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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 PERIOD ENDED MARCH 31, 1997
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, $0.25 PAR VALUE - 4,263,036 SHARES AS OF MAY 6, 1997
(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
QUARTERLY REPORT ON FORM 10-Q
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.....................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
----------- ---------------
ASSETS:
Current assets:
Cash $ 86 $ 187
Accounts receivable 14,475 16,820
Inventories 9,148 8,899
Prepaid expenses and other assets 3,023 3,211
Deferred income taxes 1,728 1,728
--------- ----------
Total current assets 28,460 30,845
--------- ----------
Property, plant, and equipment:
Land 1,533 1,533
Buildings 21,788 19,915
Equipment 71,117 68,232
--------- ----------
94,438 89,680
Less accumulated depreciation 38,301 36,380
--------- ----------
Property, plant, and equipment, net 56,137 53,300
--------- ----------
Excess of cost over net assets of businesses acquired, net 9,331 9,410
--------- ----------
Other assets, net 3,332 3,475
--------- ----------
$ 97,260 $ 97,030
========= ==========
See notes to consolidated financial statements. (continued on next page)
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
----------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Accounts payable $ 10,768 $ 14,334
Accrued expenses 6,036 8,282
Short-term debt 11,427 7,326
Current portion of long-term debt 5,521 5,225
--------- ----------
Total current liabilities 33,752 35,167
--------- ----------
Long-term debt, excluding current portion 67,044 65,148
--------- ----------
Deferred income taxes and other long-term liabilities 1,315 1,307
--------- ----------
Redeemable preferred stock, $100 par value,
at redemption value 930 930
Less excess of redemption value over par value 465 465
--------- ----------
Redeemable preferred stock at par value 465 465
--------- ----------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000
shares authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,386 12,395
Accumulated deficit (18,572) (18,322)
Cost of common stock in treasury, 85,915 shares (217) (217)
--------- ----------
Total stockholders' deficit (5,316) (5,057)
--------- ----------
$ 97,260 $ 97,030
========= ==========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1996
---- ----
Net sales $ 28,592 $ 27,898
Cost of sales 23,815 22,742
-------- --------
Gross profit 4,777 5,156
Selling and administrative expenses 2,877 2,664
-------- --------
Income from operations 1,900 2,492
Interest expense 2,150 1,954
-------- --------
Income/(loss) before income taxes (250) 538
Provision for income taxes -- 181
-------- --------
Net income/(loss) (250) 357
Preferred stock dividends 9 10
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during fiscal year 11 11
-------- --------
Net income/(loss) attributable to common
stockholders $ (270) $ 336
======== ========
Net income/(loss) per primary and fully diluted
common share:
Primary $ (0.06) $ 0.08
======== ========
Fully diluted $ (0.06) $ 0.08
======== ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income/(loss) $ (250) $ 357
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation 1,953 1,588
Amortization-- operating expense 321 279
Amortization-- interest expense 38 70
Changes in operating assets and liabilities that
provided/(used) cash:
Receivables 2,345 (1,012)
Inventories (249) (722)
Prepaid expenses and other assets 188 (617)
Accounts payable (3,566) (428)
Accrued expenses (2,246) (935)
Other 8 42
-------- --------
Net cash used by operating activities (1,458) (1,378)
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (4,798) (5,320)
Decrease/(increase) in equipment deposits, net 387 (79)
Proceeds from sales of property, plant, and equipment 6 35
Expenditures for tooling owned by customers (265) (116)
-------- --------
Net cash used by investing activities (4,670) (5,480)
-------- --------
FINANCING ACTIVITIES:
Net increase in short-term debt 4,101 5,413
Proceeds from issuance of long-term debt 31,829 6,947
Repayment of long-term debt (29,640) (5,416)
Other (263) (140)
-------- --------
Net cash provided by financing activities 6,027 6,804
-------- --------
Net decrease in cash (101) (54)
Cash at beginning of period 187 118
-------- --------
Cash at end of period $ 86 $ 64
======== ========
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 and its subsidiary (collectively,
the "Company"). 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, except as described below, in
Note 1 to the consolidated financial statements in the Company's annual report
on Form 10-K for the year ended December 31, 1996, 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 March 31, 1997, and the Company's results
