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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Act). [ ]
The aggregate market value of the registrant's Common Stock, $0.25 par value per
share, held by non-affiliates of the registrant, as of June 30, 2002, was
approximately $1,979,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be issued in connection with its
2003 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.
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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.................................... 21
Item 8. Financial Statements and Supplementary Data.................................................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 52
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 53
Item 11. Executive Compensation....................................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 53
Item 13. Certain Relationships and Related Transactions............................................... 53
Item 14. Controls and Procedures...................................................................... 53
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 54
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 rubber
and metal components that are sold to other manufacturers.
In 2002, net sales of the Rubber Group totaled $98,880,000, or
79.2% 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. During 2002, sales to automotive customers
represented 87.3% of the total net sales of the Rubber Group. The Rubber Group
also manufactures molded rubber components used in a variety of medical devices,
such as drug delivery systems and syringes.
In 2002, net sales of the Metals Group totaled $25,972,000, or
20.8% of our consolidated net sales. The Metals Group manufactures aluminum die
castings and machines components from aluminum, brass, and steel bars. During
2002, sales to automotive customers represented 86.3% 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," of our
consolidated financial statements in Part II, Item 8.
PRINCIPAL END-USES FOR OUR PRODUCTS
The following table summarizes our net sales during 2002, 2001,
and 2000, by the type of product in which our components were utilized (dollar
amounts in thousands):
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- -----------------------
Automobiles and light trucks $108,752 87.1% $107,818 85.4% $119,572 86.4%
Medical devices 11,705 9.4 9,732 7.7 8,694 6.3
Other 4,395 3.5 8,652 6.9 10,036 7.3
-------- -------- -------- -------- -------- --------
$124,852 100.0% $126,202 100.0% $138,302 100.0%
======== ======== ======== ======== ======== ========
-1-
The following table summarizes net sales of the Rubber Group and the
Metals Group during 2002, 2001, and 2000, by the type of product in which each
segment's components were utilized (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Rubber Group:
Automobiles and light trucks $ 86,345 87.3% $ 81,493 89.0% $ 93,073 91.1%
Medical devices 11,705 11.9 9,732 10.7 8,694 8.5
Other 830 0.8 307 0.3 404 0.4
-------- -------- -------- -------- -------- --------
$ 98,880 100.0% $ 91,532 100.0% $102,171 100.0%
======== ======== ======== ======== ======== ========
Metals Group:
Automobiles and light trucks $ 22,407 86.3% $ 26,325 75.9% $ 26,499 73.3%
Industrial equipment 1,104 4.2 4,631 13.4 5,097 14.1
Other 2,461 9.5 3,714 10.7 4,535 12.6
-------- -------- -------- -------- -------- --------
$ 25,972 100.0% $ 34,670 100.0% $ 36,131 100.0%
======== ======== ======== ======== ======== ========
MAJOR CUSTOMERS
Our largest customer is Delphi Corporation. During 2002, 2001, and 2000,
our net sales to Delphi totaled $25,181,000, $24,388,000, and $28,782,000, which
represented 20.2%, 19.3%, and 20.8%, respectively, of our net sales. Net sales
of rubber components to Delphi during 2002, 2001, and 2000 represented 25.1%,
25.8%, and 27.3%, respectively, of the Rubber Group's net sales. No other
customer accounted for more than 10% of our net sales during 2002, 2001, or
2000. Loss of a significant amount of business from Delphi or any of our other
large customers would 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,
aluminum ingots, 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.
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.
-2-
SEASONAL VARIATIONS
Our business generally is not subject to significant seasonal variation;
however, we generally experience decreased sales during the third calendar
quarter of each year due to shutdowns of our customers' plants in July as a
result of vacations and model-year changeovers, and during the fourth calendar
quarter of each year due to shutdowns of our customers' plants for vacations and
holidays in December.
BACKLOG
Sales of our products are made pursuant to a variety of arrangements and
practices. Our 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
The markets we compete in are characterized by intense price competition
and increasing customer requirements for quality and service. 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 2002, 2001, and 2000, we spent approximately $924,000, $890,000,
and $850,000, 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 apply or that, in the event
of an award arising out of a claim, the amount of any applicable insurance
coverage would be sufficient to satisfy the award.
-3-
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, 2002, 2001, and 2000.
DECEMBER 31
--------------------------------
2002 2001 2000
---- ---- ----
Rubber Group 876 807 869
Metals Group 260 299 416
Corporate Office 7 7 5
----- ----- -----
1,143 1,113 1,290
===== ===== =====
At December 31, 2002 and 2001, employees at the Rubber Group included
301 and 263 hourly workers at two plant locations that were subject to
collective bargaining agreements, which expire on December 11, 2004 and October
19, 2004, respectively. At December 31, 2000, employees at the Rubber Group
included 66 hourly workers at one location that were subject to a collective
bargaining agreement.
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
The Company does not currently maintain an internet website and
therefore we do not make available through a website our annual report on Form
10-K, our quarterly reports on Form 10-Q or our current reports on Form 8-K and
all amendments to these reports. We will furnish free of charge, upon written
request to the President of the Company at 767 Third Avenue, New York, NY 10017,
a paper copy of the reports that we file with the Commission. The reports that
have been filed electronically with the Securities and Exchange Commission (the
Commission) are also accessible on the Commission's website at
http://www.sec.gov.
-4-
ITEM 2. PROPERTIES
The following table shows the location and square footage of our
manufacturing facilities at December 31, 2002:
SQUARE
LOCATION FEET
- ----------------------------------- ----------
Rubber Group:
Jasper, Georgia 100,000
LaGrange, Georgia 85,000
North Canton, Ohio 42,000
Vienna, Ohio 64,000
Rock Hill, South Carolina 63,000
-------
Total Rubber Group 354,000
-------
Metals Group:
Casa Grande, Arizona 64,000
Lakewood, New York 103,000
Rochester, New York 60,000
-------
Total Metals Group 227,000
-------
Total Company 581,000
=======
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 our
facilities are adequate to meet our current operating needs. We closed our
manufacturing facility in Casa Grande, Arizona in 2002. For more information
about the closing, refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7.
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 in the future be a party 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 those actions will
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 2002.
-5-
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 22,
2003, there were approximately 786 holders of record of our common stock.
Trading in shares of our common stock is limited. During 2002 and 2001, 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
-----------------------------------------------
2002 2001
---------------------- ----------------------
HIGH LOW HIGH LOW
---------- --------- ---------- ---------
First quarter $0.32 $0.31 $0.88 $0.75
Second quarter $0.50 $0.32 $0.70 $0.40
Third quarter $0.40 $0.32 $0.68 $0.45
Fourth quarter $0.53 $0.35 $0.50 $0.30
We are not able to determine whether retail markups, markdowns, or
commissions were included in the above prices. We believe that eight 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 thirteen quarterly dividends
aggregating $86,000 on the series B preferred stock and with respect to the
redemption of 1,350 shares of series B preferred stock that we did not redeem on
each of November 30, 2002, 2001, and 2000 at an aggregate redemption price of
$270,000. Because we are in arrears with respect to more than five dividend
payments on the series B preferred stock, the holders of the series B preferred
stock are entitled to elect two persons to serve on our Board of Directors until
the annual meeting of stockholders following the date on which all such
arrearages have been paid in full.
