<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2000
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 10, 2000
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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<PAGE> 2
LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........29
PART II. OTHER INFORMATION
Item 3. Defaults on Senior Securities.......................................30
Item 4. Submission of Matters to a Vote of Security Holders.................30
Item 6. Exhibits and Reports on Form 8-K....................................31
</TABLE>
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $35,596 $36,042 $73,262 $70,538
Cost of sales 31,882 29,691 63,716 59,095
------- ------- ------- -------
Gross profit 3,714 6,351 9,546 11,443
Selling and administrative expenses 2,720 3,257 5,739 6,323
------- ------- ------- -------
Income from operations 994 3,094 3,807 5,120
Interest expense 2,496 2,408 4,933 4,750
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item (1,502) 686 (1,126) 370
Income tax provision (73) 171 40 92
------- ------- ------- -------
Income (loss) before extraordinary item (1,429) 515 (1,166) 278
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- -- -- 1,371
------- ------- ------- -------
Net income (loss) $(1,429) $ 515 $(1,166) $ 1,649
======= ======= ======= =======
BASIC NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (0.30) $ 0.12 $ (0.25) $ 0.06
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- -- -- 0.32
------- ------- ------- -------
Basic net income (loss) available to common
stockholders $ (0.30) $ 0.12 $ (0.25) $ 0.38
======= ======= ======= =======
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (0.30) $ 0.11 $ (0.25) $ 0.06
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- -- -- 0.32
------- ------- ------- -------
Diluted net income (loss) available to common
stockholders $ (0.30) $ 0.11 $ (0.25) $ 0.38
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
- 1 -
<PAGE> 4
<TABLE>
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 120 $ 8
Accounts receivable 23,071 24,098
Inventories 10,485 9,492
Prepaid expenses and other current assets 3,514 2,229
Deferred income taxes 1,676 1,676
-------- --------
Total current assets 38,866 37,503
-------- --------
Plant and equipment:
Land 2,344 1,570
Buildings 23,914 23,566
Equipment 104,124 96,694
-------- --------
130,382 121,830
Accumulated depreciation 64,172 60,041
-------- --------
Plant and equipment, net 66,210 61,789
-------- --------
Excess of cost over net assets of businesses acquired 8,304 8,462
-------- --------
Other assets 2,869 3,573
-------- --------
$116,249 $111,327
======== ========
</TABLE>
See notes to consolidated financial statements. (continued on next page)
- 2 -
<PAGE> 5
<TABLE>
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 15,360 $ 8,597
Accrued expenses 10,811 9,794
Short-term debt 67,958 98,069
Debt in default 27,412 --
-------- --------
Total current liabilities 121,541 116,460
-------- --------
Long-term debt, excluding current portion 110 116
-------- --------
Deferred income taxes and other long-term liabilities 1,899 1,884
-------- --------
Series B preferred stock, at redemption value of $200 per share 660 660
Excess of redemption value over par value (330) (330)
-------- --------
Series B preferred stock, at par value of $100 per share 330 330
-------- --------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,828,036 and 4,348,951 shares issued,
respectively 1,207 1,087
Additional paid-in-capital 12,947 12,160
Accumulated deficit (21,785) (20,493)
Cost of common stock in treasury, 85,915 shares at
December 31, 1999 -- (217)
-------- --------
Total stockholders' deficit (7,631) (7,463)
-------- --------
$116,249 $111,327
======== ========
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE> 6
<TABLE>
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (1,166) $ 1,649
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of debt -- (1,828)
Depreciation 5,862 5,394
Amortization included in operating expense 739 837
Amortization included in interest expense 98 108
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable 1,027 (3,116)
Inventories (993) 264
Prepaid expenses and other current assets (857) (53)
Accounts payable 6,763 (2,081)
Accrued expenses 1,017 668
Other 285 423
-------- -------
Net cash provided by operating activities 12,775 2,265
-------- -------
INVESTING ACTIVITIES:
Purchases of plant and equipment (10,918) (5,005)
Decrease in equipment deposits 342 142
Proceeds from sales of equipment 237 20
Expenditures for tooling owned by customers (536) (512)
-------- -------
Net cash used by investing activities (10,875) (5,355)
-------- -------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt (145) 4,624
Proceeds from issuance of long-term debt 2,460 10,244
Repayment of long-term debt (4,020) (9,326)
Repurchase of debt -- (1,980)
Other (83) (266)
-------- -------
Net cash provided (used) by financing
activities (1,788) 3,296
-------- -------
Net increase in cash 112 206
Cash at beginning of period 8 103
-------- -------
Cash at end of period $ 120 $ 309
======== =======
</TABLE>
See notes to consolidated financial statements.
- 4 -
<PAGE> 7
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, 1999.
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, 2000, and the Company's results of
operations for the three-month and six-month periods ended June 30, 2000 and
1999, and the Company's cash flows for the six-month periods ended June 30, 2000
and 1999. All such adjustments were of a normal recurring nature.
The results of operations for the three-month and six-month periods
ended June 30, 2000, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company's 12 3/4% senior subordinated notes, which have an
outstanding principal balance of $27,412,000, matured on February 1, 2000. The
Company is in default in respect of the 12 3/4% 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, on the 12 3/4% senior subordinated
notes that were due on the maturity date.
On December 28, 1999, the Company commenced a consent solicitation
seeking consents of the holders of the 12 3/4% senior subordinated notes to
extend the maturity date of the 12 3/4% senior subordinated notes to February 1,
2003. At the date of issuance of this Form 10-Q, sufficient consents had not
been received to effect the extension. The consent solicitation has been
extended several times and is currently scheduled to expire on August 31, 2000.
The holders of substantially all of the Company's other indebtedness
have waived cross-default provisions with respect to the default on the 12 3/4%
senior subordinated notes and have granted extensions of loans that have been
scheduled to mature. The actions of the various lenders are set forth below.
o 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 relating to the 12 3/4% senior subordinated notes
and have amended certain covenants to eliminate defaults that
would otherwise have occurred because all of the Company's
secured, amortizing term loans have been classified as current
liabilities in the consolidated financial statements.
o 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 October 31, 2000.
