<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 SEPTEMBER 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 NOVEMBER 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 OF CONTENTS
PAGE
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 6. Exhibits and Reports on Form 8-K...................................30
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 35,096 $ 34,218 $ 108,358 $ 104,756
Cost of sales 31,608 28,550 95,324 87,645
--------- --------- --------- ---------
Gross profit 3,488 5,668 13,034 17,111
Selling and administrative expenses 2,633 2,916 8,372 9,239
--------- --------- --------- ---------
Income from operations 855 2,752 4,662 7,872
Interest expense 2,444 2,456 7,377 7,206
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item (1,589) 296 (2,715) 666
Income tax provision (208) 74 (168) 166
--------- --------- --------- ---------
Income (loss) before extraordinary item (1,381) 222 (2,547) 500
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- 80 -- 1,451
--------- --------- --------- ---------
Net income (loss) $ (1,381) $ 302 $ (2,547) $ 1,951
========= ========= ========= =========
Per share data:
Basic and diluted net income (loss) before
extraordinary item $ (0.29) $ 0.05 $ (0.55) $ 0.10
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- 0.02 -- 0.34
--------- --------- --------- ---------
Basic and diluted net income (loss) available to
common stockholders $ (0.29) $ 0.07 $ (0.55) $ 0.44
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
ASSETS:
<S> <C> <C>
Current assets:
Cash $ 104 $ 8
Accounts receivable 22,444 24,098
Inventories 10,713 9,492
Prepaid expenses and other current assets 3,799 2,229
Deferred income taxes 1,676 1,676
-------- --------
Total current assets 38,736 37,503
-------- --------
Plant and equipment:
Land 2,344 1,570
Buildings 23,913 23,566
Equipment 106,330 96,694
-------- --------
132,587 121,830
Accumulated depreciation 67,154 60,041
-------- --------
Plant and equipment, net 65,433 61,789
-------- --------
Excess of cost over net assets of businesses acquired 8,225 8,462
-------- --------
Other assets 2,605 3,573
-------- --------
$114,999 $111,327
======== ========
</TABLE>
See notes to consolidated financial statements. (continued on next page)
-2-
<PAGE> 5
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
<S> <C> <C>
Current liabilities:
Accounts payable $ 16,882 $ 8,597
Accrued expenses 11,477 9,794
Short-term debt 65,896 98,069
Debt in default 27,412 --
--------- ---------
Total current liabilities 121,667 116,460
--------- ---------
Long-term debt, excluding current portion 107 116
--------- ---------
Deferred income taxes and other long-term liabilities 1,907 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 12,940 12,160
Accumulated deficit (23,159) (20,493)
Cost of common stock in treasury, 85,915 shares at
December 31, 1999 -- (217)
--------- ---------
Total stockholders' deficit (9,012) (7,463)
--------- ---------
$ 114,999 $ 111,327
========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (2,547) $ 1,951
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of debt -- (1,935)
Depreciation 8,971 8,119
Amortization included in operating expense 1,080 1,250
Amortization included in interest expense 149 179
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable 1,654 (3,863)
Inventories (1,221) 140
Prepaid expenses and other current assets (1,151) 392
Accounts payable 8,285 (1,068)
Accrued expenses 1,683 184
Other 349 429
-------- --------
Net cash provided by operating activities 17,252 5,778
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (13,339) (8,245)
Decrease in equipment deposits 677 497
Proceeds from sales of equipment 307 27
Expenditures for tooling owned by customers (906) (757)
-------- --------
Net cash used by investing activities (13,261) (8,478)
-------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in loans under revolving line of credit (102) 6,249
Proceeds of secured, amortizing term loans 2,460 10,587
Repayment of secured, amortizing term loans (6,119) (11,260)
Repurchase of debt -- (2,373)
Other (134) (420)
-------- --------
Net cash provided (used) by financing
activities (3,895) 2,783
-------- --------
Net increase in cash 96 83
Cash at beginning of period 8 103
-------- --------
Cash at end of period $ 104 $ 186
======== ========
</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.
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 September 30, 2000, and
the Company's results of operations for the three-month and nine-month periods
ended September 30, 2000 and 1999, and the Company's cash flows for the
nine-month periods ended September 30, 2000 and 1999. All such adjustments were
of a normal recurring nature.
The results of operations for the three-month and nine-month periods
ended September 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. In addition to the interest payment
that was due on February 1, 2000, the Company has accrued $2,330,000 of interest
on the 12 3/4% senior subordinated notes for the period February 1, 2000,
through September 30, 2000.
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 term of the consent solicitation has
been extended several times and is currently scheduled to expire on December 29,
2000. The Company also has commenced discussions with the four largest holders
of the 12 3/4% senior subordinated notes regarding amendments to the terms of
the consent solicitation.
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.
