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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 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 OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 319-4657
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.25 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 16, 2001, was approximately $1,294,000.
The number of shares outstanding of the registrant's common stock at March 16,
2001, was 4,828,036.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be issued in connection with its
2001 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by
reference into Part III. Only those portions of the Proxy Statement which are
specifically incorporated by reference are deemed filed as part of this report
on Form 10-K.
2
LEXINGTON PRECISION CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Our Common Stock and Other Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 23
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 56
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial Owners and Management 56
Item 13. Certain Relationships and Related Transactions 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
3
PART I
ITEM 1. BUSINESS
We were incorporated in Delaware in 1966. Substantially all of our
business is conducted in the continental United States. Through our two
operating segments, the Rubber Group and the Metals Group, we manufacture
engineered rubber and metal components.
In 2000, net sales of the Rubber Group totaled $105,929,000, or 74.2%
of our consolidated net sales. The Rubber Group manufactures connector seals
used in automotive wiring systems and insulators used in automotive ignition
wire sets. We believe that we are the leading manufacturer of these types of
components in North America. The Rubber Group also manufactures molded rubber
components used in a variety of medical devices, such as drug delivery systems
and syringes.
In 2000, net sales of the Metals Group totaled $36,833,000, or 25.8% of
our consolidated net sales. The Metals Group manufactures aluminum die castings
and machines components from aluminum, brass, and steel bars. The Metals Group's
sales to automotive suppliers have increased significantly over the past several
years and now represent approximately 74% of the total net sales of the Metals
Group.
Financial data and other information about our operating segments, can
be found in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II, Item 7, and in "Note 10 - Segments" in the
notes to our consolidated financial statements in Part II, Item 8.
PRINCIPAL END-USES FOR OUR PRODUCTS
The following table summarizes our net sales during 2000, 1999, and
1998 by the type of product in which our components were utilized (dollar
amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Automobiles and light trucks $123,428 86.5% $119,588 85.4% $103,052 81.3%
Medical devices 9,282 6.5 8,039 5.7 8,245 6.5
Industrial equipment 5,097 3.6 6,281 4.5 7,005 5.5
Other 4,955 3.4 6,140 4.4 8,415 6.7
-------- ----- -------- ----- -------- -----
$142,762 100.0% $140,048 100.0% $126,717 100.0%
======== ===== ======== ===== ======== =====
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The following table summarizes net sales of the Rubber Group and the
Metals Group during 2000, 1999, and 1998 by the type of product in which each
Group's components were utilized (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Rubber Group:
Automobiles and light trucks $ 96,243 90.9% $ 94,677 92.0% $ 84,098 90.8%
Medical devices 9,282 8.7 8,037 7.8 8,245 8.9
Other 404 0.4 250 0.2 267 0.3
-------- ----- -------- ----- -------- -----
$105,929 100.0% $102,964 100.0% $ 92,610 100.0%
======== ===== ======== ===== ======== =====
Metals Group:
Automobiles and light trucks $ 27,185 73.8% $ 24,911 67.2% $ 18,954 55.6%
Industrial equipment 5,097 13.8 6,281 16.9 7,005 20.5
Computers and office equipment 1,696 4.6 1,921 5.2 3,109 9.1
Other 2,855 7.8 3,971 10.7 5,039 14.8
-------- ----- -------- ----- -------- -----
$ 36,833 100.0% $ 37,084 100.0% $ 34,107 100.0%
======== ===== ======== ===== ======== =====
MAJOR CUSTOMERS
Our largest customer is Delphi Automotive Systems Corporation. During
2000, 1999, and 1998, net sales to Delphi totaled $30,000,000, $31,319,000, and
$26,233,000, which represented 21.0%, 22.4%, and 20.7%, respectively, of our net
sales. Net sales of rubber components and related tooling to Delphi during 2000,
1999, and 1998 represented 27.5%, 30.4%, and 28.3%, respectively, of the Rubber
Group's net sales. During 1998, net sales to Prestolite Wire Corporation totaled
$14,431,000, or 11.4% of our net sales and 15.6% of the Rubber Group's net
sales. No other customer accounted for more than 10% of our net sales during
2000, 1999, or 1998. Loss of a significant amount of business from Delphi or any
of our other large customers could have a material adverse effect on our
operations if that business were not substantially replaced by additional
business from existing or new customers. For information about our contractual
arrangements with Delphi refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7.
MARKETING AND SALES
Our marketing and sales effort is carried out by management personnel
and account managers.
RAW MATERIALS
Our principal raw materials are silicone and organic rubber compounds
and aluminum, steel, and brass bars. Each of our principal raw materials has
been readily available at competitive prices from several major manufacturers
and we anticipate that those materials will continue to be readily available at
competitive prices for the foreseeable future.
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PATENTS AND TRADEMARKS
We do not currently hold any patents, trademarks, or licenses that we
consider to be material to the success or operation of our business.
SEASONAL VARIATIONS
Our business generally is not subject to significant seasonal
variation.
BACKLOG
Sales of our products are made pursuant to a variety of purchasing
arrangements and practices. Customers regularly revise release schedules to
correspond to their own production requirements. We believe that the aggregate
value of scheduled releases outstanding on our books at any time cannot be
considered firm backlog because those releases may be revised at any time. We
also believe that increases or decreases in the aggregate value of scheduled
releases are not necessarily indicative of any trend in our net sales.
COMPETITION
We compete for business primarily on the basis of quality, service,
engineering capability, and price. We encounter substantial competition from a
large number of manufacturing companies. Our competitors range from small and
medium-sized specialized firms to large diversified companies, many of which
have resources substantially greater than ours. Additionally, some of our
customers have internal manufacturing operations that compete with us.
RESEARCH AND DEVELOPMENT
During 2000, 1999, and 1998, we spent approximately $850,000, $878,000,
and $450,000, respectively, on our research and development activities. Our
research and development activities include the following:
- developing materials that cost less and perform better,
- developing new, more efficient manufacturing processes,
- improving quality and reducing scrap,
- designing components to be easier to manufacture, and
- designing components to perform better in their final application.
PRODUCT LIABILITY RISKS
We are subject to potential product liability risks inherent in the
manufacture and sale of components. Although there are no claims against us that
we believe will have a material adverse effect upon our business, financial
position, or results of operations, we cannot assure you that any existing or
future claims will not have a material adverse effect on us. Although we
maintain insurance coverage for product liability, we cannot assure you that, in
the event of a claim, the insurance coverage would
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automatically apply or that, in the event of an award arising out of a claim,
the amount of the insurance coverage would be sufficient to satisfy the award.
ENVIRONMENTAL COMPLIANCE
Our operations are subject to numerous laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment. Although we make expenditures relating to the
protection of the environment, compliance with environmental laws and
regulations has not had a significant impact on our capital spending
requirements, earnings, or competitive position. We cannot assure you that
changes in environmental laws and regulations, or in the interpretation or
enforcement of those laws and regulations, will not require material
expenditures in the future.
EMPLOYEES
We believe that our employee relations are generally good. The
following table shows the number of our employees at December 31, 2000, 1999,
and 1998.
DECEMBER 31
-----------
2000 1999 1998
---- ---- ----
Rubber Group 869 886 816
Metals Group 416 374 463
Corporate Office 5 7 5
----- ----- -----
1,290 1,267 1,284
===== ===== =====
At December 31, 2000, 1999, and 1998, employees at the Rubber Group
included 66, 68, and 62 hourly workers, respectively, at one plant location that
were subject to a collective bargaining agreement. During the first quarter of
2001, the employees at another location of the Rubber Group, with approximately
200 hourly workers, voted to be represented by a labor union. We anticipate that
we will be negotiating with the union in the near future to develop a labor
contract under a collective bargaining agreement.
