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 PERIOD ENDED SEPTEMBER 30, 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 NOVEMBER 7, 1997
(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
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.......................................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,
1997 1996
--------------- ---------------
ASSETS:
Current assets:
Cash $ 171 $ 187
Trade receivables 15,120 16,820
Inventories 8,871 8,899
Prepaid expenses and other assets 3,344 3,211
Deferred income taxes 1,675 1,728
--------- --------
Total current assets 29,181 30,845
--------- --------
Plant and equipment:
Land 1,533 1,533
Buildings 23,030 19,915
Equipment 75,143 68,232
--------- --------
99,706 89,680
Accumulated depreciation (41,864) (36,380)
--------- --------
Plant and equipment, net 57,842 53,300
--------- --------
Excess of cost over net assets of businesses acquired, net 9,173 9,410
--------- --------
Other assets, net 4,419 3,475
--------- --------
$ 100,615 $ 97,030
========= ========
See notes to consolidated financial statements. (continued on next page)
-2-
4
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 13,254 $ 14,334
Accrued expenses 7,666 8,282
Short-term debt 3,896 7,326
Current portion of long-term debt 6,002 5,225
--------- --------
Total current liabilities 30,818 35,167
--------- --------
Long-term debt, excluding current portion 74,153 65,148
--------- --------
Deferred income taxes and other long-term liabilities 1,475 1,307
--------- --------
Redeemable preferred stock, $100 par value,
at redemption value 930 930
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 12,367 12,395
Accumulated deficit (19,533) (18,322)
Cost of common stock in treasury, 85,915 shares (217) (217)
--------- --------
Total stockholders' deficit (6,296) (5,057)
--------- --------
$ 100,615 $ 97,030
========= ========
See notes to consolidated financial statements.
-3-
5
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 28,342 $ 29,287 $ 87,347 $ 85,266
Cost of sales 24,171 24,301 72,959 70,212
------- -------- ------- -------
Gross profit 4,171 4,986 14,388 15,054
Selling and administrative expenses 2,787 3,024 8,632 8,467
------- -------- ------- -------
Income from operations 1,384 1,962 5,756 6,587
Interest expense 2,275 2,177 6,704 6,240
------- -------- ------- -------
Income/(loss) before income taxes (891) (215) (948) 347
Provision for income taxes 120 113 263 373
------- -------- ------- -------
Net loss (1,011) (328) (1,211) (26)
Preferred stock dividends 9 11 28 31
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year 11 11 34 34
------- -------- ------- -------
Net loss attributable to common stockholders $ (1,031) $ (350) $ (1,273) $ (91)
======= ======== ======= =======
Net loss per common share:
Primary $ (0.24) $ (0.08) $ (0.30) $ (0.02)
======= ======== ======= =======
Fully diluted $ (0.24) $ (0.08) $ (0.30) $ (0.02)
======= ======== ======= =======
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
---------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net loss $ (1,211) $ (26)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 6,243 5,119
Amortization included in operating expense 983 799
Amortization included in interest expense 112 220
Deferred income taxes 211 188
Changes in operating assets and liabilities that provided/(used) cash:
Trade receivables 1,700 (2,026)
Inventories 28 (632)
Prepaid expenses and other assets (133) (1,687)
Trade accounts payable (1,080) 1,743
Accrued expenses (616) 747
Other 379 57
--------- ---------
Net cash provided by operating activities 6,616 4,502
--------- ---------
INVESTING ACTIVITIES:
Purchases of plant and equipment (11,802) (12,442)
Increase in equipment deposits (187) (380)
Proceeds from sales of equipment 63 195
Expenditures for tooling owned by customers (669) (397)
--------- ---------
Net cash used by investing activities (12,595) (13,024)
--------- ---------
FINANCING ACTIVITIES:
Net increase/(decrease) in short-term debt (3,430) 4,406
Proceeds from issuance of long-term debt 43,492 12,346
Repayment of long-term debt (33,713) (7,974)
Other (386) (319)
--------- ---------
Net cash provided by financing activities 5,963 8,459
--------- ---------
Net decrease in cash (16) (63)
Cash at beginning of period 187 118
--------- ---------
Cash at end of period $ 171 $ 55
========= =========
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 and its subsidiaries (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
included in the Company's annual consolidated financial statements. 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.
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, 1997, the Company's
results of operations for the three-month and nine-month periods
ended September 30, 1997 and 1996, and the Company's cash flow for the
nine-month periods ended September 30, 1997 and 1996. All such adjustments
were of a normal recurring nature.
The results of operations for the third 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 at September 30, 1997, and December 31, 1996, are set forth
below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------- --------------
Finished goods $ 3,305 $ 3,615
Work in process 2,374 2,360
Raw materials and purchased parts 3,192 2,924
------ ------
$ 8,871 $ 8,899
====== ======
NOTE 3 -- ACCRUED EXPENSES
At September 30, 1997, and December 31, 1996, accrued expenses included
accrued interest expense of $795,000 and $1,754,000, respectively.