- 5 -
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
o The holder of the Company's 10 1/2% senior note, in the
outstanding principal amount of $7,500,000, has extended the
maturity date of that note to November 1, 2000, and has waived
the cross-default provision with respect to the default
relating to the 12 3/4% senior subordinated notes.
o The holder of the Company's 14% junior subordinated
non-convertible notes, in the outstanding principal amount of
$347,000, has extended the maturity date of those notes to
November 1, 2000, has deferred the interest payments on those
notes that were due on February 1, May 1, and August 1, 2000,
to November 1, 2000, and has waived the cross-default
provisions with respect to the default relating to the 12 3/4%
senior subordinated notes.
o The holders of the Company's 14% junior subordinated
convertible notes, which were outstanding on December 31,
1999, in the aggregate principal amount of $1,000,000, have
deferred the interest payments on those notes that were due on
February 1, 2000, to November 1, 2000, and have waived the
cross-default provisions with respect to the default relating
to the 12 3/4% senior subordinated notes. On February 1, 2000,
the 14% junior subordinated convertible notes were converted
into 440,000 shares of the Company's common stock.
o Effective June 30, 2000, a covenant limiting the amount of
past due accounts payable was amended. The Company currently
believes that, during the third quarter of 2000, it will be in
violation of a covenant in one of its loan agreements
requiring the maintenance of a certain minimum tangible net
worth. The Company plans to seek an amendment that would
eliminate the violation, however, there can be no assurance
that it will be successful. If the Company violates the
covenant, the lender would have the right to declare the
indebtedness under the loan agreement 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. Any
action of this type by creditors could have a material adverse
effect upon the Company.
Since January 31, 2000, the Company has made all scheduled payments of
interest and principal on all of its indebtedness other than the 12 3/4% senior
subordinated notes, and the Company has continued to borrow under its revolving
line of credit and has borrowed an aggregate of $2,460,000 under two of its
equipment lines of credit.
The Company has reached an agreement in principle with the holder of
the 10 1/2% senior note on an amendment that will extend the maturity date of
that note to August 1, 2002, increase the interest rate thereon to 12 1/2% for
the twelve-month period August 1, 2000, through July 31, 2001, and 14% for the
twelve-month period August 1, 2001, through July 31, 2002, and provide for
quarterly principal payments of $500,000 each, commencing on May 1, 2001. The
agreement in principle is subject to the Company's obtaining an amendment, on
satisfactory terms, extending the 12 3/4% senior subordinated notes, and
obtaining amendments, on satisfactory terms, from the Company's secured
creditors that
- 6 -
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
provide the Company with adequate extensions of maturity and sufficient
financing to make the payments required when the various amendments become
effective.
At the date of issuance of this Form 10-Q, the Company has not been
able to obtain the necessary consents to extend the maturity date of the 12 3/4%
senior subordinated notes. If the Company is unable to restructure or refinance
the 12 3/4% senior subordinated notes or any of the other indebtedness maturing
during 2000, or if the Company is unable to obtain the necessary amendments to
its secured credit facilities, the Company 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. The consolidated financial statements do not
include any adjustments to the amounts or classification of assets or
liabilities to reflect this uncertainty.
NEW ACCOUNTING PRONOUNCEMENT - REVENUE RECOGNITION IN FINANCIAL
STATEMENTS
In December 1999, the United States Securities and Exchange Commission
("SEC") issued "Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements" ("SAB 101"), which summarizes the staff's views regarding
the accounting for selected revenue recognition issues in accordance with
accounting principles generally accepted in the United States. SAB 101 must be
adopted no later than the fourth quarter of 2000 and is retroactive to January
1, 2000. The Company is currently waiting for interpretive guidance on SAB 101,
which it believes will be issued in the next several months by the SEC, to
complete its assessment of the impact, if any, that SAB 101 may have on the
Company's results of operations or financial position.
NOTE 2 -- INVENTORIES
Inventories at June 30, 2000, and December 31, 1999, are set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Finished goods $ 3,565 $3,565
Work in process 3,173 2,503
Raw materials and purchased parts 3,747 3,424
------- ------
$10,485 $9,492
======= ======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At June 30, 2000, and December 31, 1999, accrued expenses included
accrued interest expense of $3,487,000 and $1,751,000, respectively.
- 7 -
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
Debt at June 30, 2000, and December 31, 1999, is set forth below
(dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Short-term debt:
Revolving line of credit $21,323 $21,468
Secured, amortizing term loans 37,406 38,960
12% secured term note 1,370 1,370
10 1/2% senior note 7,500 7,500
12 3/4% senior subordinated notes -- 27,412
14% junior subordinated notes 347 1,347
------- -------
Subtotal 67,946 98,057
Plus current portion of long-term
Debt 12 12
------- -------
Total short-term debt 67,958 98,069
------- -------
Debt in default:
12 3/4% senior subordinated notes 27,412 --
------- -------
Long-term debt:
Retirement obligations 122 128
Less current portion 12 12
------- -------
Total long-term debt 110 116
------- -------
Total debt $95,480 $98,185
======= =======
</TABLE>
REVOLVING LINE OF CREDIT
Although the revolving line of credit expires on April 1, 2002, loans
outstanding thereunder 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 were also classified as short-term debt because the
Company has only received a waiver through November 1, 2000, of the
cross-default provisions of the revolving line of credit.
At June 30, 2000, availability under the revolving line of credit
totaled $2,291,000, before outstanding checks of $1,696,000 were deducted. At
June 30, 2000, and December 31, 1999, loans outstanding under the revolving line
of credit accrued interest at the London Interbank Offered Rate (LIBOR) plus 2
1/2% and the prime rate. At June 30, 2000, the prime rate was 9 1/2% and LIBOR
was 6.64%.
- 8 -
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM LOANS
Secured, amortizing term loans outstanding at June 30, 2000, and
December 31, 1999, are set forth below (dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.37% $ 2,571 $ 2,688
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2 3/4% 1,464 1,837
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,244 1,298
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,430 2,531
Term loans payable in equal monthly principal installments, final
maturities in 2002, prime rate and LIBOR plus 2 1/2% 1,681(1) 2,139(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate 499 590
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate and LIBOR plus 2 1/2% 311(1) 371(1)
Term loans payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 1,312 1,479
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 1,064 1,199
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate and LIBOR plus 2 1/2% 10,541(1) 11,947(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 3/4% 907 1,067
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate and LIBOR plus 2 1/2% 1,215(1) 1,336(1)
Term loan payable in equal monthly installments, final maturity in
2005, LIBOR plus 2 3/4% 1,120 --
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate 477 518
Term loans payable in equal monthly principal installments, final
maturities in 2006, prime rate and LIBOR plus 2 1/2% 9,246(1) 9,960(1)
Term loans payable in equal monthly installments, final maturity in
2007, prime rate and LIBOR plus 2 1/2% 1,324(1) --
------- -------
$37,406 $38,960
======= =======
</TABLE>
(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 loans outstanding under the Company's revolving line of credit and
the secured, amortizing term loans listed above are collateralized by
substantially all of the assets of the Company, including
- 9 -
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accounts receivable, inventories, equipment, certain real estate, and the stock
of its wholly-owned subsidiary, Lexington Rubber Group, Inc.
