=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-3252 LEXINGTON PRECISION CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-1830121 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 767 THIRD AVENUE, NEW YORK, NY 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (212) 319-4657 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT DATE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes No X --- --- AS OF MAY 10, 2004, THERE WERE 4,931,767 SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING. (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) =============================================================================== LEXINGTON PRECISION CORPORATION QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements................................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................10 Item 3. Quantitative and Qualitative Disclosures about Market Risk.........19 Item 4. Controls and Procedures............................................19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................20 -i- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED MARCH 31 -------------------------- 2004 2003 ---- ---- Net sales $ 33,006 $ 32,383 Cost of sales 28,931 28,653 --------- -------- Gross profit 4,075 3,730 Selling and administrative expenses 2,069 2,092 --------- -------- Income from operations 2,006 1,638 Interest expense 2,147 1,780 --------- -------- Loss before income taxes (141) (142) Income tax provision 15 27 --------- -------- Net loss $ (156) $ (169) ========= ======== Per share data: Basic and diluted net loss applicable to common stockholders $ (0.03) $ (0.04) ========= ======== See notes to consolidated financial statements. -1- LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED) <Table> <Caption> MARCH 31, DECEMBER 31, 2004 2003 ---------------- ----------------- ASSETS: Current assets: Cash $ 302 $ 189 Accounts receivable, net 20,530 17,277 Inventories, net 10,083 8,527 Prepaid expenses and other current assets 2,141 2,481 Deferred income taxes 1,360 1,360 ---------- ---------- Total current assets 34,416 29,834 Property, plant, and equipment, net 41,835 42,632 Goodwill 7,623 7,623 Other assets, net 3,710 3,598 ---------- ---------- Total assets $ 87,584 $ 83,687 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable $ 11,476 $ 10,038 Accrued expenses, excluding accrued interest 5,881 6,159 Accrued interest expense 1,033 314 Deferred gain on repurchase of debt 3,252 3,252 Short-term debt 15,499 12,246 Current portion of long-term debt 5,743 5,585 ---------- ---------- Total current liabilities 42,884 37,594 ---------- ---------- Long-term debt, excluding current portion 62,407 63,681 ---------- ---------- Deferred income taxes and other long-term liabilities 1,934 1,904 ---------- ---------- Stockholders' deficit: Common stock, $0.25 par value, 10,000,000 shares authorized, 4,931,767 shares issued 1,233 1,233 Additional paid-in-capital 13,169 13,169 Accumulated deficit (34,043) (33,894) ---------- ---------- Total stockholders' deficit (19,641) (19,492) ---------- ---------- Total liabilities and stockholders' deficit $ 87,584 $ 83,687 ========== ========== See notes to consolidated financial statements. -2- LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) <Table> <Caption> THREE MONTHS ENDED MARCH 31 ---------------------------- 2004 2003 ---- ---- OPERATING ACTIVITIES: Net loss $ (156) $ (169) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 2,188 2,606 Amortization included in operating expense 113 165 Amortization included in interest expense 252 143 Changes in operating assets and liabilities that provided (used) cash: Accounts receivable, net (3,253) (4,356) Inventories, net (1,556) (509) Prepaid expenses and other current assets 566 695 Accounts payable 1,438 (124) Accrued expenses, excluding interest expense (278) 775 Accrued interest expense 719 1,113 Other long-term liabilities 30 64 Other 12 (13) ---------- ---------- Net cash provided by operating activities 75 390 ---------- ---------- INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,393) (899) Net increase in equipment deposits (141) (47) Expenditures for tooling owned by customers (143) (77) Other (226) 151 ---------- ---------- Net cash used by investing activities (1,903) (872) ---------- ---------- FINANCING ACTIVITIES: Net increase in loans under revolving line of credit 3,253 3,142 Repayment of term notes and other debt (1,124) (2,591) Payment of financing expenses that were deferred (188) (205) ---------- ---------- Net cash provided by financing activities 1,941 346 ---------- ---------- Net increase (decrease) in cash 113 (136) Cash at beginning of period 189 1,753 ---------- ---------- Cash at end of period $ 302 $ 1,617 ========== ========== </Table> See notes to consolidated financial statements. -3- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The unaudited interim consolidated financial statements include the accounts of Lexington Precision Corporation and its subsidiaries (collectively, the "Company"). The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements do not include all the information and footnotes included in the Company's annual consolidated financial statements. Significant accounting policies followed by the Company are set forth in Note 1 to the consolidated financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2003. In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments, consisting only of