NOTE 4 -- DEBT
At September 30, 1997, and December 31, 1996, short-term debt consisted
of loans outstanding under the Company's revolving line of credit. At September
30, 1997, and December 31, 1996, $7,500,000 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. At
September 30, 1997, loans outstanding under the revolving line of credit accrued
interest at prime rate plus 0.25% and the London Interbank Offered Rate
("LIBOR") plus 2.75%.
-6-
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term debt at September 30, 1997, and December 31, 1996, is set forth
below (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
Long-term secured debt:
Revolving line of credit, prime rate plus 1% and LIBOR plus 3.25% $ - $ 6,856(1)
Term loan payable in equal monthly principal installments, final
maturity in 2000, 75% of prime rate - 398(1)
Term loans payable in equal monthly principal installments, final
maturities in 2000, LIBOR plus 3.0% - 4,369
Term loan payable in increasing monthly principal installments, final
maturity in 2000, 12% 1,720 2,136
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.37% 3,214 3,389
Term loan payable in equal monthly principal installments, final
maturity in 2001, prime rate plus 0.25% and LIBOR plus 2.75% at September
30, 1997, prime rate plus 0.75% and LIBOR plus 3.00% at
December 31, 1996 1,809 1,560
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 3,517 -
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,538 -
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,983 -
Term loans payable in equal monthly principal installments, final
maturities in 2002 and 2003, prime rate plus 1% and LIBOR plus
3.25% - 17,626(1)
Term loan, interest only until the earlier of March 1, 1998, or the first
day of the second month following the date on which the loan amount
outstanding equals $950,000, then payable in 60 equal monthly
installments, final maturity in 2003, prime rate plus 0.75% 468 -
Term loans payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% at September
30, 1997, prime rate plus 1% and LIBOR plus 3.25% at
December 31, 1996 643(2) 734(2)
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 23,483(2) -
------- --------
Total long-term secured debt 39,375 37,068
------- --------
(continued on next page)
-7-
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- ---------------
Long-term unsecured debt:
Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ 7,500(1) $ -
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 213 241
------- --------
Total long-term unsecured debt 40,780 33,305
------- --------
Total long-term debt 80,155 70,373
Less current portion 6,002 5,225
------- --------
Total long-term debt, excluding current portion $ 74,153 $ 65,148
======= ========
(1) Refinanced under long-term agreements before the consolidated financial
statements for the respective periods were issued. Amounts classified as
secured or unsecured and amounts reflected in current portion are based
upon the terms of the new borrowings.
(2) 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 Company's revolving line of credit and
the secured term loans listed above are collateralized by substantially all of
the assets of the Company, including trade receivables, inventories, equipment,
certain real estate, and the stock of one of the Company's subsidiaries.
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 September 30, 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
net deferred taxes during the first nine months of 1997.
The income tax provisions recorded during the three-month and nine-month
periods ended September 30, 1997, were primarily attributable to alternative
minimum taxes and to the reversal of a portion of a credit resulting from the
recognition in 1996 of the projected utilization of federal operating loss
carryforwards in 1997.
-8-
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- NET INCOME OR NET LOSS PER COMMON SHARE
The calculations of primary and fully diluted net loss per common share
for the three months ended September 30, 1997 and 1996, and the nine months
ended September 30, 1997 and 1996, are set forth below (in thousands, except per
share amounts). Because the pro forma conversion of the Company's 14% junior
subordinated convertible notes was calculated to be antidilutive for each of the
periods shown, the reported fully diluted net loss per common share for all
periods equals the primary net loss per common share.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
PRIMARY NET LOSS PER COMMON SHARE:
Weighted average common shares 4,263 4,263 4,263 4,245
======= ====== ======= ======
Net loss $ (1,011) $ (328) $ (1,211) $ (26)
Preferred stock dividends (9) (11) (28) (31)
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year (11) (11) (34) (34)
------- ------ ------- ------
Primary net loss attributable to common stockholders $ (1,031) $ (350) $ (1,273) $ (91)
======= ====== ======= ======
Primary net loss per common share $ (0.24) $ (0.08) $ (0.30) $ (0.02)
======= ====== ======= ======
FULLY DILUTED NET LOSS PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,263 4,263 4,263
Pro forma conversion of 14% junior subordinated convertible
notes 440 440 440 440
------- ------ ------- ------
Weighted average common and common equivalent shares 4,703 4,703 4,703 4,703
======= ====== ======= ======
Net loss $ (1,011) $ (328) $ (1,211) $ (26)
Preferred stock dividends (9) (11) (28) (31)
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year (11) (11) (34) (34)
Pro forma elimination of interest expense on the 14% junior
subordinated convertible notes, net of applicable income
taxes 26 27 78 81
------- ------ ------- ------
Fully diluted net loss attributable to common stockholders $ (1,005) $ (323) $ (1,195) $ (10)
======= ====== ======= ======
Fully diluted net loss per common share $ (0.24) $ (0.08) $ (0.30) $ (0.02)
======= ====== ======= ======
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,
-9-
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1997. Earlier application is not permitted. FAS 128 will require 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. FAS
128 will require companies to report all earnings per share amounts using the
revised method of calculation. The Company believes that the adoption of FAS 128
will not affect the earnings per share data reported by the Company during 1996
and 1997.