-6-
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data,
including the reconciliation of income from operations to earnings before
interest, taxes, depreciation, and amortization (EBITDA), for each of the years
in the five-year period ended December 31, 2002 (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
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
Net sales $ 124,852 $ 126,202 $ 138,302 $ 134,372 $ 120,598
Cost of sales 110,718 109,055 120,726 111,598 102,394
--------- --------- --------- --------- ---------
Gross profit 14,134 17,147 17,576 22,774 18,204
Selling and administrative expenses 8,658 9,911 10,923 12,153 11,006
Plant closure costs 609 -- -- -- --
Impairment of long-lived assets -- 2,047 -- 335 --
Income from insurance company
demutualization -- (1,274) -- -- --
--------- --------- --------- --------- ---------
Income from operations 4,867 6,463 6,653 10,286 7,198
Interest expense (7,220) (8,534) (9,913) (9,632) (9,772)
Gain on sale of securities 248 -- -- -- --
Income tax provision (benefit) (538) 80 (161) 133 132
Extraordinary gain on repurchase of
debt, net of applicable income taxes -- -- -- 1,542 --
--------- --------- --------- --------- ---------
Net income (loss) $ (1,567) $ (2,151) $ (3,099) $ 2,063 $ (2,706)
========= ========= ========= ========= =========
Net income (loss) per diluted common
share $ (0.32) $ (0.45) $ (0.65) $ 0.46 $ (0.65)
========= ========= ========= ========= =========
OTHER DATA:
Net cash provided by operating activities $ 16,231 $ 17,561 $ 22,136 $ 5,624 $ 8,013
========= ========= ========= ========= =========
Income from operations $ 4,867 $ 6,463 $ 6,653 $ 10,286 $ 7,198
Add back: depreciation and amortization
included in income from operations 11,865 13,103 13,490 12,728 11,451
--------- --------- --------- --------- ---------
EBITDA (1) $ 16,732 $ 19,566 $ 20,143 $ 23,014 $ 18,649
========= ========= ========= ========= =========
Capital expenditures $ 5,230 $ 6,408 $ 13,936 $ 10,328 $ 14,877
DECEMBER 31
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
FINANCIAL POSITION:
Current assets $ 32,991 $ 34,146 $ 36,968 $ 37,503 $ 32,198
Current liabilities 101,061 107,074 117,147 116,460 40,228
--------- --------- --------- --------- ---------
Net working capital deficit $ (68,070) $ (72,928) $ (80,179) $ (78,957) $ (8,030)
========= ========= ========= ========= =========
Total assets $ 92,145 $ 99,877 $ 110,289 $ 111,327 $ 108,325
Long-term debt, excluding current portion $ 1,117 $ 2,000 $ 104 $ 116 $ 74,953
Series B preferred stock $ 330 $ 330 $ 330 $ 330 $ 375
Total stockholders' deficit $ (13,199) $ (11,659) $ (9,536) $ (7,463) $ (9,451)
(1) EBITDA is not a measure of performance under accounting principles
generally accepted in the United States and should not be considered in
isolation or used as a substitute for income from operations, net
-7-
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 here and elsewhere in this
Form 10-K because this measure is used by investors, as well as our own
management, to evaluate the operating performance of our business,
including its ability to incur and to service debt. Our definition of
EBITDA may not be the same as the definition of EBITDA used by other
companies.
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 and the credit and securities markets,
- the possibility of product warranty or other liability claims,
- labor interruptions at our facilities or at our customers'
facilities,
- the impact on our operations of the defaults on our indebtedness,
and
- our inability to obtain additional borrowings or to refinance our
existing indebtedness.
Because we have substantial borrowings for a company our size and
because those borrowings require us to make substantial interest and principal
payments, any negative event may have a greater adverse effect upon us than it
would have upon a company of the same size that has less debt.
Our results of operations for any particular period are not necessarily
indicative of the results to be expected for any one or more succeeding periods.
The use of forward-looking statements should not be regarded as a representation
that any of the projections or estimates expressed in or implied by those
forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements are
expressly qualified by the discussion above.
-8-
RESULTS OF OPERATIONS -- COMPARISON OF 2002, 2001, AND 2000
The following table sets forth our consolidated operating results for
2002, 2001, and 2000 and the reconciliation of income from operations to
earnings before interest, taxes, depreciation, and amortization (EBITDA) (dollar
amounts in thousands):
YEARS ENDED DECEMBER 31
------------------------------------------------------------
2002 2001 2000
----------------- ------------------ ------------------
Net sales $ 124,852 100.0% $ 126,202 100.0% $ 138,302 100.0%
Cost of sales 110,718 88.7 109,055 86.4 120,726 87.3
--------- ------ --------- ------- --------- -------
Gross profit 14,134 11.3 17,147 13.6 17,576 12.7
Selling and administrative expenses 8,658 6.9 9,911 7.9 10,923 7.9
Plant closure costs (1) 609 0.5 -- -- -- --
Impairment of long-lived assets (1) -- -- 2,047 1.6 -- --
Income from insurance company demutualization (2) -- -- (1,274) (1.0) -- --
--------- ------ --------- ------- --------- -------
Income from operations 4,867 3.9 6,463 5.1 6,653 4.8
Add back: depreciation and amortization (3) 11,865 9.5 13,103 10.4 13,490 9.8
--------- ------ --------- ------- --------- -------
EBITDA (4) $ 16,732 13.4% $ 19,566 15.5% $ 20,143 14.6%
========= ====== ========= ======= ========= =======
Net cash provided by operating activities (5) $ 16,231 13.0% $ 17,561 13.9% $ 22,136 16.0%
========= ====== ========= ======= ========= =======
(1) In 2002, we closed our metal machining facility in Casa Grande, Arizona. As
of December 31, 2001, we recorded a provision of $2,047,000 to write down
the value of certain of the facility's assets to fair value, and, during
2002, we incurred costs of $609,000 to close the facility. For more
information, refer to the discussion of the results of operations of the
Metals Group in this section.
(2) During December 2001, we received 53,103 shares of common stock of
Principal Financial Group, Inc. (Principal) as a result of the
demutualization of Principal Mutual Holding Company, a mutual insurance
company and predecessor to Principal. For more information, refer to the
discussion of the results of operations of the Corporate Office in this
section.
(3) Does not include amortization of deferred financing expenses, which totaled
$440,000, $192,000, and $216,000, in 2002, 2001, and 2000, respectively,
and which is included in interest expense in the consolidated financial
statements.
(4) EBITDA, is not a measure of performance under accounting principles
generally accepted in the United States and should not be considered in
isolation or used as a substitute for income from operations, net income,
net cash provided by operating activities, or other operating or cash flow
statement data prepared in accordance with generally accepted accounting
principles. We have presented EBITDA here and elsewhere in this Form 10-K
because this measure is used by investors, as well as our own management,
to evaluate the operating performance of our business, including its
ability to incur and to service debt. Our definition of EBITDA may not be
the same as the definition of EBITDA used by other companies.
