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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
COMMON STOCK, $.25 PAR VALUE -- 4,263,036 SHARES AS OF AUGUST 9, 1996
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. Financial Information
Item 1. Financial Statements ................................................. 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 11
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................. 20
Item 6. Exhibits and Reports on Form 8-K .................................... 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
----------- ---------------
ASSETS:
Current assets:
Cash $ 487 $ 118
Accounts receivable 14,578 12,959
Inventories 8,728 8,105
Prepaid expenses and other assets 3,548 2,101
Deferred income taxes 843 1,195
--------- --------
Total current assets 28,184 24,478
--------- --------
Property, plant and equipment:
Land 1,533 1,525
Buildings 19,452 17,190
Equipment 64,106 57,110
--------- --------
85,091 75,825
Less accumulated depreciation 33,934 30,887
--------- --------
Property, plant and equipment, net 51,157 44,938
--------- --------
Excess of cost over net assets of businesses acquired, net 9,568 9,726
--------- --------
Other assets, net 2,456 2,734
--------- --------
$ 91,365 $ 81,876
========= ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 12,670 $ 10,628
Accrued expenses 6,989 6,572
Short-term debt 11,325 7,522
Current portion of long-term debt 5,651 4,531
--------- ---------
Total current liabilities 36,635 29,253
--------- ---------
Long-term debt, excluding current portion 58,053 56,033
--------- ---------
Deferred income taxes and other long-term liabilities 842 1,056
--------- ---------
Redeemable preferred stock, $100 par value,
at redemption value 1,020 1,020
Less excess of redemption value over par value 510 510
--------- ---------
Redeemable preferred stock, at par value 510 510
--------- ---------
Stockholders' deficit:
Common stock, $.25 par value, 10,000,000
shares authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,461 12,547
Accumulated deficit (18,006) (18,305)
Cost of common stock in treasury, 85,915 and 120,915
shares, respectively (217) (305)
--------- ---------
Total stockholders' deficit (4,675) (4,976)
--------- ---------
$ 91,365 $ 81,876
========= =========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
Net sales $ 28,081 $ 26,433 $ 55,979 $ 53,507
-------- -------- -------- --------
Costs and expenses:
Cost of sales 23,169 21,249 45,911 42,790
Selling and administrative expenses 2,779 2,514 5,443 5,134
-------- -------- -------- --------
Total costs and expenses 25,948 23,763 51,354 47,924
-------- -------- -------- --------
Income from operations 2,133 2,670 4,625 5,583
Interest expense 2,109 1,857 4,063 3,667
Other income - 641 - 641
-------- -------- -------- --------
Income before income taxes 24 1,454 562 2,557
Provision for income taxes 79 383 260 667
-------- -------- -------- --------
Net income/(loss) $ (55) $ 1,071 $ 302 $ 1,890
======== ======== ======== ========
Net income/(loss) per primary and fully diluted
common share:
Primary $ (.02) $ .25 $ .06 $ .44
======== ======== ======== ========
Fully diluted $ (.02) $ .23 $ .06 $ .40
======== ======== ======== ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 302 $ 1,890
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,979 3,007
Deferred income taxes 110 -
Loss/(gain) on sale of property, plant and equipment 3 (641)
Changes in operating assets and liabilities which
provided/(used) cash:
Receivables (1,619) (1,207)
Inventories (623) (1,685)
Prepaid expenses and other assets (1,447) 8
Accounts payable 2,042 731
Accrued expenses 414 1,402
Other 61 -
--------- ---------
Net cash provided by operating activities 3,222 3,505
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (9,559) (7,378)
Decrease/(increase) in equipment deposits, net 170 (722)
Proceeds from sales of property, plant and equipment 57 970
Additions to deferred tooling expense (260) (457)
--------- ---------
Net cash used by investing activities (9,592) (7,587)
--------- ---------
FINANCING ACTIVITIES:
Net increase in short-term debt 3,803 3,523
Proceeds from issuance of long-term debt 9,725 2,300
Repayments of long-term debt (6,603) (1,534)
Other (186) (228)
--------- ---------
Net cash provided by financing activities 6,739 4,061
--------- ---------
Net increase/(decrease) in cash 369 (21)
Cash at beginning of period 118 79
--------- ---------
Cash at end of period $ 487 $ 58
========= =========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation ("LPC") and its wholly owned
subsidiary, Lexington Components, Inc. ("LCI"). Unless the context otherwise
requires, all references herein to the "Company" are to LPC and LCI. The
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial statements do
not include all the information and footnotes normally included in the annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles. 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, 1995, which
was filed with the Securities and Exchange Commission.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at June 30, 1996, the Company's results of
operations for the three-month and six-month periods ended June 30, 1996 and
1995 and the Company's cash flows for the six-month periods ended June 30, 1996
and 1995. All such adjustments were of a normal recurring nature.