of operations and cash flows for the fiscal quarters ended March 31, 1997 and
1996. All such adjustments were of a normal recurring nature.
The results of operations for the first fiscal quarter of 1997 are not
necessarily indicative of the results to be expected for the full year or for
any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method)
or market. Inventory levels by principal classification are set forth below
(dollar amounts in thousands):
MARCH 31, DECEMBER 31,
1997 1996
----------- -------------
Finished goods $3,850 $3,615
Work in process 2,737 2,360
Raw materials and purchased parts 2,561 2,924
------ ------
$9,148 $8,899
====== ======
NOTE 3 -- ACCRUED EXPENSES
At March 31, 1997, and December 31, 1996, accrued expenses included
accrued interest expense of $705,000 and $1,754,000, respectively.
NOTE 4 -- DEBT
At March 31, 1997, and December 31, 1996, short-term debt consisted of
loans outstanding under the Company's revolving line of credit. At March 31,
1997, and December 31, 1996, $460,000 and $6,856,000, respectively, of loans
outstanding under the revolving line of credit were classified as long-term debt
because they were refinanced under long-term agreements before the consolidated
financial statements for the respective periods were issued.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 1997, the revolving line of credit was amended to, among other
things, extend the expiration date from January 2, 1998, to April 1, 2000, and
reduce the rate of interest charged on loans outstanding under the revolving
line of credit from prime rate plus 1% or the London Interbank Offered Rate
("LIBOR") plus 3.25% to prime rate plus 0.25% or LIBOR plus 2.75%.
Long-term debt at March 31, 1997, and December 31, 1996, is set forth
below (in thousands of dollars):
MARCH 31, DECEMBER 31,
1997 1996
------------ -----------
Long-term secured debt:
Revolving line of credit, prime rate plus 0.25% or LIBOR plus
2.75% at March 31, 1997, prime rate plus 1% or LIBOR plus
3.25% at December 31, 1996 $ 460(1) $ 6,856(1)
Term loans payable in equal monthly principal installments, final
maturities in 2000, 75% of prime rate - 4,767(2)
Term loan payable in increasing monthly principal installments,
final maturity in 2000, 12% 2,001 2,136
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.27% 3,311 3,389
Term loan payable in equal monthly principal installments, final
maturity in 2001, prime rate plus 0.75% or LIBOR plus 3.00% 1,440(2) 1,560
Term loan payable in equal monthly principal installments, final
maturity in 2002, LIBOR plus 2.75% 2,618 -
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity 2002, 9.37% 1,582 -
Term loans, interest only at prime rate plus 0.75% through June 1997
and then payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, interest
fixed in June 1997 at 5-year treasury note rate plus 3% 1,862(3) -
Term loans payable in equal monthly principal installments, final
maturity in 2002 and 2003, prime rate plus 1% or LIBOR plus - 17,626(2)
3.25%
Term loans payable in equal monthly principal installments, final maturity
in 2003, prime rate plus 0.25% or LIBOR plus 2.75% at March 31, 1997,
prime rate plus 1% or LIBOR plus 3.25% at
December 31, 1996 703(4) 734(4)
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% or LIBOR plus 2.75% 25,289(4) -
-------- -------
Total long-term secured debt 39,266 37,068
-------- -------
(continued on next page)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
Long-term unsecured debt:
12.75% Senior subordinated notes, due 2000 $ 31,720 $ 31,717
14% Junior subordinated convertible notes, due 2000, convertible
into 440,000 shares of common stock 1,000 1,000
14% Junior subordinated nonconvertible notes, due 2000 347 347
Other unsecured obligations 232 241
-------- -------
Total long-term unsecured debt 33,299 33,305
-------- -------
Total long-term debt 72,565 70,373
Less current portion 5,521 5,225
-------- -------
Total long-term debt, excluding current portion $ 67,044 $ 65,148
======== =======
<FN>
(1) Classified as long-term debt because the loans were refinanced under
long-term agreements before the consolidated financial statements for the
respective periods were issued.
(2) Refinanced under long-term agreements before the consolidated financial
statements for the respective periods were issued. Current portions are
based upon the terms of the new borrowings.
(3) Represents borrowings under a construction line of credit and related
permanent financing.
(4) Maturity date can be accelerated by the lender if the Company's revolving
line of credit expires prior to the stated maturity date of the term loan.