-9-
(5) 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.
Our net sales for 2002 were $124,852,000, compared to net sales of
$126,202,000 for 2001, a decrease of $1,350,000, or 1.1%. The decrease in net
sales was principally a result of an $8,195,000 reduction in sales to former
customers of our Arizona facility, which we closed in 2002. EBITDA for 2002 was
$16,732,000, or 13.4% of net sales, compared to EBITDA of $19,566,000, or 15.5%
of net sales, for 2001.
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
years ended December 31, 2002, 2001, and 2000.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. During 2002, 2001, and 2000, sales
to automotive industry customers represented 87.3%, 89.0%, and 91.1%,
respectively, of the Rubber Group's net sales. Any significant reduction in the
level of activity in the automotive industry could 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 45.6%,
46.7%, and 49.1% of the Rubber Group's net sales during 2002, 2001, and 2000,
respectively. Loss of a significant amount of business from any of the Rubber
Group's large customers would 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 2002, 2001, and 2000 and the reconciliation of the Rubber Group's income
from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
2002 2001 2000
------------------- ------------------- --------------------
Net sales $ 98,880 100.0% $ 91,532 100.0% $102,171 100.0%
Cost of sales 83,503 84.4 75,949 83.0 85,750 83.9
-------- -------- -------- -------- -------- --------
Gross profit 15,377 15.6 15,583 17.0 16,421 16.1
Selling and administrative expenses 4,612 4.7 5,194 5.7 5,937 5.8
-------- -------- -------- -------- -------- --------
Income from operations 10,765 10.9 10,389 11.3 10,484 10.3
Add back: depreciation and amortization 7,786 7.9 8,484 9.3 8,554 8.3
-------- -------- -------- -------- -------- --------
EBITDA $ 18,551 18.8% $ 18,873 20.6% $ 19,038 18.6%
======== ======== ======== ======== ======== ========
During 2002, net sales of the Rubber Group increased by $7,348,000, or
8.0%, compared to 2001. The increase in net sales was primarily due to increased
unit sales of automotive components, which resulted primarily from an increase
in the level of activity in the automotive industry and an increase in
-10-
our share of business at certain existing customers and, to a lesser extent,
increased sales of components for medical devices. The increase in net sales
during 2002 was offset, in part, by price reductions on certain automotive
components.
Delphi Corporation is the Rubber Group's largest customer. During 2002,
2001, and 2000, the Rubber Group's net sales to Delphi totaled $24,837,000,
$23,660,000, and $27,908,000, respectively, which represented 25.1%, 25.8%, and
27.3%, respectively, of the Rubber Group's net sales. Substantially all of the
Rubber Group's sales to Delphi are connector seals for automotive wiring systems
that are sold pursuant to an agreement that expires on December 31, 2004. Under
the terms of that agreement, we provided Delphi with significant price
reductions effective July 16, 2001, with further price reductions in each of the
years covered by the agreement. The price reductions granted to Delphi on July
16, 2001, reduced net sales during 2002 and 2001 by $4,366,000 and $2,588,000,
respectively.
Cost of sales as a percentage of net sales increased during 2002 to
84.4% of net sales from 83.0% of net sales during 2001, primarily because of (1)
increased costs for sorting and repair of components, which were caused by
quality problems in manufacturing a certain type of connector seal, (2)
underabsorption of overhead at our captive tool-making operation, which was
caused by a reduction in customer tooling orders for a number of months, (3)
delays in completing the cost reduction plans that were initiated in connection
with the price reductions granted to Delphi on July 16, 2001, (4) increased
workers' compensation expense, and (5) increased maintenance expenses. The
increases in these components of cost of sales were partially offset by lower
depreciation expense.
Selling and administrative expenses as a percentage of net sales
decreased during 2002 compared to 2001, primarily because of reduced European
selling expenses, the elimination of goodwill amortization as required by
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," which we adopted on January 1, 2002, and a reduction in bad
debt expense. These decreases were partially offset by an increase in management
incentive compensation.
During 2002, income from operations was $10,765,000, an increase of
$376,000, or 3.6%, compared to 2001. EBITDA for 2002 was $18,551,000, or 18.8%
of net sales, compared to $18,873,000, or 20.6% of net sales, for 2001.
During 2001, net sales of the Rubber Group decreased by $10,639,000, or
10.4%, compared to 2000. This decrease was primarily due to decreased unit sales
of insulators for automotive ignition wire sets, which resulted primarily from a
reduction in the level of activity in the automotive industry, and price
reductions on certain automotive components, offset, in part, by increased unit
sales of components for medical devices.
Cost of sales as a percentage of net sales decreased during 2001 to
83.0% of net sales from 83.9% of net sales during 2000, primarily because our
insulators division improved operating efficiencies and reduced scrap and
because we did not incur fees of a consulting firm that was retained during
2000, at a cost of $1,013,000.
Selling and administrative expenses as a percentage of net sales
decreased during 2001 compared to 2000, primarily because wages and employee
benefits, selling and office supply expenses, and depreciation expense all
decreased when compared to 2000. These increases were offset, in part, by a
$163,000 increase in bad debt expense related to the filing of a chapter 11
bankruptcy petition by one of the Rubber Group's customers.
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During 2001, income from operations was $10,389,000, a decrease of
$95,000, or 0.9%, compared to 2000. EBITDA for 2001 was $18,873,000, or 20.6% of
net sales, compared to $19,038,000, or 18.6% of net sales, for 2000.
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
components from aluminum, brass, and steel bars. During 2002, 2001, and 2000,
net sales to automotive industry customers represented 86.3%, 75.9%, and 73.3%,
respectively, of the Metals Group's net sales. Any material reduction in the
level of activity in the automotive industry could have a material adverse
effect on the results of operations of the Metals Group and on our company as a
whole.
The three largest customers of the Metals Group accounted for 57.3%,
45.9%, and 50.9% of the Metals Group's net sales during 2002, 2001, and 2000,
respectively. Loss of a significant amount of business from any of the Metals
Group's large customers would have a material adverse effect upon the Metals
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 Metals Group
for 2002, 2001, and 2000 and the reconciliation of the Metals Group's loss from
operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
2002 2001 2000
----------------- ----------------- ------------------
Net sales $ 25,972 100.0% $ 34,670 100.0% $ 36,131 100.0%
Cost of sales 27,215 104.8 33,106 95.5 34,976 96.8
-------- ------- --------- ------- --------- --------
Gross profit (1,243) (4.8) 1,564 4.5 1,155 3.2
Selling and administrative expenses 1,582 6.1 2,587 7.5 2,741 7.6
Plant closure costs 609 2.3 - - - -
Impairment of long-lived assets - - 2,047 5.9 - -
-------- ------- --------- ------- --------- --------
Loss from operations (3,434) (13.2) (3,070) (8.9) (1,586) (4.4)
Add back: depreciation and amortization 4,026 15.5 4,531 13.1 4,849 13.4
-------- ------- --------- ------- --------- --------
EBITDA $ 592 2.3% $ 1,461 4.2% $ 3,263 9.0%
======== ======= ========= ======= ========= ========
During the fourth quarter of 2001, we were notified that the Metals
Group's largest customer would cease purchasing components from the Metals Group
after December 31, 2001. During 2001, the customer purchased $5,937,000 of
machined metal components that were manufactured primarily at the Metals Group's
Arizona facility. As a result of the reduction in sales at the Arizona facility,
we closed the facility in 2002 and recorded, as of December 31, 2001, an
impairment charge of $2,047,000 to reduce to fair market value the carrying
value of the Arizona facility's land and building and certain metal
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machining equipment idled by the loss of this business. The idled assets are
currently classified in property, plant, and equipment and are being depreciated
at the rate of $17,000 per month. These assets will be reclassified as assets
held for sale if and when they meet the criteria set forth in Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which we adopted on January 1, 2002.