The results of operations for the three-month and six-month periods ended
June 30, 1996 are not necessarily indicative of the results to be expected for
the full year or for any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories at June 30, 1996 and December 31, 1995 are summarized below
(in thousands of dollars):
JUNE 30, DECEMBER 31,
1996 1995
------------ ---------------
Finished goods $ 2,973 $ 3,040
Work in process 2,550 2,213
Raw materials and purchased parts 3,205 2,852
-------- ---------
$ 8,728 $ 8,105
======== =========
NOTE 3 -- SHORT-TERM DEBT
At June 30, 1996 and December 31, 1995, short-term debt consisted of
$11,325,000 and $7,522,000, respectively, of loans outstanding under the
Company's revolving line of credit. The revolving line of credit has an
expiration date of January 2, 1998. Except for loans totaling $1,779,000 and
$3,730,000 at June 30, 1996 and December 31, 1995, respectively, which were
refinanced under long-term agreements before the financial statements were
issued, the loans outstanding under the revolving line of credit have been
classified as short-term debt at June 30, 1996 and December 31, 1995 because the
Company's cash receipts are automatically used to reduce the loans outstanding
under the revolving line of credit 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 prior approval of the Company. Loans
outstanding under the revolving line of credit bear interest at the London
Interbank Offered Rate ("LIBOR") plus 3-1/4% and/or Prime Rate plus 1%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- ACCRUED EXPENSES
At June 30, 1996 and December 31, 1995, accrued expenses included accrued
interest expense of $1,783,000 and $1,717,000, respectively.
NOTE 5 -- LONG-TERM DEBT
Long-term debt at June 30, 1996 and December 31, 1995 is summarized below
(in thousands of dollars):
JUNE 30, DECEMBER 31,
1996 1995
----------- ---------------
Loans outstanding under revolving line of credit $ 1,779 $ 3,730
Construction loan 1,000 -
Term loans, payable in monthly installments, final
maturities in 2000, 2001, 2002 or 2003 24,858 20,488
12% Note, payable in monthly installments through 2000 2,393 2,635
Industrial Revenue Bond, 75% of prime, payable in monthly
installments, final maturity in 2000 448 498
12-3/4% Senior Subordinated Notes, due 2000 31,700 31,682
14% Junior Subordinated Convertible Notes, due 2000 1,000 1,000
14% Junior Subordinated Nonconvertible Notes, due 2000 347 347
Other 179 184
-------- --------
Total long-term debt 63,704 60,564
Less current portion 5,651 4,531
-------- --------
Total long-term debt, excluding current portion $ 58,053 $ 56,033
======== ========
LOANS OUTSTANDING UNDER REVOLVING LINE OF CREDIT
At June 30, 1996 and December 31, 1995, $1,779,000 and $3,730,000,
respectively, of borrowings outstanding under the Company's revolving line of
credit were classified as long-term debt because the borrowings were refinanced
under long-term agreements before the financial statements for each respective
date were issued.
CONSTRUCTION LOAN
At June 30, 1996, a construction loan totaling $1,000,000 was classified
as long-term debt because it was refinanced under a long-term agreement before
the financial statements for June 30, 1996 were issued.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TERM LOANS
Term loans having an aggregate principal balance of $23,375,000 at June
30, 1996 are payable in equal monthly principal installments with maturities in
2000, 2001, 2002 or 2003. A term loan having a principal balance of $1,483,000
at June 30, 1996 is payable in equal monthly principal installments of $8,000
until 2001 when the remaining principal balance of $1,008,000 will be due. Term
loans having a principal balance of $17,882,000 at June 30, 1996 are subject to
earlier maturity in the event the Company's revolving line of credit terminates
or expires.
The term loans having an aggregate principal balance of $23,375,000 bear
interest at LIBOR plus 3% or 3-1/4% or Prime Rate plus 3/4% or 1%. The term loan
having a principal balance of $1,483,000 bears interest at a fixed rate of 8.37%
per annum. The term loans are secured by the Company's receivables, inventories
and equipment and by certain of the Company's real property.
12% NOTE
The 12% Note, due April 30, 2000 (the "12% Note"), is payable by LCI, is
secured by a mortgage on LCI's Rock Hill, South Carolina, facility and is
guaranteed by LPC. Level payments of principal and interest in the amount of
$66,000 are due monthly until the 12% Note is paid in full.
12-3/4% NOTES
The 12-3/4% Senior Subordinated Notes, due February 1, 2000 (the "12-3/4%
Notes"), are unsecured obligations of the Company, redeemable at the option of
the Company, in whole or in part, at a declining premium over the principal
amount thereof. Interest on the 12-3/4% Notes is due semi-annually on February 1
and August 1.