The loans outstanding under the revolving line of credit and the secured
term loans listed above are collateralized by substantially all of the assets of
the Company, including accounts receivable, inventory, equipment, certain real
estate, and the stock of the Company's subsidiary.
RESTRICTIVE COVENANTS
Certain of the Company's financing arrangements 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 the incurrence 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 5 -- PROVISION FOR INCOME TAXES
At March 31, 1997, and December 31, 1996, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in the components of the
deferred tax assets, deferred tax liabilities, or the valuation allowance during
the first quarter of 1997.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- 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 first quarters of 1997 and 1996 are set forth below (in
thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31
---------------------
1997 1996
---- ----
PRIMARY NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,228
Common equivalent shares -- incentive stock options -- 26
------- -------
Weighted average common and common equivalent shares 4,263 4,254
======= =======
Net income/(loss) $ (250) $ 357
Preferred stock dividends (9) (10)
Allocated portion of excess of redemption value over par value of
preferred stock to be redeemed during fiscal year (11) (11)
------- -------
Primary net income/(loss) attributable to common stockholders $ (270) $ 336
======= =======
Primary net income/(loss) per common share $ (0.06) $ 0.08
======= =======
FULLY DILUTED NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,228
Pro forma conversion of 14% junior subordinated convertible notes 440 440
Common equivalent shares-- incentive stock options -- 26
------- -------
Weighted average common and common equivalent shares 4,703 4,694
======= =======
Net income/(loss) $ (250) $ 357
Preferred stock dividends (9) (10)
Allocated portion of excess of redemption value over par value of
preferred stock to be redeemed during fiscal year (11) (11)
Pro forma elimination of interest expense on the 14% junior
subordinated convertible notes, net of applicable income taxes 26 27
------- -------
Fully diluted net income/(loss) attributable to common
stockholders $ (244) $ 363
======= =======
Fully diluted net income/(loss) per common share $ (0.06)(1) $ 0.08
======= =======
<FN>
(1) Because the fully diluted net loss per share for the first
quarter of 1997 was calculated to be antidilutive, the reported
fully diluted net loss per share equals the primary net loss
per share.
In February 1997, the Financial Accounting Standards Board issued
"Financial Accounting Standard No. 128, Earnings per Share" ("FAS 128"), which
is effective for fiscal periods ending after December 15, 1997. Earlier
application is not permitted. FAS 128 requires the presentation of basic and
diluted earnings per share. Basic earnings per share is based on the
weighted-average number of common shares outstanding
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
during each period, and diluted earnings per share includes the dilutive effect
of stock options, convertible securities, and other potentially dilutive
securities. Upon adoption, FAS 128 requires the Company to restate all
previously reported earnings per share amounts. The calculation of earnings per
share data according to the provisions of FAS 128 is not expected to have any
impact on earnings per share data presented herein for the quarters ended March
31, 1997, and March 31, 1996. The impact of FAS 128 on the calculation of
primary and fully diluted earnings per share for all quarters in 1997 is not
expected to be material.
NOTE 7 -- 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, including actions naming the Company as 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. The Company records provisions for such loss contingencies when it is
probable that an asset has been impaired or a liability incurred and the amount
of the loss can be reasonably estimated. 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.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued "Statement of Position
No. 96-1, Environmental Remediation Liabilities" ("SOP 96-1"), which clarifies
the existing authoritative guidance on loss contingencies that apply in
determining environmental liabilities. Adoption of SOP 96-1 during the first
quarter of 1997 by the Company was not material to the Company's results of
operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Various statements in this Item 2 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, labor
interruptions at the Company or at its customers, 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 operated with lower financial leverage and
greater 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.
RESULTS OF OPERATIONS -- FIRST QUARTER OF 1997 VERSUS FIRST QUARTER OF 1996
The Company manufactures, to customer specifications, component parts
through two business segments, the Rubber Group and the Metals Group.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components.
The Rubber Group consists of four operating companies: Lexington Connector
Seals, Lexington Insulators, Lexington Medical, and Lexington Technologies.
During the first quarters of 1997 and 1996, net sales of automotive components
represented 91.2% and 88.9%, respectively, of the Rubber Group's total net
sales. Any material reduction in the level of activity in the automotive
industry may have a material adverse effect on the results of operations of the
Rubber Group and the Company.