10 1/2% SENIOR NOTE
The 10 1/2% senior note, due November 1, 2000, is an unsecured
obligation of the Company. The holder of this note has waived the cross-default
provision with respect to the default relating to the 12 3/4% senior
subordinated notes. These notes are senior in right of payment to the 12 3/4%
senior subordinated notes and the 14% junior subordinated notes. Effective
August 1, 2000, the effective interest rate on the 10 1/2% senior note increased
to 12 1/2%.
12 3/4% SENIOR SUBORDINATED NOTES
The 12 3/4% 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 senior debt, including loans
under the revolving line of credit, the secured, amortizing term loans, the 12%
secured term note, and the 10 1/2% senior note. The Company is in default in
respect of the 12 3/4% 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, on the 12 3/4% senior subordinated notes that were due on
February 1, 2000. For more information regarding the status of the 12 3/4%
senior subordinated notes, refer to Note 1, "Basis of Presentation."
14% JUNIOR SUBORDINATED NOTES
The 14% junior subordinated convertible notes and the 14% junior
subordinated nonconvertible notes are unsecured obligations of the Company. The
14% junior subordinated convertible notes, which had an aggregate principal
amount of $1,000,000, were converted into 440,000 shares of common stock on
February 1, 2000. The 14% junior subordinated nonconvertible notes are due on
November 1, 2000, and are subordinated in right of payment to all existing and
future senior debt of the Company, including loans under the revolving line of
credit, the secured, amortizing term loans, the 12% secured term note, the 10
1/2% senior note, and the 12 3/4% senior subordinated notes. The holders of the
14% junior subordinated notes have deferred, until November 1, 2000, the
interest payments that were due on February 1, May 1, and August 1, 2000, and
waived the cross-default provisions with respect to the default relating to the
12 3/4% 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 trade 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, certain of the financial covenants contained in the
Company's various loan agreements have been amended or waived in order to
maintain or otherwise ensure current or future compliance by the Company. For
more information regarding recent amendments to and waivers of provisions of the
Company's various loan agreements, refer to Note 1, "Basis of Presentation."
- 10 -
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- INCOME TAXES
At June 30, 2000, and December 31, 1999, the Company's net deferred
income tax assets were fully offset by a valuation allowance.
NOTE 6 -- 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, 2000 and 1999,
are set forth below (in thousands, except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerators:
Income (loss) before extraordinary item $(1,429) $ 515 $(1,166) $ 278
Preferred stock dividends (6) (7) (13) (15)
Excess of redemption value over par value of
preferred stock redeemable during the year (11) (11) (22) (22)
------- ------ ------- ------
Numerator for basic net income (loss) per share--
income available to common stockholders before
extraordinary item (1,446) 497 (1,201) 241
------- ------ ------- ------
Effect of assumed conversion of dilutive securities:
14% junior subordinated convertible notes -- 26 -- --
------- ------ ------- ------
Numerator for diluted net income (loss) per share--
income available to common stockholders before
extraordinary items (1,446) 523 (1,201) 241
Extraordinary gain, net of applicable income taxes -- -- -- 1,371
------- ------ ------- ------
Numerator for net income (loss) per share-- income
available to common stockholders after extraordinary
item and assumed conversions $(1,446) $ 523 $(1,201) $1,612
======= ====== ======= ======
Denominators:
Denominator for basic net income (loss) per share--
weighted-average common shares 4,828 4,263 4,735 4,263
Adjustments to derive denominator for diluted net
income (loss) per share:
Conversion of 14% junior subordinated
convertible notes into 440,000 common shares -- 440 75 --
Issuance of 125,000 shares of restricted common
stock -- -- 18 --
------- ------ ------- ------
Denominator for diluted net income (loss) per share--
adjusted weighted average common shares 4,828 4,703 4,828 4,263
======= ====== ======= ======
</TABLE>
(continued on next page)
- 11 -
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic net income (loss) per common share:
Income (loss) before extraordinary item $ (0.30) $ 0.12 $ (0.25) $ 0.06
Extraordinary gain, net of applicable income taxes -- -- -- 0.32
------- ------ ------- ------
Basic net income (loss) available to common
stockholders $ (0.30) $ 0.12 $ (0.25) $ 0.38
======= ====== ======= ======
Diluted net income (loss) per common share:
Income (loss) before extraordinary item $ (0.30) $ 0.11 $ (0.25) $ 0.06
Extraordinary gain, net of applicable income taxes -- -- -- 0.32
------- ------ ------- ------
Diluted net income (loss) available to common
stockholders $ (0.30) $ 0.11 $ (0.25) $ 0.38
======= ====== ======= ======
</TABLE>
- 12 -
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month and six-month periods ended June 30, 2000
and 1999, is summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
Rubber Group $ 26,762 $ 26,206 $ 55,733 $ 51,166
Metals Group 8,834 9,836 17,529 19,372
-------- -------- -------- --------
Total net sales $ 35,596 $ 36,042 $ 73,262 $ 70,538
======== ======== ======== ========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 2,052 $ 4,117 $ 5,771 $ 7,433
Metals Group (592) (294) (889) (989)
Corporate office (466) (729) (1,075) (1,324)
-------- -------- -------- --------
Total income from operations $ 994 $ 3,094 $ 3,807 $ 5,120
======== ======== ======== ========
ASSETS:
Rubber Group $ 76,365 $ 69,635 $ 76,365 $ 69,635
Metals Group 36,434 37,651 36,434 37,651
Corporate office 3,450 3,011 3,450 3,011
-------- -------- -------- --------
Total assets $116,249 $110,297 $116,249 $110,297
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,086 $ 2,061 $ 4,125 $ 4,025
Metals Group 1,224 1,081 2,434 2,187
Corporate office 23 14 42 19
-------- -------- -------- --------
Total depreciation and amortization $ 3,333 $ 3,156 $ 6,601 $ 6,231
======== ======== ======== ========
CAPITAL EXPENDITURES:
Rubber Group $ 4,099 $ 2,532 $ 8,166 $ 3,556
Metals Group 668 564 2,751 1,379
Corporate office -- 21 1 70
-------- -------- -------- --------
Total capital expenditures $ 4,767 $ 3,117 $ 10,918 $ 5,005
======== ======== ======== ========
</TABLE>
(1) Does not include amortization of deferred financing expenses, which
totaled $98,000 and $108,000 during the six-month periods ended
June 30, 2000 and 1999, respectively.