14% NOTES
The 14% Junior Subordinated Convertible Notes, due May 1, 2000 (the "14%
Convertible Notes"), and 14% Junior Subordinated Nonconvertible Notes, due May
1, 2000 (collectively with the 14% Convertible Notes, the "14% Notes"), are
unsecured obligations of the Company and are redeemable at the option of the
Company, in whole or in part, at a declining premium over the principal amount
thereof. Interest on the 14% Notes is due quarterly on February 1, May 1, August
1 and November 1. The 14% Convertible Notes are convertible into 440,000 shares
of the Company's common stock.
RESTRICTIVE COVENANTS
Certain of the Company's loan agreements contain requirements with
respect to the maintenance of minimum levels of working capital, net worth and
cash flow coverage, and place certain restrictions on the Company's business and
operations, including restrictions on the issuance or assumption of additional
debt, the sale of all or substantially all of the Company's assets, the funding
of capital expenditures, the purchase of common stock, the redemption of
preferred stock and the payment of cash dividends.
-8-
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- PROVISION FOR INCOME TAXES
At June 30, 1996 and December 31, 1995, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. The income tax provisions recorded for the three-month
and six-month periods ended June 30, 1996 were primarily attributable to state
income taxes and deferred federal income taxes and were calculated using the
projected effective tax rate for the year ending December 31, 1996.
NOTE 7 -- NET INCOME OR NET LOSS PER COMMON SHARE
The calculations for primary and fully diluted net income or net loss
per common share for the three-month and six-month periods ended June 30, 1996
and 1995 are set forth below (in thousands, except per share amounts):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
PRIMARY NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,244 4,214 4,236 4,209
Common stock equivalents: incentive stock options - 26 - 26
------ ------ ------- -------
Weighted average common and common equivalent shares
common equivalent shares 4,244 4,240 4,236 4,235
====== ====== ======= =======
Net income/(loss) $ (55) $ 1,071 $ 302 $ 1,890
Preferred stock dividends (10) (11) (20) (22)
Pro rata portion of the excess of the redemption cost over the
value of preferred stock redeemed (11) (11) (22) (22)
------ ------ ------- -------
Income for primary net income/(loss) per share $ (76) $ 1,049 $ 260 $ 1,846
====== ====== ======= =======
Primary net income/(loss) per common share $ (.02) $ .25 $ .06 $ .44
====== ====== ======= =======
FULLY DILUTED NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,228 4,263 4,228
Pro forma conversion of 14% Convertible Notes 440 440 440 440
Common stock equivalents: incentive stock options - 26 - 26
------ ------ ------- -------
Weighted average common and common equivalent shares 4,703 4,694 4,703 4,694
====== ====== ======= =======
Net income/(loss) $ (55) $ 1,071 $ 302 $ 1,890
Preferred stock dividends (10) (11) (20) (22)
Pro rata portion of the excess of the redemption cost over the
value of preferred stock redeemed (11) (11) (22) (22)
Pro forma elimination of interest expense on the 14%
Convertible Notes, net of applicable income taxes 27 26 54 52
------ ------ ------- -------
Income for fully diluted income per share $ (49) $ 1,075 $ 314 $ 1,898
====== ====== ======= =======
Fully diluted net income/(loss) per common share $ (.02) $ .23 $ .06 $ .40
======= ======= ======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8 -- Commitments and Contingencies
The Company is subject to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. In addition, the Company has been named a potentially responsible
party or a third-party defendant, along with other companies, for certain waste
disposal sites. Each of these matters is subject to various uncertainties and it
is possible that some of these matters may be decided unfavorably to the
Company. Management believes that any liability that may ultimately result from
the resolution of these matters will not have a material adverse effect on the
financial position of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless the context otherwise requires, all references herein to the
"Company" are to Lexington Precision Corporation ("LPC") and its wholly-owned
subsidiary, Lexington Components, Inc. ("LCI"). Through its two business
segments, the Rubber Group and the Metals Group, the Company manufactures, to
customer specifications, rubber and metal component parts. The Rubber Group
manufactures silicone and organic rubber components for sale primarily to
manufacturers of automobiles, automotive replacement parts and medical devices.
The Metals Group manufactures metal components for sale primarily to
manufacturers of automobiles, industrial equipment, home appliances and business
machines. The Rubber Group operates through three divisions of LCI, the
Electrical Insulator Division, the Precision Seals Division and Lexington
Medical, and through a division of LPC, Lexington Manufacturing. The Metals
Group operates through two divisions of LPC, Falconer Die Casting Company
("Falconer") and Ness Precision Products ("Ness").