- 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
through February 1,
-5-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2001, and have amended certain covenants to eliminate defaults
that would otherwise have occurred during 2000 because all of
the Company's secured, amortizing term loans have been
classified as current liabilities in the consolidated
financial statements. Effective June 30, 2000, a covenant
limiting the amount of past due accounts payable was amended
and effective August 31, 2000, that covenant was further
amended through February 1, 2001. Also, effective June 30,
2000, a covenant requiring a minimum level of tangible net
worth was amended through February 1, 2001.
- 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 January 31, 2001.
- 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 February 1, 2001, and has waived
the cross-default provision with respect to the default
relating to the 12 3/4% senior subordinated notes. On August
1, 2000, the effective interest rate on the 10 1/2% senior
note increased to 12 1/2%.
- 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
February 1, 2001, has deferred the interest payments on those
notes that were due on February 1, May 1, August 1, and
November 1, 2000, to February 1, 2001, and has waived the
cross-default provisions with respect to the default relating
to the 12 3/4% senior subordinated notes.
- 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 February 1, 2001, 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.
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.
Earlier this year, the Company reached a non-binding agreement with the
holder of the 10 1/2% senior note on an amendment that would 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 non-binding agreement was 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 provide the Company with adequate extensions of maturity and
sufficient financing to make the payments required when the various amendments
become effective.
-6-
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. The Company has commenced discussions with the four
largest holders of the 12 3/4% senior subordinated notes regarding amendments to
the terms of the consent solicitation. In connection with any such amendment,
the Company may also seek to change the terms of its non-binding agreement with
the holder of the 10 1/2% senior note. If the Company is unable to restructure
or refinance the 12 3/4% senior subordinated notes, the 10 1/2% senior note, or
any of the other indebtedness maturing during 2001, 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.
RECENT 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 believes that the adoption of SAB 101 during the fourth
quarter of 2000 will not affect the results of operations or financial position
of the Company.
NOTE 2 -- INVENTORIES
Inventories at September 30, 2000, and December 31, 1999, are set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------- -------
<S> <C> <C>
Finished goods $ 3,854 $ 3,565
Work in process 3,050 2,503
Raw materials and purchased parts 3,809 3,424
------- -------
$10,713 $ 9,492
======= =======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At September 30, 2000, and December 31, 1999, accrued expenses included
accrued interest expense of $4,334,000 and $1,751,000, respectively.
-7-
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
Debt at September 30, 2000, and December 31, 1999, is set forth below
(dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Short-term debt:
Revolving line of credit $21,366 $21,468
Secured, amortizing term loans 35,301 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 65,884 98,057
Plus current portion of long-term
debt 12 12
------- -------
Total short-term debt 65,896 98,069
------- -------
Debt in default:
12 3/4% senior subordinated notes 27,412 --
------- -------
Long-term debt:
Retirement obligations 119 128
Less current portion 12 12
------- -------
Total long-term debt 107 116
------- -------
Total debt $93,415 $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 February 1, 2001, of the
cross-default provisions of the revolving line of credit.
At September 30, 2000, availability under the revolving line of credit
totaled $1,526,000, before outstanding checks of $1,477,000 were deducted. At
September 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 September 30, 2000, LIBOR was 6.62% and the
prime rate was 9 1/2%.
-8-
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SECURED, AMORTIZING TERM LOANS
Secured, amortizing term loans outstanding at September 30, 2000, and
December 31, 1999, are set forth below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 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% $ 2,512 $ 2,688
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2 3/4% 1,277 1,837
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,218 1,298
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,380 2,531
Term loans payable in equal monthly principal installments, final
maturities in 2002, prime rate and LIBOR plus 2 1/2% 1,451(1) 2,139(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate 454 590
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate and LIBOR plus 2 1/2% 281(1) 371(1)
Term loans payable in equal monthly principal installments, final
maturities in 2004, LIBOR plus 2 3/4% 1,229 1,479
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate and LIBOR plus 2 1/2% 996 1,199
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate and LIBOR plus 2 1/2% 9,838(1) 11,947(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2 3/4% 827 1,067
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate and LIBOR plus 2 1/2% 1,155(1) 1,336(1)
Term loan payable in equal monthly installments, final maturity in
2005, LIBOR plus 2 3/4% 1,083 --
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate 456 518
Term loans payable in equal monthly principal installments, final
maturities in 2006, prime rate and LIBOR plus 2 1/2% 8,868(1) 9,960(1)
Term loans payable in equal monthly installments, final maturity in
2007, prime rate and LIBOR plus 2 1/2% 1,276(1) --
------- -------
$35,301 $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 and its
-9-
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
wholly-owned subsidiary, Lexington Rubber Group, Inc., including accounts
receivable, inventories, equipment, certain real estate, and the stock of
Lexington Rubber Group, Inc.