adjustments of a normal, recurring nature, necessary to present fairly the financial position of the Company at March 31, 2004, and the Company's results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. To prepare the accompanying interim consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. The results of operations for the three-month period ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year or for any succeeding quarter. NOTE 2 -- INVENTORIES Inventories at March 31, 2004, and December 31, 2003, are set forth below (dollar amounts in thousands): <Table> <Caption> MARCH 31, DECEMBER 31, 2004 2003 ----------------- ---------------- Finished goods $ 3,685 $ 3,793 Work in process 3,280 2,018 Raw materials 3,118 2,716 ---------- ---------- $ 10,083 $ 8,527 ========== ========== </Table> NOTE 3 -- PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at March 31, 2004, and December 31, 2003, are set forth below (dollar amounts in thousands): <Table> <Caption> MARCH 31, DECEMBER 31, 2004 2003 ----------------- ---------------- Land $ 2,350 $ 2,350 Buildings 23,006 22,863 Equipment 117,778 116,557 ---------- ---------- 143,134 141,770 Accumulated depreciation 101,299 99,138 ---------- ---------- Property, plant, and equipment, net $ 41,835 $ 42,632 ========== ========== </Table> -4- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 -- DEBT Debt at March 31, 2004, and December 31, 2003, is set forth below (dollar amounts in thousands): <Table> <Caption> MARCH 31, DECEMBER 31, 2004 2003 ----------------- ---------------- Short-term debt: Revolving line of credit $ 15,341 $ 12,088 12 3/4% Senior Subordinated Notes 158 158 -------- --------- Subtotal 15,499 12,246 Current portion of long-term debt 5,743 5,585 -------- --------- Total short-term debt 21,242 17,831 -------- --------- Long-term debt: Equipment Term Loan 12,900 13,500 Real Estate Term Loan 11,213 11,500 12% Senior Subordinated Notes 42,441 42,441 13% Junior Subordinated Notes 347 347 Unsecured, amortizing term notes 60 104 Capital lease obligations 416 573 Series B Preferred Stock 602 594 Other 171 207 -------- --------- Subtotal 68,150 69,266 Less current portion (5,743) (5,585) -------- --------- Total long-term debt 62,407 63,681 -------- --------- Total debt $ 83,649 $ 81,512 ======== ========= </Table> REVOLVING LINE OF CREDIT At March 31, 2004, the aggregate principal amount of loans outstanding under the revolving line of credit was $15,341,000 and unused availability totaled $2,819,000. The revolving line of credit expires on June 30, 2006. Loans under the revolving line of credit bear interest at either the prime rate plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at the Company's option. The loans outstanding under the revolving line of credit are classified as short-term debt because the revolving line of credit provides that the Company's cash receipts are automatically used to reduce such loans on a daily basis, by means of a lock-box sweep arrangement, and the lender has the ability to modify certain terms of the revolving line of credit without the Company's approval. Loans under the revolving line of credit are limited to 88% of eligible accounts receivable plus 65% of eligible inventories. All loans under the revolving line of credit are secured by first priority liens on substantially all of the Company's assets other than real property. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) At March 31, 2004, availability under the revolving line of credit was reduced by three separate reserves established by the lender, which totaled $3,000,000. The elimination of $1,000,000 of these reserves is subject to the attainment of certain specified financial performance goals and the elimination of $650,000 of the reserves is subject to the Company obtaining an appraisal of its equipment that indicates that the outstanding principal amount of the Equipment Term Loan does not exceed 85% of the net orderly liquidation value of the equipment that secures it. Based on the results of an appraisal of the Company's equipment completed during April 2004, the lender released the $650,000 appraisal reserve on May 3, 2004. Based upon the Company's operating results for the three-month period ended March 31, 2004, the Company anticipates that $500,000 of the reserve related to financial performance goals will be released during the second quarter of 2004. The Company cannot predict at this time whether any of the remaining reserves will be released. 12% SENIOR SUBORDINATED NOTES The 12% Senior Subordinated Notes mature on August 1, 2009, and are unsecured obligations of the Company that are subordinated in right of payment to all of the Company's existing and future secured debt. Interest on the 12% Senior Subordinated Notes is payable quarterly on February 1, May 1, August 1, and November 1. SERIES B PREFERRED STOCK At March 31, 2004, there were outstanding 3,300 shares of the Company's $8 Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred Stock"), par value $100 per share, with a carrying value of $602,000. Redemptions of $90,000 are scheduled on November 30 of each year in order to retire 450 shares of Series B Preferred Stock annually. The Company failed to make scheduled redemptions in the aggregate amount of $360,000 on November 30, 2000, 2001, 2002, and 2003. On July 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("FAS 150"), which established standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer that have