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Various statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon projections and estimates,
as distinct from past or historical facts and events. These forward-looking
statements are subject to a number of risks, uncertainties and contingencies
that could cause actual results to be materially different. Such risks and
uncertainties include increases and decreases in business awarded to the Company
by its various customers, unanticipated operating results and cash flows,
changes in future economic conditions, changes in the competitive environment,
changes in the capital markets and a number of other factors.
The results of operations for any particular fiscal period of the Company
are not necessarily indicative of the results to be expected for any one or more
succeeding fiscal periods.
RESULTS OF OPERATIONS -- SECOND QUARTER OF 1996 VERSUS SECOND QUARTER OF 1995
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group for
the second quarters of 1996 and 1995 follows (dollar amounts in thousands):
THREE MONTHS ENDED
JUNE 30, PERCENTAGE
------------------------- INCREASE/
1996 1995 (DECREASE)
---- ---- ----------
Rubber Group $ 18,775 $ 15,923 17.9%
Metals Group 9,306 10,510 (11.5)
-------- -------- ------
$ 28,081 $ 26,433 6.2%
======== ======== ======
The increase in net sales of the Rubber Group was the result of increased
sales of insulators and seals for automotive wiring systems and increased sales
of medical components offset, in part, by reduced sales of tooling. The second
quarter of 1995 included net sales of $665,000 from the Rubber Group's Extruded
and Lathe-Cut Products Division, which was sold in June 1995.
-11-
13
The decrease in net sales of the Metals Group resulted primarily from
lower sales of computer components manufactured by Falconer. At Ness, an
increase in the net sales of a variety of components was substantially offset by
the continued decline in net sales of a single automotive airbag component to
TRW Vehicle Safety Systems, Inc. ("TRW VSSI"). The decline in sales of the
single component resulted from the planned phase-out during 1995 and 1996 of the
inflator system in which the component is used. Net sales of the component
totaled $2,378,000, $1,228,000 and $614,000, during the second quarters of 1994,
1995 and 1996, respectively. Net sales of the component are projected to be
negligible during the second half of 1996. The decline in sales of the component
has resulted in operating losses at Ness' manufacturing facility in Casa Grande,
Arizona, during the first and second quarters of 1996. Although there can be no
assurance, management of the Company believes that net sales of new airbag
components manufactured at the Casa Grande facility will increase during the
second half of 1996, returning the facility to profitability.
COST OF SALES
A summary of cost of sales and cost of sales as a percentage of net sales
for the Rubber Group and the Metals Group for the second quarters of 1996 and
1995 follows (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30,
--------------------------------------- PERCENTAGE
1996 1995 INCREASE
---------------- ---------------- ------------
Rubber Group $ 14,787 78.8% $ 13,016 81.7% 13.6%
Metals Group 8,382 90.1 8,233 78.3 1.8
-------- ----- -------- ----- ------
$ 23,169 82.5% $ 21,249 80.4% 9.0%
======== ===== ======== ===== ======
Cost of sales of the Rubber Group as a percentage of net sales decreased
to 78.8% during the second quarter of 1996 from 81.7% during the second quarter
of 1995 primarily because of reduced material costs expressed as a percentage of
net sales. Material costs as a percentage of net sales decreased primarily
because of a change in the mix of components sold, a reduction in the cost of
certain raw materials, a reduction in sales of tooling purchased from third
parties and the exclusion of sales of the Company's Extruded and Lathe-Cut
Products Division. During the second quarter of 1996, factory overhead expense
as a percentage of net sales was unchanged, compared to the second quarter of
1995, primarily because of start-up expenses incurred at Lexington
Manufacturing, the Rubber Group's new mold manufacturing and engineering
division, and increased depreciation expense, which totaled $1,228,000 during
the second quarter of 1996, compared to $894,000 during the second quarter of
1995.
Cost of sales of the Metals Group as a percentage of net sales increased
to 90.1% during the second quarter of 1996 from 78.3% during the second quarter
of 1995. Factory overhead expense as a percentage of net sales and, to a lesser
extent, direct labor cost as a percentage of net sales both increased during the
second quarter of 1996 primarily because of additional expenses incurred in
connection with the start-up of new metal machining equipment, reduced
absorption of fixed factory overhead expenses due to the decrease in net sales
and increased depreciation expense, which totaled $607,000 during the second
quarter of 1996, compared to $474,000 during the second quarter of 1995.
-12-
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SELLING AND ADMINISTRATIVE EXPENSES
A summary of selling and administrative expenses and selling and
administrative expenses as a percentage of net sales for the Rubber Group, the
Metals Group and the Corporate Office for the second quarters of 1996 and 1995
follows (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30,
--------------------------------------- PERCENTAGE
1996 1995 INCREASE
---------------- ---------------- ----------
Rubber Group $ 1,179 6.3% $ 1,061 6.7% 11.1%
Metals Group 999 10.7 887 8.4 12.6
Corporate Office 601 N/A 566 N/A 6.2
-------- ----- -------- ----- -----
$ 2,779 9.9% $ 2,514 9.5% 10.5%
======== ===== ======== ===== =====
At the Rubber Group, selling and administrative expenses as a percentage
of net sales decreased to 6.3% during the second quarter of 1996 primarily
because most selling and administrative expenses grew at a slower rate than net
sales and because employee-related relocation expenses declined.
