1 ================================================================================ 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 SEPTEMBER 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 NOVEMBER 7, 1996 (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) ================================================================================ 2 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 6. Exhibits and Reports on Form 8-K ............................... 19 -1- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1996 1995 --------------- ---------------- ASSETS: Current assets: Cash $ 55 $ 118 Accounts receivable 14,985 12,959 Inventories 8,737 8,105 Prepaid expenses and other assets 3,788 2,101 Deferred income taxes 843 1,195 -------- -------- Total current assets 28,408 24,478 -------- -------- Property, plant and equipment: Land 1,533 1,525 Buildings 19,816 17,190 Equipment 66,027 57,110 -------- -------- 87,376 75,825 Less accumulated depreciation 35,296 30,887 -------- -------- Property, plant and equipment, net 52,080 44,938 -------- -------- Excess of cost over net assets of businesses acquired, net 9,489 9,726 -------- -------- Other assets, net 3,031 2,734 -------- -------- $ 93,008 $ 81,876 ======== ======== See notes to consolidated financial statements. -2- 4 LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (THOUSANDS OF DOLLARS) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1996 1995 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Accounts payable $ 12,371 $ 10,628 Accrued expenses 7,319 6,572 Short-term debt 11,928 7,522 Current portion of long-term debt 6,107 4,531 -------- -------- Total current liabilities 37,725 29,253 -------- -------- Long-term debt, excluding current portion 58,855 56,033 -------- -------- Deferred income taxes and other long-term liabilities 929 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 12,450 12,547 Accumulated deficit (18,331) (18,305) Cost of common stock in treasury, 85,915 and 120,915 shares, respectively (217) (305) -------- -------- Total stockholders' deficit (5,011) (4,976) -------- -------- $ 93,008 $ 81,876 ======== ======== See notes to consolidated financial statements. -3- 5 LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENTS OF INCOME (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ---------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $ 29,287 $ 24,221 $ 85,266 $ 77,728 -------- -------- -------- -------- Costs and expenses: Cost of sales 24,301 20,135 70,212 62,925 Selling and administrative expenses 3,024 2,306 8,467 7,440 -------- -------- -------- -------- Total costs and expenses 27,325 22,441 78,679 70,365 -------- -------- -------- -------- Income from operations 1,962 1,780 6,587 7,363 Interest expense 2,177 1,962 6,240 5,629 Other income - - - 641 -------- -------- -------- -------- Income/(loss) before income taxes (215) (182) 347 2,375 Provision/(credit) for income taxes 113 (73) 373 594 -------- -------- -------- -------- Net income/(loss) $ (328) $ (109) $ (26) $ 1,781 ======== ======== ======== ======== Net income/(loss) per primary and fully diluted common share: Primary $ (.08) $ (.03) $ (.02) $ .40 ======== ======== ======== ======== Fully diluted $ (.08) $ (.03) $ (.02) $ .38 ======== ======== ======== ======== See notes to consolidated financial statements. -4- 6 LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income/(loss) $ (26) $ 1,781 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 6,138 4,671 Deferred income taxes 188 - Gain on sale of property, plant and equipment (14) (668) Changes in operating assets and liabilities which provided/(used) cash: Receivables (2,026) (1,267) Inventories (632) (1,136) Prepaid expenses and other assets (1,687) (1,044) Accounts payable 1,743 (572) Accrued expenses 747 (170) Other 71 - --------- --------- Net cash provided by operating activities 4,502 1,595 --------- --------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (12,442) (11,943) Increase in equipment deposits, net (380) (396) Proceeds from sales of property, plant and equipment 195 998 Additions to deferred tooling expense (397) (705) --------- --------- Net cash used by investing activities (13,024) (12,046) --------- --------- FINANCING ACTIVITIES: Net increase in short-term debt 4,406 6,501 Proceeds from issuance of long-term debt 12,346 6,700 Repayments of long-term debt (7,974) (2,301) Other (319) (455) --------- --------- Net cash provided by financing activities 8,459 10,445 --------- --------- Decrease in cash (63) (6) Cash at beginning of period 118 79 --------- --------- Cash at end of period $ 55 $ 73 ========= ========= See notes to consolidated financial statements. -5- 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION The unaudited interim consolidated financial statements include the accounts of Lexington Precision Corporation ("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 September 30, 1996, the Company's results of operations for the three-month and nine-month periods ended September 30, 1996 and 1995 and the Company's cash flows