During the first quarter of 1997, the Company and the largest customer
of Lexington Connector Seals and of the Company, Delphi Packard Electric
Systems, a division of General Motors Corporation ("Delphi Packard Electric"),
entered into an agreement that will govern, through 2001, the purchase of
substantially all of the component parts that the Company currently sells to
Delphi Packard Electric. Under the terms of the agreement, (i) the Company
agreed to sell and Delphi Packard Electric agreed to purchase approximately 100%
of Delphi Packard Electric's requirements for all specified component parts,
(ii) the Company agreed to warrant that the specified components will remain
competitive in terms of technology, design, and quality, (iii) the Company and
Delphi Packard Electric agreed to adjust selling prices of the specified
components to reflect increases or decreases in material costs, and (iv) the
Company agreed to reduce the selling prices of the specified components by
certain specified amounts in each of the five years covered by the agreement.
Although there can be no assurance given, the Company currently believes that it
will be able to offset a significant portion of the price reductions granted to
Delphi Packard Electric through reductions in manufacturing costs.
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The following table sets forth the operating results of the Rubber Group
for the first quarters of 1997 and 1996 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
----------------------------------------
1997 1996
----------------- ----------------
Net sales $ 19,483 100.0% $ 18,151 100.0%
Cost of sales 15,401 79.0 14,272 78.6
--------- ---- -------- ----
Gross profit 4,082 21.0 3,879 21.4
Selling and administrative expenses 1,220 6.3 1,056 5.8
--------- ---- -------- ----
Income from operations $ 2,862 14.7% $ 2,823 15.6%
========= ==== ======== ====
During the first quarter of 1997, net sales of the Rubber Group totaled
$19,483,000, an increase of $1,332,000, or 7.3%, compared to the first quarter
of 1996. This increase was primarily due to increased unit sales of connector
seals and insulators for automotive wiring systems, offset, in part, by reduced
sales of tooling and medical components and price reductions granted to Delphi
Packard Electric.
During the first quarter of 1997, income from operations totaled
$2,862,000, an increase of $39,000, or 1.4%, compared to the first quarter of
1996.
Cost of sales as a percentage of net sales increased at a faster rate
than net sales during the first quarter of 1997 primarily because of
(i) increased indirect labor expense resulting primarily from (a) the hiring of
technical and supervisory personnel as Lexington Connector Seals prepared for
production of a new style of seal and (b) start-up expenses incurred at
Lexington Technologies, (ii) increased employee fringe benefit costs, and
(iii) increased depreciation and amortization, which totaled $1,396,000 during
the first quarter of 1997, compared to $1,131,000 during the first quarter of
1996. These increases were offset, in part, by reduced material costs expressed
as a percentage of net sales resulting primarily from reduced sales of tooling.
Selling and administrative expenses as a percentage of net sales increased
during the first quarter of 1997 compared to the first quarter of 1996 primarily
because of the addition of personnel and increases in compensation rates.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die castings
and machines aluminum, brass, and steel components. The Metals Group consists of
three operating companies: Lexington Die Casting, Lexington Machining, and
Lexington Safety Components. During the first quarters of 1997 and 1996, net
sales of automotive components represented 39.9% and 31.3%, respectively, of the
Metals Group's total net sales.
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The following table sets forth the operating results of the Metals Group
for the first quarters of 1997 and 1996 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
1997 1996
------------------ -----------------
Net sales $ 9,109 100.0% $ 9,747 100.0%
Cost of sales 8,414 92.4 8,470 86.9
-------- ----- -------- -----
Gross profit 695 7.6 1,277 13.1
Selling and administrative expenses 1,100 12.1 991 10.2
-------- ----- -------- -----
Income/(loss) from operations $ (405) (4.5)% $ 286 2.9%
======== ===== ======== =====
During the first quarter of 1997, net sales of the Metals Group totaled
$9,109,000, a decrease of $638,000, or 6.5%, compared to the first quarter of
1996. This reduction resulted primarily from lower net sales of components for
computers and business machines at Lexington Die Casting and lower net sales of
a variety of components at Lexington Machining, offset, in part, by an increase
in net sales of airbag components at Lexington Safety Components.
