive income, other than net income, consisted of unrealized gains on its marketable securities of $303,000 and $373,000, respectively. No income tax expense is currently allocable to these unrealized gains. Comprehensive income for the three-month and six-month periods ended June 30, 2002 and 2001, is set forth below:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Net income (loss) $ 207 $ 755 $ (1,419) $ 374 Other comprehensive income: Unrealized gain on marketable securities 303 - 373 - -------- -------- -------- -------- Comprehensive income $ 510 $ 755 $ (1,046) $ 374 ======== ======== ======== ========
NOTE 12 -- EXCESS OF COST OVER NET ASSETS OF BUSINESS ACQUIRED (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 and other intangible assets with indefinite useful lives be reviewed for impairment at least annually and written down to fair value if found to be impaired. The Company does not possess any intangible assets with indefinite lives other than goodwill. Prior to the adoption of FAS No. 142, goodwill was amortized over forty years. During June 2002, the Company completed the transitional impairment test of its January 1, 2002, unamortized goodwill balance as required by FAS 142. On January 1, 2002, $7,831,000 of unamortized goodwill existed on the Company's books, including $7,623,000 related to the Rubber Group and $208,000 related to the Metals Group. As a result of the Company's transitional impairment tests, none of the Company's unamortized goodwill was deemed to be impaired as of January 1, 2002. The Company will test its goodwill for impairment in the fourth quarter of 2002 unless there are significant indicators of impairment prior to that time. (continued on next page) -14- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued from previous page) The following table shows the pro forma effect on net income and net income per share in 2001 if FAS 142 were effective for 2001 and goodwill had not been amortized.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- --------- Net income (loss), as reported $ 207 $ 755 $ (1,419) $ 374 Add back amortization of goodwill, net of income taxes - 79 - 158 -------- -------- -------- --------- Adjusted net income (loss) $ 207 $ 834 $ (1,419) $ 532 ======== ======== ======== ========= Per share data: Net income (loss) per common share, as reported $ 0.04 $ 0.16 $ (0.29) $ 0.08 Add back amortization of goodwill, net of income taxes - 0.01 - 0.03 -------- -------- -------- --------- Adjusted net income (loss) per common share $ 0.04 $ 0.17 $ (0.29) $ 0.11 ======== ======== ======== =========
-15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Some of our statements in this Form 10-Q, including this item, are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements usually can be identified by our use of words like "believes," "expects," "may," "will," "should," "anticipates," "estimates," "projects," or the negative thereof. They may be used when we discuss strategy, which typically involves risk and uncertainty, and they generally are based upon projections and estimates rather than historical facts and events. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results or performance to be materially different from the future results or performance expressed in or implied by those statements. Some of those risks and uncertainties are: - increases and decreases in business awarded to us by our customers, - unanticipated price reductions for our products as a result of competition, - unanticipated operating results and cash flows, - increases or decreases in capital expenditures, - changes in economic conditions, - strength or weakness in the North American automotive market, - changes in the competitive environment, - changes in interest rates and the credit and securities market, - 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. All forward-looking statements are expressly qualified by the discussion above. Our 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. -16- Our ability to refinance, extend, amend, or exchange approximately $80,000,000 of short-term debt, as more fully described below, is subject to risks and uncertainties. As a result, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments to the amounts or classification of assets or liabilities to reflect this uncertainty. RESULTS OF OPERATIONS -- SECOND QUARTER OF 2002 VERSUS SECOND QUARTER OF 2001 The following table sets forth our consolidated operating results for the second quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 -------------------- ------------------ 2002 2001 ------------------ ------------------ Net sales $32,996 100.0% $33,831 100.0% Cost of sales 28,356 85.9 28,193 83.3 ------- ---- ------- --- Gross profit 4,640 14.1 5,638 16.7 Selling and administrative expenses 2,349 7.1 2,651 7.8 Plant closure costs (1) 87 0.3 -- -- ------- ---- ------- --- Income from operations 2,204 6.7 2,987 8.9 Add back depreciation and amortization (2) 2,980 9.0 3,259 9.6 ------- ---- ------- --- Earnings before interest, taxes, depreciation, and amortization (EBITDA) (3) 5,184 15.7 6,246 18.5 Proforma adjustments for certain nonrecurring expenses: Plant closure costs (1) 87 0.3 -- -- ------- ---- ------- --- Adjusted EBITDA (3) $ 5,271 16.0% $ 6,246 18.5% ======= ==== ======= === Net cash provided by operating activities (4) $ 3,522 10.7% $ 1,635 4.8% ======= ==== ======= ===