10 1/2% SENIOR NOTE
The 10 1/2% senior note, due February 1, 2001, 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. On 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. In addition to the interest payment that was due on February
1, 2000, the Company has accrued $2,330,000 of interest on the 12 3/4% senior
subordinated notes for the period February 1, 2000, through September 20, 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
February 1, 2001, 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 February 1, 2001, the
interest payments that were due on February 1, May 1, August 1, and November 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
-10-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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."
NOTE 5 -- INCOME TAXES
At September 30, 2000, and December 31, 1999, the Company's net
deferred income tax assets were fully offset by a valuation allowance. The
income tax credit recorded for the quarter ended September 30, 2000, resulted
from a refund of income taxes expensed during prior periods.
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 nine-month periods ended September 30, 2000 and
1999, are set forth below (in thousands, except per share amounts). The pro
forma conversion of the Company's potentially dilutive securities was not
dilutive for the three-month and nine-month periods ended September 30, 2000 and
1999, respectively. As a result, the per share data set forth below does not
reflect any pro forma conversion.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerators:
Income (loss) before extraordinary item $(1,381) $ 222 $(2,547) $ 500
Preferred stock dividends (7) (8) (20) (23)
Excess of redemption value over par value of
preferred stock redeemable during the year (11) (11) (34) (34)
------- ------- ------- -------
Numerator for basic net income (loss) per share--
income (loss) available to common stockholders
before extraordinary item (1,399) 203 (2,601) 443
Effect of assumed conversion of dilutive securities:
14% junior subordinated convertible notes -- 26 -- 78
------- ------- ------- -------
Numerator for diluted net income (loss) per share -- income
(loss) available to common stockholders before
extraordinary items (1,399) 229 (2,601) 521
Extraordinary gain, net of applicable income taxes -- 80 -- 1,451
------- ------- ------- -------
Numerator net income (loss) per share -- income (loss)
available to common stockholders after extraordinary
item and assumed conversions $(1,399) $ 309 $(2,601) $ 1,972
======= ======= ======= =======
</TABLE>
(continued on next page)
-11-
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from previous page)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- --------------------
2000 1999 2000 1999
--------- --------- ------ ---------
<S> <C> <C> <C> <C>
Denominators:
Denominator for basic net income (loss) per share--
weighted-average common shares 4,828 4,263 4,766 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 50 440
Issuance of 125,000 shares of restricted common
stock -- -- 12 --
--------- --------- ------ ---------
Denominator for diluted net income (loss) per share--
adjusted weighted average common shares 4,828 4,703 4,828 4,703
========= ========= ====== =========
Per share data:
Basic and diluted net income (loss) per common share
before extraordinary item $ (0.29) $ 0.05 $ (0.55) $ 0.10
Extraordinary gain, net of applicable income taxes -- 0.02 -- 0.34
--------- --------- ------ ---------
Basic and diluted net income (loss) available to
common stockholders $ (0.29) $ 0.07 $ (0.55) $ 0.44
========= ========= ====== =========
</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 nine-month periods ended September 30,
2000 and 1999, is summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES:
Rubber Group $ 25,930 $ 25,123 $ 81,663 $ 76,289
Metals Group 9,166 9,095 26,695 28,467
--------- --------- --------- ---------
Total net sales $ 35,096 $ 34,218 $ 108,358 $ 104,756
========= ========= ========= =========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 1,945 $ 3,390 $ 7,716 $ 10,823
Metals Group (500) (125) (1,389) (1,114)
Corporate office (590) (513) (1,665) (1,837)
--------- --------- --------- ---------
Total income from operations $ 855 $ 2,752 $ 4,662 $ 7,872
========= ========= ========= =========
ASSETS:
Rubber Group $ 75,748 $ 71,402 $ 75,748 $ 71,402
Metals Group 36,646 37,144 36,646 37,144
Corporate office 2,605 2,092 2,605 2,092
--------- --------- --------- ---------
Total assets $ 114,999 $ 110,638 $ 114,999 $ 110,638
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION (1):
Rubber Group $ 2,221 $ 2,000 $ 6,346 $ 6,025
Metals Group 1,207 1,125 3,641 3,312
Corporate office 22 13 64 32
--------- --------- --------- ---------
Total depreciation and amortization $ 3,450 $ 3,138 $ 10,051 $ 9,369
========= ========= ========= =========
CAPITAL EXPENDITURES:
Rubber Group $ 1,732 $ 2,636 $ 9,898 $ 6,192
Metals Group 689 600 3,440 1,979
Corporate office -- 4 1 74
--------- --------- --------- ---------
Total capital expenditures $ 2,421 $ 3,240 $ 13,339 $ 8,245
========= ========= ========= =========
</TABLE>
(1) Does not include amortization of deferred financing expenses, which
totaled $51,000 and $71,000 during the three-month periods ended
September 30, 2000 and 1999, respectively, and $149,000 and $179,000
during the nine-month periods ended September 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. During the three-month period ended September 30, 1999, the Company
repurchased $500,000 principal amount of 12 3/4% senior subordinated notes for
$393,000 plus accrued interest. The Company recorded an extraordinary gain, net
of applicable income taxes, of $80,000 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 third quarter of 1999, the Manchester
facility had no net sales and income from operations of $28,000. For the nine
months ended September 30, 1999, the facility had net sales of $935,000 and a
loss from operations of $186,000. During the second quarter of 1999, the Company
recorded expenses for the closure and disposal of the facility in the amount of
$590,000. During the third quarter of 1999, the Company reduced its estimate of
the cost to close and dispose of the facility by $22,000.