for the nine-month periods ended September 30, 1996 and 1995. All such adjustments were of a normal recurring nature. The results of operations for the three-month and nine-month periods ended September 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 September 30, 1996 and December 31, 1995 are summarized below (in thousands of dollars): SEPTEMBER 30, DECEMBER 31, 1996 1995 --------------- ---------------- Finished goods $ 3,146 $ 3,040 Work in process 2,783 2,213 Raw materials and purchased parts 2,808 2,852 --------- -------- $ 8,737 $ 8,105 ========= ======== NOTE 3 -- SHORT-TERM DEBT At September 30, 1996 and December 31, 1995, short-term debt consisted of $11,928,000 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 $3,730,000 at December 31, 1995, which were refinanced under long-term agreements before the 1995 financial statements were issued, the loans outstanding under the revolving line of credit have been classified as short-term debt at September 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%. -6- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 -- ACCRUED EXPENSES At September 30, 1996 and December 31, 1995, accrued expenses included accrued interest expense of $742,000 and $1,717,000, respectively. NOTE 5 -- LONG-TERM DEBT Long-term debt at September 30, 1996 and December 31, 1995 is summarized below (in thousands of dollars): SEPTEMBER 30, DECEMBER 31, 1996 1995 ---------------- --------------- Loans outstanding under revolving line of credit $ - $ 3,730 Term loans, payable in monthly installments, final maturities in 2000, 2001, 2002 or 2003 29,040 20,488 12% Note, payable in monthly installments, final maturity in 2000 2,266 2,635 Industrial Revenue Bond, 75% of prime, payable in monthly installments, final maturity in 2000 423 498 12-3/4% Senior Subordinated Notes, due 2000 31,708 31,682 14% Junior Subordinated Convertible Notes, due 2000 1,000 1,000 14% Junior Subordinated Nonconvertible Notes, due 2000 347 347 Other 178 184 -------- -------- Total long-term debt 64,962 60,564 Less current portion 6,107 4,531 -------- -------- Total long-term debt, excluding current portion $ 58,855 $ 56,033 ======== ======== LOANS OUTSTANDING UNDER REVOLVING LINE OF CREDIT At December 31, 1995, $3,730,000, 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 1995 financial statements were issued. TERM LOANS Term loans having an aggregate principal balance of $25,593,000 at September 30, 1996 are payable in equal monthly principal installments with maturities in 2000, 2001, 2002 or 2003. Two term loans having a total principal balance of $3,447,000 at September 30, 1996 are payable in equal monthly principal installments totaling $19,000 until 2001 when the remaining total principal balance of $2,432,000 will be due. Term loans having a principal balance of $19,239,000 at September 30, 1996 are subject to earlier maturity in the event the Company's revolving line of credit terminates or expires. -7- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The term loans having an aggregate principal balance of $25,593,000 bear interest at LIBOR plus 3% or 3-1/4% or Prime Rate plus 3/4% or 1%. The term loans having a principal balance of $3,447,000 bear 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. NOTE 6 -- PROVISION FOR INCOME TAXES At September 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 nine-month periods ended September 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. -8- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 nine-month periods ended September 30, 1996 and 1995 are set forth below (in thousands, except per share amounts): THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1996 1995 1996 1995 ------ ------ ------ ------ PRIMARY NET INCOME/(LOSS) PER COMMON SHARE: Weighted average common shares outstanding during period 4,263 4,228 4,245 4,215 Common stock equivalents: incentive stock options - 28 - 28 ------ ------ ------- ------- Weighted average common and common equivalent shares 4,263 4,256 4,245 4,243 ====== ====== ======= ======= Net income/(loss) $ (328) $ (109) $ (26) $ 1,781 Preferred stock dividends (11) (11) (31) (33) Pro rata portion of the excess of the redemption cost over the value of preferred stock redeemed (11) (11) (34) (33) ------ ------ ------- ------- Income for primary net income/(loss) per share $ (350) $ (131) $ (91) $ 1,715 ====== ====== ======= ======= Primary net income/(loss) per common share $ (.08) $ (.03) $ (.02) $ .40 ====== ====== ======= ======= 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 - 28 - 28 ------ ------ ------- ------- Weighted average common and common equivalent shares 4,703 4,696 4,703 4,696 ====== ====== ======= ======= Net income/(loss) $ (328) $ (109) $ (26) $ 1,781 Preferred stock dividends (11) (11) (31) (33) Pro rata portion of the excess of the redemption cost over the value of preferred stock redeemed (11) (11) (34) (33) Pro forma elimination of interest expense on the 14% Convertible Notes, net of applicable income taxes 27 26 81 78 ------ ------ ------- ------- Income for fully