(1) During the first quarter of 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 the value of certain of the facility's assets to fair value, and during the second quarter of 2002, we incurred charges of $87,000 to close the facility. For more information, refer to the discussion of the results of operations of the Metals Group in this section. (2) Does not include amortization of deferred financing expenses, which totaled $125,000 and $49,000 during the second quarters of 2002 and 2001, respectively, and which is included in interest expense in the consolidated financial statements. -17- (3) 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 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 use the term adjusted EBITDA to refer to EBITDA adjusted to exclude nonrecurring items of expense. During the second quarter of 2002, adjusted EBITDA excluded the nonrecurring charges incurred to close the Company's facility in Casa Grande, Arizona. We have presented EBITDA and adjusted EBITDA here and elsewhere in this Form 10-Q because we believe that these measures are 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 and adjusted EBITDA may not be the same as the definition of EBITDA and adjusted EBITDA used by other companies. (4) The calculation of net cash provided by operating activities is detailed in the consolidated statement of cash flows that is part of our consolidated financial statements in Part I, Item 1. Our net sales for the second quarter of 2002 were $32,996,000, compared to net sales of $33,831,000 for the second quarter of 2001, a decrease of $835,000, or 2.5%. The decrease in second quarter net sales was principally a result of a $2,320,000 reduction in sales at our Arizona facility, which we closed during the first quarter of 2002. EBITDA, excluding the $87,000 of plant closure costs, for the second quarter of 2002 was $5,271,000, or 16.0% of net sales, compared to $6,246,000, or 18.5% of net sales, for the second quarter of 2001. This reduction resulted primarily from the closing of the Arizona facility. 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 June 30, 2002 and 2001. -18- 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 second quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 ----------------------------------------- 2002 2001 ------------------ ------------------ Net sales $ 26,161 100.0% $ 24,923 100.0% Cost of sales 21,515 82.2 20,214 81.1 -------- ---- -------- ---- Gross profit 4,646 17.8 4,709 18.9 Selling and administrative expenses 1,197 4.6 1,388 5.6 -------- ---- -------- ---- Income from operations 3,449 13.2 3,321 13.3 Add back depreciation and amortization 1,947 7.4 2,103 8.5 -------- ---- -------- ---- EBITDA $ 5,396 20.6% $ 5,424 21.8% ======== ==== ======== ====
During the second quarter of 2002, net sales of the Rubber Group increased by $1,238,000, or 5.0%, compared to the second quarter of 2001. This increase was primarily due to increased unit sales of connector seals for automotive wiring systems, insulators for automotive ignition wire sets, and 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 the second quarter of 2002 to 82.2% of net sales from 81.1% of net sales during the second quarter of 2001, due, in part, to higher maintenance expenses and reduced efficiencies associated with repairs initiated on certain tooling. Selling and administrative expenses as a percentage of net sales decreased during the second quarter of 2002, compared to the second quarter of 2001, primarily because of reduced international selling expenses, and the elimination of the amortization of goodwill as required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which we adopted on January 1, 2002. During the second quarter of 2002, income from operations totaled $3,449,000, an increase of $128,000, or 3.9%, compared to the second quarter of 2001. EBITDA for the second quarter of 2002 was $5,396,000, or 20.6% of net sales, compared to $5,424,000, or 21.8% of net sales, for the second quarter of 2001. -19- METALS GROUP The Metals Group manufactures aluminum die castings and machines components from aluminum, brass, and steel bars, 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. The following table sets forth the operating results of the Metals Group for the second quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 ----------------------------------------- 2002 2001 ------------------- ------------------ Net sales $ 6,835 100.0% $ 8,908 100.0% Cost of sales 6,841 100.1 7,979 89.6 ------- ----- ------- ----- Gross profit (loss) (6) (0.1) 929 10.4 Selling and administrative expenses 399 5.8 601 6.7 Plant closure costs 87 1.3 -- -- ------- ----- ------- ----- Income (loss) from operations (492) (7.2) 328 3.7 Add back depreciation and amortization 1,022 14.9 1,135 12.7 ------- ----- ------- ----- EBITDA 530 7.7 1,463 16.4 Proforma adjustments for certain nonrecurring expenses: Plant closure costs 87 1.3 -- -- ------- ----- ------- ---- Adjusted EBITDA $ 617 9.0% $ 1,463 16.4% ======= ===== ======= =====