- 4 -
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ITEM 2. PROPERTIES
The following table shows the location and square footage of our
manufacturing facilities at December 31, 2000:
SQUARE
LOCATION FEET
-------- ----
Rubber Group:
Jasper, Georgia 101,000
LaGrange, Georgia 77,000
North Canton, Ohio 41,000
Vienna, Ohio 60,000
Rock Hill, South Carolina 60,000
-------
Total Rubber Group 339,000
-------
Metals Group:
Casa Grande, Arizona 64,000
Lakewood, New York 91,000
Rochester, New York 60,000
-------
Total Metals Group 215,000
-------
Total Company 554,000
=======
All of our facilities, except those in Jasper, Georgia, and Rochester,
New York, are encumbered by mortgages. All of our plants are general
manufacturing facilities suitable for our operations. We believe that the
facilities are adequate to meet our current operating needs.
We occupy, in the aggregate, 6,000 square feet of office space for
corporate executive and administrative purposes. We lease an office in
Cleveland, Ohio, and reimburse an affiliate for the cost of leasing an office in
New York City.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of our business activities.
It is our policy to record accruals for claims and legal proceedings when we
consider a loss to be probable and we can reasonably estimate the amount of that
loss. The various actions to which we are or may be a party in the future are at
various stages of completion. Although we cannot assure you as to the outcome of
existing or potential litigation, we currently believe, based upon the
information currently available to us, that the outcome of any of those actions
would not have a material adverse effect upon our financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 2000.
- 5 -
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PART II
ITEM 5. MARKET FOR OUR COMMON STOCK AND OTHER STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market. At March 16,
2001, there were approximately 834 holders of record of our common stock.
Trading in shares of our common stock is limited. During 2000 and 1999, trading
data for our stock was available on the OTC Bulletin Board operated by the
National Association of Securities Dealers, Inc. (NASD). The following table
sets forth prices at which transactions in our common stock were reported on the
OTC Bulletin Board:
YEARS ENDED DECEMBER 31
-----------------------
2000 1999
---- ----
HIGH LOW HIGH LOW
---- --- ---- ---
First quarter $1.31 $1.05 $1.81 $1.19
Second quarter $1.25 $0.75 $1.81 $1.13
Third quarter $1.13 $0.97 $1.75 $1.19
Fourth quarter $1.22 $0.78 $1.38 $1.19
We are not able to determine whether retail markups, markdowns, or
commissions were included in the above prices. We believe that twelve brokerage
firms currently make a market in our common stock, although both bid and asked
quotations may be limited.
We have not paid dividends on our common stock since 1979, and we have
no current plans to reinstate the payment of dividends. In addition, we are
currently restricted from paying cash dividends on our common stock and on our
series B preferred stock, and from redeeming any shares of series B preferred
stock because a payment default exists on our senior subordinated notes. We are
currently in arrears with respect to the payment of five dividends on the series
B preferred stock that were due on March 15, June 15, September 15, and December
15, 2000, and March 15, 2001, and with respect to the redemption of 450 shares
of series B preferred stock, at an aggregate redemption price of $90,000, that
was scheduled for November 30, 2000. If we are in arrears with respect to six
dividend payments on the series B preferred stock, the holders of the series B
preferred stock will be entitled to elect two persons to our Board of Directors
until the annual meeting of stockholders following the date on which all such
arrearages have been paid in full.
- 6 -
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
each of the years in the five-year period ended December 31, 2000 (dollar
amounts in thousands, except per share amounts). The financial data has been
derived from our consolidated financial statements, which have been audited by
Ernst & Young LLP, independent certified public accountants. This information is
not necessarily indicative of the results of future operations and should be
read in conjunction with, and is qualified by, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7,
and our consolidated financial statements in Part II, Item 8.
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
Net sales $ 142,762 $ 140,048 $ 126,717 $ 118,631 $ 114,872
========= ========= ========= ========= =========
Income from operations $ 6,653 $ 10,286 $ 7,198 $ 7,784 $ 8,565
Interest expense 9,913 9,632 9,772 9,065 8,542
Other income -- -- -- 425 --
Income tax provision (benefit) (161) 133 132 672 40
Extraordinary gain on repurchase of
debt, net of applicable income taxes -- 1,542 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (3,099) $ 2,063 $ (2,706) $ (1,528) $ (17)
========= ========= ========= ========= =========
Net income (loss) per diluted common
share $ (0.65) $ 0.46 $ (0.65) $ (0.38) $ (0.02)
========= ========= ========= ========= =========
OTHER DATA:
Depreciation and amortization included
in operating expense $ 13,490 $ 12,728 $ 11,451 $ 9,838 $ 8,267
Net cash provided by operating
activities $ 22,136 $ 5,624 $ 8,013 $ 7,529 $ 8,193
Earnings before interest, taxes,
depreciation, and amortization $ 20,143 $ 23,014 $ 18,649 $ 17,622 $ 16,832
Capital expenditures $ 13,936 $ 10,328 $ 14,877 $ 15,790 $ 15,708
DECEMBER 31
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
FINANCIAL POSITION:
Current assets $ 36,968 $ 37,503 $ 32,198 $ 31,828 $ 30,845
Current liabilities 117,147 116,460 40,228 36,003 35,167
--------- --------- --------- --------- ---------
Net working capital deficit $ (80,179) $ (78,957) $ (8,030) $ (4,175) $ (4,322)
========= ========= ========= ========= =========
Total assets $ 110,289 $ 111,327 $ 108,325 $ 104,124 $ 97,030
Long-term debt, excluding current
portion $ 104 $ 116 $ 74,953 $ 72,622 $ 65,148
Series B preferred stock $ 330 $ 330 $ 375 $ 420 $ 465
Total stockholders' deficit $ (9,536) $ (7,463) $ (9,451) $ (6,667) $ (5,057)
- 7 -
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Some of our statements in this section are "forward-looking
statements," as that term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements usually can be identified by our use of
words like "believes," "expects," "may," "will," "should," "anticipates,"
"estimates," "projects," or the negative thereof. They may be used when we
discuss strategy, which typically involves risk and uncertainty, and they
generally are based upon projections and estimates rather than historical facts
and events.
Forward-looking statements are subject to a number of risks and
uncertainties that could cause our actual results or performance to be
materially different from the future results or performance expressed in or
implied by those statements. Some of those risks and uncertainties are:
- increases and decreases in business awarded to us by our
customers,
- unanticipated price reductions for our products as a result of
competition,
- unanticipated operating results and cash flows,
- increases or decreases in capital expenditures,
- changes in economic conditions,
- strength or weakness in the North American automotive market,
- changes in the competitive environment,
- changes in interest rates,
- the possibility of product warranty claims,
- labor interruptions at our facilities or at our customers'
facilities,
- the impact on our operations of the defaults on our indebtedness
and the delays in paying our accounts payable, and
- our inability to obtain additional borrowings or to refinance our
existing indebtedness.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a
representation that any of the projections or estimates expressed in or implied
by those forward-looking statements will be realized, and
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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.