At the Metals Group, selling and administrative expenses as a percentage
of net sales increased to 10.7% during the second quarter of 1996 primarily
because most selling and administrative expenses remained unchanged while net
sales declined by 11.5%. Legal expenses and personnel costs at the Metals Group
also increased during second quarter of 1996, compared to the second quarter of
1995.
INTEREST EXPENSE
Interest expense totaled $2,109,000 during the second quarter of 1996, an
increase of $252,000, compared to the second quarter of 1995. This increase was
caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At June 30, 1996 and December 31, 1995, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. The income tax provision recorded during the second
quarter of 1996 was primarily attributable to state income taxes and deferred
federal income taxes and was calculated using the projected effective tax rate
for the year ending December 31, 1996. The income tax provision otherwise
recognizable during the second quarter of 1995 was reduced by the utilization of
portions of the Company's tax loss carryforwards and tax credit carryforwards.
-13-
15
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF 1996 VERSUS FIRST SIX MONTHS OF
1995
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group for
the first six months of 1996 and 1995 follows (dollar amounts in thousands):
SIX MONTHS ENDED
JUNE 30, PERCENTAGE
------------------------- INCREASE/
1996 1995 (DECREASE)
---- ---- ----------
Rubber Group $ 36,926 $ 31,611 16.8%
Metals Group 19,053 21,896 (13.0)
-------- -------- ------
$ 55,979 $ 53,507 4.6%
======== ======== ======
The increase in net sales of the Rubber Group was the result of increased
sales of insulators and seals for automotive wiring systems and increased sales
of medical components. The first six months of 1995 included net sales of
$1,321,000 from the Rubber Group's Extruded and Lathe-Cut Products Division,
which was sold in June 1995.
The decrease in net sales of the Metals Group resulted primarily from
lower sales of computer components manufactured by Falconer and airbag
components manufactured by Ness. The decrease in net sales at Ness during the
first six months of 1996, versus the first six months of 1995, resulted
primarily from a decline in net sales of a single airbag component to TRW VSSI.
The decline in sales of the single component resulted from the planned phase-out
during 1995 and 1996 of the inflator system in which the component is used. Net
sales of the component totaled $2,378,000, $1,228,000 and $614,000 during the
first six months of 1994, 1995 and 1996, respectively. Net sales of the
component are projected to be negligible during the second half of 1996. The
decline in sales of the component has resulted in operating losses at Ness'
manufacturing facility in Casa Grande, Arizona, during the first six months of
1996. Although there can be no assurance, management of the Company believes
that net sales of new airbag components manufactured at the Casa Grande facility
will increase during the second half of 1996, returning the facility to
profitability.
COST OF SALES
A summary of cost of sales and cost of sales as a percentage of net sales
for the Rubber Group and the Metals Group for the first six months of 1996 and
1995 follows (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30, PERCENTAGE
--------------------------------------- INCREASE/
1996 1995 (DECREASE)
---------------- ---------------- ----------
Rubber Group $ 29,059 78.7% $ 25,436 80.5% 14.2%
Metals Group 16,852 88.5 17,354 79.3 (2.9)
-------- ----- -------- ----- ------
$ 45,911 82.0% $ 42,790 80.0% 7.3%
======== ===== ======== ===== ======
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16
Cost of sales of the Rubber Group as a percentage of net sales decreased
to 78.7% during the first six months of 1996 from 80.5% during the first six
months of 1995 primarily because of reduced material costs expressed as a
percentage of net sales. Material costs as a percentage of net sales decreased
primarily because of a change in the mix of components sold, a reduction in the
cost of certain raw materials and the exclusion of the sales of the Company's
Extruded and Lathe-Cut Products Division. During the first six months of 1996,
factory overhead expense as a percentage of net sales decreased primarily
because of increased absorption of fixed factory overhead expense due to the
increase in net sales and because of reduced workers' compensation expense. The
reduction in factory overhead expense as a percentage of net sales was
substantially offset by start-up expenses incurred at Lexington Manufacturing,
the Rubber Group's new mold manufacturing and engineering division, and by
increased depreciation expense, which totaled $2,359,000 during the first six
months of 1996, compared to $1,695,000 during the first six months of 1995.