During the fourth quarter of 2001, we were notified that the Metal Group's largest customer would cease purchasing components from the Metals Group after December 31, 2001. During 2001, this customer purchased $5,937,000 of machined metal components, which were manufactured primarily at our Casa Grande, Arizona, facility. As a result of the reduction in sales at the Arizona facility, we closed the facility during the first quarter of 2002 and recorded, as of December 31, 2001, an impairment charge of $2,047,000 to reduce to fair market value the carrying value of the Arizona facility's land and building and certain metal machining equipment currently idled by the loss of this business. The land, building, and equipment idled by the loss of business is currently classified in property, plant, and equipment and is being depreciated at the rate of approximately $36,000 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," which we adopted on January 1, 2002. -20- The following table sets forth certain operating data of the Arizona facility for the second quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 -------------------- 2002 2001 -------- -------- Net sales $ - $ 2,320 ======== ======== Operating profit (loss) before plant closure costs $ (235) $ 66 -------- -------- Plant closure costs: Asset relocation costs 43 - Other costs 44 - -------- -------- 87 - -------- -------- Operating profit (loss) (322) 66 Add back depreciation and amortization 101 418 -------- -------- EBITDA $ (221) $ 484 ======== ========
During 2002, operating losses other than plant closure costs resulted primarily from the underabsorption of operating costs incurred due to minimal sales and poor operating efficiencies while the facility was being shut down, and, to a lesser extent, from the cost of maintaining, insuring, protecting, and depreciating the facility and the equipment remaining in the facility. During the second quarter of 2002, net sales of the Metals Group decreased by $2,073,000, or 23.3%, compared to the second quarter of 2001. The decrease resulted from reduced sales of machined metal components due to the loss, effective December 31, 2001, of the Metals Group's largest customer. Cost of sales, as a percentage of net sales increased during the second quarter of 2002 to 100.1% of net sales from 89.6% of net sales during the second quarter of 2001, primarily due to the second quarter operating loss incurred at the Arizona facility, which was closed during the first quarter of 2002, excess costs and production inefficiencies caused by the transfer of certain business and equipment from Arizona to the Rochester, New York, facility, and higher material costs resulting from the delayed pass-through of increased aluminum prices to customers. Selling and administrative expenses as a percentage of net sales decreased during the second quarter of 2002 compared to the second quarter of 2001, primarily because of the closing of the Arizona facility. During the second quarter of 2002, the loss from operations was $492,000 compared to income from operations of $328,000 during the second quarter of 2001. Excluding the $87,000 of plant closure costs, the loss from operations during the second quarter of 2002, was $405,000. EBITDA, excluding the $87,000 of plant closure costs, for the second quarter of 2002 was $617,000, or 9.0% of net sales, compared to $1,463,000, or 16.4% of net sales, for the second quarter of 2001. -21- CORPORATE OFFICE Corporate office expenses, which are not included in the operating results of the Rubber Group or the Metals Group, represent administrative expenses incurred primarily at our New York and Cleveland offices. Corporate office expenses are consolidated with the selling and administrative expenses of the Rubber Group and the Metals Group in our consolidated financial statements. The following table sets forth the operating results of the corporate office for the second quarters of 2002 and 2001 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 -------------------- 2002 2001 ------- -------- Loss from operations $ (753) $ (662) Add back depreciation and amortization 11 21 ------- -------- EBITDA $ (742) $ (641) ======= ========
During the second quarter of 2002, corporate office expenses increased compared to the second quarter of 2001, primarily because of accruals for incentive compensation. INTEREST EXPENSE During the second quarters of 2002 and 2001, interest expense totaled $1,967,000 and $2,152,000, respectively, which included amortization of deferred financing expenses of $125,000 and $49,000, respectively. The decrease in interest expense was caused primarily by lower rates of interest on our floating rate indebtedness. INCOME TAX PROVISION At June 30, 2002, and December 31, 2001, our net deferred income tax assets were fully offset by a valuation allowance. -22- RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF 2002 VERSUS FIRST SIX MONTHS OF 2001 The following table sets forth our consolidated operating results for the first six months of 2002 and 2001 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 --------------------------------------- 2002 2001 ------------------ ------------------ Net sales $63,240 100.0% $66,799 100.0% Cost of sales 55,632 88.0 56,742 84.9 ------- ----- ------- --- Gross profit 7,608 12.0 10,057 15.1 Selling and administrative expenses 4,604 7.3 5,126 7.7 Plant closure costs (1) 609 0.9 -- -- ------- ----- ------- --- Income from operations 2,395 3.8 4,931 7.4 Add back depreciation and amortization (2) 6,029 9.5 6,631 9.9 ------- ----- ------- --- EBITDA (3) 8,424 13.3 11,562 17.3 Proforma adjustments for certain nonrecurring expenses: Plant closure costs (1) 609 0.9 -- -- ------- ----- ------- --- Adjusted EBITDA (3) $ 9,033 14.2% $11,562 17.3% ======= ===== ======= === Net cash provided by operating activities (4) $ 5,132 8.1% $ 2,731 4.1% ======= ===== ======= ===