diluted income/(loss) per share $ (323) $ (105) $ (10) $ 1,793 ====== ====== ======= ======= Fully diluted net income/(loss) per common share, excluding any antidilutive effect of the pro forma elimination of interest on the 14% Convertible Notes $ (.08) $ (.03) $ (.02) $ .38 ====== ====== ======= ======= 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 -9- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. -10- 12 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 and business machines. Effective September 30, 1996, the majority of the operating units of the Company changed their names to better reflect their respective lines of business and to clarify their affiliation with LPC and the other operating units of the Company. The following chart sets forth the current and former names of each operating unit: CURRENT NAME FORMER NAME ------------ ----------- Rubber Group: Lexington Connector Seals Precision Seals Division Lexington Insulators Electrical Insulator Division Lexington Medical (no change) Lexington Technologies Lexington Manufacturing Metals Group: Lexington Die Casting Falconer Die Casting Company Lexington Machining Ness Precision Products (New York) Lexington Safety Components Ness Precision Products (Arizona) 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, increases in capital expenditures, changes in future economic conditions, changes in the competitive environment, changes in the capital markets and a number of other factors. Because the Company operates with substantial financial leverage and limited liquidity, the impact of any negative event may have a greater adverse effect upon the Company than if the Company did not operate with such substantial financial leverage and limited liquidity. 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. -11- 13 RESULTS OF OPERATIONS -- THIRD QUARTER OF 1996 VERSUS THIRD QUARTER OF 1995 NET SALES A summary of the net sales of the Rubber Group and the Metals Group for the third quarters of 1996 and 1995 follows (dollar amounts in thousands): THREE MONTHS ENDED SEPTEMBER 30, ------------------------- PERCENTAGE 1996 1995 INCREASE -------- -------- ----------- Rubber Group $ 18,844 $ 14,335 31.5% Metals Group 10,443 9,886 5.6 -------- -------- ------ $ 29,287 $ 24,221 20.9% ======== ======== ====== The increase in net sales of the Rubber Group was the result of increased sales of connector seals and insulators for automotive wiring systems and increased sales of medical components and tooling. The increase in net sales of the Metals Group resulted primarily from increased sales of machined automotive components manufactured by Lexington Machining and Lexington Safety Components, offset, in part, by reduced sales of diecast computer components manufactured by Lexington Die Casting. 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 third quarters of 1996 and 1995 follows (dollar amounts in thousands): THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------- PERCENTAGE 1996 1995 INCREASE ---------------- ---------------- ------------- Rubber Group $ 15,115 80.2% $ 11,943 83.3% 26.6% Metals Group 9,186 88.0 8,192 82.9 12.1 -------- ----- -------- ----- ------ $ 24,301 83.0% $ 20,135 83.1% 20.7% ======== ===== ======== ===== ====== At the Rubber Group, cost of sales as a percentage of net sales decreased to 80.2% during the third quarter of 1996 from 83.3% during the third quarter of 1995 primarily because of reduced material and factory overhead costs as percentages of net sales. During the third quarter of 1996, material costs as a percentage of net sales decreased primarily because of a reduction in the cost of certain raw materials, offset, in part, by increased sales of tooling purchased from third parties. Factory overhead expense as a percentage of net sales decreased during the third quarter of 1996 primarily because of increased absorption of fixed factory overhead expenses as net sales increased by 31.5%. The improvement in factory overhead expense as a percentage of net sales was limited by increased depreciation expense, which totaled $1,321,000 during the third quarter of 1996, compared to $936,000 during the third quarter of 1995, and by start-up expenses incurred at Lexington Technologies, the Rubber Group's new mold manufacturing and engineering operation. At the Metals Group, cost of sales as a percentage of net sales increased to 88.0% during the third quarter of 1996 from 82.9% during the third quarter of 1995 primarily because of increased material and factory overhead costs as percentages of net sales. During the third quarter of 1996, material cost as a -12- 14 percentage of net sales increased because of increased tooling sales, offset, in part, by a change in product mix. Factory overhead expense as a percentage of net sales increased during the third quarter of 1996, primarily because of start-up expenses related to several new automotive components, increased depreciation expense, which totaled $629,000 during the third quarter of 1996, compared to $530,000 during the third quarter of 1995, and increased medical costs. 