characteristics of both liabilities and equity. As a result of the adoption of FAS 150, the Company classifies the Series B Preferred Stock as debt in the consolidated financial statements. Subsequent to adoption, increases in the fair value of the Series B Preferred Stock and payments of quarterly dividends have been recorded by monthly charges to interest expense. RESTRICTIVE COVENANTS The agreements governing the revolving line of credit, the Equipment Term Loan, and the Real Estate Term Loan contain certain financial covenants that require the Company to maintain specified financial ratios as of the end of specified periods, including the maintenance of a minimum fixed charge coverage ratio, minimum levels of net worth and earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. The Company also has other covenants that place restrictions on its business and operations, including covenants relating to the sale of all or substantially all of its assets, the purchase of common stock, the redemption of preferred stock, -6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) compliance with specified laws and regulations, the purchase of plant and equipment, and the payment of cash dividends. From time to time, the Company's secured lenders have agreed to waive, amend, or eliminate certain of the financial covenants contained in the Company's various financing agreements in order to maintain or otherwise ensure the Company's current or future compliance. On March 31, 2004, the Company's two senior, secured lenders amended their fixed charge coverage ratio and their annual limitation on unfinanced capital expenditures in order for the Company to avoid projected defaults under these two covenants during 2004. In the event that the Company is not in compliance with any of its covenants in the future and its lenders do not agree to amend, waive, or eliminate those covenants, the lenders would have the right to declare the borrowings under their financing agreements to be due and payable immediately. NOTE 5 -- INCOME TAXES At March 31, 2004, and December 31, 2003, the Company's net deferred income tax assets were fully offset by a valuation allowance. The income tax provisions recorded during the three-month periods ended March 31, 2004 and 2003, consisted of estimated state income taxes payable. NOTE 6 -- NET LOSS PER COMMON SHARE The calculations of basic and diluted net loss per common share for the three-month periods ended March 31, 2004 and 2003, are set forth below (in thousands, except per share amounts). The pro forma conversion of the Series B Preferred Stock and the pro forma exercise of outstanding warrants to purchase the Company's common stock, which were issued on December 18, 2003 (the "Warrants"), were not dilutive. As a result, the calculation of diluted net loss per common share set forth below does not reflect the pro forma conversion of the Series B Preferred Stock or the pro forma exercise of the Warrants. THREE MONTHS ENDED MARCH 31 ------------------------ 2004 2003 ---- ---- Numerator -- net loss applicable to common stockholders $ (156) $ (169) ========= ========= Denominator -- weighted average common shares 4,932 4,828 ========= ========= Basic and diluted net loss applicable to common stockholders $ (0.03) $ (0.04) ========= ========= -7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 -- SEGMENTS Information relating to the Company's operating segments and its corporate office for the three-month periods ended March 31, 2004 and 2003, is summarized below (dollar amounts in thousands): <Table> <Caption> THREE MONTHS ENDED MARCH 31 -------------------------- 2004 2003 ---- ---- NET SALES: Rubber Group $ 27,803 $ 26,722 Metals Group 5,203 5,661 ---------- ---------- Total net sales $ 33,006 $ 32,383 ========== ========== INCOME (LOSS) FROM OPERATIONS: Rubber Group $ 3,542 $ 2,812 Metals Group (960) (583) ---------- ---------- Subtotal 2,582 2,229 Corporate Office (576) (591) ---------- ---------- Total income from operations $ 2,006 $ 1,638 ========== ========== ASSETS: Rubber Group $ 64,810 $ 65,645 Metals Group 18,515 23,239 ---------- ---------- Subtotal 83,325 88,884 Corporate Office 4,259 5,584 ---------- ---------- Total assets $ 87,584 $ 94,468 ========== ========== DEPRECIATION AND AMORTIZATION (1): Rubber Group $ 1,740 $ 1,875 Metals Group 551 887 ---------- ---------- Subtotal 2,291 2,762 Corporate Office 10 9 ---------- ---------- Total depreciation and amortization $ 2,301 $ 2,771 ========== ========== CAPITAL EXPENDITURES (2): Rubber Group $ 910 $ 827 Metals Group 483 176 ---------- ---------- Subtotal 1,393 1,003 Corporate Office - 2 ---------- ---------- Total capital expenditures $ 1,393 $ 1,005 ========== ========== </Table> (1) Does not include amortization of deferred financing expenses, which totaled $252,000 and $143,000 during the three-month periods ended March 31, 2004 and 2003, respectively, and which is included in interest expense in the consolidated financial statements. (2) Capital expenditures for the three-month period ended March 31, 2003, included $106,000 of equipment purchased under a capital lease obligation. -8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 -- DEFERRED GAIN ON REPURCHASE OF DEBT On December 18, 2003, the Company repurchased its $7,500,000 senior, unsecured note, and all accrued and unpaid interest thereon, for a purchase price of $5,810,000. The pre-tax gain of $3,252,000 on the repurchase of the senior, unsecured note was deferred and recorded in the current liabilities section of the Company's consolidated balance sheet as "Deferred gain on repurchase of debt" because the agreement governing the repurchase of the note provided that the claim could be reinstated if certain events occurred prior to April 20, 2004. Because none of these events occurred prior to April 20, 2004, the Company will recognize the pre-tax gain of $3,252,000 during the three-month period ending June 30, 2004. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Some of our statements in this Form 10-Q, including this item, are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements usually can be identified by our use of words like "believes," "expects," "may," "will," "should," "anticipates," "estimates," "projects," or the negative thereof. They may be used when we discuss strategy, which typically involves risk and uncertainty, and they generally are based upon projections and estimates rather than historical facts and events. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results or performance to be materially different from the future results or performance expressed in or implied by those statements. Some of those risks and uncertainties are: - increases and decreases in business awarded to us by our customers, - unanticipated price reductions for our products as a result of competition, - unanticipated operating results, - changes in the cost of raw materials, - 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, and - labor interruptions at our facilities or at our customers' facilities. 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. RESULTS OF OPERATIONS -- FIRST QUARTER OF 2004 VERSUS FIRST QUARTER OF 2003 The following table sets forth our consolidated operating results for the three-month periods ended March 31, 2004 and 2003, and the reconciliation of income from operations to earnings before -10- interest, taxes, depreciation, and amortization, which is commonly referred to as EBITDA (dollar amounts in thousands): <Table> <Caption> THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2004 2003 ------------------ ------------------ Net sales $ 33,006 100.0% $ 32,383 100.0% Cost of sales 28,931 87.7 28,653 88.5 --------- ------- --------- ------- Gross profit 4,075 12.3 3,730 11.5 Selling and administrative expenses 2,069 6.3 2,092 6.5 --------- ------- --------- ------- Income from operations 2,006 6.0 1,638 5.0 Add back: depreciation and amortization (1) 2,301 7.0 2,771 8.6 --------- ------- --------- ------- EBITDA (2) $ 4,307 13.0% $ 4,409 13.6% ========= ======= ========= ======= Net cash provided by operating activities (3) $ 75 0.2% $ 390 1.2% ========= ======= ========= ======= (1) Does not include amortization of deferred financing expenses, which totaled $252,000 and $143,000 during the three-month periods ended March 31, 2004 and 2003, respectively, and which is included in interest expense in the consolidated financial statements. (2) 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-Q 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. (3) The calculation of net cash provided by operating activities is detailed in the consolidated statement of cash flows that is part of our consolidated financial statements in Part I, Item 1. Our net sales for the first quarter of 2004 were $33,006,000, compared to net sales of $32,383,000 for the first quarter of 2003, an increase of $623,000, or 1.9%. The increase in net sales was principally a result of increased net sales of rubber components, offset, in part, by reduced sales of machined metal components. EBITDA for the first quarter of 2004 was $4,307,000, or 13.0% of net sales, compared to EBITDA of $4,409,000, or 13.6% of net sales, for the first quarter of 2003. The change in EBITDA was primarily a result of a $632,000 reduction in EBITDA at our Metals Group, partially offset by a $595,000 increase in EBITDA at our Rubber Group. -11- Net cash provided by operating activities during the first quarter of 2004 totaled $75,000, compared to $390,000 for the first quarter of 2003. Please refer to the consolidated statement of cash flows in Part I, Item 1, for details regarding net cash provided by our operating activities. The discussion that follows sets forth our analysis of the operating results of the Rubber Group, the Metals Group, and the Corporate Office for the three-month periods ended March 31, 2004 and 2003. RUBBER GROUP The Rubber Group manufactures silicone and organic rubber components primarily for automotive industry customers. Any significant reduction in the level of activity in the automotive industry may have a material adverse effect on the results of operations of the Rubber Group and on our company taken as a whole. Delphi Corporation is the Rubber Group's largest customer. During 2003, 2002, and 2001, the Rubber Group's net sales to Delphi totaled $24,150,000, $24,837,000, and $23,660,000, respectively, which represented 23.4%, 25.1%, and 25.8%, respectively, of the Rubber Group's net sales. Net sales to Delphi of connector seals for automotive wire harnesses totaled $20,227,000, $21,147,000, and $22,295,000, during 2003, 2002, and 2001, respectively. Substantially all of the connector seals we sell to Delphi are sold pursuant to a supply agreement that expires on December 31, 2004. We cannot predict whether we and Delphi will enter into a new agreement for us to supply connector seals to Delphi when the current agreement expires on December 31, 2004, or, if