(1) During the first quarter of 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 the value of certain of the facility's assets to fair value, and during the first six months of 2002, we incurred charges of $609,000 to close the facility. For more information, refer to the discussion of the results of operations of the Metals Group in this section. (2) Does not include amortization of deferred financing expenses, which totaled $161,000 and $94,000 during the first six months of 2002 and 2001, respectively, and which is included in interest expense in the consolidated financial statements. (3) 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 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 use the term adjusted EBITDA to refer to -23- EBITDA adjusted to exclude nonrecurring items of expense. During the first six-months of 2002, adjusted EBITDA excluded the nonrecurring charges incurred to close the Company's facility in Casa Grande, Arizona. We have presented EBITDA and adjusted EBITDA here and elsewhere in this Form 10-Q because we believe that these measures are 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 and adjusted EBITDA may not be the same as the definition of EBITDA and adjusted EBITDA used by other companies. (4) The calculation of net cash provided by operating activities is detailed in the consolidated statement of cash flows that is part of our consolidated financial statements in Part I, Item 1. Our net sales for the first six months of 2002 were $63,240,000, compared to net sales of $66,799,000 for the first six months of 2001, a decrease of $3,559,000, or 5.3%. The decrease in net sales was principally a result of a $4,846,000 reduction in sales at our Arizona facility, which we closed during the first quarter of 2002. EBITDA, excluding the $609,000 of plant closure costs, for the first six months of 2002 was $9,033,000, or 14.2% of net sales, compared to $11,562,000, or 17.3% of net sales, for the first six months of 2001. This reduction was principally a result of the expenses related to the closing of the Arizona facility and the transfer of certain equipment and business to our Rochester, New York, facility. 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 six-month periods ended June 30, 2002 and 2001. -24- 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 six months of 2002 and 2001 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ----------------------------------------- 2002 2001 ------------------ ------------------ Net sales $ 50,114 100.0% $ 47,855 100.0% Cost of sales 41,851 83.5 39,964 83.5 -------- ----- -------- ----- Gross profit 8,263 16.5 7,891 16.5 Selling and administrative expenses 2,324 4.6 2,701 5.7 -------- ----- -------- ----- Income from operations 5,939 11.9 5,190 10.8 Add back depreciation and amortization 3,947 7.8 4,304 9.0 -------- ----- -------- ----- EBITDA $ 9,886 19.7% $ 9,494 19.8% ======== ===== ======== =====
During the first six months of 2002, net sales of the Rubber Group increased by $2,259,000, or 4.7%, compared to the first six months of 2001. This increase was primarily due to increased unit sales of connector seals for automotive wiring systems and components for medical devices, offset, in part, by price reductions on certain automotive components. Cost of sales as a percentage of net sales during the first six months of 2002 was 83.5% of net sales, unchanged from the first six months of 2001. Selling and administrative expenses as a percentage of net sales decreased during the first six months of 2002, compared to the first six months of 2001, primarily because of reduced international selling expenses, and the elimination of the amortization of goodwill as required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which we adopted January 1, 2002. For the reasons stated above, during the first six months of 2002, income from operations totaled $5,939,000, an increase of $749,000, or 14.4%, compared to the first six months of 2001. EBITDA for the first six months of 2002 was $9,886,000, or 19.7% of net sales, compared to $9,494,000, or 19.8% of net sales, for the first six months of 2001. -25- METALS GROUP The Metals Group manufactures aluminum die castings and machines components from aluminum, brass, and steel bars, 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. The following table sets forth the operating results of the Metals Group for the first six months of 2002 and 2001 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ----------------------------------------- 2002 2001 ------------------ ------------------ Net sales $ 13,126 100.0% $ 18,944 100.0% Cost of sales 13,781 105.0 16,778 88.6 --------- ----- --------- ----- Gross profit (loss) (655) (5.0) 2,166 11.4 Selling and administrative expenses 944 7.2 1,268 6.7 Plant closure costs 609 4.6 - - --------- ----- --------- ----- Income (loss) from operations (2,208) (16.8) 898 4.7 Add back depreciation and amortization 2,050 15.6 2,284 12.1 --------- ----- --------- ----- EBITDA (158) (1.2) 3,182 16.8 Proforma adjustments for certain nonrecurring expenses: expenses: Plant closure costs 609 4.6 - - --------- ----- --------- ----- Adjusted EBITDA $ 451 3.4% $ 3,182 16.8% ========= ===== ========= =====