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 third quarters of 1996 and 1995 follows (dollar amounts in thousands): THREE MONTHS ENDED SEPTEMBER 30, --------------------------------------- PERCENTAGE 1996 1995 INCREASE ---------------- ---------------- ------------- Rubber Group $ 1,154 6.1% $ 910 6.3% 26.8% Metals Group 1,309 12.5 892 9.0 46.7 Corporate Office 561 N/A 504 N/A 11.3 -------- ----- -------- ----- ------ $ 3,024 10.3% $ 2,306 9.5% 31.1% ======== ===== ======== ===== ====== At the Rubber Group, selling and administrative expenses as a percentage of net sales decreased to 6.1% for the third quarter of 1996 primarily because most selling and administrative expenses grew at a slower rate than net sales. At the Metals Group, selling and administrative expenses as a percentage of net sales increased to 12.5% for the third quarter of 1996 primarily because of increased personnel costs, commissions and legal expenses. INTEREST EXPENSE Interest expense totaled $2,177,000 during the third quarter of 1996, an increase of $215,000, compared to the third quarter of 1995. The increase was caused primarily by an increase in average borrowings outstanding. PROVISION FOR INCOME TAXES At September 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 third 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 third 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 NINE MONTHS OF 1996 VERSUS FIRST NINE MONTHS OF 1995 NET SALES A summary of the net sales of the Rubber Group and the Metals Group for the first nine months of 1996 and 1995 follows (dollar amounts in thousands): NINE MONTHS ENDED SEPTEMBER 30, PERCENTAGE ------------------------ INCREASE/ 1996 1995 (DECREASE) ------- ------- ---------- Rubber Group $ 55,770 $ 45,946 21.4% Metals Group 29,496 31,782 (7.2) -------- -------- ------ $ 85,266 $ 77,728 9.7% ======== ======== ====== The increase in net sales of the Rubber Group was the result of increased sales of connector seals and insulators for automotive wiring systems and increased sales of medical components and tooling. The first nine 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 die cast components for computers, business machines and industrial equipment. 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 nine months of 1996 and 1995 follows (dollar amounts in thousands): NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- PERCENTAGE 1996 1995 INCREASE ---------------- ---------------- ------------- Rubber Group $ 44,174 79.2% $ 37,379 81.4% 18.2% Metals Group 26,038 88.3 25,546 80.4 1.9 -------- ----- -------- ----- ------ $ 70,212 82.3% $ 62,925 81.0% 11.6% ======== ===== ======== ===== ====== At the Rubber Group, cost of sales as a percentage of net sales decreased to 79.2% during the first nine months of 1996 from 81.4% during the first nine months of 1995 primarily because of reduced material and factory overhead costs as percentages of net sales. Material costs as a percentage of net sales decreased during the first nine months of 1996 primarily because of 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. Factory overhead expense as a percentage of net sales decreased during the first nine months of 1996 primarily because of improved absorption of fixed factory overhead expenses as net sales increased by 21.4% and because of reduced workers' compensation expense. The improvement in factory overhead expense as a percentage of net sales was limited by increased depreciation expense, which totaled $3,680,000 during the first nine months of 1996, compared to $2,631,000 during the first nine months of 1995, and by start-up expenses incurred at Lexington Technologies, the Rubber Group's new mold manufacturing and engineering operation. -14- 16 At the Metals Group, cost of sales as a percentage of net sales increased to 88.3% during the first nine months of 1996 from 80.4% during the first nine 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 increased during the first nine months of 1996 primarily because of start-up expenses related to several new automotive components, increased depreciation expense, which totaled $1,816,000 during the first nine months of 1996, compared to $1,455,000 during the first nine months of 1995, and increases in a variety of factory overhead expenses. 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 nine months of 1996 and 1995 follows (dollar amounts in thousands): NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- PERCENTAGE 1996 1995 INCREASE ---------------- ---------------- ------------- Rubber Group $ 3,318 5.9% $ 2,981 6.5% 11.3% Metals Group 3,291 11.2 2,736 8.6 20.3 Corporate Office 1,858 N/A 1,723 N/A 7.8 -------- ----- -------- ----- ------- $ 8,467 9.9% $ 7,440 9.6% 13.8% ======== ===== ======== ===== ======= At the Rubber Group, selling and administrative expenses as a percentage of net sales decreased to 5.9% for the first nine months of 1996 primarily because most selling and administrative expenses grew at a slower rate than net sales. At the Metals Group, selling and administrative expenses as