-14-
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Some of our statements in this section are "forward-looking
statements," as that term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements usually can be identified by our use of
words like "believes," "expects," "may," "will," "should," "anticipates,"
"estimates," "projects," or the negative thereof. They may be used when we
discuss strategy, which typically involves risk and uncertainty, and they
generally are based upon projections and estimates rather than historical facts
and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- unanticipated operating results and cash flows,
- increases or decreases in capital expenditures,
- changes in economic conditions,
- strength or weakness in the North American automotive market,
- changes in the competitive environment,
- changes in interest rates,
- the possibility of product warranty claims,
- labor interruptions at our facilities or at our customers'
facilities,
- the impact on our operations of the defaults on our
indebtedness and the delays in paying our accounts payable,
and
- our inability to obtain additional borrowings or to refinance
our existing indebtedness.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have 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-- THIRD QUARTER OF 2000 VERSUS THIRD QUARTER OF 1999
The following table sets forth our consolidated operating results for
the third quarters of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $35,096 100.0% $34,218 100.0%
Cost of sales 31,608 90.1 28,550 83.4
------- --------- ------- ---------
Gross profit 3,488 9.9 5,668 16.6
Selling and administrative expenses 2,633 7.5 2,916 8.5
------- --------- ------- ---------
Income from operations 855 2.4 2,752 8.1
Add back depreciation and
amortization (1) 3,450 9.8 3,138 9.1
------- --------- ------- ---------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 4,305 12.2% $ 5,890 17.2%
======= ========= ======= =========
Net cash provided by operating
activities (3) $ 4,477 12.8% $ 3,513 10.3%
======= ========= ======= =========
</TABLE>
(1) Does not include amortization of deferred financing expenses,
which totaled $51,000 and $71,000 during the third 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 September 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 third quarters of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------
2000 1999
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales $25,930 100.0% $25,123 100.0%
Cost of sales 22,589 87.1 20,222 80.5
------- ------- ------- -------
Gross profit 3,341 12.9 4,901 19.5
Selling and administrative expenses 1,396 5.4 1,511 6.0
------- ------- ------- -------
Income from operations 1,945 7.5 3,390 13.5
Add back depreciation and
amortization 2,221 8.5 2,000 8.0
------- ------- ------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 4,166 16.0% $ 5,390 21.5%
======= ======= ======= =======
</TABLE>
During the third quarter of 2000, net sales of the Rubber Group
increased by $807,000, or 3.2%, compared to the third quarter of 1999. This
increase was primarily due to increased unit sales of connector seals for
automotive wiring systems, insulators for ignition wire sets, and components for
medical devices, offset, in part, by price reductions on certain automotive
components.
During the third quarter of 2000, income from operations totaled
$1,945,000, a decrease of $1,445,000, or 42.6%, compared to the third quarter of
1999. Cost of sales as a percentage of net sales increased during the third
quarter of 2000 to 87.1% of net sales from 80.5% of net sales during the third
quarter of 1999, primarily due to reduced operating efficiencies and increased
levels of scrap at the Company's insulators division and, to a lesser extent,
increased product development costs and higher quality control costs at the
Company's connector seals division. In an attempt to improve operating
performance at the insulators division, a number of management changes were
effected during the second quarter. From April through August 2000, a consulting
firm was retained to assist the management team of the insulators division in
implementing improved operating systems. Cost of sales for the third quarter of
2000 included $414,000 of expenses related to the consulting firm's services.
Selling and administrative expenses as a percentage of net sales
decreased during the third quarter of 2000 compared to the third 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 Rubber Group's facilities.
-17-
<PAGE> 20
During the third quarter of 2000, EBITDA decreased to $4,166,000, a
decrease of $1,224,000, or 22.7%, compared to the third quarter of 1999.
Delphi Automotive Systems Corporation is the Rubber Group's largest
customer. During the first nine months of 2000, the Rubber Group's net sales to
Delphi totaled $22,924,000, which represented 28.1% of the Rubber Group's net
sales. Substantially all of the Rubber Group's sales to Delphi are of connector
seals for automotive wiring systems.