- 13 -
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- EXTRAORDINARY ITEM
During the three-month period ended March 31, 1999, the Company
repurchased $3,808,000 principal amount of its 12 3/4% senior subordinated notes
for $1,980,000 plus accrued interest. The Company recorded an extraordinary
gain, net of applicable income taxes, of $1,371,000 as a result of the
repurchase.
NOTE 9 -- PLANT CLOSURE
In May 1999, the Company closed a 21,000 square foot diecasting
facility in Manchester, New York. For the three-month and six-month periods
ended June 30, 1999, the Manchester facility had net sales of $446,000 and
$894,000, respectively, and losses from operations of $95,000 and $214,000,
respectively. In addition, during the second quarter of 1999, the company
recorded expenses related to the closure and disposal of the facility in the
amount of $590,000.
- 14 -
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
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:
o increases and decreases in business awarded to us by our
customers,
o unanticipated price reductions for our products as a result of
competition,
o unanticipated operating results and cash flows,
o increases or decreases in capital expenditures,
o changes in economic conditions,
o strength or weakness in the North American automotive market,
o changes in the competitive environment,
o changes in interest rates,
o the possibility of product warranty claims,
o labor interruptions at our facilities or at our customers'
facilities,
o the impact on our operations of the defaults on our
indebtedness and the delays in paying our accounts payable,
and
o 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 on 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.
Consequently, 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.
- 15 -
<PAGE> 18
RESULTS OF OPERATIONS-- SECOND QUARTER OF 2000 VERSUS SECOND QUARTER OF 1999
The following table sets forth our consolidated operating results for
the second quarters of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $35,596 100.0% $36,042 100.0%
Cost of sales 31,882 89.5 29,691 82.4
------- ----- ------- -----
Gross profit 3,714 10.5 6,351 17.6
Selling and administrative expenses 2,720 7.6 3,257 9.0
------- ----- ------- -----
Income from operations 994 2.9 3,094 8.6
Add back depreciation and
amortization (1) 3,333 9.4 3,156 8.7
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization (2) $ 4,327 12.3% $ 6,250 17.3%
======= ===== ======= =====
Net cash provided by operating
activities (3) $ 4,573 12.9% $ 1,751 4.9%
======= ===== ======= =====
</TABLE>
(1) Does not include amortization of deferred financing expenses, which
totaled $49,000 and $58,000 during the second quarters of 2000 and
1999, 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.
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, 2000 and 1999.
- 16 -
<PAGE> 19
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 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $26,762 100.0% $26,206 100.0%
Cost of sales 23,138 86.5 20,420 77.9
------- ----- ------- -----
Gross profit 3,624 13.5 5,786 22.1
Selling and administrative expenses 1,572 5.9 1,669 6.4
------- ----- ------- -----
Income from operations 2,052 7.6 4,117 15.7
Add back depreciation and
amortization 2,086 8.0 2,061 7.9
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 4,138 15.6% $ 6,178 23.6%
======= ===== ======= =====
</TABLE>
During the second quarter of 2000, net sales of the Rubber Group
increased by $556,000, or 2.1%, compared to the second quarter of 1999. This
increase was primarily due to increased unit sales of connector seals for
automotive wiring systems, and, to a lesser extent, increased unit sales of
components for medical devices, offset, in part, by reduced sales of tooling and
price reductions on certain automotive components.
During the second quarter of 2000, income from operations totaled
$2,052,000, a decrease of $2,065,000, or 50.2%, compared to the second quarter
of 1999. Cost of sales as a percentage of net sales increased during the second
quarter of 2000 to 86.5% of net sales from 77.9% of net sales during the second
quarter of 1999, primarily due to reduced operating efficiencies and increased
levels of scrap at the Company's insulator division. In an attempt to improve
operating performance at the insulator division a number of management changes
were effected during the second quarter. Since April, a consulting firm has been
retained to assist the management team of the insulator division in implementing
enhanced operating systems. Cost of sales for the second quarter of 2000
included $599,000 of expenses related to the consulting firm's services.
Selling and administrative expenses as a percentage of net sales
decreased during the second quarter of 2000 compared to the second quarter of
1999, primarily because those expenses are partially fixed in nature and because
of a reduction in consulting fees associated with the installation of new
computer hardware and software at certain of the Group's facilities.
- 17 -
<PAGE> 20
During the second quarter of 2000, EBITDA decreased to $4,138,000, a
decrease of $2,040,000, or 33.0%, compared to the second quarter of 1999.
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.
Since 1997, we have been implementing a strategy designed to improve
the profitability and growth potential of the Metals Group by eliminating the
production of a large number of diverse, short-run components and by building
productive capacity to manufacture higher-volume components for customers in
target markets. The repositioning has entailed a shift to a new customer base
and has required that our manufacturing facilities be structured and equipped to
run high-volume parts efficiently and accurately. The repositioning of the
Metals Group has caused us to experience underabsorption of fixed overhead
expenses resulting from the cut-back in short-run business. Additionally, the
Metals Group has incurred expenses for the implementation of improved quality
systems, expenses related to moving equipment and upgrading buildings, costs
related to establishing relationships with major new customers, and costs
resulting from inefficiencies experienced during the rollout of new products.
Certain of these factors and the fact that new, high-volume business is limited
at this stage of the transition adversely affected the results of operations of
the Metals Group during the second quarters of 2000 and 1999.
In May 1999, we closed a 21,000 square foot diecasting facility in
Manchester, New York. For the three-month period ended June 30, 1999, the
Manchester facility had net sales of $446,000 and a loss from operations of
$95,000. During the second quarter of 1999, the Company also recorded expenses
related to the closure and disposal of the facility in the amount of $590,000.