a percentage of net sales increased to 11.2% for the first nine months of 1996 primarily because of increased personnel costs and legal expenses. INTEREST EXPENSE Interest expense totaled $6,240,000 during the first nine months of 1996, an increase of $611,000, compared to the first nine months of 1995. The increase was caused primarily by an increase in average borrowings outstanding. PROVISION FOR INCOME TAXES At September 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 nine 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 nine months of 1995 was reduced by the utilization of portions of the Company's tax loss carryforwards and tax credit carryforwards. -15- 17 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first nine months of 1996, the operating activities of the Company provided $4,502,000 of cash. Cash provided by operating activities included $2,490,000 of cash provided by increased accounts payable and accrued expenses, which increased primarily because of higher levels of production during the third quarter of 1996, compared to the fourth quarter of 1995. Cash was used to fund increased accounts receivable, prepaid expenses and other current assets. Accounts receivable increased by $2,026,000 primarily because net sales in September 1996 exceeded net sales in December 1995. Prepaid expenses and other current assets increased by $1,687,000 primarily because of increased customer tooling in process. INVESTING ACTIVITIES During the first nine months of 1996, the investing activities of the Company used $13,024,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group and the Metals Group totaled $7,505,000 and $4,937,000, respectively. FINANCING ACTIVITIES During the first nine months of 1996, the financing activities of the Company provided $8,459,000 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 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 uses an equipment line of credit to finance a portion of qualified new equipment purchases with term loans, repayable in equal monthly installments through 2002. 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 November 4, 1996, subject to the acquisition of new equipment as collateral, availability under the equipment line of credit totaled approximately $5,500,000. During the first nine months of 1996, borrowings classified as short-term under the revolving line of credit increased by $4,406,000. Borrowings classified as long-term decreased by $3,730,000. During the first nine months of 1996, the Company refinanced $4,035,000 of term loans and $12,042,000 of loans outstanding under the revolving line of credit with new term loans in the aggregate amount of $16,077,000. The new term loans are secured by the Company's receivables, inventories and equipment and by certain of the Company's real property. As a result of the new term loan financings, the current portion of long-term debt increased from $4,531,000 at December 31, 1995 to $6,107,000 at September 30, 1996. -16- 18 LIQUIDITY The Company operates with high financial leverage and limited liquidity. During the first nine months of 1996, aggregate indebtedness of the Company, excluding accounts payable, increased by $8,804,000 to $76,890,000. The Company's net working capital deficit increased by $4,542,000, primarily because capital expenditures were financed with increased short-term borrowings under the Company's revolving line of credit and increased term loan financings which in turn increased the current portion of long-term debt. At November 8, 1996, availability under the Company's revolving line of credit totaled $1,200,000 before deducting outstanding checks of approximately $550,000. The Company believes that it has limited ability to extend its trade accounts payable balances beyond current payment practices without having a material adverse effect on the business of the Company. The Company presently projects that capital expenditures will total approximately $18,000,000 during 1996, including approximately $5,600,000 during the fourth quarter. At September 30, 1996, the Company had commitments outstanding for capital expenditures supported by purchase orders totaling approximately $4,200,000. Effective as of August 14, 1996, the Company and its lenders amended a loan covenant to change the Company's capital spending limit for 1996 from $15,000,000 to $23,000,000. In conjunction with its capital spending program, the Company is currently negotiating loan documents with a lender for a $7,000,000 line of credit to finance the purchase of certain metal machining equipment. Under the terms of the equipment line of credit, as proposed, the lender will advance 100% of the cost of the equipment financed. Borrowings under the equipment line of credit will be repayable in 60 equal monthly principal installments with interest at a rate of LIBOR plus 3-1/8%. The Company has also commenced discussions with a lender for construction and permanent mortgage financing of approximately $1,700,000 for the expansion of the Company's manufacturing facility in Casa Grande, Arizona. There