During the first quarter of 1997, the Metals Group incurred a loss from
operations of $405,000, compared to income from operations of $286,000 during
the first quarter of 1996.
While material and direct labor costs as a percentage of net sales
decreased during the first quarter of 1997, manufacturing overhead as a
percentage of net sales increased primarily because of (i) reduced sales and an
underabsorption of fixed overhead at Lexington Die Casting and Lexington
Machining, (ii) start-up expenses related to the production of new airbag
components and the installation of new metal machining equipment at Lexington
Safety Components, (iii) increased depreciation, which totaled $708,000 during
the first quarter of 1997, compared to $580,000 during the first quarter of
1996, and (iv) increased indirect labor costs resulting, in part, from the
hiring of additional technical and professional staff. Increased selling and
administrative expenses resulted primarily from the addition of personnel.
The Company commenced, during 1996, a program to try to increase net
sales, profitability, and operating cash flow of the Metals Group. Actions taken
included (i) hiring of new technical and professional staff with the goal of
improving the Metals Group's manufacturing processes, quality systems, and
administrative capabilities, (ii) formation of Lexington Safety Components as a
separate business unit with its own management team, (iii) elimination of sales
representatives and hiring of in-house sales engineers, (iv) addition of
equipment and construction of 44,000 square feet of manufacturing and office
space at Lexington Safety Components, (v) reduction of low-volume, unprofitable
production, (vi) focus on higher-volume business in target markets, and
(vii) enhancement of quality systems with the objective of obtaining QS 9000
registration status in 1997. The management of the Company believes that certain
of these actions may adversely affect the short-term profitability of the
Company.
CORPORATE OFFICE
Corporate office expenses, which are consolidated with selling and
administrative expenses of the Rubber Group and the Metals Group in the
Company's consolidated financial statements, totaled $557,000 and $617,000
during the first quarters of 1997 and 1996, respectively. During the first
quarter of 1997, corporate office expenses decreased primarily because of
reduced accruals for incentive compensation.
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15
INTEREST EXPENSE
During the first quarters of 1997 and 1996, interest expense totaled
$2,150,000 and $1,954,000, respectively. The increase during the first quarter
of 1997 was caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At March 31, 1997, and December 31, 1996, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in the components of the
deferred tax assets, deferred tax liabilities, or the valuation allowance during
the first quarter of 1997.
The income tax provision recorded during the first quarter of 1996 was
primarily attributable to state income taxes and alternative minimum taxes and
was calculated using the then-projected effective tax rate for the year ending
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 1997, the operating activities of the
Company used $1,458,000 of cash.
During the first quarter of 1997, accounts payable and accrued expenses
were reduced by $3,566,000 and $2,246,000, respectively. At March 31, 1997, the
Company's accounts payable included approximately $3,268,000 relating to the
purchase of new property, equipment, and customer-owned tooling, compared to
$4,305,000 relating to such activities at December 31, 1996. After excluding
accounts payable balances related to the purchase of new property, equipment,
and customer-owned tooling, accounts payable decreased by $2,529,000. Accrued
expenses were reduced primarily by payment of accrued incentive bonus awards
earned during 1996, payment of an accrued profit sharing contribution to the
Company's retirement and savings plan for the 1996 plan year, and payment of
accrued interest on the Company's 12.75% senior subordinated notes. At March 31,
1997, accounts payable were at a level that the Company believes is customary in
the industries in which it operates.
During the first quarter of 1997, accounts receivable declined by
$2,345,000 primarily because in January the Company received a payment of
$1,612,000 that was due in December 1996 from its largest customer.
-14-
16
INVESTING ACTIVITIES
During the first quarter of 1997, the investing activities of the
Company used $4,670,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$1,573,000 and $3,225,000, respectively. The Company presently expects that
capital expenditures will total approximately $14,500,000 during 1997, including
$12,500,000 for equipment and $2,000,000 for buildings. At March 31, 1997, the
Company had commitments outstanding for capital expenditures totaling
approximately $2,500,000.
FINANCING ACTIVITIES
During the first quarter of 1997, the financing activities of the
Company provided $6,027,000 of cash.