- 18 -
<PAGE> 21
The following table sets forth the operating results of the Metals
Group for the second quarters of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $8,834 100.0% $9,836 100.0%
Cost of sales 8,744 99.0 9,271 94.3
------ ----- ------ -----
Gross profit 90 1.0 565 5.7
Selling and administrative expenses 682 7.7 859 8.7
------ ----- ------ -----
Loss from operations (592) (6.7) (294) (30)
Add back depreciation and
amortization 1,224 13.9 1,081 11.0
------ ----- ------ -----
Earnings before interest, taxes,
depreciation, and amortization $ 632 7.2% $ 787 8.0%
====== ===== ====== =====
</TABLE>
During the second quarter of 2000, net sales of the Metals Group
decreased by $1,002,000, or 10.2%, compared to the second quarter of 1999. This
decrease resulted primarily from a reduction in low-volume business, the
shutdown of the Manchester facility, and reduced sales of tooling.
The Metals Group recorded a loss from operations of $592,000 during the
second quarter of 2000, compared to a loss from operations of $294,000 during
the second quarter of 1999. The loss for the second quarter of 2000 includes a
loss of $303,000 on the disposal and write-down of assets held for sale, which
was charged to cost of sales. The loss for the second quarter of 1999 includes a
loss from operations of $94,000 and a shutdown provision of $590,000 related to
the Group's Manchester facility. Of the $590,000 shutdown provision, $535,000
was charged to cost of sales and $55,000 was charged to selling and
administrative expenses. Excluding the $303,000 loss on the disposal and
write-down of assets held for sale and the $535,000 of Manchester closure
expenses charged to cost of sales, cost of sales as a percentage of net sales
increased from 88.8% during the second quarter of 1999 to 95.6% during the
second quarter of 2000 primarily due to underabsorption of fixed overhead
resulting from reduced net sales, increased depreciation expense, and higher
employee benefit costs.
Selling and administrative expenses as a percentage of net sales
decreased during the second quarter of 2000 compared to the second quarter of
1999, primarily due to reduced consulting fees related to the installation of
new computer systems, and elimination of certain expenses as a result of the
shutdown of the Group's Manchester facility.
During the second quarter of 2000, EBITDA decreased to $632,000, a
decrease of $155,000, or 19.7%, compared to the second quarter of 1999.
CORPORATE OFFICE
Expenses of the corporate office, which are not included in the
operating results for the Rubber Group or the Metals Group, represent
administrative expenses incurred primarily at our New York and
- 19 -
<PAGE> 22
Cleveland offices. Expenses of the corporate office 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 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30
---------------------
2000 1999
---- ----
<S> <C> <C>
Loss from operations (466) (729)
Add back depreciation and
amortization 23 14
---- ----
Earnings before interest, taxes,
depreciation, and amortization (443) (715)
==== ====
</TABLE>
Corporate office expenses decreased by $263,000 during the second
quarter of 2000 compared to the second quarter of 1999, primarily because of a
reduced provision for management incentive compensation.
INTEREST EXPENSE
During the second quarters of 2000 and 1999, interest expense totaled
$2,496,000 and $2,408,000, respectively. Interest expense includes amortization
of deferred financing expenses, which totaled $49,000 and $58,000, during the
second quarters of 2000 and 1999, respectively. The increase in interest expense
was primarily the result of increases in average interest rates on our floating
rate debt.
INCOME TAXES
At June 30, 2000, and December 31, 1999, our net deferred income tax
assets were fully offset by a valuation allowance.
- 20 -
<PAGE> 23
RESULTS OF OPERATIONS-- FIRST SIX MONTHS OF 2000 VERSUS FIRST SIX MONTHS OF 1999
The following table sets forth our consolidated operating results for
the first six months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $73,262 100.0% $70,538 100.0%
Cost of sales 63,716 86.9 59,095 83.8
------- ----- ------- -----
Gross profit 9,546 13.1 11,443 16.2
Selling and administrative expenses 5,739 7.8 6,323 8.9
------- ----- ------- -----
Income from operations 3,807 5.3 5,120 7.3
Add back depreciation and
amortization (1) 6,601 9.0 6,231 8.8
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization (2) $10,408 14.3% $11,351 16.1%
======= ===== ======= =====
Net cash provided by operating
activities (3) $12,775 17.4% $ 2,265 3.2%
======= ===== ======= =====
</TABLE>
(1) Does not include amortization of deferred financing expenses, which
totaled $98,000 and $108,000 during the first six months of 2000 and
1999, 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.
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, 2000 and 1999.
- 21 -
<PAGE> 24
RUBBER GROUP
The following table sets forth the operating results of the Rubber
Group for the first six months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
--------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $55,733 100.0% $51,166 100.0%
Cost of sales 46,719 83.8 40,442 79.0
------- ----- ------- -----
Gross profit 9,014 16.2 10,724 21.0
Selling and administrative expenses 3,243 5.8 3,291 6.4
------- ----- ------- -----
Income from operations 5,771 10.4 7,433 14.5
Add back depreciation and
amortization 4,125 7.4 4,025 7.9
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 9,896 17.8% $11,458 22.4%
======= ===== ======= =====
</TABLE>
During the first six months of 2000, net sales of the Rubber Group
increased by $4,567,000, or 8.9%, compared to the first six months of 1999. This
increase was primarily due to increased unit sales of connector seals for
automotive wiring systems, and, to a lesser extent, increased unit sales of
insulators for automotive ignition wire sets and components for medical devices,
offset, in part, by reduced tooling sales and price reductions on certain
automotive components.
During the first six months of 2000, income from operations totaled
$5,771,000, a decrease of $1,662,000, or 22.4%, compared to the first six months
of 1999. Cost of sales as a percentage of net sales increased during the first
six months of 2000 to 83.8% of net sales from 79.0% of net sales during the
first six months of 1999, primarily due to reduced operating efficiencies and
increased levels of scrap at the Company's insulator division. In an attempt to
improve operating performance at the insulator division a number of management
changes were effected during the first six months of 2000. Since April, a
consulting firm has been retained to assist the management team of the insulator
division in implementing enhanced operating systems. Cost of sales for the first
six months of 2000 included $599,000 of expenses related to the consulting
firm's services.