As previously discussed, during the fourth quarter of 2001, we were notified that the Metal Group's largest customer would cease purchasing components from the Metals Group after December 31, 2001. During 2001, the customer purchased $5,937,000 of machined metal components that were manufactured primarily at the Company's Casa Grande, Arizona, facility. As a result of the reduction in sales at the Arizona facility, we closed the facility during the first quarter of 2002 and recorded, as of December 31, 2001, an impairment charge of $2,047,000 to reduce to fair market value the carrying value of the Arizona facility's land and building and certain metal machining equipment currently idled by the loss of this business. The idled assets are currently classified in property, plant, and equipment and are being depreciated at the rate of approximately $36,000 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," which we adopted on January 1, 2002. At June 30, 2002, we had a reserve of $43,000 for the closure of the Arizona facility, primarily for unpaid severance benefits. -26- The following table sets forth certain operating data of the Arizona facility for the first six months of 2002 and 2001 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ------- 2002 2001 ---- ---- Net sales $ 332 $5,178 ====== ====== Operating profit (loss) before plant $ (936) $ 318 closure costs ------ ------ Plant closure costs: Severance and other employee 246 termination costs Asset relocation costs 209 -- Other costs 154 -- ------ ------ 609 -- ------ ------ Operating profit (loss) (1,545) 318 Add back depreciation and amortization 366 841 ------ ------ EBITDA $(1,179) $1,159 ====== ======
During 2002, operating losses other than plant closure costs resulted primarily from the underabsorption of operating costs incurred due to minimal sales and poor operating efficiencies while the facility was being shut down, and, to a lesser extent, from the cost of maintaining, insuring, protecting, and depreciating the facility and the equipment remaining in the facility. During the first six months of 2002, net sales of the Metals Group decreased by $5,818,000, or 30.7%, compared to the first six months of 2001. The decrease resulted from reduced sales of machined metal components due to the departure, effective December 31, 2001, of the Metals Group's largest customer and reduced sales to certain customers who had accumulated excess amounts of inventory in prior periods. Cost of sales as a percentage of net sales increased during the first six months of 2002 to 105.0% of net sales from 88.6% of net sales during the first six months of 2001, primarily due to the first six months operating loss incurred at the Arizona facility, which resulted primarily from minimal sales and poor operating efficiencies 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, and the cost of maintaining, insuring, protecting, and depreciating the facility and equipment remaining in the Arizona facility. Selling and administrative expenses as a percentage of net sales increased during the first six months of 2002 compared to the first six months of 2001, primarily because of the dramatically reduced sales level. For the reasons stated above, during the first six months of 2002, the loss from operations was $2,208,000, compared to income from operations of $898,000 during the first six months of 2001. Excluding the $609,000 of plant closure costs, the loss from operations during the first six months of 2002 was $1,599,000. Excluding the entire loss incurred at the Arizona facility during the first six months of 2002, the loss from operations during the first six months of 2002 was $663,000. Adjusted -27- EBITDA was $451,000, or 3.4% of net sales, compared to $3,182,000, or 16.8% of net sales for the first six months of 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 the first six months of 2002 and 2001 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ------- 2002 2001 ---- ---- Loss from operations $(1,336) $(1,157) Add back depreciation and amortization 32 43 ------ ------ EBITDA $(1,304) $(1,114) ====== =======
During the first six months of 2002, corporate office expenses increased compared to the first six months of 2001, primarily because of accruals for incentive compensation. INTEREST EXPENSE During the first six months of 2002 and 2001, interest expense totaled $3,763,000 and $4,477,000, respectively, which included amortization of deferred financing expenses of $161,000 and $94,000, 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 June 30, 2002, and December 31, 2001, our net deferred income tax assets were fully offset by a valuation allowance. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first six months of 2002, our operating activities provided $5,132,000 of cash. Accounts receivable increased by $2,687,000. The increase was caused primarily by an increase in net sales during May and June 2002 compared to November and December 2001. Accounts payable decreased by $1,368,000, primarily as a result of a decrease in balances outstanding beyond agreed upon payment terms. In the first quarter of 2002, we converted $167,000 of past due accounts payable into notes payable in seventeen equal, monthly principal installments -28- commencing during the first quarter of 2002, and during the second quarter of 2002, improved cash flow from operations was used to reduce trade accounts payable. We rely on our suppliers to provide us credit for our purchases. In certain cases, we extend our accounts payable beyond their stated terms. If our vendors were to reduce materially the amount of credit available to us, it could have a material adverse effect on our results of operations and financial position. Accrued expenses increased by $3,386,000 during the first six months of 2002, primarily due to an increase in accrued interest of $2,033,000, reflecting unpaid interest on our senior subordinated notes, senior, unsecured note, and junior subordinated notes. INVESTING ACTIVITIES During the first six months of 2002, our investing activities used $2,362,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group and the Metals Group totaled $1,566,000 and $359,000, respectively. Capital expenditures for the first six months of 2002 included $1,882,000 for equipment and $43,000 for building improvements. We presently project that capital expenditures during 2002 will total approximately $4,900,000, 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 $3,200,000 and $1,700,000, respectively, during 2002. At June 30, 2002, we had outstanding commitments to purchase plant and equipment of approximately $1,624,000. FINANCING ACTIVITIES During the first six months of 2002, our financing activities used $2,877,000 of cash. During the first six months of 2002, we made payments on our long-term debt totaling $5,069,000, and we increased the net borrowings under our revolving line of credit by $2,431,000. 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, which expires on September 2, 2002, is subject to certain availability formulas based on the levels of our accounts receivable and inventories. At August 9, 2002, availability under our revolving line of credit totaled $1,666,000 before outstanding checks of $1,233,000 were deducted. Substantially all of our assets are pledged as collateral for various of our borrowings. A number of our financing arrangements contain covenants 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. From time to time, our lenders have agreed to waive or amend certain of the financial covenants contained in our various financing agreements in order to maintain or otherwise ensure our current or future compliance. In the event that we are not in compliance with any of our covenants in the future and -29- our lenders do not agree to amend or waive those covenants, the lenders would have the right to declare the borrowings under their financing agreements to be due and payable. We are in default in the payment of our senior subordinated notes and our senior, unsecured note. In addition, during the last six months of 2002, we have $5,028,000 of secured term notes and $347,000 of junior subordinated notes that mature. During the last six months of 2002, we also have scheduled principal payments of $3,536,000 on our amortizing term loans. We estimate that, at existing contractual and market rates, the interest expense on all of our debt during 2002 will be approximately $7,500,000. We had a net working capital deficit of $70,636,000 at June 30, 2002, compared to a net working capital deficit of $72,928,000 at December 31, 2001. The net working capital deficit exists primarily because the majority of our debt is in default or subject to cross defaults. 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. We have been in default on our 12-3/4% senior subordinated notes since February 1, 2000, when we did not make the payments of principal, in the amount of $27,412,000, and interest, in the amount of $1,748,000, that were due on that date. On July 10, 2002, we commenced an exchange offer for the 12-3/4% senior subordinated notes. If the exchange offer is consummated, at least 99% of the 12-3/4% senior subordinated notes will be exchanged for new 11-1/2% senior subordinated notes due August 1, 2007, in a principal amount equal to the principal amount of the 12-3/4% senior subordinated notes being exchanged plus the accrued and unpaid interest thereon through April 30, 2002, which accrued interest totals $350.625 for each $1,000 principal amount of 12-3/4% senior subordinated notes. Interest on the 11-1/2% senior subordinated notes will accrue from May 1, 2002, and will be payable on each August 1, November 1, February 1, and May 1. Each $1,000 principal amount of 11-1/2% senior subordinated notes will be issued together with warrants to purchase ten shares of common stock at a price of $3.50 per share at any time from January 1, 2004, through August 1, 2007. If the exchange offer is consummated, we will pay a participation fee of 3% of the principal amount of 12-3/4% senior subordinated notes that are exchanged. The consummation of the exchange offer is conditioned upon, among other things, the valid tender for exchange of at least 99% of the senior subordinated notes. Our senior, secured lenders