During the first quarter of 1997, the Company obtained new term loans in
the aggregate amount of $31,369,000. Proceeds from the new term loans refinanced
$21,350,000 of existing term loans, $9,397,000 of loans outstanding under the
revolving line of credit, and $622,000 of capital expenditures. Certain
information concerning the new term loans is set forth below.
- In January 1997, the Company borrowed $1,600,000 collateralized by a
mortgage on the Company's facility in LaGrange, Georgia, and by other
assets of the Company. Proceeds from the new term loan refinanced an
existing term loan in the amount of $1,071,000 and $529,000 of loans
outstanding under the Company's revolving line of credit. The new term
loan bears interest at the fixed rate of 9.37% and is repayable in 59
equal monthly principal installments of $9,000 with a final payment of
$1,076,000 due in 2002.
- In the first quarter of 1997, the Company borrowed $1,862,000 under a
$3,000,000 construction line of credit for an addition to its Casa
Grande, Arizona, facility. Proceeds from the construction loans
refinanced an existing term loan in the amount of $322,000, $918,000
of loans outstanding under the Company's revolving line of credit, and
$622,000 of capital expenditures. At the completion of construction,
the borrowings under the construction line of credit will convert to a
term loan payable in 59 equal monthly principal installments of
$17,000 with a final payment of $2,017,000 due in 2002. The loans
currently bear interest at prime rate plus 0.75%.
- In March 1997, the Company amended certain of its financing agreements
to, among other things, extend the expiration date of the Company's
revolving line of credit from January 2, 1998, to April 1, 2000, and
obtain term loans in the aggregate amount of $27,907,000 to refinance
$19,957,000 of existing term loans and $7,950,000 of loans outstanding
under the revolving line of credit. The new term loans bear interest
at prime rate plus 0.25% or LIBOR plus 2.75%. New term loans in the
amount of $25,289,000 are payable in 84 monthly principal installments
of $301,000, and new term loans in the amount of $2,618,000 are
payable in 60 monthly principal installments of $44,000. The Company
obtained two equipment lines of credit in the aggregate amount of
$6,882,000, which will be used to fund new equipment purchases.
During the first quarter of 1997, borrowings under the revolving line of
credit decreased by $2,295,000.
In April 1997, the Company borrowed $1,900,000 secured by certain
equipment and other assets of the Company. Proceeds from the new term loan
refinanced an existing term loan in the amount of $1,440,000 and loans
outstanding under the Company's revolving line of credit in the amount of
$460,000. The new term
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loan bears interest at prime rate plus 0.25% or LIBOR plus 2.75% and is payable
in 84 monthly principal installments of $23,000.
LIQUIDITY
The Company finances its operations with cash from operating activities
and a variety of financing arrangements, including loans under a revolving line
of credit and term loans. The ability of the Company to borrow under its
revolving line of credit is subject to certain availability formulas based on
the levels of accounts receivable and inventories of the Company and covenant
compliance.
The Company operates with high financial leverage and limited liquidity.
As a result of increased borrowings during the first quarter of 1997, aggregate
indebtedness of the Company, excluding accounts payable, increased by $6,293,000
to $83,992,000. During 1997, cash interest and principal payments are projected
to total approximately $8,600,000 and $5,200,000, respectively.
At May 9, 1997, availability under the Company's revolving line of
credit totaled $2,129,000 before deducting outstanding checks of approximately
$1,608,000.
The Company had a net working capital deficit of $5,292,000 at March 31,
1997. Except for certain loans that were refinanced under long-term agreements
before the consolidated financial statements for the quarter ended March 31,
1997, were issued, loans outstanding under the revolving line of credit
classified as short-term debt at March 31, 1997, totaled $11,427,000. The
working capital deficit resulted, in part, from the classification of loans
outstanding under the Company's revolving line of credit as current liabilities.
These loans are classified as current liabilities 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
agreement, and the lender has the ability to modify certain terms of the
revolving line of credit without the prior approval of the Company. The
expiration date of the revolving line of credit is April 1, 2000.