Cost of sales of the Metals Group as a percentage of net sales increased
to 88.5% during the first six months of 1996 from 79.3% during the first six
months of 1995. Factory overhead expense as a percentage of net sales and, to a
lesser extent, direct labor cost as a percentage of net sales both increased
during the first six months of 1996 primarily because of additional expenses
incurred in connection with the start-up of new metal machining equipment,
reduced absorption of fixed factory overhead expense due to the decrease in net
sales and increased depreciation expense, which totaled $1,187,000 during the
first six months of 1996, compared to $925,000 during the first six months of
1995.
SELLING AND ADMINISTRATIVE EXPENSES
A summary of selling and administrative expenses and selling and
administrative expenses as a percentage of net sales for the Rubber Group, the
Metals Group and the Corporate Office for the first six months of 1996 and 1995
follows (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30,
--------------------------------------- PERCENTAGE
1996 1995 INCREASE
---------------- ---------------- -------------
Rubber Group $ 2,164 5.9% $ 2,071 6.6% 4.5%
Metals Group 1,982 10.4 1,844 8.4 7.5
Corporate Office 1,297 N/A 1,219 N/A 6.4
-------- ----- -------- ----- -------
$ 5,443 9.7% $ 5,134 9.6% 6.0%
======== ===== ======== ===== =======
At the Rubber Group, selling and administrative expenses as a percentage
of net sales decreased to 5.9% during the first six months of 1996 primarily
because most selling and administrative expenses grew at a slower rate than net
sales and because employee-related relocation expenses declined.
At the Metals Group, selling and administrative expenses as a percentage
of net sales increased to 10.4% during the first six months of 1996 primarily
because most selling and administrative expenses remained unchanged while net
sales declined by 13.0%. Legal expenses and personnel costs at the Metals Group
also increased during the first six months of 1996, compared to the first six
months of 1995.
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INTEREST EXPENSE
Interest expense totaled $4,063,000 during the first six months of 1996,
an increase of $396,000, compared to the first six months of 1995. This increase
was caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At June 30, 1996 and December 31, 1995, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. The income tax provision recorded during the first six
months of 1996 was primarily attributable to state income taxes and deferred
federal income taxes and was calculated using the projected effective tax rate
for the year ending December 31, 1996. The income tax provision otherwise
recognizable during the first six months of 1995 was reduced by the utilization
of portions of the Company's tax loss carryforwards and tax credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first six months of 1996, the operating activities of the
Company provided $3,222,000 of cash.
During the first six months of 1996, cash provided by operating
activities included $2,042,000 of cash provided by increased accounts payable.
At June 30, 1996, accounts payable included approximately $3,957,000 of accounts
payable relating to building construction, the acquisition of equipment and the
purchase of customer-owned tooling, compared to $2,876,000 at December 31,
1995. Excluding accounts payable relating to building construction, the
acquisition of equipment and the purchase of customer-owned tooling, accounts
payable increased by $961,000, or 12%, from $7,752,000 at December 31, 1995 to
$8,713,000 at June 30, 1996. The increase resulted primarily from higher levels
of production during the second quarter of 1996 compared to the fourth quarter
of 1995.
During the first six months of 1996, cash was used to fund increased
accounts receivable, prepaid expenses and other current assets. Accounts
receivable increased by $1,619,000 primarily because net sales in June 1996
exceeded net sales in December 1995. Prepaid expenses and other current assets
increased by $1,447,000 primarily because of increased customer tooling in
process.
INVESTING ACTIVITIES
During the first six months of 1996, the investing activities of the
Company used $9,592,000 of cash, primarily for capital expenditures. During the
first six months of 1996, capital expenditures attributable to the Rubber Group
and the Metals Group totaled $5,909,000 and $3,650,000, respectively.
FINANCING ACTIVITIES
During the first six months of 1996, the financing activities of the
Company provided $6,739,000 of cash.
The Company finances its day-to-day operations through a revolving line
of credit. The Company borrows and repays loans outstanding under the revolving
line of credit daily, depending on cash receipts and disbursements. The ability
of the Company to borrow under the revolving line of credit is governed by
certain availability formulas which are based on the levels of accounts
receivable and inventories of the Company. The
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Company also uses the revolving line of credit to fund capital expenditures with
the intention of later refinancing a portion of such borrowings with term loans.
The Company also uses an equipment line of credit to finance a portion of
qualified new equipment purchases with term loans, repayable in equal monthly
installments through 2003. Generally, the amount of financing available under
the equipment line of credit to fund new equipment purchases is equal to 85% of
the appraised orderly liquidation value of the equipment being purchased. At
July 31, 1996, subject to the acquisition of new equipment as collateral,
funding potentially available under the equipment line of credit totaled
approximately $4,300,000.