we do enter into an agreement, what the volume, pricing, duration, and other terms of that agreement will be. Delphi has indicated to us that they currently plan to in-source, during 2005, approximately 30 connector seals currently manufactured by us under the supply agreement. Our aggregate net sales of these parts during 2003 were $9,319,000. Assuming those connector seals were in-sourced on the earliest possible date, January 1, 2005, and we were unable to replace the lost business with new business from Delphi or other customers, we estimate that the operating profit and EBITDA of the Rubber Group would be reduced by approximately $2,500,000 per annum. We are currently in discussions with Delphi regarding our ongoing supply relationship, and we are developing plans to restructure the operations of our connector seals division to reduce expenses and mitigate the impact of any lost business. Any such restructuring of our connector seals business could include, among other things, the closing of one of our existing manufacturing facilities, which could result in significant cash and non-cash expenses. Although we can give you no assurance, it is also possible that, if we do continue to sell components to Delphi, the average price for those components may increase, thereby partially offsetting the negative impact of lower volume. -12- The following table sets forth the operating results of the Rubber Group for the three-month periods ended March 31, 2004 and 2003, and the reconciliation of the Rubber Group's income from operations to its EBITDA (dollar amounts in thousands): <Table> <Caption> THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2004 2003 ------------------ ------------------ Net sales $ 27,803 100.0% $ 26,722 100.0% Cost of sales 23,117 83.1 22,769 85.2 -------- -------- -------- -------- Gross profit 4,686 16.9 3,953 14.8 Selling and administrative expenses 1,144 4.1 1,141 4.3 -------- -------- -------- -------- Income from operations 3,542 12.7 2,812 10.5 Add back: depreciation and amortization 1,740 6.2 1,875 7.0 -------- -------- -------- -------- EBITDA $ 5,282 19.0% $ 4,687 17.5% ======== ======== ======== ======== During the first quarter of 2004, net sales of the Rubber Group increased by $1,081,000, or 4.0%, compared to the first quarter of 2003. The increase in net sales was primarily due to increased unit sales of insulators for automotive ignition wire sets, which resulted primarily from an increase in the level of activity in the automotive industry and an increase in our share of business at certain existing customers, and, to a lesser extent, increased sales of connector seals for automotive wire systems and components for medical devices. These increases were offset, in part, by price reductions on certain automotive components. Cost of sales as a percentage of net sales decreased during the first quarter of 2004 to 83.1% of net sales from 85.2% of net sales during the first quarter of 2003, primarily because of improved operating performance at our insulator division, reduced employee benefit costs, lower maintenance expenses, and reduced depreciation and amortization expenses, offset, in part, by reduced operating performance at our connector seals division. During the first quarter of 2004, the operating results of the connector seals division included: - increased costs for scrap, sorting, and repair, relating to a particular type of connector seal; - increased freight costs, which resulted from delivery issues related to those quality problems; - costs related to the rollout of new business at our operations that mold seals from liquid silicone rubber; - losses resulting from the production problems encountered in the manufacture of automotive door grommets utilizing non-silicone materials; and - costs incurred due to the general disruption to our operations as we attempted to cope with the problems listed above. -13- During the second half of 2003, we initiated a plan to reduce or eliminate these operating problems. The plan includes: - upgrading management and supervisory personnel; - installing and utilizing improved process controllers and centralized data collection capabilities on all molding presses; - implementing improved manufacturing procedures throughout the operation; - installing automated visual inspection and repair equipment; and - improving utilization of the division's enterprise resource planning software system. During the first quarter of 2004, the operating performance of the connector seals division improved compared to the second half of 2003. We believe that the operations improvement plan has begun to benefit our operations and will continue to yield improving results during 2004 as key components of the plan take effect. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 2004, compared to the first quarter of 2003, primarily because certain of our selling and administrative expenses are fixed, or partially fixed, in nature. During the first quarter of 2004, income from operations totaled $3,542,000, an increase of $730,000, or 26.0%, compared to the first quarter of 2003. EBITDA for the first quarter of 2004 was $5,282,000, or 19.0% of net sales, compared to $4,687,000, or 17.5% of net sales, during the first quarter of 2003. METALS GROUP The Metals Group manufactures aluminum die castings and machine components from aluminum, brass, and steel bars, primarily for automotive industry customers. Any significant 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. -14- The following table sets forth the operating results of the Metals Group for the three-month periods ended March 31, 2004 and 2003, and the reconciliation of the Metals Group's income from operations to its EBITDA (dollar amounts in thousands): <Table> <Caption> THREE MONTHS ENDED MARCH 31 ----------------------------------------- 2004 2003 ------------------ ------------------ Net sales $ 5,203 100.0% $ 5,661 100.0% Cost of sales 5,814 111.7 5,884 103.9 -------- ------- -------- ------- Gross profit (611) (11.7) (223) (3.9) Selling and administrative expenses 349 6.7 360 6.4 -------- ------- -------- ------- Income from operations (960) (18.4) (583) (10.3) Add back: depreciation and amortization 551 10.6 887 15.7 -------- ------- -------- ------- EBITDA $ (409) (7.8) $ 304 5.4% ======== ======= ======== ======= During the first quarter of 2004, net sales of the Metals Group decreased by $458,000, or 8.1%, compared to the first quarter of 2003. The decrease resulted from reduced sales of machined metal components, primarily due to the loss of sales of a high-volume, machined metal component because the customer converted the part to a stamped metal component, offset, in part, by increased sales of machined metal components resulting primarily from the rollout of certain new business obtained from existing customers. Cost of sales, as a percentage of net sales increased to 111.7% of net sales during the first quarter of 2004 from 103.9% of net sales during the first quarter of 2003, primarily because of higher than anticipated start up costs on recently awarded machined metal components and the adverse effect of relatively high fixed, or partially fixed, operating expenses in a period of low sales volume. During the first quarter of 2004, the Metals Group's operating expenses were reduced, in part, by reduced employee benefit expenses and lower depreciation and amortization expenses. Selling and administrative expenses decreased during the first quarter of 2004 compared to the first quarter of 2003, primarily because of a reduction in salaried payroll expense and related employee benefit costs, offset, in part, by increased legal fees. During the first quarter of 2004, the loss from operations was $960,000 compared to a loss from operations of $583,000 during the first quarter of 2003. EBITDA for the first quarter of 2004 was a negative $409,000, or a negative 7.8% of net sales, a decrease of $713,000, compared to the first quarter of 2003. -15- CORPORATE OFFICE Corporate Office expenses, which are not included in the operating results of the Rubber Group or the Metals Group, represent administrative expenses incurred primarily at our New York and Cleveland offices. Corporate Office expenses are consolidated with the selling and administrative expenses of the Rubber Group and the Metals Group in our consolidated financial statements. The following table sets forth the operating results of the Corporate Office for the three-month periods ended March 31, 2004 and 2003, and the reconciliation of the loss from operations to EBITDA (dollar amounts in thousands): THREE MONTHS ENDED MARCH 31 ----------------------- 2004 2003 ---- ---- Loss from operations $ (576) $ (591) Add back: depreciation and amortization 10 9 ------- -------- EBITDA $ (566) $ (582) ======= ======== INTEREST EXPENSE During the first quarters of 2004 and 2003, interest expense totaled $2,147,000 and $1,780,000, respectively, which included amortization of deferred financing expenses of $252,000 and $143,000, respectively. Interest expense increased primarily because the amount of outstanding debt on which we accrued and paid interest increased from $72,906,000 at March 31, 2003, to $83,649,000 at March 31, 2004, because we converted $15,029,000 of accrued and unpaid interest on our 12 3/4% Senior Subordinated Notes, on which we did not accrue interest, into new 12% Senior Subordinated Notes due August 1, 2009, during the fourth quarter of 2003. INCOME TAX PROVISION At March 31, 2004, and December 31, 2003, our net deferred income tax assets were fully offset by a valuation allowance. The income tax provisions recorded during the three-month periods ended March 31, 2004 and 2003, consisted of estimated state income taxes payable. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first quarter of 2004, our operating activities provided $75,000 of cash. Our accounts receivable increased by $3,253,000, our inventory increased by $1,556,000, and our accounts payable increased by $1,438,000, primarily due to increased levels of business activity in the first quarter of 2004 compared to the fourth quarter of 2003. At March 31, 2004, and December 31, 2003, accounts payable included outstanding checks of $1,089,000 and $1,488,000, respectively. Prepaid expenses and other current assets decreased by $566,000, primarily because of a reduction in the amount of unbilled tooling being manufactured or purchased by us for sale to our customers. -16- INVESTING ACTIVITIES During the first quarter of 2004, our investing activities used $1,903,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group and the Metals Group totaled $910,000 and $483,000, respectively, primarily for the purchase of equipment. Capital expenditures for the Rubber Group, the Metals Group, and the Corporate Office are currently projected to total $5,339,000, $1,553,000, and $5,000, respectively, during 2004. At March 31, 2004, we had outstanding commitments to purchase