At December 31, 2002, the book value of the assets remaining to be disposed of
at the Arizona facility totaled $1,937,000, which includes $1,737,000 for the
land and building and $200,000 for equipment. The cost to hold the building and
the remaining equipment is currently projected to total approximately $465,000
per annum, which includes $265,000 for building maintenance, property taxes,
insurance, and security services and $200,000 for depreciation expense.
The following table sets forth certain operating data of the Arizona
facility for 2002 and 2001 and the reconciliation of the Arizona facility's
income from operations to its EBITDA (dollar amounts in thousands):
YEAR ENDED
DECEMBER 31
------------------------
2002 2001
Net sales $ 332 $ 8,954
======= =======
Operating loss before nonrecurring charges $(1,290) $ (523)
------- -------
Nonrecurring charges:
Plant closure costs:
Severance and other employee termination costs 246 --
Asset relocation costs 209 --
Other costs 154 --
------- -------
Subtotal 609 --
Impairment of long-lived assets -- 2,047
------- -------
609 2,047
------- -------
Operating loss (1,899) (2,570)
Add back: depreciation and amortization 527 1,658
------- -------
EBITDA $(1,372) $ (912)
======= =======
During 2002, net sales of the Metals Group decreased by $8,698,000, or
25.1%, compared to 2001. The decrease resulted primarily from an $8,195,000
reduction in sales to former customers of the Arizona facility.
During 2002, operating losses other than plant closure costs at the
Arizona facility resulted primarily from the underabsorption of operating costs
due to minimal sales and poor operating efficiencies while the facility was
being shut down, and, to a lesser extent, from the cost of maintaining,
insuring, protecting, and depreciating the facility and the remaining equipment.
Cost of sales as a percentage of net sales increased during 2002 to
104.8% of net sales from 95.5% of net sales during 2001, primarily due to
minimal sales and operating inefficiencies incurred at the Arizona facility
while the facility was being closed, excess costs and production inefficiencies
caused by the transfer of certain business and equipment from Arizona to the
Rochester, New York, facility, the cost
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of maintaining, insuring, protecting, and depreciating the Arizona facility and
the remaining equipment, reduced efficiencies on certain high-volume automotive
components due to increased customer quality standards, and an adverse change in
product mix caused by the start-up of new products and the loss of certain
mature components.
Selling and administrative expenses as a percentage of net sales
decreased during 2002 compared to 2001, primarily because of the closing of the
Arizona facility, a reduction in bad debt expense, and reduced depreciation
expense.
During 2002, the loss from operations was $3,434,000, compared to a loss
from operations of $3,070,000 during 2001. Excluding the $609,000 of plant
closure costs, the loss from operations during 2002 was $2,825,000. Excluding
the entire loss incurred at the Arizona facility during 2002, the loss from
operations during 2002 was $1,535,000. EBITDA was $592,000 or 2.3% of net sales,
compared to $1,461,000, or 4.2% of net sales, for 2001.
During 2001, net sales of the Metals Group decreased by $1,461,000, or
4.0%, compared to 2000. This decrease resulted primarily from a planned
reduction in low-volume business during 2001.
Cost of sales as a percentage of net sales decreased during 2001 to
95.5% of net sales from 96.8% of net sales during 2000, primarily due to
improved operating efficiencies, reduced indirect labor costs, reduced operating
and repair costs, and lower depreciation and amortization expenses, offset, in
part, by startup costs on certain new products and a provision of $362,000 for
inventory losses related to the loss of the Group's largest customer, discussed
above.
As discussed previously, during February 2002, we decided to close the
Arizona facility. In accordance with the provisions of FAS 144, we recorded, as
of December 31, 2001, an impairment charge of $2,047,000 to reduce to fair
market value the carrying value of the land and building at the Arizona facility
and certain metal machining equipment currently idled by the loss of this
business. Our estimate of fair market value was based on appraisals of the
assets.
Selling and administrative expenses as a percentage of net sales
decreased during 2001 compared to 2000, primarily due to reduced employee
recruitment and relocation expenses, lower office expenses, and reduced
consulting fees related to the installation of new computer systems, which were
offset, in part, by a $220,000 increase in bad debt expense related to the
filing of chapter 11 bankruptcy petitions by two of the Metals Group's
customers.
During 2001, the loss from operations was $3,070,000 compared to a loss
from operations of $1,586,000 during 2000. Excluding the provision for asset
impairment, the loss from operations during 2001 was $1,023,000. EBITDA was
$1,461,000, or 4.2% of net sales, compared to $3,263,000, or 9.0% of net sales,
in 2000.
CORPORATE OFFICE
Corporate Office expenses, which are not included in the operating
results of the Rubber Group or the Metals Group, represent administrative
expenses incurred primarily at our New York and Cleveland offices. Corporate
Office expenses are consolidated with the selling and administrative expenses of
the Rubber Group and the Metals Group in our consolidated financial statements.
-14-
The following table sets forth the operating results of the Corporate
Office for 2002, 2001, and 2000 and the reconciliation of the corporate office's
loss from operations to its EBITDA (dollar amounts in thousands):
YEARS ENDED DECEMBER 31
-------------------------------------
2002 2001 2000
---- ---- ----
Administrative expenses $ 2,464 $ 2,130 $ 2,245
Income from insurance company
demutualization - (1,274) -
--------- -------- --------
Loss from operations (2,464) (856) (2,245)
Add back: depreciation and
amortization (1) 53 88 87
--------- -------- --------
EBITDA $ (2,411) $ (768) $ (2,158)
========= ======== ========
(1) Excludes amortization of deferred financing expenses, which totaled
$440,000, $192,000, and $216,000, in 2002, 2001, and 2000, respectively,
and which is included in interest expense in the consolidated financial
statements.
During December of 2001, a mutual insurance company, Principal Mutual
Holding Company, underwent a demutualization and converted to a stock company,
Principal Financial Group, Inc., (Principal). We were a member of the mutual
insurance company as a policyholder and received 53,103 shares of common stock
of Principal as a result of the demutualization. In accordance with Financial
Accounting Standards Board Emerging Issue Task Force Bulletin 99-4, "Accounting
for Stock Received from the Demutualization of a Mutual Insurance Company," we
recorded these shares at fair value by using the published closing price for the
stock on December 31, 2001.