During the first six months of 1996, the Company's net borrowings under
the revolving line of credit increased by $1,852,000. Also, during the first six
months of 1996, the Company incurred additional borrowings of $1,000,000 in
connection with the construction of its new facility in North Canton, Ohio. On
July 1, 1996, the construction loan was refinanced as part of a $2,000,000 term
loan which bears interest at a fixed rate of 8.37% and is payable in 59 monthly
installments of $11,000 with a final payment of $1,344,000 due in 2001. At
June 30, 1996 and December 31, 1995, $1,779,000 and $3,730,000, respectively, of
borrowings outstanding under the revolving line of credit were classified as
long-term debt in the Company's consolidated financial statements because the
borrowings were refinanced under long-term agreements before the Company's
financial statements for June 30, 1996 and December 31, 1995, respectively, were
issued. In addition, the $1,000,000 construction loan was also classified as
long-term debt at June 30, 1996 because it was refinanced under a long-term
agreement before the Company's financial statements for June 30, 1996 were
issued.
During the first six months of 1996, the Company borrowed $10,677,000 in
term loans to refinance $4,035,000 of pre-existing term loans and $6,642,000 of
loans outstanding under the revolving line of credit. The new term loans are
secured by the Company's receivables, inventories and equipment and by certain
of the Company's real property. New term loans totaling $5,377,000 bear interest
at the London Interbank Offered Rate ("LIBOR") plus 3% and are payable in 48
equal monthly principal installments; new term loans totaling $2,000,000 bear
interest at LIBOR plus 3-1/4% and/or Prime Rate plus 1% and are payable in equal
monthly principal installments ranging from 70 to 84 months; a new $1,800,000
term loan bears interest at LIBOR plus 3% and/or Prime Rate plus 3/4% and is
payable in 60 equal monthly principal installments; and a new $1,500,000 term
loan bears interest at a fixed rate of 8.37% per annum and is payable in 59
monthly installments of $8,000 with a final payment of $1,008,000 due in 2001.
In July 1996, the Company borrowed $3,400,000 in term loans to refinance
$2,400,000 of loans outstanding under the revolving line of credit and the
$1,000,000 construction loan.
LIQUIDITY
The Company operates with high financial leverage and limited liquidity.
During the first six months of 1996, aggregate indebtedness of the Company,
excluding accounts payable, increased by $6,943,000 to $75,029,000. Net working
capital declined by $3,676,000, primarily because capital expenditures were
financed with increased borrowings under the Company's revolving line of credit.
During the year ending December 31, 1996, cash interest and principal
payments are projected to total approximately $8,000,000 and $5,200,000,
respectively.
At August 9, 1996, availability under the Company's revolving line of
credit totaled $1,203,000 before deducting outstanding checks of approximately
$700,000. On August 9, 1996, the Company received a commitment, subject to
appropriate documentation, for term loans totaling $2,000,000 which will bear
interest at LIBOR plus 3-1/4% and/or Prime Rate plus 1% and will be payable in
66 equal monthly principal installments. Proceeds received from the loan, if
completed, will be used to refinance $2,000,000 of loans
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outstanding under the Company's revolving line of credit. There can be no
assurance that the financing will be completed.
The Company presently projects that capital expenditures will total
approximately $22,000,000 during 1996, including approximately $18,000,000 for
equipment and approximately $4,000,000 for buildings. At June 30, 1996, the
Company had commitments outstanding for capital expenditures totaling
approximately $4,400,000.
The Company's projected capital expenditures for 1996 have increased by
approximately $8,000,000 since it previously disclosed projected capital
expenditures in May 1996. The increase is primarily the result of an effort to
increase production capacity at Ness' manufacturing facility in Casa Grande,
Arizona. Management of the Company currently projects that the additional
production capacity will be required to support increased sales of components
used in automotive airbags.
Certain of the Company's loan agreements currently include a covenant
which limits capital expenditures to $15,000,000 in any calendar year. Although
management of the Company believes that it should be able to obtain a waiver or
amendment of the covenant to permit the spending of approximately $22,000,000 in
1996, there can be no assurance given that such waiver or amendment will be
obtained. If the Company is unable to obtain such waiver or amendment, the
Company would have to reduce or delay its capital spending program in order to
remain in compliance with the covenant, which could have an adverse effect upon
the Company.
In conjunction with its plans to fund the additional $8,000,000 of
capital expenditures currently projected for 1996, on August 1, 1996, the
Company received a non-binding proposal from an institutional lender for a
$7,000,000 line of credit to finance the purchase of certain metal machining
equipment. If consummated in accordance with the terms of the proposal,
borrowings under this additional equipment line of credit will be repayable in
84 equal monthly installments with interest at a rate of LIBOR plus 3-1/4%.
During the remaining six months of 1996 and the first six months of 1997,
the Company anticipates that, in addition to cash flows from operations, new
loans in the amount of approximately $17,000,000 will be required to meet the
Company's working capital, capital expenditure and debt service requirements.