For the last four years, most of the connector seals that we have sold
to Delphi have been subject to a multi-year agreement that expires on December
31, 2001. Under the terms of that agreement and several similar agreements that
expire at later dates:
- we sell and Delphi purchases approximately 100% of Delphi's
requirements for all specified components,
- we warrant that the components will remain competitive in
terms of technology, design, and quality,
- the selling prices of the components are adjusted to reflect
increases or decreases in material costs, and
- the selling prices of the components are reduced by
agreed-upon percentages in each of the years covered by the
agreements.
Recently, we began discussions with Delphi regarding an extension of
all of our agreements. During the third quarter, we made a proposal to Delphi
that would entail substantial price reductions on a number of high-volume
components. Although Delphi has not agreed to extend the agreements, we
currently believe that:
- Delphi will extend the agreements to December 31, 2006,
- Delphi will insource approximately $3,600,000 of components
that we currently produce after December 31, 2001,
- we will give Delphi approximately $5,500,000 of annual price
reductions that would become effective at various times
thoughout 2001,
- we will generate annual cost savings of approximately
$1,600,000 as a result of reduced material costs and changes
in our manufacturing processes,
- Delphi will purchase certain new tooling that will permit us
to make those changes in our manufacturing processes, and
- substantial new business awarded to the connector seals
division by Delphi and other customers and scheduled to begin
production in 2001 should generate incremental profits that
will, in conjunction with the above mentioned cost savings,
offset a major portion of the reduction in profitability
caused by the proposed price reductions.
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-
-18-
<PAGE> 21
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 third quarters
of 2000 and 1999.
In May 1999, we closed a 21,000 square foot diecasting facility in
Manchester, New York. For the third quarter of 1999, the Manchester facility had
no net sales and income from operations of $28,000. During the third quarter of
1999, we reduced our estimate of the cost to close and dispose of the facility
by $22,000.
The following table sets forth the operating results of the Metals
Group for the third quarters of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 9,166 100.0% $ 9,095 100.0%
Cost of sales 9,019 98.4 8,328 91.6
------- ------ -------- ------
Gross profit 147 1.6 767 8.4
Selling and administrative expenses 647 7.1 892 9.8
------- ------ -------- ------
Loss from operations (500) (5.5) (125) (1.4)
Add back depreciation and
amortization 1,207 13.2 1,125 12.4
------- ------ -------- ------
Earnings before interest, taxes,
depreciation, and amortization $ 707 7.7% $ 1,000 11.0%
======= ====== ======== ======
</TABLE>
During the third quarter of 2000, net sales of the Metals Group
increased by $71,000, or 0.8%, compared to the third quarter of 1999.
The Metals Group recorded a loss from operations of $500,000 during the
third quarter of 2000, compared to a loss from operations of $125,000 during the
third quarter of 1999. Cost of sales as a percentage of net sales increased from
91.6% during the third quarter of 1999 to 98.4% during the third quarter of 2000
primarily due to increased depreciation expense, higher employee compensation
costs, and increased cost of manufacturing supplies.
-19-
<PAGE> 22
Selling and administrative expenses as a percentage of net sales
decreased during the third quarter of 2000 compared to the third quarter of
1999, primarily due to reduced consulting fees related to the installation of
new computer systems and reduced employee benefit costs.
During the third quarter of 2000, EBITDA decreased to $707,000, a
decrease of $293,000, or 29.3%, compared to the third quarter of 1999.
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 third quarters of 2000 and 1999 (dollar amounts in thousands):
THREE MONTHS ENDED
SEPTEMBER 30
------------------------
2000 1999
------- -------
Loss from operations (590) (513)
Add back depreciation and
amortization 22 14
------- -------
Earnings before interest, taxes,
depreciation, and amortization (568) (499)
======= =======
INTEREST EXPENSE
During the third quarters of 2000 and 1999, interest expense totaled
$2,444,000 and $2,456,000, respectively. Interest expense includes amortization
of deferred financing expenses, which totaled $51,000 and $71,000 during the
third quarters of 2000 and 1999, respectively.
INCOME TAXES
At September 30, 2000, and December 31, 1999, our net deferred income
tax assets were fully offset by a valuation allowance. The income tax credit
recorded for the quarter ended September 30, 2000, resulted from a refund of
income taxes that were expensed during prior periods.