plant and equipment of approximately $1,409,000. FINANCING ACTIVITIES During the first quarter of 2004, our financing activities used $1,941,000 of cash. During the first quarter of 2004, we made scheduled monthly payments on our Equipment Term Loan and Real Estate Term Loan of $887,000. Net borrowings under our revolving line of credit increased by $3,253,000 during the first quarter of 2004, primarily to fund capital expenditures and increases in accounts receivable and inventories. LIQUIDITY We operate with substantial financial leverage and limited liquidity. Our aggregate indebtedness as of March 31, 2004, totaled $83,649,000. During the remaining nine months of 2004, interest and scheduled principal payments are projected to be approximately $5,616,000 and $4,522,000, respectively. We finance our operations with cash from operating activities and a variety of financing arrangements, including the Equipment Term Loan, the Real Estate Term Loan, and loans under our revolving line of credit. The Equipment Term Loan bears interest at the prime rate plus 1 1/2% or LIBOR plus 3 3/4%, at our option. The Real Estate Term Loan bears interest at the prime rate plus 4%, subject to a minimum rate of 8 1/4% and requires us to pay a fee of 1.875% of the outstanding principal amount of the loans on each anniversary of the closing date. Loans under the revolving line of credit bear interest at the prime rate plus 1% or the London Interbank Offered Rate ("LIBOR") plus 3 1/4%, at our option. The revolving loans are limited to 88% of eligible accounts receivable plus 65% of eligible inventories. Our revolving line of credit is currently scheduled to expire on June 30, 2006. The revolving line of credit and the Equipment Term Loan are secured by first priority liens on substantially all of our assets other than real property. The Real Estate Term Loan is secured by first priority liens on all of our real property and second priority liens on substantially all of our other assets. At March 31, 2004, availability under the revolving line of credit was being reduced by three separate reserves established by the lender, which totaled $3,000,000. The elimination of $1,000,000 of these reserves is subject to the attainment of certain specified financial performance goals and the elimination of $650,000 of the reserves is subject to our obtaining an appraisal of our equipment that indicates that the outstanding principal amount of the Equipment Term Loan does not exceed 85% of the net orderly liquidation value of the equipment that secures it. Based on the results of an appraisal of our equipment completed during April 2004, the lender released the $650,000 appraisal reserve on May 3, 2004. Based upon our operating results for the three-month period ended March 31, 2004, we anticipate that $500,000 of the reserve related to financial performance goals will be released sometime during the second quarter of 2004. We cannot predict at this time whether any of the remaining reserves will be released. -17- At March 31, 2004, availability under our revolving line of credit totaled $2,819,000. At May 12, 2004, availability under our revolving line of credit totaled $1,956,000. At March 31, 2004, and December 31, 2003, the aggregate principal amount of loans outstanding under the revolving line of credit was $15,341,000 and $12,088,000, respectively. These loans are classified as short-term debt because the revolving line of credit requires that our cash receipts are automatically used to reduce such loans on a daily basis, by means of a lock-box sweep arrangement, and the lender has the ability to modify certain terms of the revolving line of credit without our approval. The agreements governing the revolving line of credit, the Equipment Term Loan, and the Real Estate Term Loan contain certain financial covenants that require us to maintain specified financial ratios as of the end of specified periods, including the maintenance of a minimum fixed charge coverage ratio, minimum levels of net worth and earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and a maximum leverage ratio. We also have covenants that limit our unfinanced capital expenditures to $6,250,000 per annum and limit the amount of additional secured financing we can incur for the purchase of plant and equipment to $2,500,000 per annum. Although we do not believe this provision will limit our planned capital expenditures during 2004, we may be required to obtain new borrowings in order to complete our planned capital expenditures. We currently believe, although we can give you no assurance, that the necessary new borrowings would be available to us under financing arrangements that we may negotiate. We also have other covenants that place restrictions on our business and operations, including covenants relating to the sale of all or substantially all of our assets, the purchase of common stock, the redemption of preferred stock, compliance with specified laws and regulations, and the payment of cash dividends. On December 18, 2003, we repurchased our $7,500,000 senior, unsecured note, and all accrued and unpaid interest thereon, for a purchase price of $5,810,000. The pre-tax gain of $3,252,000 on the repurchase was deferred and recorded in the current liabilities section of our consolidated balance sheets as "Deferred gain on repurchase of debt" because the agreement governing the repurchase of the note provided that the claim could be reinstated if certain events occurred prior to April 20, 2004. Because none of these events occurred prior to April 20, 2004, we will recognize the pre-tax gain of $3,252,000 during the second quarter of 2004. From time to time, our secured 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. On March 31, 2004, our two senior, secured lenders amended the fixed charge coverage ratio and the annual limitation on unfinanced capital expenditures in order for us to avoid projected defaults under these two covenants during 2004. 