The Company is currently projecting that it will require financing of
approximately $2,000,000 in excess of its current lines of credit, assuming the
new proposed $7,000,000 equipment line of credit is consummated. Although no
assurance can be given, the Company currently believes that cash flows from
operations along with financing provided by existing and/or new institutional
lenders should be adequate to meet its anticipated working capital, capital
expenditure and debt service requirements for the remainder of 1996 and the
first six months of 1997. If cash flows from operations or financing provided by
existing and/or new institutional lenders fall below expectations, the Company
intends to reduce or delay its capital expenditure program and/or to extend
accounts payable balances with suppliers beyond terms which the Company believes
are customary in the industries in which it operates. Any such reduction or
delay in capital expenditures could have an adverse effect upon the Company.
Certain of the Company's loan agreements contain requirements with
respect to the maintenance of minimum levels of working capital, net worth and
cash flow coverage and place certain restrictions on the Company's business and
operations, including restrictions on the issuance or assumption of additional
debt, the sale of all or substantially all of the Company's assets, the funding
of capital expenditures, the purchase of common stock, the redemption of
preferred stock and the payment of cash dividends.
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ACQUISITIONS
The Company may seek, from time to time, to acquire assets and businesses
related to its current operations with the intention of expanding its existing
operations. Depending on, among other things, the size and terms of such
acquisitions, the Company may be required to obtain additional financing and, in
some cases, the approval of certain holders of the Company's debt. The Company's
ability to effect acquisitions may be dependent upon its ability to obtain such
financing and, to the extent applicable, consents.
ENVIRONMENTAL MATTERS
The Company has been named from time to time as one of numerous
potentially responsible parties under applicable environmental laws for
restoration costs at waste disposal sites, as a third-party defendant in cost
recovery actions pursuant to applicable environmental laws and as a defendant or
potential defendant in various other environmental law matters. It is the
Company's policy to record accruals for such matters when a loss is deemed
probable and the amount of such loss can be reasonably estimated. The various
actions to which the Company is or may be a party in the future are at various
stages of completion and, although there can be no assurance as to the outcome
of existing or potential environmental litigation, in the event such litigation
were commenced, based upon the information currently available to the Company,
the Company believes that the outcome of such actions would not have a material
adverse effect upon its financial position.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 16,
1996.
(b) The matters voted upon at the Annual Meeting and the results of the
voting as to each such matter are set forth below:
(i) The election of William B. Conner and Phillips E. Patton as
directors of the Company for terms expiring in 1999.
Votes for Mr. Conner 3,798,431
Votes withheld from Mr. Conner 20,836
Votes for Mr. Patton 3,798,279
Votes withheld from Mr. Patton 20,988
(ii) The ratification of Ernst & Young LLP as independent auditors of
the Company for the year ending December 31, 1996.
Votes for Ernst & Young LLP 3,810,785
Votes against Ernst & Young LLP 2,662
Abstentions 5,820
There were no broker non-votes in respect of the foregoing
matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
10-1 Term Note dated May 31, 1996 from Lexington Precision Corporation
in favor of Congress Financial Corporation
10-2 Term Note dated July 1, 1996 from Lexington Components, Inc. in
favor of Congress Financial Corporation
10-3 Term Note dated July 1, 1996 from Lexington Precision Corporation
in favor of Congress Financial Corporation
10-4 Term Note dated July 1, 1996 from Lexington Precision Corporation
in favor of Bank One, Akron, NA
27-1 Financial Data Schedule*
* Not deemed filed for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust Indenture
Act of 1939, or otherwise subject to the liabilities of such
sections and not deemed part of any registration statement
to which such exhibit relates.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1996.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
August 14, 1996 By: /s/ Michael A. Lubin
- --------------- -----------------------
Date Michael A. Lubin
Chairman of the Board
August 14, 1996 By: /s/ Warren Delano
- --------------- -----------------------
Date Warren Delano
President
August 14, 1996 By: /s/ Dennis J. Welhouse
- --------------- -----------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Exhibit Location
------ ------- --------
10-1 Term Note dated May 31, 1996 from Filed with this Form 10-Q
Lexington Precision Corporation in favor
of Congress Financial Corporation
10-2 Term Note dated July 1, 1996 from Filed with this Form 10-Q
Lexington Components, Inc. in favor of
Congress Financial Corporation
10-3 Term Note dated July 1, 1996 from Filed with this Form 10-Q
Lexington Precision Corporation in favor
of Congress Financial Corporation
10-4 Term Note dated July 1, 1996 from Filed with this Form 10-Q
Lexington Precision Corporation in favor
of Bank One, Akron, NA
27-1 Financial Data Schedule Filed with this Form 10-Q