Selling and administrative expenses as a percentage of net sales
decreased during the first six months of 2000 compared to the first six months
of 1999, primarily because those expenses are partially fixed in nature and
because of a reduction in consulting fees associated with the installation of
new computer hardware and software at certain of the Group's facilities.
During the first six months of 2000, EBITDA decreased to $9,896,000, a
decrease of $1,562,000, or 13.6%, compared to the first six months of 1999.
- 22 -
<PAGE> 25
METALS GROUP
The following table sets forth the operating results of the Metals
Group for the first six months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $17,529 100.0% $19,372 100.0%
Cost of sales 16,997 97.0 18,653 96.3
------- ----- ------- -----
Gross profit 532 3.0 719 3.7
Selling and administrative expenses 1,421 8.1 1,708 8.8
------- ----- ------- -----
Loss from operations (889) (5.1) (989) (5.1)
Add back depreciation and
amortization 2,434 13.9 2,187 11.3
------- ----- ------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 1,545 8.8% $ 1,198 6.2%
======= ===== ======= =====
</TABLE>
During the first six months of 2000, net sales of the Metals Group
decreased by $1,843,000, or 9.5%, compared to the first six months of 1999. This
decrease resulted primarily from a reduction in low-volume business, the
shutdown of the Manchester facility, and reduced sales of tooling.
The Metals Group recorded a loss from operations of $889,000 during the
first six months of 2000, compared to a loss from operations of $989,000 during
the first six months of 1999. The loss for the first six months of 2000 includes
a loss of $305,000 on the disposal and write-down of assets held for sale, which
was charged to cost of sales. The loss for the first six months of 1999 includes
a loss from operations of $214,000 and a shutdown provision of $590,000 related
to the Group's Manchester facility. Of the $590,000 shutdown provision, $535,000
was charged to cost of sales and $55,000 was charged to selling and
administrative expenses. Excluding the $305,000 loss on the disposal and
write-down of assets held for sale and the $535,000 of Manchester closure
expenses charged to cost of sales, cost of sales as a percentage of net sales
increased from 93.5% during the first six months of 1999 to 95.2% during the
first six months of 2000 primarily due to underabsorption of fixed overhead
resulting from reduced net sales, increased depreciation expense, and higher
employee benefit costs.
Selling and administrative expenses as a percentage of net sales
decreased during the first six months of 2000 compared to the first six months
of 1999, primarily due to reduced consulting fees related to the installation of
new computer systems, and elimination of certain expenses as a result of the
shutdown of the Group's Manchester facility.
During the first six months of 2000, EBITDA increased to $1,545,000, an
increase of $347,000, or 28.9%, compared to the first six months of 1999.
- 23 -
<PAGE> 26
CORPORATE OFFICE
Expenses of the corporate office, which are not included in the
operating results for the Rubber Group or the Metals Group, represent
administrative expenses incurred primarily at our New York and Cleveland
offices. Expenses of the corporate office 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 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
2000 1999
------ ------
<S> <C> <C>
Loss from operations (1,075) (1,324)
Add back depreciation and
amortization 42 19
------ ------
Earnings before interest, taxes,
depreciation, and amortization (1,033) (1,305)
====== ======
</TABLE>
Corporate office expenses decreased by $249,000 during the first six
months of 2000 compared to the first six months of 1999, primarily because of a
reduced provision for management incentive compensation.
INTEREST EXPENSE
During the first six months of 2000 and 1999, interest expense totaled
$4,933,000 and $4,750,000, respectively. Interest expense includes amortization
of deferred financing expenses, which totaled $98,000 and $108,000, during the
first six months of 2000 and 1999, respectively. The increase in interest
expense was primarily the result of increases in average interest rates on our
floating rate debt.
INCOME TAXES
At June 30, 2000, and December 31, 1999, 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 2000, our operating activities provided
$12,775,000 of cash.
Accounts payable increased by $6,763,000. This increase was caused
primarily by our decision to delay the payment of accounts payable in order to
preserve liquidity. Our ability to continue this practice is dependent upon the
maintenance of good relationships with vendors. This practice and any change in
those relationships could have an adverse impact on us.
- 24 -
<PAGE> 27
INVESTING ACTIVITIES
During the first six months of 2000, our investing activities used
$10,875,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the corporate office
totaled $8,166,000, $2,751,000, and $1,000, respectively. Capital expenditures
for the first six months of 2000 included $9,796,000 for equipment and
$1,122,000 for land and building improvements. We presently project that capital
expenditures will total approximately $17,800,000 during 2000, including
$16,400,000 for equipment and $1,400,000 for land and building improvements.
Capital expenditures for the Rubber Group and the Metals Group are projected to
total approximately $12,800,000 and $5,000,000, respectively. At June 30, 2000,
we had outstanding commitments to purchase plant and equipment of $4,818,000, of
which $4,156,000 is expected to be purchased during 2000, and $662,000 is
expected to be purchased in 2001. (See also "Liquidity," in Part I, Item 2.)
FINANCING ACTIVITIES
During the first six months of 2000, our financing activities used
$1,788,000 of cash, primarily to make schedule monthly payments on our secured,
amortizing term loans. On February 1, 2000, our 14% junior subordinated
convertible notes, in the aggregate principal amount of $1,000,000, were
converted into 440,000 shares of common stock. During the second quarter, we
obtained three new secured, amortizing term loans in the aggregate amount of
$2,460,000, which refinanced $1,623,000 of loans outstanding under the revolving
line of credit and funded $837,000 of capital expenditures.
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 August 10, 2000, availability under our revolving line of credit
totaled $1,429,000 before outstanding checks of $1,135,000 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. During the first six months of 2000, our aggregate indebtedness, excluding
accounts payable, decreased by $2,705,000. Assuming we obtain the necessary
consents to extend the maturity date of the 12 3/4% senior subordinated notes
and pay the interest that became due on the 12 3/4% senior subordinated notes on
February 1 and August 1, 2000 (as discussed more fully below), during the second
half of 2000, interest expense is estimated to be approximately $5,400,000 and
cash interest payments are estimated to be approximately $7,000,000. Principal
payments on secured, amortizing term loans during the second half of 2000 are
projected to total approximately $4,700,000.
We had a net working capital deficit of $82,675,000 at June 30, 2000,
compared to a net working capital deficit of $78,957,000 at December 31, 1999.