Excluding the income from the insurance company demutualization,
Corporate Office expenses increased by 15.7% in 2002, primarily because of
increased legal and professional fees, increased directors' fees and expenses,
and higher premiums for directors and officers insurance and fiduciary liability
insurance.
INTEREST EXPENSE
During 2002, 2001, and 2000, interest expense totaled $7,220,000,
$8,534,000, and $9,913,000, respectively. During 2002, 2001, and 2000, interest
expense included amortization of deferred financing expenses of $440,000,
$192,000, and $216,000, respectively. The decrease in interest expense in 2002
was caused primarily by lower rates of interest on our floating rate
indebtedness and a reduction in the amount of borrowings outstanding, offset, in
part, by fees paid during 2002 to the lenders providing loans under our
revolving line of credit to extend the expiration date of the revolving line of
credit beyond April 1, 2002.
-15-
GAIN ON SALE OF SECURITIES
During the fourth quarter of 2002, we sold the 53,103 shares of
Principal common stock that we received during the fourth quarter of 2001 and
realized a pre-tax gain of $248,000 on the sale.
INCOME TAX PROVISION (BENEFIT)
The income tax benefit recorded during 2002 results from a refund of
alternative minimum taxes, currently estimated to be approximately $643,000,
which were paid in earlier periods, offset, in part, by state income tax
expense. During 2002, we received $148,000 of the alternative minimum tax refund
and we currently anticipate that the balance of $495,000 will be refunded to us
during 2003.
During 2001, the income tax provision consisted of state income taxes.
During 2000, the income tax benefit consisted primarily of the refund of
federal income tax expensed in a prior period.
For additional information concerning income taxes and related matters,
see Note 9 to our consolidated financial statements in Part II, Item 8.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During 2002, our operating activities provided $16,231,000 of cash.
Accounts receivable decreased by $2,342,000. The decrease was caused primarily
by a decrease in product sales during November and December of 2002 compared to
November and December of 2001, a reduction in accounts receivable for tooling,
and the payment by one customer of approximately $450,000 of invoices in advance
of their scheduled due dates. Accounts payable decreased by $1,279,000. During
2002, $167,000 of accounts payable were converted into unsecured, amortizing
term notes and $246,000 of accounts payable were eliminated because we returned
a piece of equipment purchased in 2001. Accrued interest expense increased by
$4,137,000, reflecting the accrual of interest on our senior, unsecured note,
our senior subordinated notes, and our junior subordinated notes.
INVESTING ACTIVITIES
During 2002, our investing activities used $3,104,000 of cash, primarily
for capital expenditures. We presently project that capital expenditures will
total approximately $7,264,000 in 2003, primarily for equipment. Capital
expenditures for the Rubber Group, the Metals Group, and the Corporate Office,
are projected to total $6,196,000, $1,046,000, and $22,000, respectively, during
2003. We project that approximately $807,000 will be expended to rebuild or
replace existing equipment, and approximately $6,457,000 will be expended to
effect cost reductions and expand productive capacity.
At December 31, 2002, we had outstanding commitments to purchase
equipment aggregating $1,019,000.
FINANCING ACTIVITIES
During 2002, our financing activities used $11,563,000 of cash,
primarily as a result of $10,194,000 of payments on our secured and unsecured,
amortizing term notes and a $750,000 reduction in borrowings under our revolving
line of credit.
-16-
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 is subject to certain availability formulas based on the levels of our
accounts receivable and inventories. Our revolving line of credit is currently
scheduled to expire on April 4, 2003. At March 25, 2003 the aggregate principal
amount outstanding under our revolving line of credit was $19,477,000. We intend
to replace the revolving line of credit with a revolving line of credit provided
by a new lender or to negotiate an extension of the April 4, 2003, expiration
date with our existing lender. We can give no assurance, however, that we will
be able to replace or extend the revolving line of credit on favorable terms or
at all. At December 31, 2002, availability under our revolving line of credit
totaled $2,094,000 before outstanding checks of $971,000 were deducted.
Substantially all of our assets are pledged as collateral for various of
our borrowings. A number of our financing arrangements contain covenants with
respect to the maintenance of minimum levels of 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, amend, or eliminate
certain of the financial covenants contained in our various financing agreements
in order to maintain or otherwise ensure our current or future compliance.
During 2002, covenants requiring minimum levels of working capital were
eliminated from three of our financing agreements, and, during 2003,
noncompliance with the net worth covenant under one of our loan agreements was
waived. 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, waive, or eliminate those
covenants, the lenders would have the right to declare the borrowings under
their financing agreements to be due and payable.
We are in default in the payment of our senior subordinated notes and
our senior, unsecured note, which have outstanding principal amounts of
$27,412,000 and $7,500,000, respectively, and accrued interest, as of December
31, 2002, of $11,941,000 and $703,000, respectively. In addition, our revolving
line of credit is currently scheduled to expire on April 4, 2003, we have
$643,000 of unsecured, amortizing term notes and $347,000 of junior subordinated
notes that are scheduled to mature during 2003, and we have $11,122,000 of
scheduled principal payments on our secured, amortizing term notes during 2003.
We estimate that, at existing contractual and market rates, the interest expense
on all of our debt during 2003 will be approximately $7,000,000. Interest paid
during 2002, 2001, and 2000 totaled $2,663,000, $4,838,000, and $6,214,000.
We had a net working capital deficit of $68,070,000 at December 31,
2002, compared to a net working capital deficit of $72,928,000 at December 31,
2001. The net working capital deficit exists primarily because the majority of
our debt is in default or subject to short-term waivers of cross defaults. As
discussed in more detail below, we are in the process of negotiating extensions
or refinancings of all of our matured and maturing debt, although there can be
no assurance that we will be successful in this effort. If our debt were
refinanced on the terms that are set forth below, we estimate that our monthly
interest expense would be approximately $670,000.
We have been in default on our 12 3/4% senior subordinated notes since
February 1, 2000, when we did not make the payments of principal, in the amount
of $27,412,000, and interest, in the amount of $1,748,000, that were due on that
date. On July 10, 2002, we commenced an exchange offer for the
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12 3/4% senior subordinated notes. The exchange offer was amended on March 7,
2003. If the amended exchange offer is consummated, at least 99% of the 12 3/4%
senior subordinated notes will be exchanged for new 11 1/2% senior subordinated
notes due August 1, 2007, in a principal amount equal to the principal amount of
the 12 3/4% senior subordinated notes being exchanged plus the accrued and
unpaid interest thereon through the day before the date the amended exchange
offer is consummated, which accrued interest will total $470.000 for each $1,000
principal amount of 12 3/4% senior subordinated notes, assuming the amended
exchange offer is consummated on April 8, 2003. Interest on the 11 1/2% senior
subordinated notes will accrue from the date the amended exchange offer is
consummated, and will be payable on each May 1, August 1, November 1, and
February 1. Each $1,000 principal amount of 11 1/2% senior subordinated notes
will be issued together with warrants to purchase ten shares of common stock at
a price of $3.50 per share at any time from January 1, 2004, through August 1,
2007. If the amended exchange offer is consummated, we will pay a participation
fee of 3% of the principal amount of 12 3/4% senior subordinated notes that are
exchanged. Our senior, secured lenders and the holders of the junior
subordinated notes have waived the cross-default provisions with respect to the
default on the senior subordinated notes through April 4, 2003, and May 1, 2003,
respectively. The current expiration date of the amended exchange offer is
April 3, 2003. One of the conditions to the consummation of the amended exchange
offer is the tender for exchange of at least 99% of the senior subordinated
notes. As of March 26, 2003, we have received tenders of $27,209,000 principal
amount of 12 3/4% senior subordinated notes, or 99.3% of the notes. However,
there are additional conditions to the consummation of the amended exchange
offer that may not be satisfied by the expiration date.