RESULTS OF OPERATIONS -- COMPARISON OF 2000, 1999, AND 1998
The following table sets forth our consolidated operating results for
2000, 1999, and 1998 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Net sales $142,762 100.0% $140,048 100.0% $126,717 100.0%
Cost of sales 125,186 87.7 117,609 84.0 108,513 85.6
-------- ----- -------- ----- -------- -----
Gross profit 17,576 12.3 22,439 16.0 18,204 14.4
Selling and administrative expenses 10,923 7.7 12,153 8.7 11,006 8.7
-------- ----- -------- ----- -------- -----
Income from operations 6,653 4.6 10,286 7.3 7,198 5.7
Add back: depreciation and
amortization (1) 13,490 9.5 12,728 9.1 11,451 9.0
-------- ----- -------- ----- -------- -----
Earnings before interest, taxes,
depreciation, and amortization (2) $ 20,143 14.1% $ 23,014 16.4% $ 18,649 14.7%
======== ==== ======== ==== ======== ====
Net cash provided by operating
activities (3) $ 22,136 15.5% $ 5,624 4.0% $ 8,013 6.3%
======== ==== ======== ==== ======== ====
(1) Does not include amortization of deferred financing expenses, which totaled
$216,000, $234,000, and $198,000, in 2000, 1999, and 1998, 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 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 II, Item 8.
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The discussion that follows sets forth our analysis of the operating
results of the Rubber Group, the Metals Group, and the corporate office.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. During 2000, 1999, and 1998,
automotive industry customers of the Rubber Group represented 90.9%, 92.0%, and
90.8%, respectively, of the Rubber Group's net sales. 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 as a
whole.
The three largest customers of the Rubber Group accounted for 48.6%,
50.9%, and 50.1% of the Rubber Group's net sales during 2000, 1999, and 1998,
respectively. Loss of a significant amount of business from any of the Rubber
Group's large customers could have a material adverse effect upon the Rubber
Group and upon our company as a whole if that business were not substantially
replaced by additional business from existing or new customers.
The following table sets forth the operating results of the Rubber
Group for 2000, 1999, and 1998 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Net sales $105,929 100.0% $102,964 100.0% $ 92,610 100.0%
Cost of sales 89,508 84.5 82,405 80.0 73,209 79.0
-------- ----- -------- ----- -------- -----
Gross profit 16,421 15.5 20,559 20.0 19,401 21.0
Selling and administrative expenses 5,937 5.6 6,235 6.1 6,100 6.6
-------- ----- -------- ----- -------- -----
Income from operations 10,484 9.9 14,324 13.9 13,301 14.4
Add back: depreciation and amortization 8,554 8.1 8,096 7.9 7,476 8.0
-------- ----- -------- ----- -------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 19,038 18.0% $ 22,420 21.8% $ 20,777 22.4%
======== ==== ======== ==== ======== ====
During 2000, net sales of the Rubber Group increased by $2,965,000, or
2.9%, compared to 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 insulators for automotive ignition wire sets and price
reductions on certain automotive components.
During 2000, income from operations totaled $10,484,000, a decrease of
$3,840,000, or 26.8%, compared to 1999. Cost of sales as a percentage of net
sales increased during 2000 to 84.5% of net sales from 80.0% of net sales during
1999, primarily due to reduced operating efficiencies and increased levels of
scrap at the Company's insulators division and higher employee benefit costs. In
an attempt to improve operating performance at the insulators division, a number
of management changes were effected during
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13
2000 and a consulting firm was retained to assist the management team of the
insulators division in implementing improved operating systems. Cost of sales
for 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 2000 compared to 1999, primarily because those expenses are
partially fixed in nature, and because incentive compensation, consulting fees
related to the installation of new computer systems, and foreign selling
expenses all decreased when compared to 1999.
During 2000, EBITDA decreased to $19,038,000, a decrease of $3,382,000,
or 15.1%, compared to 1999.
During 1999, net sales of the Rubber Group increased by $10,354,000, or
11.2%, compared to 1998. 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 sales of tooling and
by price reductions on certain automotive components.
During 1999, income from operations totaled $14,324,000, an increase of
$1,023,000, or 7.7%, compared to 1998. The Rubber Group's operating results for
1999 and 1998 included credits to cost of sales of $219,000 and $622,000,
respectively, resulting from special rebates from the State of Ohio Bureau of
Workers' Compensation, which represented the Company's share of excess funds
distributed by the Bureau. If the special rebates were excluded from the Rubber
Group's operating results for 1999 and 1998, income from operations would have
increased by $1,426,000 or 11.2%, and cost of sales as a percentage of net sales
would have been 80.2% during 1999 compared to 79.7% during 1998.
Selling and administrative expenses as a percentage of net sales
decreased during 1999 compared to 1998, primarily because those expenses are
partially fixed in nature.
EBITDA increased to $22,420,000, or 21.8% of net sales, in 1999 from
$20,777,000, or 22.4% of net sales, in 1998. Excluding the special rebates from
the Rubber Group's EBITDA for 1999 and 1998, EBITDA was $22,201,000, or 21.6% of
net sales, in 1999, compared to $20,155,000, or 21.8% of net sales, in 1998.
Delphi Automotive Systems Corporation is the Rubber Group's largest
customer. During 2000, the Rubber Group's net sales to Delphi totaled
$29,126,000, which represented 27.5% of the Rubber Group's net sales.
Substantially all of the Rubber Group's sales to Delphi are connector seals for
automotive wiring systems.
For the last four years, most of the connector seals that we sold to
Delphi were subject to a multi-year agreement that expires on December 31, 2001.
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,
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14
- 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.
During the third quarter of 2000, Delphi requested and we offered a
proposal for a multi-year extension of our agreements that would entail
substantial price reductions on a number of high-volume components. Although
Delphi has not accepted our proposal at this time, we currently believe that:
- Delphi will extend the agreements to December 31, 2006,
- after December 31, 2001, Delphi will insource approximately
$3,600,000 of components that we currently produce,
- we will give Delphi approximately $5,500,000 of annual price
reductions that will become effective at various times during
2001,
- we will achieve annual cost savings of approximately $1,600,000 as
a result of reduced material costs and changes in our
manufacturing processes,
- Delphi will purchase certain new tooling that will permit us to
make those changes in our manufacturing processes, and
- substantial new business awarded to the connector seals division
by Delphi and other customers and scheduled to begin production in
2001 and subsequent years will generate incremental profits that
will, in conjunction with the above mentioned cost savings, offset
a major portion of the reduction in profitability caused by the
proposed price reductions.
We cannot assure you that Delphi will accept our proposal or that, if
they accept our proposal, the consequences will be as set forth above.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars. During 2000, 1999, and 1998,
net sales to automotive industry customers represented 73.8%, 67.2%, and 55.6%,
respectively, of the Metals Group's net sales. Any material reduction in the
level of activity in the automotive industry may have a material adverse effect
on the results of operations of the Metals Group and on our company taken as a
whole.
The three largest customers of the Metals Group accounted for 49.9%,
50.0%, and 35.3% of the Metals Group's net sales during 2000, 1999, and 1998,
respectively. Loss of a significant amount of business from any of the Metals
Group's large customers could have a material adverse effect upon the Metals
Group and upon our company taken as a whole if that business were not
substantially replaced by additional business from existing or new customers.
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
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15
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 cutback 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 2000, 1999, and 1998.
In May 1999, the Company closed a 21,000 square foot diecasting
facility in Manchester, New York. During 1999, and 1998, the Manchester facility
had net sales of $935,000, and $2,258,000, respectively, and losses from
operations of $186,000 and $237,000, respectively.
During 1999, the Company recorded expenses related to the closure and
disposal of the facility in the amount of $553,000, of which $507,000 was
charged to cost of sales and $46,000 was charged to selling and administrative
expenses. The expenses were comprised of $335,000 for the write-down of plant
and equipment, $107,000 of employee severance payments, and $111,000 of other
plant closing costs.
At December 31, 2000, the book value of the Manchester assets remaining
to be disposed of totaled $161,000. The Company presently anticipates that it
will complete the disposal of the Manchester assets during 2001.