have waived the cross-default provisions with respect to the default on the senior subordinated notes through September 2 or October 31, 2002, and the holder of the junior subordinated notes has waived the cross-default provisions with respect to the default on the senior subordinated notes through November 1, 2002. The current expiration date of the exchange offer is August 30, 2002. As of August 9, 2002, we had received valid tenders of 12-3/4% senior subordinated notes in the principal amount of $27,098,000 or 98.9% of the notes. We have also reached an agreement with the holders of our 14% junior subordinated notes on the terms of a restructuring of those notes. If the restructuring is completed, we will exchange new 12-1/2% junior subordinated notes due November 1, 2007, for the $347,000 principal amount of existing 14% junior subordinated notes and the accrued interest thereon for the period November 1, 1999, through April 30, 2002, which totals $156,000. Interest on the 12-1/2% junior subordinated notes will accrue from May 1, 2002, and will be payable on each August 1, November 1, February 1, and May 1. Each $1,000 principal amount of 12-1/2% junior subordinated notes will be issued together with warrants to purchase ten shares of common stock at a price of $3.50 per share at any time from January 1, 2004, through November 1, 2007. If the restructuring is completed, we will also pay a participation fee of 3% of the principal amount of 14% junior subordinated notes. -30- The completion of the proposed restructuring of the 12-3/4% senior subordinated notes and the 14% junior subordinated notes is subject to a number of conditions precedent, including the restructuring of our outstanding $7,500,000 senior, unsecured note on satisfactory terms. We have proposed that the senior, unsecured note be restructured to provide for twenty quarterly principal payments of $375,000 beginning on November 1, 2002, with a final maturity date of August 1, 2007, interest at the rate of 10-1/2% per annum, payable quarterly, and a 2% participation fee. On April 30, 2002, the maturity date of the senior, unsecured note, the holder of the note rejected our proposal for a restructuring and our request for an interim, three-month extension. We did not pay the principal of the note or the monthly interest payment of $78,000 on April 30, 2002, and we have not made any interest payments since that date. Our senior, secured lenders have waived the cross-default provisions with respect to the default on the senior, unsecured note through September 2 or October 31, 2002, and the holder of the junior subordinated notes has waived the cross-default provisions with respect to the default on the senior, unsecured note through November 1, 2002. Another condition of the proposed restructuring of the 12-3/4% senior subordinated notes and the 14% junior subordinated notes is the refinancing of our senior, secured debt on satisfactory terms. We are currently in discussions with several lenders regarding a refinancing of its senior, secured credit facilities. We can give no assurance that we will be able to consummate the exchange offer, restructure the senior, unsecured note, or refinance our senior, secured financing arrangements on terms satisfactory to us. If we are unable to do so, we may file a petition under the federal bankruptcy code in order to carry out a debt restructuring plan on terms substantially similar to those discussed above or on other terms. Although we believe that such a restructuring could be accomplished without material disruption to our operations, any such proceeding involves considerable risks and uncertainties and could have a material adverse effect on our operations and financial position. The consolidated financial statements do not include any adjustments to the amounts or classifications of assets or liabilities to reflect those risks and uncertainties. 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 June 30, 2002, we had $37,983,000 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 June 30, 2002, we had outstanding $42,009,000 of fixed-rate, long-term debt with a weighted-average interest rate of 12.2%, of which $40,422,000 had matured or was scheduled to mature during 2002. If we were able to refinance or extend the matured or maturing debt, it might 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 over 80% of our 12-3/4% senior subordinated notes, to exchange the 12-3/4% senior subordinated notes for new 11-1/2% senior subordinated notes due August 1, 2007, in a principal amount equal to the principal amount of the existing 12-3/4% senior subordinated notes being exchanged plus the accrued and unpaid interest thereon through April 30, 2002, which accrued interest totals $350.625 for each $1,000 principal amount of 12-3/4% senior subordinated notes exchanged. With respect to our $7,500,000 senior, unsecured note, we have proposed to extend the -31- maturity date from April 30, 2002, to August 1, 2007, pay interest at the rate of 10-1/2% per annum, and repay the note in twenty quarterly principal payments in the amount of $375,000 each beginning November 1, 2002. The holder of the note has rejected our proposal. If we negotiated 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 $61,000. For further information about our