We have reached an agreement with the holders of our 14% junior
subordinated notes on the terms of a restructuring of those notes. If the
restructuring is completed, we will exchange new 12 1/2% junior subordinated
notes due November 1, 2007, for the existing 14% junior subordinated notes. The
accrued interest on the 14% junior subordinated notes for the period November 1,
1999, through the day before the restructuring is consummated, which will total
$202,000, assuming the restructuring is consummated on April 8, 2003, will be
converted into shares of our common stock at a price of $2.27 per share.
Interest on the 12 1/2% junior subordinated notes will accrue from the date the
restructuring is consummated, and will be payable on each May 1, August 1,
November 1, and February 1. Each $1,000 principal amount of 12 1/2% junior
subordinated notes will be issued with warrants to purchase ten shares of common
stock at a price of $3.50 per share at any time from January 1, 2004, through
November 1, 2007. If the restructuring is completed, we will also pay a
participation fee of 3% of the principal amount of 14% junior subordinated
notes.
On April 30, 2002, the maturity date of the senior, unsecured note, the
holder of the note rejected our proposal for a restructuring and our request for
a three-month extension. We did not pay the principal, in the amount of
$7,500,000, and interest, in the amount of $78,000, on April 30, 2002, and we
have not made any payments on the senior, unsecured note since that date. If the
other aspects of the financial restructuring program are completed, we have
proposed to repurchase the senior, unsecured note for $5,550,000 in cash plus
interest on that amount from November 1, 2002, to the date the amended exchange
offer is consummated, at the prime rate. Our senior, secured lenders and the
holders of the junior subordinated notes have waived the cross-default
provisions with respect to the default on the senior, unsecured note through
April 4, 2003, and May 1, 2003, respectively.
We are currently in discussions with several lenders regarding a
refinancing of our senior, secured credit facilities.
We can give no assurance that we will be able to consummate the amended
exchange offer, restructure the senior, unsecured note, or refinance our senior,
secured financing arrangements on satisfactory terms. If we are unable to do so,
we may file a petition under the federal bankruptcy code in order to carry out a
debt restructuring plan on terms substantially similar to those discussed above
or on
-18-
other terms. Although we believe that such a restructuring could be accomplished
without material disruption to our operations, any such proceeding involves
considerable risks and uncertainties and could have a material adverse effect on
our business, results of operations, cash flows, and financial position. The
consolidated financial statements do not include any adjustments to the amounts
or classifications of assets or liabilities to reflect those risks.
INFLATION
We generally attempt to pass through to our customers fluctuations in
raw material costs; 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 to our
consolidated financial statements in Part II, Item 8.
QUARTERLY FINANCIAL DATA
For quarterly financial data please refer to Note 15 to our consolidated
financial statements in Part II, Item 8.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are more fully described in Note 1, "Summary of
Significant Accounting Policies," to our consolidated financial statements in
Part II, Item 8. As set forth in Note 1, the preparation of our consolidated
financial statements in conformity with generally accepted accounting principles
requires us 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 amount of revenues
and expenses during each reporting period. The accuracy of our estimates is
subject to an inherent amount of risk. Future events and their impact on our
results of operations or financial position cannot be determined with absolute
certainty. Although we strive to use our best judgment in making estimates,
actual results could vary materially from our estimates.
As a manufacturer of rubber and metal components, we believe that the
most critical accounting policies inherent in the preparation of our
consolidated financial statements include (1) estimates of the recoverability of
accounts receivable and inventory, (2) estimates used to determine liabilities
related to environmental matters, litigation, income taxes, restructuring
reserves, and other contingencies, and (3) the valuation of long-lived assets.
-19-
The process of making estimates takes into account historical
experience, specific facts and circumstances, present and projected economic and
business conditions, projected unit volumes, projected operating efficiencies,
and any other relevant factors and assumptions. The valuation of long-lived
assets is based on such factors as estimated, undiscounted, future cash flows
before interest and taxes over relatively long periods of time and estimates of
the fair values of business units and assets. Although the Company believes that
its estimates of future cash flows are reasonable, changes in assumptions
regarding future unit volumes, pricing, operating efficiencies, material, labor,
and overhead costs, and other factors could significantly affect the Company's
cash flow projections. We reevaluate our estimates whenever factors relevant to
the making of a critical estimate change.
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern. There exists substantial doubt about our
ability to continue as a going concern and our ability to realize our assets and
discharge our liabilities in the ordinary course of business. Our consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary if we are unable to continue
as a going concern.
RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (FAS 142), which is effective for all fiscal periods beginning after
December 15, 2001. FAS 142 prohibits the amortization of goodwill, but requires
goodwill to be tested annually for impairment in accordance with the
requirements set forth in FAS 142. Other intangible assets will continue to be
amortized over their useful lives. We adopted the provisions of FAS 142 on
January 1, 2002. The elimination of goodwill amortization pursuant to FAS 142
increased the income from operations of the Rubber Group and the Metals Group by
$284,000 and $32,000, respectively, during 2002. Since adoption, the Company has
determined that its goodwill is not impaired.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (FAS 144), which is effective for
all fiscal periods beginning after December 15, 2001. FAS 144 sets forth the
conditions under which an impairment charge should be recognized for long-lived
assets to be held and used, except for goodwill, assets to be disposed of by
sale, and assets to be disposed of other than by sale. Our adoption of FAS 144
on January 1, 2002, did not affect our results of operations or financial
position during 2002.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146, ACCOUNTING FOR COST
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146), which is effective for all
restructuring, exit, or disposal activities that are initiated after December
31, 2002. FAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred rather than at
the date on which an entity commits to a plan to restructure, exit, or dispose
of a facility. This statement applies, but is not limited to, termination
benefits provided to current employees, contract termination costs, and costs
incurred to consolidate facilities or
-20-
relocate employees. We currently do not believe that our adoption of FAS 146
during the first quarter of 2003 will adversely affect our results of operations
or financial position, although FAS 146 may change the time period in which we
recognize costs associated with future restructuring, exit, or disposal
activities.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE
In December 2002, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). FAS 148 amends Financial
Accounting Standard No. 123, "Accounting for Stock Based Compensation" (FAS
123), which provides entities with alternative methods of transition should they
decide to voluntarily change from the intrinsic value method of recognizing
stock based compensation as permitted under APB 25 to the fair value method. FAS
148 also amends FAS 123 to require disclosure in both annual and interim
financial statements about the method of recognizing stock-based compensation.