The following table sets forth the operating results of the Metals
Group for 2000, 1999, and 1998 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Net sales $ 36,833 100.0% $ 37,084 100.0% $ 34,107 100.0%
Cost of sales 35,678 96.9 35,204 94.9 35,304 103.5
---------- ----- ---------- ----- ---------- -----
Gross profit (loss) 1,155 3.1 1,880 5.1 (1,197) (3.5)
Selling and administrative expenses 2,741 7.4 3,472 9.4 2,877 8.4
---------- ----- ---------- ----- ---------- -----
Loss from operations (1,586) (4.3) (1,592) (4.3) (4,074) (11.9)
Add back: depreciation and amortization 4,849 13.2 4,585 12.4 3,957 11.6
---------- ----- ---------- ----- ---------- -----
Earnings before interest, taxes,
depreciation, and amortization $ 3,263 8.9% $ 2,993 8.1% $ (117) (0.3)%
========== === ========== === ========== ====
During 2000, net sales of the Metals Group decreased by $251,000, or
0.7%, compared to 1999. This decrease resulted primarily from a reduction in
low-volume business, the shutdown of the Manchester facility, and reduced sales
of tooling, partially offset by increases in sales of higher-volume components.
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16
The Metals Group recorded a loss from operations of $1,586,000 during
2000, compared to a loss from operations of $1,592,000 during 1999. The loss for
2000 included a loss of $325,000 on the disposal and write-down of assets held
for sale, which was charged to cost of sales. The loss for 1999 included a loss
from operations of $186,000 and closure costs of $553,000 related to the
Manchester facility. Excluding the $325,000 loss on the disposal and write-down
of assets held for sale during 2000, and $507,000 of Manchester closure expenses
that were charged to cost of sales during 1999, cost of sales as a percentage of
net sales increased from 93.6% during 1999 to 96% during 2000, primarily due to
higher employee compensation costs, higher costs for production supplies, and
increased depreciation expense.
Selling and administrative expenses as a percentage of net sales
decreased during 2000 compared to 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 incentive compensation.
During 2000, EBITDA increased to $3,263,000, an increase of $270,000,
or 9.0%, compared to 1999.
During 1999, net sales of the Metals Group increased by $2,977,000, or
8.7%, compared to 1998. This increase resulted primarily from increased unit
sales of automotive components and increased tooling sales, offset, in part, by
the effects of the shutdown of the Manchester facility and of the reduction in
low-volume business.
During 1999, the Metals Group incurred a loss from operations of
$1,592,000, compared to a loss from operations of $4,074,000 during 1998. If the
$553,000 of closure costs related to the Manchester facility were excluded from
the Metals Group's operating results, the Metals Group would have incurred a
loss from operations of $1,039,000 during 1999. If the $507,000 of closure
expenses charged to cost of sales during 1999 were excluded from the Metals
Group's operating results, cost of sales as a percentage of net sales would have
decreased from 103.5% during 1998 to 93.6% during 1999, primarily due to
increased absorption of fixed manufacturing overhead, which resulted from higher
sales levels, and a reduction in direct labor costs as a percentage of net
sales, which resulted from improved operating efficiencies and increased
utilization of skilled equipment operators who had been retained during prior
periods of lower sales volume.
Selling and administrative expenses as a percentage of net sales
increased during 1999, primarily because of costs related to the installation of
new computer systems during 1999 and because selling and administrative expenses
for 1998 were reduced by $170,000, due to the settlement of certain litigation
for less than had been previously reserved.
EBITDA increased to $2,993,000, or 8.1% of net sales, in 1999 from
negative $117,000, or negative 0.3% of net sales, in 1998. Excluding the
$553,000 of closure expenses related to the Manchester facility, EBITDA for 1999
was $3,546,000, or 9.6% of net sales.
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.
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17
The following table sets forth the operating results of the corporate
office for 2000, 1999, and 1998 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Loss from operations $ (2,245) $ (2,446) $ (2,029)
Add back: depreciation and
amortization (1) 87 47 18
---------- ---------- ----------
Earnings before interest, taxes,
depreciation, and amortization $ (2,158) $ (2,399) $ (2,011)
========== ========== ==========
(1) Excludes amortization of deferred financing expenses, which
totaled $216,000, $234,000, and $198,000, in 2000, 1999, and
1998, respectively, and which is included in interest expense
in the consolidated financial statements.
Corporate office expenses declined in 2000, primarily because no
management incentive compensation was accrued for corporate office personnel in
2000.
INTEREST EXPENSE
During 2000, 1999, and 1998, interest expense totaled $9,913,000,
$9,632,000, and $9,772,000, respectively. During 2000, 1999, and 1998, interest
expense included amortization of deferred financing expenses of $216,000,
$234,000, and $198,000, respectively. The increase in interest expense in 2000
was caused primarily by higher rates of interest on our floating rate
indebtedness and our senior unsecured notes.
EXTRAORDINARY GAIN
During 1999, we recorded an extraordinary gain, net of the related
income tax provision, of $1,542,000 on the repurchase of $4,308,000 principal
amount of our senior subordinated notes.
INCOME TAX PROVISION (BENEFIT)
During 2000, the income tax benefit totaled $161,000, which consisted
primarily of the refund of federal income tax expensed in a prior period.
During 1999, the income tax provision was $526,000 of which $133,000
related to our income from operations and $393,000 related to the extraordinary
gain on the repurchase of debt. During 1999, the income tax provision consisted
primarily of federal alternative minimum taxes. During 1998, the income tax
provision consisted primarily of state income taxes.
For additional information concerning income taxes and related matters,
see Note 9 to the consolidated financial statements in Part II, Item 8.
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LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During 2000, our operating activities provided $22,136,000 of cash.
Accounts receivable decreased by $4,186,000. This decrease was caused
primarily by a decrease in net sales during December 2000 compared to December
1999, and an unusual year-end build-up in accounts receivable during 1999.
Accounts payable increased by $8,396,000. 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 the continued forbearance of numerous vendors and the
willingness of certain vendors to continue to provide us with goods and services
despite delays in payment. We currently do not have funds available to make
material reductions in the level of accounts payable. Any effort by significant
trade creditors to collect past due accounts payable could force us to seek
relief from our creditors under the Federal bankruptcy code. Any unwillingness
of significant vendors to continue to provide us with goods and services could
cause us to be unable to meet the requirements of our customers. Either of the
foregoing events could have a material adverse effect on our results of
operations and financial position.
INVESTING ACTIVITIES
During 2000, our investing activities used $13,836,000 of cash,
primarily for capital expenditures. The following table sets forth capital
expenditures for the Rubber Group, the Metals Group, and the corporate office
during 2000, 1999, and 1998 (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Rubber Group:
Equipment $ 9,160 $ 7,201 $ 8,277
Land and buildings 1,195 307 105
---------- ---------- ----------
10,355 7,508 8,382
---------- ---------- ----------
Metals Group:
Equipment 3,542 2,542 6,184
Land and buildings 38 169 238
---------- ---------- ----------
3,580 2,711 6,422
---------- ---------- ----------
Corporate office:
Equipment 1 109 73
Land and buildings - - -
---------- ---------- ----------
1 109 73
---------- ---------- ----------
Total company:
Equipment 12,703 9,852 14,534
Land and buildings 1,233 476 343
---------- ---------- ----------
$ 13,936 $ 10,328 $ 14,877
========== ========== ==========
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We presently project that capital expenditures will total approximately
$7,300,000 in 2001, including $7,000,000 for equipment and $300,000 for land and
buildings. Capital expenditures for the Rubber Group and the Metals Group are
projected to total approximately $5,200,000 and $2,100,000, respectively, during
2001. We project that approximately $1,500,000 will be expended to rebuild or
replace existing equipment, and approximately $5,800,000 will be expended to
effect cost reductions and expand productive capacity.