-20-
<PAGE> 23
RESULTS OF OPERATIONS-- FIRST NINE MONTHS OF 2000 VERSUS FIRST NINE MONTHS OF
1999
The following table sets forth our consolidated operating results for
the first nine months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------
2000 1999
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales $108,358 100.0% $104,756 100.0%
Cost of sales 95,324 88.0 87,645 83.7
-------- ------- -------- -------
Gross profit 13,034 12.0 17,111 16.3
Selling and administrative expenses 8,372 7.7 9,239 8.8
-------- ------- -------- -------
Income from operations 4,662 4.3 7,872 7.5
Add back depreciation and
amortization (1) 10,051 9.3 9,369 9.0
-------- ------- -------- -------
Earnings before interest, taxes,
depreciation, and amortization (2) $ 14,713 13.6% $ 17,241 16.5%
======== ======= ======== =======
Net cash provided by operating
activities (3) $ 17,252 15.9% $ 5,778 5.5%
======== ======= ======== =======
</TABLE>
(1) Does not include amortization of deferred financing expenses,
which totaled $149,000 and $179,000 during the first nine
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
nine-month periods ended September 30, 2000 and 1999.
-21-
<PAGE> 24
RUBBER GROUP
The following table sets forth the operating results of the Rubber
Group for the first nine months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------
2000 1999
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales $81,663 100.0% $76,289 100.0%
Cost of sales 69,308 84.9 60,664 79.5
------- ------- ------- -------
Gross profit 12,355 15.1 15,625 20.5
Selling and administrative expenses 4,639 5.7 4,802 6.3
------- ------- ------- -------
Income from operations 7,716 9.4 10,823 14.2
Add back depreciation and
amortization 6,346 7.8 6,025 7.9
------- ------- ------- -------
Earnings before interest, taxes,
depreciation, and amortization $14,062 17.2% $16,848 22.1%
======= ======= ======= =======
</TABLE>
During the first nine months of 2000, net sales of the Rubber Group
increased by $5,374,000, or 7.0%, compared to the first nine 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 nine months of 2000, income from operations totaled
$7,716,000, a decrease of $3,107,000, or 28.7%, compared to the first nine
months of 1999. Cost of sales as a percentage of net sales increased during the
first nine months of 2000 to 84.9% of net sales from 79.5% of net sales during
the first nine months of 1999, primarily due to reduced operating efficiencies
and increased levels of scrap at the Company's insulators division. In an
attempt to improve operating performance at the insulators division, a number of
management changes were effected during the first nine months of 2000. From
April through August 2000, a consulting firm was retained to assist the
management team of the insulators division in implementing improved operating
systems. Cost of sales for the first nine months of 2000 included $1,013,000 of
expenses related to the consulting firm's services.
Selling and administrative expenses as a percentage of net sales
decreased during the first nine months of 2000 compared to the first nine months
of 1999, primarily because those expenses are partially fixed in nature and
because of reduced employee benefit cost.
During the first nine months of 2000, EBITDA decreased to $14,062,000,
a decrease of $2,786,000, or 16.5%, compared to the first nine months of 1999.
-22-
<PAGE> 25
METALS GROUP
The following table sets forth the operating results of the Metals
Group for the first nine months of 2000 and 1999 (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 26,695 100.0% $ 28,467 100.0%
Cost of sales 26,016 97.5 26,981 94.8
-------- ------- -------- -------
Gross profit 679 2.5 1,486 5.2
Selling and administrative expenses 2,068 7.7 2,600 9.1
-------- ------- -------- -------
Loss from operations (1,389) (5.2) (1,114) (3.9)
Add back depreciation and
amortization 3,641 13.6 3,312 11.6
-------- ------- -------- -------
Earnings before interest, taxes,
depreciation, and amortization $ 2,252 8.4% $ 2,198 7.7%
======== ======== ========= ========
</TABLE>
During the first nine months of 2000, net sales of the Metals Group
decreased by $1,772,000, or 6.2%, compared to the first nine 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 $1,389,000 during
the first nine months of 2000, compared to a loss from operations of $1,114,000
during the first nine months of 1999. The loss for the first nine months of 2000
included a loss of $312,000 on the disposal and write-down of assets held for
sale, which was charged to cost of sales. The loss for the first nine months of
1999 included a loss from operations of $186,000 and a shutdown provision of
$568,000 related to the Metals Group's Manchester facility. Of the $568,000
shutdown provision, $522,000 was charged to cost of sales and $46,000 was
charged to selling and administrative expenses. Excluding the $312,000 loss on
the disposal and write-down of assets held for sale and the $522,000 of
Manchester closure expenses charged to cost of sales, cost of sales as a
percentage of net sales increased from 92.9% during the first nine months of
1999 to 96.3% during the first nine months of 2000 primarily due to increased
depreciation expense and higher employee compensation costs.
Selling and administrative expenses as a percentage of net sales
decreased during the first nine months of 2000 compared to the first nine months
of 1999, primarily due to reduced consulting fees related to the installation of
new computer systems, the elimination of certain expenses as a result of the
shutdown of the Metals Group's facility in Manchester, New York, and reduced
employee benefit costs.