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
- 25 -
<PAGE> 28
the payment of cash dividends. In addition, substantially all of our financing
agreements include cross-default provisions.
From time to time, certain of the financial covenants contained in our
various loan agreements have been amended or waived in order to maintain or
otherwise ensure our current or future compliance. Effective June 30, 2000, a
covenant limiting the amount of past due accounts payable was amended. We
currently believe that, during the third quarter of 2000, we will be in
violation of a covenant in one of our loan agreements requiring the maintenance
of a certain minimum tangible net worth. We plan to seek an amendment that would
eliminate the violation, however, there can be no assurance that we will be
successful. If we violate the covenant, the lender would have the right to
declare the indebtedness under the loan agreement 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, among other things, have 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.
Any action of this type by creditors could have a material adverse effect upon
us.
On December 28, 1999, we commenced a consent solicitation seeking
consents of the holders of our 12 3/4% senior subordinated notes to an extension
of the maturity date of the 12 3/4% senior subordinated notes to February 1,
2003, and providing for a 1% fee to consenting holders and increases in the
interest rate payable on the notes to the rates set forth in the following
table:
<TABLE>
<CAPTION>
PERIOD INTEREST RATE
------ -------------
<S> <C>
February 1, 2000 - January 31, 2001 13 1/2%
February 1, 2001 - July 31, 2001 15 1/2%
August 1, 2001 - January 31, 2002 16%
February 1, 2002 - July 31, 2002 17%
August 1, 2002 - January 31, 2003 18%
</TABLE>
During the term of the consent solicitation, we have been communicating
with the principal non-consenting holders of the 12 3/4% senior subordinated
notes. As a result of those communications, we have recently offered to reduce
the term of the extension by six months and to increase the fee to consenting
holders to 2%.
We are in default in respect of the 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, on the 12 3/4% senior subordinated
notes that were due on February 1, 2000. We have extended the consent
solicitation through August 31, 2000, and we plan to amend the consent
solicitation to seek waivers of the events of default that occurred as a result
of our failure to make the payments of principal and interest. We can give no
assurance that we will be able to obtain the necessary consents to extend the
maturity date of the 12 3/4% senior subordinated notes.
The holders of substantially all of our other indebtedness have waived
cross-default provisions with respect to the default on the 12 3/4% senior
subordinated notes and have granted extensions of loans that have been scheduled
to mature. The actions of the various lenders are set forth below.
o 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 the
default relating to the 12 3/4% senior subordinated notes
through November 1, 2000, and have amended certain covenants
to eliminate defaults that would otherwise have
- 26 -
<PAGE> 29
occurred because all of our secured, amortizing term loans
were classified as current liabilities in our consolidated
financial statements.
o 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 from January 31, 2000, to April 30, 2000, then to
July 31, 2000, and, most recently, to October 31, 2000; that
note has no cross-default provision with respect to the
default relating to the 12 3/4% senior subordinated notes.
o The holder of our 10 1/2% senior note, in the outstanding
principal amount of $7,500,000, has extended the maturity date
of that note from February 1, 2000, to May 1, 2000, then to
August 1, 2000, and, most recently, to November 1, 2000, and
has waived the cross-default provisions with respect to the
default relating to the 12 3/4% senior subordinated notes. We
have reached an agreement in principle with the holder of our
10 1/2% senior note, which provides that, if the 12 3/4%
senior subordinated notes are extended to August 1, 2002, and
certain other conditions are met, the 10 1/2% senior notes
will be extended to August 1, 2002, the interest rate thereon
will be increased to 12 1/2% through July 31, 2001, and 14%
thereafter, and quarterly principal payments of $500,000 will
commence on May 1, 2001. In connection with that agreement in
principle, we have agreed to increase the interest rate on the
note to 12 1/2% for the three-month period ending October 31,
2000.
o The holder of our 14% junior subordinated nonconvertible
notes, in the outstanding principal amount of $347,000, has
extended the maturity date of those notes from May 1, 2000, to
August 1, 2000, and most recently, to November 1, 2000, has
deferred the interest payments on those notes that were due on
February 1, May 1, and August 1, 2000, to November 1, 2000,
and has waived the cross-default provisions with respect to
the default relating to the 12 3/4% senior subordinated notes.
o The holders of our 14% junior subordinated convertible notes,
which were outstanding on December 31, 1999, in the aggregate
principal amount of $1,000,000, have deferred the interest
payments on those notes that were due on February 1, 2000, to
November 1, 2000, and have waived the cross-default provision
with respect to the default relating to the 12 3/4% senior
subordinated notes. On February 1, 2000, the 14% junior
subordinated convertible notes were converted into 440,000
shares of our common stock.
Since January 31, 2000, we have made all scheduled payments of interest
and principal on all of our indebtedness, other than the 12 3/4% senior
subordinated notes, and we have continued to borrow under our revolving line of
credit and have borrowed an aggregate of $2,460,000 under two of our equipment
lines of credit.
To date, we have been unable to obtain the necessary consents to the
extension of our 12 3/4% senior subordinated notes. If we are unable to
restructure or refinance all of our matured or maturing indebtedness, 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 estimate that, in addition to our cash flow from operations and
borrowings available under our revolving line of credit, we will require
approximately $11,500,000 of new borrowings during the
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<PAGE> 30
second half of 2000 to meet our working capital requirements, fund our projected
capital expenditures, reduce our trade accounts payable to levels considered
customary for the industries in which we operate, and meet our anticipated debt
service requirements, including the amounts we would have to pay to the holders
of our 10 1/2% senior note, our 12 3/4% senior subordinated notes, and our 14%
junior subordinated notes if we were to complete the consent solicitation on the
terms we are currently proposing. If we are unable to obtain additional
financing in the amount set forth, we may be unable to complete the extensions
of our matured and maturing indebtedness as contemplated in the consent
solicitation, in which case 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
UNITED STATES SECURITIES AND EXCHANGE COMMISSION STAFF ACCOUNTING
BULLETIN 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
In December 1999, the United States Securities and Exchange Commission
("SEC") issued "Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements" ("SAB 101"), which summarizes the staff's views regarding
the accounting for selected revenue recognition issues in accordance with
accounting principles generally accepted in the United States. SAB 101 must be
adopted no later than the fourth quarter of 2000 and is retroactive to January
1, 2000. We are currently waiting for interpretive guidance on SAB 101, which we
believe will be issued in the next several months by the SEC, to complete our
assessment of the impact, if any, that SAB 101 may have on our results of
operations or financial position.