At December 31, 2000, we had outstanding commitments to purchase plant
and equipment of approximately $4,357,000.
FINANCING ACTIVITIES
During 2000, our financing activities used $8,243,000 of cash,
primarily to make scheduled monthly payments on our secured, amortizing term
loans. During 2000, we obtained new term loans in the aggregate amount of
$2,460,000, which refinanced loans outstanding under our revolving line of
credit.
Net borrowings under our revolving line of credit, which are classified
as short-term debt, decreased by $2,291,000 during 2000, primarily as a result
of reduced borrowing availability, due to the reduction in accounts receivable
at December 31, 2000.
On February 1, 2000, our 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 March 28, 2001, availability under our revolving line of credit
totaled $2,498,000 before outstanding checks of $1,110,000 were deducted.
We have substantial borrowings for a company our size. Because those
borrowings require us to make substantial interest and principal payments, any
negative event may have a greater adverse effect upon us than if we had less
debt. We are in default in the payment of our senior subordinated notes, which
have a principal amount of $27,412,000 and accrued interest, as of December 31,
2000, of $4,951,000. In addition, we have secured term notes with scheduled
balloon maturities during 2001 of $2,351,000, and $1,370,000 of secured term
notes and $7,847,000 of unsecured term notes that have been extended to mature
during the second quarter of 2001. Excluding the debt listed above, there are
$8,365,000 of scheduled principal payments during 2001 on our secured,
amortizing term loans. We estimate that, if our debt is not restructured or
refinanced, the interest expense on all of our debt during 2001, at existing
contractual rates, would be approximately $9,400,000.
As discussed in more detail below, we are in the process of negotiating
extensions of all of our matured and maturing debt. Although there can be no
assurance that we will be successful in this effort, if we were to complete
these extensions on the proposed terms, which are set forth below, we estimate
that our monthly interest expense would increase by approximately $160,000.
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If we are to complete the extensions of our matured and maturing debt,
it will be necessary to renegotiate our senior, secured financing arrangements
in order to provide financing for our on-going capital expenditure requirements
and to reduce our accounts payable to levels that are considered customary for
the industries in which we operate. If we are unable to obtain adequate
financing to reduce our accounts payable to these levels, we may be required to
negotiate with certain of our trade creditors to further extend the payment
dates of our past-due accounts payable. We can give you no assurance that we
will be able to obtain the necessary financing or extensions of past-due
accounts payable. If we are unable to do so, we may be forced to seek relief
from our creditors under the Federal bankruptcy code. Any proceeding under the
Federal bankruptcy code could have a material adverse effect on our results of
operations and financial position.
Based upon our current business plan, even if we are unable to complete
the proposed extensions of our matured and maturing debt, we believe that we
will have adequate financing to meet our working capital and capital expenditure
requirements and the scheduled payments on our secured, amortizing term loans
through the end of 2001, and to make gradual reductions in our past-due accounts
payable, without the need for additional borrowings, if:
- the holders of our senior subordinated notes do not take action to
enforce their rights against us,
- none of our significant trade creditors take action to collect
past-due accounts payable or refuse to continue to provide us with
goods and services,
- the holders of our 12% secured term note, our senior unsecured
note, and our junior subordinated note are willing to continue to
grant waivers and extensions similar to those granted previously,
- the holders of our secured, amortizing term loans are willing to
continue to grant waivers similar to those granted previously and
to extend the scheduled balloon maturities during 2001, and
- the lenders under our revolving line of credit are willing to
continue to grant waivers similar to those granted previously and
to continue to provide revolving loans in accordance with the
availability formulas presently in effect.
We had a net working capital deficit of $80,179,000 at December 31,
2000, compared to a net working capital deficit of $78,957,000 at December 31,
1999.
The working capital deficit exists primarily because:
- our senior subordinated notes, which have an aggregate principal
balance of $27,412,000, matured during the first half of 2000 and
our 12% secured term note, our senior unsecured note, and our
junior subordinated note, which have an aggregate principal
balance of $9,217,000, were originally scheduled to mature during
2000 but have been extended for three month intervals;
consequently, all of this indebtedness was classified as current
liabilities in our consolidated financial statements at December
31, 2000 and 1999; and
- the long-term portions of our secured, amortizing term loans were
classified as current liabilities at December 31, 2000 and 1999,
because at each of those dates, the lenders had granted waivers,
for a period of less than one year, of defaults on those term
loans related to the payment default on the senior subordinated
notes.
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21
Substantially all of our assets are pledged as collateral for certain
of our indebtedness. Certain of our financing arrangements contain covenants
with respect to the maintenance of minimum levels of working capital, net worth,
and cash flow coverage and other covenants that place certain restrictions on
our business and operations, including covenants relating to the incurrence or
assumption of additional debt, the level of past-due trade accounts payable, the
sale of all or substantially all of our assets, the purchase of plant and
equipment, the purchase of common stock, the redemption of preferred stock, and
the payment of cash dividends. In addition, substantially all of our financing
arrangements include cross-default provisions.
From time to time, our lenders have agreed to waive or amend certain of
the financial covenants contained in our various loan agreements in order to
maintain or otherwise ensure our current or future compliance. A covenant
requiring a minimum level of working capital, as defined in the covenant, was
amended once during 2000. A covenant that limits the amount of past due accounts
payable has been amended three times over the past year, most recently through
June 29, 2001. A covenant requiring a minimum level of tangible net worth was
amended twice during the past year, most recently through June 30, 2001. A
covenant requiring a minimum level of cash flow coverage, as defined in the
covenant, has been amended through June 30, 2001. We cannot assure you that our
lenders will agree to waive or amend these covenants in the future. In the event
that we are not in compliance with any of our covenants in the future and our
lenders do not agree to amend or waive those covenants, the lenders would have
the right to declare the indebtedness under their loan agreements to be
immediately due and payable and the violation might trigger cross-default
provisions under substantially all of our other indebtedness. In those
circumstances, the holders of that indebtedness, would have, among other things,
the right to declare the indebtedness to be immediately due and payable, in
which event, we might be required to consider alternatives, including seeking
relief from our creditors under the Federal bankruptcy code. Any proceeding
under the Federal bankruptcy code could have a material adverse effect on our
results of operations and financial position.
On December 28, 1999, we commenced a consent solicitation seeking
consents of the holders of our senior subordinated notes to an extension of the
maturity date of the notes from February 1, 2000, to February 1, 2003, and
providing for certain increases in the interest rate payable on the notes. The
consent solicitation expired on December 29, 2000, without our having received
the requisite consents.
Since February 1, 2000, we have held numerous discussions with the four
largest holders of the senior subordinated notes. In March 2001, we reached
agreement in principle with the four largest holders of the senior subordinated
notes on the terms of a restructuring of the senior subordinated notes. The
major terms of the agreement in principle are set forth below:
- conversion of the accrued and unpaid interest on the senior
subordinated notes, which aggregated $4,951,000 at December 31,
2000, into additional senior subordinated notes,
- an extension of the maturity date to December 31, 2004,
- an increase in the interest rate to 14% for the period from the
effective date of the restructuring through December 31, 2001, and
to 15% thereafter,
- a change in the frequency of interest payments from semi-annual to
quarterly, and
- a number of changes in financial covenants, primarily designed to
reduce our ability to incur additional debt, pay cash dividends,
and redeem capital stock.
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If the restructuring becomes effective, we have agreed to pay a consent
fee to each holder that consents to the restructuring in the amount of 3% of the
principal amount of that holder's senior subordinated notes and to issue
warrants to purchase, in the aggregate, approximately 3% of our outstanding
common stock.