indebtedness, we recommend that you also read Notes 1 and 5 of our consolidated financial statements in Part I, Item 1. -32- PART II. OTHER INFORMATION ITEM 3. DEFAULTS ON SENIOR SECURITIES (a) We are in default in respect of our 12-3/4% senior subordinated notes because we did not make the payments of principal, in the amount of $27,412,000, and interest, in the amount of $1,748,000, that were due on February 1, 2000. For more information regarding the default in respect of the 12-3/4% senior subordinated notes, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity," in Part I, Item 2, which is incorporated by reference herein. We are in default in respect of our 10-1/2% senior, unsecured note because we did not make the payment of principal, in the amount of $7,500,000, and interest, in the amount of $78,000, that were due on April 30, 2002. For more information regarding the default in respect of the 10-1/2% senior, unsecured note, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity," in Part I, Item 2, which is incorporated by reference herein. The lenders under our revolving line of credit and secured, amortizing term loans have waived the cross-default provisions with respect to the defaults on the senior subordinated notes and the senior, unsecured note through September 2 or October 31, 2002, and the holder of our junior subordinated notes has waived the cross-default provisions with respect to the senior subordinated notes and the senior, unsecured note through November 1, 2002. (b) We did not pay dividends on our $8 cumulative convertible preferred stock, series B, during the three-month or six-month periods ended June 30, 2002, in the aggregate amount of $6,600 and $13,200, respectively. At June 30, 2002, the Company was in arrears in the payment of ten dividends on the series B preferred stock in the aggregate amount of $66,000 and in the redemption of 900 shares of series B preferred stock for $180,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on June 12, 2002. The matters voted upon at the Annual Meeting and the results of the voting on each matter are set forth below: o A proposal to elect six directors (Messrs. William B. Conner, Warren Delano, Kenneth I. Greenstein, Michael A. Lubin, and Joseph A. Pardo, and Ms. Elizabeth Ruml). Mr. Conner: Votes for Mr. Conner 3,053,808 Votes withheld from Mr. Conner 15,225 Mr. Delano: Votes for Mr. Delano 3,047,554 Votes withheld from Mr. Delano 21,479
(continued on next page) -33- (continued from previous page) Mr. Greenstein: Votes for Mr. Greenstein 3,052,583 Votes withheld from Mr. Greenstein 16,450 Mr. Lubin: Votes for Mr. Lubin 3,047,554 Votes withheld from Mr. Lubin 21,479 Mr. Pardo: Votes for Mr. Pardo 3,052,125 Votes withheld from Mr. Pardo 16,908 Ms. Ruml: Votes for Ms. Ruml 3,050,025 Votes withheld from Ms. Ruml 19,008
o The ratification of Ernst & Young LLP as independent auditors of the Company for the year ending December 31, 2002. Votes for Ernst & Young LLP 3,052,478 Votes against Ernst & Young LLP 5,306 Abstentions 11,249
There were no broker non-votes in respect of the foregoing matters. 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 June 30, 2002, between Lexington Precision Corporation ("LPC") and Michael A. Lubin 10-2 Agreement relating to Junior Subordinated Convertible Increasing Rate Note dated as of July 31, 2002, among LPC, Michael A. Lubin, and Warren Delano 10-3 Agreement dated as of June 28, 2002, between LPC and Congress Financial Corporation 10-4 Agreement dated as of June 28, 2002, between Lexington Rubber Group, Inc. ("LRGI") and Congress Financial Corporation 10-5 Agreement dated as of April 30, 2002 among LPC, LRGI, and Bank One, NA 10-6 Agreement dated July 31, 2002, among LPC, LRGI, and Bank One, NA 10-7 Seventh Amendment Agreement dated June 26, 2002, between LPC, LRGI, and Bank One, NA -34- 10-8 Agreement dated as of April 30, 2002, between LPC and The CIT Group/Equipment Financing, Inc. 10-9 Agreement dated as of July 31, 2002, between LPC and The CIT Group/Equipment Financing, Inc. (b) REPORTS ON FORM 8-K On April 8, 2002, we filed a Form 8-K that included a press release dated April 1, 2002, stating that we were extending the expiration date of our offer to exchange our 12-3/4% senior subordinated notes from 5:00 p.m., New York City time, on April 1, 2002, to 5:00 p.m., New York City time, April 30, 2002. On May 2, 2002, we filed a Form 8-K that included a press release dated May 1, 2002, stating that our exchange offer for our 12-3/4% senior subordinated notes expired on April 30, 2002, and that we expected to commence a new exchange offer for the 12-3/4% senior subordinated notes. We also announced that our proposal to restructure our 10-1/2% senior, unsecured note to August 7, 2007, was rejected by the holders of the 10-1/2 senior, unsecured note. -35- LEXINGTON PRECISION CORPORATION FORM 10-Q JUNE 30, 2002 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) August 13, 2002 By: /s/ Michael A. Lubin --------------- -------------------------------- Date Michael A. Lubin Chairman of the Board August 13, 2002 By: /s/ Warren Delano --------------- -------------------- Date Warren Delano President August 13, 2002 By: /s/ Dennis J. Welhouse --------------- -------------------------- Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -36-