No stock options were outstanding during 2002, 2001, or 2000.
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, 2002, we had $35,049,000 of outstanding floating-rate
debt at interest rates equal to either LIBOR plus 2 1/2%, LIBOR plus 2 3/4%,
prime rate plus 1%, prime rate plus 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, 2002, we had outstanding $37,200,000 of fixed-rate,
long-term debt with a weighted-average interest rate of 12.6%, of which
$34,912,000 has matured. We have received tenders of over 99% of our 12 3/4%
senior subordinated notes in exchange for new 11 1/2% senior subordinated notes
due August 1, 2007, in a principal amount equal to the principal amount of the
existing 12 3/4% senior subordinated notes being exchanged plus the accrued and
unpaid interest thereon through the day before the date the exchange is
effected, which accrued interest will total $470.000 for each $1,000 principal
amount of 12 3/4% senior subordinated notes exchanged, if the exchange offer is
consummated on April 8, 2003. The holder of our 14% junior subordinated notes
has agreed to exchange the $347,000 principal amount of those notes for new 12
1/2% junior subordinated notes due November 1, 2007, and to convert the accrued
interest on the notes into shares of common stock. If the other aspects of the
financial restructuring are completed, we have proposed to repurchase our
$7,500,000 senior, unsecured note for $5,550,000 plus interest on that amount
from November 1, 2002, to the date of repurchase, at the prime rate.
If the financial restructuring is completed on the terms currently
negotiated, we estimate that our monthly interest expense would be approximately
$670,000 and that a one percentage point increase or decrease in the applicable
short-term rate would increase or decrease our monthly interest expense by
approximately $34,000.
For further information about our indebtedness, we recommend that you
also read Note 5 to our consolidated financial statements in Part II, Item 8.
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THIS PAGE INTENTIONALLY LEFT BLANK
-22-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
Report of Independent Auditors.........................................................24
Consolidated Statement of Operations for the Years Ended
December 31, 2002, 2001, and 2000....................................................25
Consolidated Balance Sheet at December 31, 2002 and 2001...............................26
Consolidated Statement of Stockholders' Deficit for
the Years Ended December 31, 2002, 2001, and 2000....................................28
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000....................................................29
Notes to Consolidated Financial Statements.............................................30
-23-
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, 2002 and 2001, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the three years in the period ended December 31, 2002.
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, 2002 and
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, 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
$71,000,000 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.
As discussed in Notes 1 and 17 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill in accordance with the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
Ernst & Young LLP
Cleveland, Ohio
March 26, 2003
-24-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31
-------------------------------------------
2002 2001 2000
---- ---- ----
Net sales $ 124,852 $ 126,202 $ 138,302
Cost of sales 110,718 109,055 120,726
--------- --------- ---------
Gross profit 14,134 17,147 17,576
Selling and administrative expenses 8,658 9,911 10,923
Plant closure costs 609 -- --
Impairment of long-lived assets -- 2,047 --
Income from insurance company demutualization -- (1,274) --
--------- --------- ---------
Income from operations 4,867 6,463 6,653
Interest expense (7,220) (8,534) (9,913)
Gain on sale of securities 248 -- --
--------- --------- ---------
Income (loss) before income taxes (2,105) (2,071) (3,260)
Income tax provision (benefit) (538) 80 (161)
--------- --------- ---------
Net income (loss) $ (1,567) $ (2,151) $ (3,099)
========= ========= =========
Per share data:
Basic and diluted net income (loss) applicable to
common stockholders $ (0.32) $ (0.45) $ (0.65)
========= ========= =========
See notes to consolidated financial statements.
-25-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
DECEMBER 31
-------------------------
2002 2001
---- ----
ASSETS:
Current assets:
Cash $ 1,753 $ 189
Marketable securities -- 1,274
Accounts receivable, net 16,411 18,753
Inventories, net 8,841 8,493
Prepaid expenses and other current assets 3,682 3,523
Deferred income taxes 2,304 1,914
-------- --------
Total current assets 32,991 34,146
-------- --------
Plant and equipment:
Land 2,314 2,309
Buildings 22,935 22,601
Equipment 113,291 111,206
-------- --------
138,540 136,116
Accumulated depreciation 89,511 80,792
-------- --------
Plant and equipment, net 49,029 55,324
-------- --------
Goodwill, net 7,831 7,831
-------- --------
Other assets, net 2,294 2,576
-------- --------
$ 92,145 $ 99,877
======== ========
See notes to consolidated financial statements. (continued on next page)
-26-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
DECEMBER 31
-----------------------------
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,798 $ 12,077
Accrued expenses, excluding accrued interest 6,256 5,848
Accrued interest expense 12,875 8,738
Short-term debt 69,665 77,794
Current portion of long-term debt 1,467 2,617
--------- ---------
Total current liabilities 101,061 107,074
--------- ---------
Long-term debt, excluding current portion 1,117 2,000
--------- ---------
Deferred income taxes and other long-term liabilities 2,836 2,132
--------- ---------
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 shares issued
at December 31, 2002 and 2001 1,207 1,207
Additional paid-in-capital 12,960 12,960
Accumulated deficit (27,366) (25,826)
--------- ---------
Total stockholders' deficit (13,199) (11,659)
--------- ---------
$ 92,145 $ 99,877
========= =========
See notes to consolidated financial statements.
-27-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(THOUSANDS OF DOLLARS)
ADDITIONAL TOTAL
COMMON PAID-IN- ACCUMULATED TREASURY STOCKHOLDERS'
STOCK CAPITAL DEFICIT STOCK DEFICIT
----- ------- ------- ----- -------
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)
Net loss -- -- (2,151) -- (2,151)
Amortization of restricted stock
grants -- -- 28 -- 28
-------- -------- -------- -------- --------
Balance at December 31, 2001 1,207 12,960 (25,826) -- (11,659)
Net loss -- -- (1,567) -- (1,567)
Amortization of restricted stock
grants -- -- 27 -- 27
-------- -------- -------- -------- --------
Balance at December 31, 2002 $ 1,207 $ 12,960 $(27,366) $ -- $(13,199)
======== ======== ======== ======== ========
See notes to consolidated financial statements.