Since February 1, 2000, the holders of substantially all of our
indebtedness other than the senior subordinated notes have waived cross-default
provisions with respect to the default on the senior subordinated notes and have
granted extensions of loans that have been scheduled to mature. 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 on the
senior subordinated notes through May 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 April 30, 2001; that note has
no cross-default provision with respect to the default on the
senior subordinated notes.
- The holder of our senior unsecured 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, 2001, and has waived
the cross-default provisions with respect to the default on the
senior subordinated notes. During 2000, we reached a non-binding
agreement with the holder of our senior unsecured note on a
proposed amendment to the terms of the senior unsecured note. In
connection with that non-binding agreement, the effective interest
rate on the note increased to 12-1/2% for the nine-month period
ending May 1, 2001. We have recently made a revised proposal to
amend the terms of the senior unsecured note. The principal terms
of the proposal are the following:
- an extension of the maturity date to December 31,
2004,
- an increase in the interest rate to 13% for the
period from the effective date of the amendment
through December 31, 2001, with a further increase
to 14% thereafter, and
- quarterly principal payments of $625,000,
commencing on March 31, 2002.
We have offered to pay an amendment fee of 2% of the principal
amount of the senior unsecured note. The holder of the senior
unsecured note has not yet responded to our proposal.
- The holder of our junior subordinated notes, in the outstanding
principal amount of $347,000, has extended the maturity date of
those notes from May 1, 2000, to May 1, 2001, has deferred five
quarterly interest payments on those notes to May 1, 2001, and has
waived the cross-default provision with respect to the default on
the senior subordinated notes.
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23
- The holders of our junior subordinated convertible notes, which
were outstanding on December 31, 1999, in the aggregate principal
amount of $1,000,000, have deferred one quarterly interest payment
on those notes to May 1, 2001, and have waived the cross-default
provision with respect to the default on the senior subordinated
notes. On February 1, 2000, the junior subordinated convertible
notes were converted into 440,000 shares of our common stock.
Since February 1, 2000, we have made all scheduled payments of interest
and principal on all of our indebtedness as extended, other than the senior
subordinated notes, and we have continued to borrow under our revolving line of
credit and have received new term loans secured by equipment in the aggregate
principal amount of $4,460,000 under two of our equipment lines of credit.
Although, as mentioned above, we expect to begin shortly a consent
solicitation seeking consent of the holders of the senior subordinated notes to
amendments that reflect the terms of our agreement in principle with the four
largest holders of the senior subordinated notes, we can give you no assurance
that we will be able to obtain the necessary consents, nor can we give you any
assurance that we will be able to reach an agreement for an extension of our
senior unsecured note, to negotiate extensions of our past-due accounts payable,
or to renegotiate our senior secured financing arrangements on terms
satisfactory to us. If we are unable to do so, we may be forced to seek relief
from our creditors under the Federal bankruptcy code. Any proceeding under the
Federal bankruptcy code could have a material adverse effect on our results of
operations and financial position.
INFLATION
We generally attempt to pass through fluctuations in raw material costs
to our customers; however, many of our customers will not accept price increases
from us to compensate for increases in labor and overhead expenses that result
from inflation. To offset inflationary increases in costs that we cannot pass
through to our customers and to maintain or improve our operating margins, we
attempt to improve our production efficiencies and manufacturing processes.
ENVIRONMENTAL MATTERS
We have been named from time to time as one of numerous potentially
responsible parties or third-party defendants under applicable environmental
laws for restoration costs at waste-disposal sites, and as a defendant or
potential defendant in various other environmental law matters. It is our policy
to record accruals for matters of these types when we deem a loss to be probable
and we can reasonably estimate the amount of that loss. The various actions to
which we are or may in the future be a party are at various stages of
completion; although we can give you no assurance as to the outcome of existing
or potential environmental litigation, based upon the information currently
available to us, we believe that the outcome thereof will not have a material
adverse effect upon our financial position. You will find information concerning
certain other commitments and contingencies affecting us in "Note 12 -
Commitments and Contingencies" in the notes to our consolidated financial
statements in Part II, Item 8.
QUARTERLY FINANCIAL DATA
For quarterly financial data please refer to "Note 16 - Quarterly
Financial Data" in the notes to our consolidated financial statements in Part
II, Item 8.
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RECENTLY ISSUED ACCOUNTING STANDARDS
UNITED STATES SECURITIES AND EXCHANGE COMMISSION STAFF ACCOUNTING
BULLETIN 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
On December 31, 2000, the company adopted "United States Securities and
Exchange Commission 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. Our adoption of
SAB 101 during the fourth quarter of 2000 did not affect our results of
operations or financial position.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("FAS 133"), requires
all derivative instruments to be recognized on the balance sheet at fair value.
We must adopt FAS 133 no later than January 1, 2001. We believe that our
adoption of FAS 133 during the first quarter of 2001 will not have a material
effect on our results of operations or financial position.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or trade market risk sensitive instruments. We also
do not have any foreign operations or any significant amount of foreign sales
and, therefore, we believe that our exposure to foreign currency exchange rate
risk is minimal.
At December 31, 2000, we had $46,380,000 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 December 31, 2000, we had outstanding $42,720,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.1%, of which
$39,083,000 has matured or is scheduled to mature during 2001. If we are able to
refinance or extend the matured or maturing debt, it will be at interest rates
that are significantly higher than the weighted-average interest rate on the
matured or maturing debt. We have reached an agreement in principle with the
holders of approximately 75% of our $27,412,000 of outstanding senior
subordinated notes to extend the maturity date of those notes from February 1,
2000, to December 31, 2004, to issue additional senior subordinated notes in
payment of accrued and unpaid interest on the notes through the effective date
of the proposed amendment, and to increase the interest rate on the senior
subordinated notes to 14% for the period from the effective date of the proposed
amendment through December 31, 2001, and to 15% thereafter. We have also
proposed to extend the maturity date of our $7,500,000 senior unsecured note
from May 1, 2001, to December 31, 2004, and to increase the interest rate
thereon to 13% from the effective date of the amendment through December 31,
2001, and to 14% thereafter.
If we are successful in our effort to negotiate extensions of our
matured and maturing debt on the proposed terms discussed above and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity" in Part II, Item 7, we estimate that our monthly
interest expense would increase by approximately $160,000.
We recommend that you also read "Note 5 - Debt" in the notes to our
consolidated financial statements in Part II, Item 8.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Page
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Report of Independent Auditors.................................. 26
Consolidated Statement of Operations for the Years Ended
December 31, 2000, 1999, and 1998............................ 27
Consolidated Balance Sheet at December 31, 2000 and 1999........ 28
Consolidated Statement of Stockholders' Deficit for
the Years Ended December 31, 2000, 1999, and 1998............. 30
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998............................. 31
Notes to Consolidated Financial Statements...................... 32
- 25 -
28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lexington Precision Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Lexington Precision Corporation and its subsidiaries at December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 2000. Our audits also included the financial statement schedule contained in
Part IV, Item 14, of the Company's report on Form 10-K. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lexington Precision Corporation and its subsidiaries at December 31, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Lexington Precision Corporation will continue as a going concern.
As more fully described in Notes 1 and 5, the Company has approximately
$89,000,000 of short-term debt, including $27,412,000 principal amount of senior
subordinated notes that matured on February 1, 2000, and that have not been
paid. Substantial doubt exists about the Company's ability to refinance, extend,
amend, or exchange such obligations. As a result, there is substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to the amounts or
classifications of assets or liabilities to reflect this uncertainty.