- 28 -
<PAGE> 31
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, 2000, we had $52,484,000 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, 2000, we had outstanding $42,996,000 of fixed rate
long-term debt with a weighted-average interest rate of 11.76%, of which
$36,629,000 has matured or is scheduled to mature during 2000. If we are able to
refinance or extend the matured or maturing debt, it may be at interest rates
that are significantly higher than the weighted-average interest rate on the
matured or maturing debt. In connection with our solicitation of consents to
extend the maturity date of our $27,412,000 of outstanding 12 3/4% senior
subordinated notes from February 1, 2000, to February 1, 2003, we have offered
to increase the interest rates thereon to the rates set forth in the following
table:
<TABLE>
<CAPTION>
PERIOD INTEREST RATE
------ -------------
<S> <C>
February 1, 2000 - January 31, 2001 13 1/2%
February 1, 2001 - July 31, 2001 15 1/2%
August 1, 2001 - January 31, 2002 16%
February 1, 2002 - July 31, 2002 17%
August 1, 2002 - January 31, 2003 18%
</TABLE>
If the consent solicitation is successful and assuming the maturity
date of the 12 3/4% senior subordinated notes were extended to February 1, 2003,
and all of the notes were to remain outstanding during 2000, 2001, and 2002, we
would pay $188,000, $765,000, and $1,256,000 more interest during those
respective periods than if the interest rate were to remain at 12 3/4%. In
addition, if the 10 1/2% senior note were amended in accordance with our
agreement in principle, we would pay $63,000, $177,000, and $109,000 more during
2000, 2001, and 2002, respectively, than if the interest rate were to remain at
10 1/2%. For more information regarding the status of the consent solicitation,
you should refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity," in Part I, Item 2, and Note 1 to the
consolidated financial statements in Part I, Item 1.
- 29 -
<PAGE> 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.
(b) We did not pay dividends on our $8 Cumulative Convertible Preferred
Stock, Series B, during the six-month period ended June 30, 2000, in the
aggregate amount of $13,000. The total amount of dividends in arrears as of June
30, 2000, was $13,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May
23, 2000.
(b) The matters voted upon at the Annual Meeting and the results of
the voting on each matter are set forth below:
(i) A proposal to elect four directors (Messrs. William
B. Conner, Warren Delano, Kenneth I. Greenstein, and
Michael A. Lubin).
Mr. Conner:
Votes for Mr. Conner 4,482,778
Votes withheld from Mr. Conner 16,323
Mr. Delano:
Votes for Mr. Delano 4,482,778
Votes withheld from Mr. Delano 16,323
Mr. Greenstein:
Votes for Mr. Greenstein 4,477,449
Votes withheld from Mr. Greenstein 21,652
Mr. Lubin:
Votes for Mr. Lubin 4,482,778
Votes withheld from Mr. Lubin 16,323
(ii) The ratification of Ernst & Young LLP as independent
auditors of the Company for the year ending December
31, 2000.
Votes for Ernst & Young LLP 4,482,626
Votes against Ernst & Young LLP 2,300
Abstentions 10,175
There were no broker non-votes in respect of the
foregoing matters.
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<PAGE> 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Promissory Note dated June 26, 2000, between Lexington
Precision Corporation ("LPC") and CIT Group/Equipment
Financing, Inc. ("CIT")
10-2 Amendment No.4 to Loan and Security Agreement dated June
26, 2000, between LPC and CIT
10-3 Agreement relating to 14% Junior Subordinated Notes dated
July 31, 2000, between LPC and Michael A. Lubin
10-4 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated July 31, 2000, among LPC,
Michael A. Lubin, and Warren Delano
10-5 Note Amendment No. 3 to Note dated as of July 31, 2000,
between LPC and Tri-Links Investment Trust, as successor to
Nomura Holding America, Inc.
10-6 Fifth Amendment Agreement dated July 31, 2000, between
Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell
10-7 Agreement dated as of July 31, 2000, among LPC, LRGI, and
Congress Financial Corporation
10-8 Agreement dated as of July 31, 2000, between LPC and CIT
10-9 Agreement dated as of July 31, 2000, among LPC, LRGI, and
Bank One, NA
10-10 Congress Covenant Waiver
27-1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
commission during the second quarter of 2000.
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<PAGE> 34
LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 2000
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 10, 2000 By: /s/ Michael A. Lubin
--------------- ---------------------
Date Michael A. Lubin
Chairman of the Board
August 10, 2000 By: /s/ Warren Delano
--------------- ------------------
Date Warren Delano
President
August 10, 2000 By: /s/ Dennis J. Welhouse
--------------- -----------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
- 32 -
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Location
------ ------- --------
<S> <C> <C>
10-1 Promissory Note dated June 26, 2000, Filed with this Form 10-Q
Between Lexington Precision Corporation
("LPC") and CIT Group/Equipment Financing,
Inc. ("CIT")
10-2 Amendment No. 4 to Loan and Security Filed with this Form 10-Q
Agreement dated June 26, 2000, between LPC
and CIT
10-3 Agreement relating to 14% Junior Subordinated Filed with this Form 10-Q
Notes dated July 31, 2000, between LPC and
Michael A. Lubin
10-4 Agreement relating to Junior Subordinated Filed with this Form 10-Q
Convertible Increasing Rate Note dated
July 31, 2000, among LPC, Michael A. Lubin,
and Warren Delano
10-5 Note Amendment No. 3 to Note dated as of Filed with this Form 10-Q
July 31, 2000, between LPC and Tri-Links
Investment Trust, as successor to Nomura
Holding America, Inc.
10-6 Fifth Amendment Agreement dated July 31, Filed with this Form 10-Q
2000, between LRGI and Paul H. Pennell
10-7 Agreement dated as of July 31, 2000, among Filed with this Form 10-Q
LPC, LRGI, and Congress Financial Corporation
("Congress")
10-8 Agreement dated as of July 31, 2000, between Filed with this Form 10-Q
LPC and CIT
10-9 Agreement dated as of July 31, 2000, among Filed with this Form 10-Q
LPC, LRGI, and Bank One, NA
10-10 Congress Covenant Waiver Filed with this Form 10-Q
27-1 Financial Data Schedule Filed with this Form 10-Q
</TABLE>