can be no assurance given that either of the financings will be completed. If the Company is unable to obtain either financing, the Company intends to reduce or delay its capital expenditure program. Any such reduction or delay in capital expenditures could have an adverse effect upon the future operating results of the Company. The Company is currently projecting that, during the fourth quarter of 1996 and the first six months of 1997, it will require financing of approximately $2,500,000 in excess of its current lines of credit, assuming that the proposed $7,000,000 equipment line of credit and the proposed construction and permanent mortgage financing of approximately $1,700,000 are consummated. There can be no assurance given that the $2,500,000 of projected required financing can be obtained on terms acceptable to the Company. Certain of the Company's loan agreements contain covenants 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. Based upon the Company's current projection, the Company believes that, if certain refinancings of existing term loans cannot be obtained, the Company may need to seek the amendment or waiver as of December 31, 1996 and March 31, 1997 of a loan covenant which requires that the Company maintain a cash flow coverage ratio (net income plus depreciation and amortization to the current portion of long-term debt) of at least 1.25 to 1.00. Although there can be no assurance given that the financings, refinancings or loan amendment or waiver discussed above can be obtained by the Company, the Company believes that it will be able to meet the -17- 19 presently anticipated working capital and capital expenditure requirements through 1997. If the Company is unable to obtain the necessary financing, refinancing or amendment or waiver, the Company would reduce or delay its capital expenditure program and take actions to curtail or postpone certain operating expenses in order to increase the short-term cash flow of the Company. In the event that the Company's projections prove to be inaccurate and if remedial actions failed to provide the cash flow necessary to meet the Company's anticipated working capital needs, the Company might have to delay the payment of the scheduled interest payments on its senior and junior subordinated debt which are due on February 1, 1997. If, as a result of a payment or covenant default, any lender seeks to obtain a judgment against the Company or attempts to foreclose on any material assets of the Company, the Company could decide to seek protection from its creditors under the federal bankruptcy code in an effort to restructure its debts in an orderly fashion. The federal bankruptcy code generally imposes restrictions upon the ability of creditors and other parties in interest to exercise certain rights against a debtor, including the exercise of foreclosure remedies, without bankruptcy court approval. 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, 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. -18- 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: 10-1 Third Amended and Restated Promissory Note dated August 21, 1996 from Lexington Components, Inc. in favor of Congress Financial Corporation 10-2 Third Amended and Restated Promissory Note dated August 21, 1996 from Lexington Precision Corporation in favor of Congress Financial Corporation 10-3 Amendment to Financing Agreements dated August 21, 1996 from Lexington Components, Inc. in favor of Congress Financial Corporation 10-4 Amendment to Financing Agreements dated August 21, 1996 from Lexington Precision Corporation in favor of Congress Financial Corporation 27-1 Financial Data Schedule* <FN> * 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 September 30, 1996. -19- 21 LEXINGTON PRECISION CORPORATION FORM 10-Q SEPTEMBER 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) November 13, 1996 By: /s/ Michael A. Lubin - ----------------- ------------------------- Date Michael A. Lubin Chairman of the Board November 13, 1996 By: /s/ Warren Delano - ----------------- ------------------------- Date Warren Delano President November 13, 1996 By: /s/ Dennis J. Welhouse - ----------------- ------------------------- Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -20- 22 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT LOCATION - ------ ------- -------- 10-1 Third Amended and Restated Promissory Note Filed with this Form 10-Q dated August 21, 1996 from Lexington Components, Inc. in favor of Congress Financial Corporation 10-2 Third Amended and Restated Promissory Note Filed with this Form 10-Q dated August 21, 1996 from Lexington Precision Corporation in favor of Congress Financial Corporation 10-3 Amendment to Financing Agreements dated Filed with this Form 10-Q August 21, 1996 from Lexington Components, Inc. in favor of Congress Financial Corporation 10-4 Amendment to Financing Agreements dated Filed with this Form 10-Q August 21, 1996 from Lexington Precision Corporation in favor of Congress Financial Corporation 27-1 Financial Data Schedule Filed with this Form 10-Q