During the first nine months of 2000, EBITDA increased to $2,252,000,
an increase of $54,000, or 2.5%, compared to the first nine months of 1999.
-23-
<PAGE> 26
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 nine months of 2000 and 1999 (dollar amounts in thousands):
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2000 1999
-------- --------
Loss from operations (1,665) (1,837)
Add back depreciation and
amortization 64 32
------- -------
Earnings before interest, taxes,
depreciation, and amortization (1,601) (1,805)
======= =======
Corporate office expenses decreased by $172,000 during the first nine
months of 2000 compared to the first nine months of 1999, primarily because of a
reduced provision for management incentive compensation.
INTEREST EXPENSE
During the first nine months of 2000 and 1999, interest expense totaled
$7,377,000 and $7,206,000, respectively. Interest expense includes amortization
of deferred financing expenses, which totaled $149,000 and $179,000 during the
first nine months of 2000 and 1999, respectively. The increase in interest
expense was primarily the result of an increase in the average interest rate on
our floating rate debt.
INCOME TAXES
At September 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 nine months of 2000, our operating activities provided
$17,252,000 of cash.
Accounts payable increased by $8,285,000. This increase was caused
primarily by our decision to delay the payment of accounts payable in order to
preserve liquidity. Our ability to continue to delay the payment of accounts
payable is dependent upon our relationships with numerous vendors. A material
deterioration in our relationships with our vendors could have an adverse impact
on us.
-24-
<PAGE> 27
INVESTING ACTIVITIES
During the first nine months of 2000, our investing activities used
$13,261,000 of cash, primarily for capital expenditures. Capital expenditures
attributable to the Rubber Group, the Metals Group, and the corporate office
totaled $9,898,000, $3,440,000, and $1,000, respectively. Capital expenditures
for the first nine months of 2000 included $12,218,000 for equipment and
$1,121,000 for land and building improvements. We presently project that capital
expenditures will total approximately $15,000,000 during 2000, including
approximately $13,900,000 for equipment and approximately $1,100,000 for land
and building improvements. Capital expenditures for the Rubber Group and the
Metals Group are projected to total approximately $11,100,000 and $3,900,000,
respectively. At September 30, 2000, we had outstanding commitments to purchase
plant and equipment of approximately $3,200,000, of which approximately
$1,700,000 is expected to be purchased during 2000 and approximately $1,500,000
is expected to be purchased in 2001. (See also "Liquidity," below)
FINANCING ACTIVITIES
During the first nine months of 2000, our financing activities used
$3,895,000 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.
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 November 13, 2000, availability under our revolving line of
credit totaled $1,729,000 before outstanding checks of $2,009,000 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 nine months of 2000, our aggregate indebtedness,
excluding accounts payable, decreased by $4,770,000. During the fourth quarter
of 2000, we estimate that our interest expense will total approximately
$2,520,000 and principal payments on secured, amortizing term loans will total
approximately $2,130,000.
We had a net working capital deficit of $82,931,000 at September 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
the payment of cash dividends. In addition, substantially all of our financing
agreements include cross-default provisions.
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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 and
effective August 31, 2000, that covenant was further amended through February 1,
2001. Also, effective June 30, 2000, a covenant requiring a minimum level of
tangible net worth was amended through February 1, 2001.
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:
PERIOD INTEREST RATE
-------- ---------------
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%
The term of the consent solicitation has been extended several times
and is currently scheduled to expire on December 29, 2000. 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 offered to reduce the term of the extension by six
months and to increase the fee to consenting holders to 2%. We have recently
commenced discussions with the four largest holders of the 12 3/4% senior
subordinated notes regarding further amendments to the terms of the consent
solicitation. If we are able to reach agreement with those holders, we plan to
amend the consent solicitation to reflect the amended terms and to seek waivers
of the events of default that occurred 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 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.
- 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 February 1, 2001, and have amended certain
covenants to eliminate defaults that would otherwise have
occurred because all of our secured, amortizing term loans
were classified as current liabilities in our consolidated
financial statements.
- 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 January 31,
2001; that note has no cross-default provision with respect
to the default relating to the 12 3/4% senior subordinated
notes.
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- 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 February 1,
2001, and has waived the cross-default provisions with
respect to the default relating to the 12 3/4% senior
subordinated notes. Earlier this year, we reached a
non-binding agreement with the holder of our 10 1/2% senior
note, which provided that, if the 12 3/4% senior
subordinated notes were extended to August 1, 2002, and
certain other conditions were met, the 10 1/2% senior notes
would be extended to August 1, 2002, the interest rate
thereon would be increased to 12 1/2% through July 31, 2001,
and 14% thereafter, and quarterly principal payments of
$500,000 would commence on May 1, 2001. In connection with
that non-binding agreement, the effective interest rate on
the note increased to 12 1/2% for the six-month period
ending January 31, 2001. In connection with any amendment to
the terms of the consent solicitation, we may also seek to
change the terms of our non-binding agreement with the
holder of the 10 1/2% senior note.