Based on the Company's current business plan, the Company anticipates
that, in addition to its projected cash flows from operations, new borrowings in
the amount of approximately $4,200,000 will be required to meet the Company's
working capital, capital expenditure, and debt service requirements during the
remainder of 1997. Peak borrowings of approximately $87,500,000 are projected to
occur during July 1997. Although no assurance can be given, the Company believes
that, based on its current business plan, cash flow from operations and
borrowings available to the Company under its various financing agreements will
enable the Company to meet presently anticipated working capital, capital
expenditure, and debt service requirements during the remainder of 1997 and for
the first quarter of 1998. If actual operating profits are materially less than
those currently projected, or if working capital requirements are materially
higher than those currently projected, the Company may be forced to delay
certain planned capital expenditures, to take further actions to reduce
operating expenses, and to extend payments to its trade creditors beyond terms
that the Company believes are customary in the industries in which it operates.
Certain of the Company's financing arrangements, which are secured by
substantially all of the Company's assets and the stock of its subsidiary,
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 the incurrence 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 is seeking to acquire assets and businesses related to its
current operations with the intention of expanding its existing operations.
Depending on the size, terms and other aspects of such acquisitions, the Company
may be required to obtain additional financing and, in some cases, the consents
of its existing lenders. 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; 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 will not have a
material adverse effect upon its financial position.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued "Statement of Position
No. 96-1, Environmental Remediation Liabilities" ("SOP 96-1"), which clarifies
the existing authoritative guidance on loss contingencies that apply in
determining environmental liabilities. Adoption of SOP 96-1 during the first
quarter of 1997 by the Company was not material to the Company's results of
operations.
FINANCIAL ACCOUNTING STANDARD NO. 128, EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
"Financial Accounting Standard No. 128, Earnings per Share" ("FAS 128"), which
is effective for fiscal periods ending after December 15, 1997. Earlier
application is not permitted. FAS 128 requires the presentation of basic and
diluted earnings per share. Basic earnings per share is based on the
weighted-average number of common shares outstanding during each period, and
diluted earnings per share includes the dilutive effect of stock options,
convertible securities, and other potentially dilutive securities. Upon
adoption, FAS 128 requires the Company to restate all previously reported
earnings per share amounts. The calculation of earnings per share data according
to the provisions of FAS 128 is not expected to have any impact on earnings per
share data presented herein for the quarters ended March 31, 1997, and March 31,
1996. The impact of FAS 128 on the calculation of primary and fully diluted
earnings per share for all quarters in 1997 is not expected to be material.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Amendment to Financing Agreements and Consent dated April
17, 1997, between Lexington Precision Corporation and
Congress Financial Corporation
10-2 Amendment to Financing Agreements and Consent dated April
17, 1997, between Lexington Components, Inc. and Congress
Financial Corporation
10-3 First Amendment Agreement dated April 17, 1997, between and
among Lexington Precision Corporation, Lexington Components,
Inc., and Bank One, Akron, NA
10-4 Amended and Restated Promissory Note dated April 17, 1997,
of Lexington Precision Corporation and Lexington Components,
Inc. to Bank One, Akron, NA
27-1 Financial Data Schedule
(b) REPORTS OF FORM 8-K
On March 12, 1997, the Company filed a Form 8-K with the
Securities and Exchange Commission stating that, on March 11,
1997, the Company had amended its credit facility with Congress
Financial Corporation to, among other things, increase the
aggregate facility from $40,000,000 to $50,000,000, reduce the
rate of interest payable under the facility from prime rate plus
1% or LIBOR plus 3.25% to prime rate plus 0.25% or LIBOR plus
2.75%, and extend the maturity date of the Company's revolving
line of credit from January 2, 1998, to April 1, 2000.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 12, 1997 By: /s/ Michael A. Lubin
- ------------ --------------------------
Date Michael A. Lubin
Chairman of the Board
May 12, 1997 By: /s/ Warren Delano
- ------------ -----------------------
Date Warren Delano
President
May 12, 1997 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 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated April 17, 1997, between Lexington
Precision Corporation and Congress
Financial Corporation
10-2 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated April 17, 1997, between Lexington
Components, Inc. and Congress Financial
Corporation
10-3 First Amendment Agreement dated April 17, Filed with this Form 10-Q
1997, between and among Lexington Precision
Corporation and Lexington Components, Inc.
and Bank One, Akron, NA
10-4 Amended and Restated Promissory Note Filed with this Form 10-Q
dated April 17, 1997, of Lexington
Precision Corporation and Lexington
Components, Inc. to Bank One, Akron, NA
27-1 Financial Data Schedule Filed with this Form 10-Q