ERNST & YOUNG LLP
Cleveland, Ohio
March 30, 2001
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29
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
Net sales $ 142,762 $ 140,048 $ 126,717
Cost of sales 125,186 117,609 108,513
--------- --------- ---------
Gross profit 17,576 22,439 18,204
Selling and administrative expenses 10,923 12,153 11,006
--------- --------- ---------
Income from operations 6,653 10,286 7,198
Interest expense 9,913 9,632 9,772
--------- --------- ---------
Income (loss) before income taxes and
extraordinary item (3,260) 654 (2,574)
Income tax provision (benefit) (161) 133 132
--------- --------- ---------
Income (loss) before extraordinary item (3,099) 521 (2,706)
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- 1,542 --
--------- --------- ---------
Net income (loss) $ (3,099) $ 2,063 $ (2,706)
========= ========= =========
Per share data:
Basic and diluted income (loss) before extraordinary
item $ (0.65) $ 0.10 $ (0.65)
Extraordinary gain on repurchase of debt, net of
applicable income taxes -- 0.36 --
--------- --------- ---------
Basic and diluted net income (loss) available to
common stockholders $ (0.65) $ 0.46 $ (0.65)
========= ========= ==========
See notes to consolidated financial statements.
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30
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
DECEMBER 31
-----------
2000 1999
---- ----
ASSETS:
Current assets:
Cash $ 65 $ 8
Accounts receivable 19,912 24,098
Inventories 11,109 9,492
Prepaid expenses and other current assets 3,833 2,229
Deferred income taxes 2,049 1,676
-------- --------
Total current assets 36,968 37,503
-------- --------
Plant and equipment:
Land 2,348 1,570
Buildings 24,022 23,566
Equipment 106,004 96,694
-------- --------
132,374 121,830
Accumulated depreciation 69,596 60,041
-------- --------
Plant and equipment, net 62,778 61,789
-------- --------
Excess of cost over net assets of businesses acquired, net 8,147 8,462
-------- --------
Other assets, net 2,396 3,573
-------- --------
$110,289 $111,327
======== ========
See notes to consolidated financial statements. (continued on next page)
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31
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
DECEMBER 31
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 16,993 $ 8,597
Accrued expenses 11,158 9,794
Short-term debt 88,984 98,057
Current portion of long-term debt 12 12
--------- ---------
Total current liabilities 117,147 116,460
--------- ---------
Long-term debt, excluding current portion 104 116
--------- ---------
Deferred income taxes and other long-term liabilities 2,244 1,884
--------- ---------
Series B preferred stock, $100 par value, at
redemption value 660 660
Excess of redemption value over par value (330) (330)
--------- ---------
Series B preferred stock at par value 330 330
--------- ---------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,828,036 and 4,348,951 shares issued
at December 31, 2000 and 1999, respectively 1,207 1,087
Additional paid-in-capital 12,960 12,160
Accumulated deficit (23,703) (20,493)
Cost of common stock in treasury, 85,915 shares
at December 31, 1999 -- (217)
--------- ---------
Total stockholders' deficit (9,536) (7,463)
--------- ---------
$ 110,289 $ 111,327
========= =========
See notes to consolidated financial statements.
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32
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(THOUSANDS OF DOLLARS)
ADDITIONAL TOTAL
COMMON PAID-IN- ACCUMULATED TREASURY STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK DEFICIT
----- ------- ------- ----- -------
Balance at December 31, 1997 $ 1,087 $ 12,313 $(19,850) $ (217) $ (6,667)
======== ======== ======== ======== ========
Net loss -- -- (2,706) -- (2,706)
Preferred stock dividends
and redemptions -- (78) -- -- (78)
-------- -------- -------- -------- --------
Balance at December 31, 1998 $ 1,087 $ 12,235 $(22,556) $ (217) $ (9,451)
======== ======== ======== ======== ========
Net income -- -- 2,063 -- 2,063
Preferred stock dividends
and redemptions -- (75) -- -- (75)
-------- -------- -------- -------- --------
Balance at December 31, 1999 $ 1,087 $ 12,160 $(20,493) $ (217) $ (7,463)
======== ======== ======== ======== ========
Net loss -- -- (3,099) -- (3,099)
Issuance of 125,000 shares of
restricted stock 10 (90) (137) 217 --
Amortization of restricted stock
grants -- -- 26 -- 26
Conversion of junior subordinated
notes into 440,000 shares of
common stock 110 890 -- -- 1,000
-------- -------- -------- -------- --------
Balance at December 31, 2000 $ 1,207 $ 12,960 $(23,703) $ -- $ (9,536)
======== ======== ======== ======== ========
See notes to consolidated financial statements.
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33
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31
-----------------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $ (3,099) $ 2,063 $ (2,706)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of debt -- (1,935) --
Depreciation 12,059 10,971 10,001
Amortization included in operating expense 1,431 1,757 1,450
Amortization included in interest expense 216 234 198
Changes in operating assets and liabilities that provided (used)
cash:
Accounts receivable 4,186 (6,261) (258)
Inventories (1,617) 678 (1,139)
Prepaid expenses and other assets (1,093) (99) 747
Accounts payable 8,396 (2,694) (1,337)
Accrued expenses 1,364 449 850
Other 293 461 207
-------- -------- --------
Net cash provided by operating activities 22,136 5,624 8,013
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (13,936) (10,328) (14,877)
Decrease (increase) in equipment deposits 447 (231) 261
Proceeds from sales of equipment 313 162 913
Expenditures for tooling owned by customers (1,076) (697) (1,901)
Other 416 170 570
-------- -------- --------
Net cash used by investing activities (13,836) (10,924) (15,034)
-------- -------- --------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt (2,291) 8,473 4,155
Proceeds from issuance of long-term debt 2,460 15,567 8,891
Repayment of long-term debt (8,254) (16,092) (6,003)
Repurchase of debt -- (2,373) --
Other (158) (370) (127)
-------- -------- --------
Net cash provided (used) by financing activities (8,243) 5,205 6,916
-------- -------- --------
Net increase (decrease) in cash 57 (95) (105)
Cash at beginning of year 8 103 208
-------- -------- --------
Cash at end of year $ 65 $ 8 $ 103
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 6,214 $ 9,618 $ 9,567
Income taxes paid $ 113 $ 96 $ 136
See notes to consolidated financial statements
- 31 -
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Lexington
Precision Corporation and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
method) or market. Inventory levels by principal classification are set forth
below (dollar amounts in thousands):
DECEMBER 31
-----------
2000 1999
---- ----
Finished goods $ 5,067 $3,565
Work in process 2,677 2,503
Raw materials and purchased parts 3,365 3,424
------- ------
$11,109 $9,492
======= ======
PLANT AND EQUIPMENT
Plant and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated principally on the straight-line method over the
estimated useful lives of the various assets (15 to 32 years for buildings and 3
to 8 years for equipment). When property is retired or otherwise disposed of,
the related cost and accumulated depreciation are eliminated. Maintenance and
repair expenses are charged against income as incurred, while major improvements
that increase the useful life of plant and equipment are capitalized.
Maintenance and repair expenses were $7,817,000, $6,099,000, and $5,169,000 for
2000, 1999, and 1998, respectively.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
The excess of cost over net assets of businesses acquired (goodwill) is
amortized on the straight-line method, principally over 40 years. At December
31, 2000 and 1999, accumulated amortization of goodwill was $3,842,000 and
$3,527,000, respectively. During 2000, 1999, and 1998, amortization of goodwill
totaled $315,000, $316,000, and $316,000, respectively. The Company assesses the
recoverability of goodwill and other long-lived assets, when events or changes
in circumstances indicate that the carrying amount may be impaired, by
evaluating whether the anticipated undiscounted
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35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future cash flows of the related business will be sufficient to recover the
carrying amount over the remaining useful life of the asset. If the future
undiscounted cash flows are not adequate to recover the carrying value of an
asset over its remaining life, the carrying amount of that asset is adjusted to
its fair value.