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 immediately. We had a net working capital deficit of $8,387,000 at March 31, 2004, compared to a net working capital deficit of $7,760,000 at December 31, 2003. The net working capital deficit exists primarily because we are required, under accounting principles generally accepted in the United States, to classify the loans outstanding under the revolving line of credit, which totaled at March 31, 2004, and December 31, 2003, $15,341,000 and $12,088,000, respectively, as current liabilities and because current liabilities on those dates included the $3,252,000 deferred gain on the repurchase of debt that we will recognize as income during the second quarter of 2004. -18- Based on our most recent financial projections, we estimate that, in addition to cash flow from operations and borrowings under our revolving line of credit, we will require approximately $1,200,000 of new borrowings during 2004 to meet our working capital and debt service requirements and to fund projected capital expenditures. We currently believe, although there can be no assurance, that the required new borrowings will be available to us under financing arrangements that we plan to negotiate. If cash flow from operations or availability under existing and new financing arrangements fall below expectations, we may be forced to delay certain capital expenditures, reduce certain operating expenses, extend certain trade accounts payable beyond terms that we believe are customary in the industries in which we operate, or consider other alternatives designed to improve our liquidity. Some of these actions could have a material adverse effect upon our business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not invest in or trade market risk sensitive instruments. We also do not have any foreign operations or any significant amount of foreign sales and, therefore, we believe that our exposure to foreign currency exchange rate risk is insignificant. At December 31, 2003, we had $37,192,000 of outstanding floating rate debt at interest rates equal to either LIBOR plus 3 1/4%, LIBOR plus 3 3/4%, the prime rate plus 1%, the prime rate plus 1 1/2%, the prime rate plus 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 March 31, 2004, we had outstanding $44,320,000 of fixed-rate, long-term debt with a weighted-average interest rate of 11.9%, of which $158,000 had matured. We currently estimate that our monthly cash interest expense during the remaining nine months of 2004 will be approximately $625,000 and that a one percentage point increase or decrease in short-term interest rates would increase or decrease our monthly interest expense by approximately $31,000. For further information about our indebtedness, we recommend that you also read Note 4 to our consolidated financial statements in Part II, Item 8. ITEM 4. CONTROLS AND PROCEDURES Our Chairman of the Board, President, and Chief Financial Officer, with the participation of the management of our operating divisions, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2004. Based on that evaluation, our Principal Executive Officers and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. We also reviewed our internal controls, and determined that there have been no changes in our internal controls or in other factors identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. -19- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed herewith: 31-1 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Michael A. Lubin, Chairman of the Board and co-Principal Officer of the registrant. 31-2 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Warren Delano, President and co-Principal Officer of the registrant. 31-3 Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Dennis J. Welhouse, Chief Financial Officer and Principal Financial Officer of the registrant. 32-1 Certification of Michael A. Lubin, Chairman of the Board and Co-Principal Executive Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32-2 Certification of Warren Delano, President and Co-Principal Executive Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32-3 Certification of Dennis J. Welhouse, Chief Financial Officer and Principal Financial Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K On April 14, 2004, we filed a report on Form 8-K that included a press release dated April 14, 2004, announcing financial results for the quarter and year ended December 31, 2003. -20- LEXINGTON PRECISION CORPORATION FORM 10-Q MARCH 31, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEXINGTON PRECISION CORPORATION (Registrant) May 14, 2004 By: /s/ Michael A. Lubin - ------------ ------------------------------ Date Michael A. Lubin Chairman of the Board May 14, 2004 By: /s/ Warren Delano - ------------ ------------------------------ Date Warren Delano President May 14, 2004 By: /s/ Dennis J. Welhouse - ------------ ------------------------------ Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -21-