-28-
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31
------------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES:
Net income (loss) $(1,567) $(2,151) $(3,099)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 11,047 11,923 12,059
Amortization included in operating expense 818 1,180 1,431
Amortization included in interest expense 440 192 216
Income from insurance company demutualization -- (1,274) --
Provision for impairment loss on long-lived assets -- 2,047 --
Gain on sales of marketable securities (248) -- --
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable, net 2,342 1,159 4,186
Inventories, net (348) 2,616 (1,617)
Prepaid expenses and other assets (278) (31) (1,093)
Accounts payable (866) (1,677) 8,396
Accrued expenses, excluding interest expense 408 (76) (2,119)
Accrued interest expense 4,137 3,504 3,483
Other long term liabilities 314 23 (13)
Other 32 126 306
-------- -------- --------
Net cash provided by operating activities 16,231 17,561 22,136
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (4,618) (6,081) (13,936)
Proceeds from sales of marketable securities 1,522 -- --
Decrease in equipment deposits 205 56 447
Proceeds from sales of equipment 147 195 313
Expenditures for tooling owned by customers (688) (646) (1,076)
Other 328 (241) 416
-------- -------- --------
Net cash used by investing activities (3,104) (6,717) (13,836)
-------- -------- --------
FINANCING ACTIVITIES:
Net decrease in revolving line of credit (750) (2,992) (2,291)
Proceeds from issuance of amortizing term notes -- 2,000 2,460
Repayment of amortizing term notes (10,194) (9,263) (8,254)
Other (619) (465) (158)
-------- -------- --------
Net cash used by financing activities (11,563) (10,720) (8,243)
-------- -------- --------
Net increase in cash 1,564 124 57
Cash at beginning of year 189 65 8
-------- -------- --------
Cash at end of year $ 1,753 $ 189 $ 65
======== ======== ========
See notes to consolidated financial statements
-29-
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 and 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.
MARKETABLE SECURITIES
Marketable securities held by the Company are classified as available
for sale and consist of equity securities, which are stated at fair value as
determined by quoted market prices. Unrealized holding gains or losses on
marketable securities, net of applicable income taxes, are reported as a
separate component of comprehensive income and included as part of the Company's
accumulated deficit until realized. Realized gains or losses are based on the
first-in, first-out specific identification method. During 2002, realized gains
from the sales of marketable securities totaled $248,000.
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
---------------------
2002 2001
---- ----
Finished goods $ 3,580 $ 3,727
Work in process 2,493 2,060
Raw materials and purchased parts 2,768 2,706
------ ------
$ 8,841 $ 8,493
====== ======
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 an asset 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 $7,409,000, $6,405,000, and $7,817,000 for
2002, 2001, and 2000, respectively.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION OF LONG-LIVED ASSETS
The Company evaluates long-lived assets, such as plant and equipment and
other long-term amortizable assets, for impairment when events or changes in
circumstances indicate that the carrying value of the assets may not be fully
recoverable. To perform this evaluation the Company compares the aggregate,
estimated, undiscounted future cash flows before interest and taxes of an asset
or group of assets to its carrying value. If such estimated, cash flows are less
than the carrying value of the asset or asset group, an impairment loss is
recognized for the difference between the estimated fair value and the carrying
value of the asset or asset group. Although the Company believes that its
estimates of future cash flows are reasonable, changes in assumptions regarding
future unit volumes, pricing, operating efficiencies, material, labor, and
overhead costs, and other factors could significantly affect the Company's cash
flow projections.
Effective, January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (FAS 144), which did not affect its results of operations or
financial position.
GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142).
FAS 142 prohibits the amortization of goodwill but requires goodwill to be
tested for impairment annually using a fair value approach. The elimination of
goodwill amortization pursuant to FAS 142 increased the income from operations
of the Rubber Group and the Metals Group by $284,000 and $32,000, respectively,
during 2002. At December 31, 2002 and December 31, 2001, our unamortized
purchased goodwill balance was $7,831,000. Of this amount, $7,624,000 was
assigned to the Rubber Group and $207,000 was assigned to the Metals Group. At
December 31, 2002 and 2001, accumulated amortization of goodwill totaled
$4,158,000. For additional information, see Note 17.
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 $924,000, $890,000, and $850,000 during 2002,
2001, and 2000, 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.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
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 the
passage of title and risk of loss to the 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's restricted stock award plan, which expired on December 31,
2001, permitted it to award restricted shares of its common stock to officers
and key employees. Shares awarded under the plan are accounted for using the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion Number 25 (APB 25), "Accounting for Stock Issued to
Employees." 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.
In December 2002, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). FAS 148 amends Financial
Accounting Standard No. 123, "Accounting for Stock Based Compensation" (FAS
123), which provides entities with alternative methods of transition should they
decide to voluntarily change from the intrinsic value method of recognizing
stock based compensation as permitted under APB 25 to the fair value method. FAS
148 also amends FAS 123 to require disclosure in both annual and interim
financial statements about the method of recognizing stock based compensation.
No stock options were outstanding during 2002, 2001, or 2000.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146, ACCOUNTING FOR COST
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146), which is effective for all
restructuring, exit, or disposal activities that are initiated after
December 31, 2002. FAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred rather
than at the date on which an entity commits to a plan to restructure, exit, or
dispose of a facility. This statement applies, but is not limited to,
termination benefits provided to current employees, contract termination costs,
and cost incurred to consolidate facilities or relocate employees. The Company
currently does not believe that the adoption of FAS 146 during the first quarter
of 2003 will adversely affect its results of operations or financial position,
although FAS 146 may change the time period in which the Company recognizes
costs associated with future restructuring, exit, or disposal activities.
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's
ability to refinance, extend, amend, or exchange substantially all of its
outstanding debt, as more fully described below, is subject to risks and
uncertainties. As a result, there is substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
statements do not include any adjustments to the amounts or classification of
assets or liabilities to reflect this uncertainty.
The Company has been in default on its 12 3/4% senior subordinated notes
since February 1, 2000, when it did not make the payments of principal, in the
amount of $27,412,000, and interest, in the amount of $1,748,000, that were due
on that date. On July 10, 2002, the Company commenced an exchange offer for the
12 3/4% senior subordinated notes. The exchange offer was amended on March 7,
2003. If the amended exchange offer is consummated, at least 99% of the 12 3/4%
senior subordinated notes will be exchanged for new 11 1/2% senior subordinated
notes due August 1, 2007, in a principal amount equal to the principal amount of
the 12 3/4% senior subordinated notes being exchanged plus the accrued and
unpaid interest thereon through the day before the date the amended exchange
offer is consummated, which accrued interest, will total $470.000 for each
$1,000 principal amount of 12 3/4% senior subordinated notes assuming the
amended exchange offer is consummated on April 8, 2003. Interest on the 11 1/2%
senior subordinated notes will accrue from the date the amended exchange offer
is consummated, and will be payable on each May 1, August 1, November 1, and
February 1. Each $1,000 principal amount of 11 1/2% senior subordinated notes
will be issued with warrants to purchase ten shares of common stock at a price
of $3.50 per share at any time from January 1, 2004, through August 1, 2007. If
the amended exchange offer is consummated, the Company will pay a participation
fee of 3% of the principal amount of 12 3/4% senior subordinated notes that are
exchanged. The Company's senior, secured lenders and the holder of the junior
subordinated notes have waived the cross-default provisions with respect to the
default on the senior subordinated notes through April 4, 2003, and May 1, 2003,
respectively. The current expiration date of the amended exchange offer is
April 3, 2003. One of the conditions to the consummation of the amended exchange
offer is the tender for exchange of at least 99% of the senior subordinated
notes. As of March 26, 2003, the Company has received tenders of $27,209,000
principal amount of 12 3/4% senior subordinated notes, or 99.3% of the notes.
However, there are additional conditions to the consummation of the amended
exchange offer that may not be satisfied by the expiration date.
The Comp