DEFERRED FINANCING EXPENSES
Deferred financing expenses are amortized over the lives of the related
debt instruments.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are recorded as expenses in the year
incurred. These costs totaled approximately $850,000, $878,000, and $450,000
during 2000, 1999, and 1998, respectively.
NET INCOME OR LOSS PER COMMON SHARE
Basic net income or loss per common share is computed using the
weighted-average number of common shares outstanding. Diluted net income or loss
per share is calculated after giving effect to all potential common shares that
were dilutive, using the treasury stock method. Potential common shares are
securities (such as convertible debt securities and convertible preferred stock)
that do not have a current right to participate in earnings but could do so in
the future by virtue of their option or conversion rights. For purposes of the
net income or loss per common share calculations, net income or loss has been
reduced by preferred stock dividends declared and the amount by which the
redemption value of preferred shares redeemed exceeds the par value of such
shares.
REVENUE RECOGNITION
Substantially all of the Company's revenues result from the sale of
rubber and metal components. The Company recognizes revenue from the sale of
components upon shipment and passage of title to customers according to shipping
schedules and terms of sale mutually agreed to by the Company and its customers.
STOCK BASED EMPLOYEE COMPENSATION PLAN
The Company has a restricted stock award plan that permits it to award
restricted shares of its common stock to officers and key employees. Shares
awarded under the plan are accounted for in accordance with the provisions of
"Accounting Principles Board Opinion Number 25, Accounting for Stock Issued to
Employees" (APB 25). Compensation expense equal to the market value of the
shares on the date of grant is charged to earnings over the vesting period of
the shares, while the unamortized value of the restricted shares is recorded as
a reduction of stockholders' equity.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION STAFF ACCOUNTING
BULLETIN 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
On December 31, 2000, the company adopted "United States Securities and
Exchange Commission 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. The adoption of
- 33 -
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SAB 101 by the Company did not affect the results of operations or the financial
position of the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("FAS 133"), requires
all derivative instruments to be recognized on the balance sheet at fair value.
FAS 133 must be adopted by the Company no later than January 1, 2001. The
Company believes that the adoption of FAS 133 will not affect the results of
operations or the financial position of the Company.
BASIS OF PRESENTATION
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company is in default on the senior subordinated notes because it
did not make the payments of principal, in the amount of $27,412,000, and
interest, in the amount of $1,748,000, that were due on February 1, 2000. On
December 28, 1999, the Company had commenced a consent solicitation seeking
consents of the holders of the senior subordinated notes to an extension of the
maturity date of the senior subordinated notes to February 1, 2003, and
providing for certain increases in the interest rate payable on the notes. The
consent solicitation expired on December 29, 2000.
During March 2001, the Company reached agreement in principle with the
four largest holders of the senior subordinated notes on the terms of a
restructuring of the senior subordinated notes. The major terms of the agreement
in principle are set forth below:
- conversion of the accrued and unpaid interest on the senior
subordinated notes, which aggregated $4,951,000 at December 31,
2000, into additional senior subordinated notes,
- an extension of the maturity date to December 31, 2004,
- an increase in the interest rate to 14% for the period from the
effective date of the restructuring through December 31, 2001, and
to 15% thereafter,
- a change in the frequency of interest payments from semi-annual to
quarterly, and
- a number of changes in financial covenants, primarily designed to
reduce the Company's ability to incur additional debt, pay cash
dividends, and redeem capital stock.
If the restructuring becomes effective, the Company will pay a consent
fee to each holder that consents to the restructuring in the amount of 3% of the
principal amount of that holder's senior subordinated notes and issue warrants
to purchase, in the aggregate, approximately 3% of the Company's outstanding
common stock.
Since February 1, 2000, the holders of substantially all of the
Company's indebtedness other than the senior subordinated notes have waived
cross-default provisions with respect to the default on the
- 34 -
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 on the senior subordinated notes through May 1, 2001, and
have amended certain covenants to eliminate defaults that would
otherwise have occurred because all of the Company's secured,
amortizing term loans were classified as current liabilities in
the Company's consolidated financial statements.
- 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 from January 31, 2000, to April 30,
2001; that note has no cross-default provision with respect to the
default on the senior subordinated notes.
- The holder of the Company's senior unsecured note, in the
outstanding principal amount of $7,500,000, has extended the
maturity date of that note from February 1, 2000, to May 1, 2001,
and has waived the cross-default provisions with respect to the
default on the senior subordinated notes. During 2000, the Company
reached a non-binding agreement with the holder of the senior
unsecured note on a proposed amendment to the terms of the senior
subordinated note. In connection with that non-binding agreement,
the effective interest rate on the note increased to 12-1/2% for
the nine-month period ending May 1, 2001. The Company recently
made a revised proposal to amend the terms of the senior unsecured
note. The principal terms of that proposal are the following:
- an extension of the maturity date to December 31,
2004,
- an increase in the interest rate to 13% for the
period from the effective date of the amendment
through December 31, 2001, with a further increase
to 14% thereafter,
- quarterly principal payments of $625,000,
commencing on March 31, 2002.
The Company has offered to pay an amendment fee of 2% of the
principal amount of the senior unsecured note. The holder of the
senior unsecured note has not yet responded to the Company's
proposal.
- The holder of the Company's junior subordinated notes, in the
outstanding principal amount of $347,000, has extended the
maturity date of those notes from May 1, 2000, to May 1, 2001, has
deferred five quarterly interest payments on those notes to May 1,
2001, and has waived the cross-default provision with respect to
the default on the senior subordinated notes.
- The holders of the Company's junior subordinated convertible
notes, which were outstanding on December 31, 1999, in the
aggregate principal amount of $1,000,000, have deferred one
quarterly interest payment on those notes to May 1, 2001, and have
waived the cross-default provision with respect to the default on
the senior subordinated
- 35 -
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes. On February 1, 2000, the junior subordinated convertible
notes were converted into 440,000 shares of our common stock.
If the Company is to complete the extensions of its matured and
maturing debt, it will be necessary to renegotiate its senior, secured financing
arrangements in order to provide financing for on-going capital expenditure
requirements and to reduce accounts payable to levels that are considered
customary for the industries in which it operates. If the Company is unable to
obtain adequate financing to reduce its accounts payable to these levels, it may
be required to negotiate with certain of its trade creditors to further extend
the payment dates of its past-due accounts payable. There can be no assurance
that the Company will be able to obtain the necessary financing or extensions of
past-due accounts payable.
Since February 1, 2000, the Company has made all scheduled payments of
interest and principal on all of its indebtedness, as extended, other than the
senior subordinated notes, and has continued to borrow under its revolving line
of credit and has received new term loans secured by equipment in the aggregate
principal amount of $4,460,000 under two of its equipment lines of credit.
Although, as mentioned above, the Company expects to begin shortly a
consent solicitation seeking consent of the holders of the senior subordinated
notes to an amendment that reflects the terms of the agreement in principle with
the four largest holders of the senior subordinated notes, the Company can give
no assurance that it will be able to obtain the necessary consents, to reach an
agreement for an extension of the senior unsecured notes, to negotiate an
extension of past-due accounts payable, or to renegotiate its senior, secured
financing arrangements on satisfactory terms. If the Company is unable to do so,
it may be forced to seek relief from its creditors under the Federal bankruptcy
code. Any proceeding under the Federal bankruptcy code could have a material
adverse effect on the Company's results of operations and financial position.
RECLASSIFICATIONS
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the presentation for 2000.
NOTE 2 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31, 2000 and 1999, other current assets included $1,972,000
and $1,477,000, respectively, of tooling manufactured or purchased by the
Company pursuant to purchase orders issued by customers of the Compa