- 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 February 1, 2001, has deferred the interest payments on
those notes that were due on February 1, May 1, August 1,
and November 1, 2000, to February 1, 2001, and has waived
the cross-default provisions with respect to the default
relating to the 12 3/4% senior subordinated notes.
- 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 February 1, 2001, 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 $6,400,000 of new borrowings during the fourth quarter 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, excluding the amounts that are past due in respect of our 12 3/4%
senior subordinated notes. In addition, further borrowings will be necessary to
complete the restructuring contemplated by the consent solicitation or any
amendment thereto. We can give you no assurance that we will be able to obtain
the additional financing required, in which case we may be forced to seek relief
from our creditors under the Federal bankruptcy code. Any proceeding under the
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<PAGE> 30
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. The Company believes that the adoption of SAB 101 during the fourth
quarter of 2000 will not affect the results of operations or financial position
of the Company.
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<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 September 30, 2000, we had $50,557,000 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 September 30, 2000, we had outstanding $42,858,000 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 2001. 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:
PERIOD INTEREST RATE
-------- ---------------
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%
If the consent solicitation were effectuated in accordance with its
current terms 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
non-binding agreement, we would pay $63,000, $177,000, and $109,000 more
interest during 2000, 2001, and 2002, respectively, than if the interest rate
were to remain at 10 1/2%. The numbers set forth above may change because
discussions have commenced with the four largest holders of the 12 3/4% senior
subordinated notes and the holder of the 10 1/2% senior note to amend the terms
of the consent solicitation and the non-binding agreement, respectively. 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.
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<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 nine-month period ended September 30,
2000, in the aggregate amount of $20,000. The total amount of dividends in
arrears as of September 30, 2000, was $20,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Agreement relating to 14% Junior Subordinated Notes dated
October 31, 2000, between LPC and Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Convertible
Increasing Rate Note dated October 31, 2000, among LPC,
Michael A. Lubin, and Warren Delano
10-3 Note Amendment No. 4 to Note dated as of October 31, 2000,
between LPC and Tri-Links Investment Trust, as successor to
Nomura Holding America, Inc.
10-4 Sixth Amendment Agreement dated October 31, 2000, between
Lexington Rubber Group, Inc. ("LRGI") and Paul H. Pennell
10-5 Agreement dated as of October 31, 2000, among LPC, LRGI,
and Congress Financial Corporation
10-6 Agreement dated as of October 31, 2000, between LPC and CIT
10-7 Agreement dated as of October 31, 2000, among LPC, LRGI,
and Bank One, NA
10-8 Congress Covenant Amendment dated as of August 31, 2000
10-9 Amendment No. 10 to Credit Facility and Security Agreement
dated as of June 30, 2000, between LPC, LRGI, and Bank One,
NA
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 third quarter of 2000.
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<PAGE> 33
LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 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)
November 13, 2000 By: /s/ Michael A. Lubin
----------------- ---------------------
Date Michael A. Lubin
Chairman of the Board
November 13, 2000 By: /s/ Warren Delano
----------------- ------------------
Date Warren Delano
President
November 13, 2000 By: /s/ Dennis J. Welhouse
----------------- -----------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Exhibit Location
------ ------- --------
<S> <C> <C>
10-1 Agreement relating to 14% Junior Subordinated Filed with this Form 10-Q
Notes dated October 31, 2000, between LPC and
Michael A. Lubin
10-2 Agreement relating to Junior Subordinated Filed with this Form 10-Q
Convertible Increasing Rate Note dated
October 31, 2000, among LPC, Michael A. Lubin,
and Warren Delano
10-3 Note Amendment No. 4 to Note dated as of Filed with this Form 10-Q
October 31, 2000, between LPC and Tri-Links
Investment Trust, as successor to Nomura
Holding America, Inc.
10-4 Sixth Amendment Agreement dated October 31, Filed with this Form 10-Q
2000, between LRGI and Paul H. Pennell
10-5 Agreement dated as of October 31, 2000, among Filed with this Form 10-Q
LPC, LRGI, and Congress Financial Corporation
("Congress")
10-6 Agreement dated as of October 31, 2000, Filed with this Form 10-Q
between LPC and CIT
10-7 Agreement dated as of October 31, 2000, among Filed with this Form 10-Q
LPC, LRGI, and Bank One, NA
10-8 Congress Covenant Amendment dated as of Filed with this Form 10-Q
August 31, 2000
10-9 Amendment No. 10 to Credit Facility and Filed with this Form 10-Q
Security Agreement dated as of June 30, 2000,
between LPC, LRGI, and Bank One, NA
27-1 Financial Data Schedule Filed with this Form 10-Q
</TABLE>