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 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 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 litigation, in
the event such litigation were commenced, based upon the information currently
available to the Company, the Company currently believes that the outcome of
such actions would not have a material adverse effect upon its financial
position.
NOTE 8 -- SUBSEQUENT EVENT
On October 29, 1997, the Company entered into a term loan financing
pursuant to which it issued $7,500,000 principal amount of its 10.5% senior
unsecured notes to an institutional investor. The notes mature in their entirety
on February 1, 2000. Proceeds from the financing were used to refinance loans
outstanding under the Company's secured revolving line of credit.
-10-
12
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 price reductions for the
Company's products as a result of competition, unanticipated operating results
and cash flows, increases or decreases in capital expenditures, changes in
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 -- THIRD QUARTER OF 1997 VERSUS THIRD 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 third quarters of 1997 and 1996, net sales of automotive components
represented 89.8% and 87.9%, 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.
The following table sets forth the operating results of the Rubber Group
for the third quarters of 1997 and 1996 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
1997 1996
----------------- ----------------
Net sales $ 18,885 100.0% $ 18,844 100.0%
Cost of sales 15,461 81.9 15,115 80.2
-------- ------ ------- ------
Gross profit 3,424 18.1 3,729 19.8
Selling and administrative expenses 1,305 6.9 1,225 6.5
-------- ------ ------- ------
Income from operations $ 2,119 11.2% $ 2,504 13.3%
======== ====== ======= ======
During the third quarter of 1997, net sales of the Rubber Group
increased by $41,000, or less than 1%, compared to the third quarter of 1996.
While net sales of insulators for automotive wiring systems and net sales of
tooling increased, net sales of connector seals for automotive wiring systems
and medical components decreased. The small increase in net sales also reflected
the effect of price reductions on certain automotive components.
-11-
13
During the third quarter of 1997, income from operations decreased by
$385,000, or 15.4%, compared to the third quarter of 1996. Cost of sales as a
percentage of net sales increased to 81.9% during the third quarter of 1997. The
increase in cost of sales as a percentage of net sales resulted, in part, from
(i) increased depreciation and amortization, which totaled $1,875,000, or 9.9%
of net sales, during the third quarter of 1997, compared to $1,488,000, or 7.9%
of net sales, during the third quarter of 1996, (ii) underabsorption of fixed
overhead caused by reduced net sales at Lexington Connector Seals, (iii)
increased indirect labor expense resulting primarily from continuing start-up
expenses incurred at Lexington Technologies, and (iv) increased sales of
tooling, which generally have lower margins than sales of components. Selling
and administrative expenses as a percentage of net sales increased during the
third quarter of 1997 compared to the third quarter of 1996 primarily because of
costs incurred in connection with the installation of new information systems at
Lexington Insulators.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die castings
and machines aluminum, brass, steel, and stainless steel components. The Metals
Group consists of three operating companies: Lexington Die Casting, Lexington
Machining, and Lexington Safety Components. During the third quarters of 1997
and 1996, net sales of automotive components represented 41.8% and 41.5%,
respectively, of the Metals Group's total net sales.
The following table sets forth the operating results of the Metals Group
for the third quarters of 1997 and 1996 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------
1997 1996
----------------- ----------------
Net sales $ 9,457 100.0% $ 10,443 100.0%
Cost of sales 8,710 92.1 9,186 88.0
-------- ------ ------- ------
Gross profit 747 7.9 1,257 12.0
Selling and administrative expenses 941 10.0 1,317 12.6
-------- ------ ------- ------
Loss from operations $ (194) (2.1)% $ (60) (0.6)%
======== ====== ======= ======
During the third quarter of 1997, net sales of the Metals Group
decreased by $986,000, or 9.4%, compared to the third quarter of 1996. This
reduction resulted primarily from lower net sales of a variety of components at
Lexington Machining.
During the third quarter of 1997, the Metals Group incurred a loss from
operations of $194,000, compared to a loss of $60,000 during the third quarter
of 1996. While material costs as a percentage of net sales decreased during the
third quarter of 1997, manufacturing overhead as a percentage of net sales
increased primarily because of (i) underabsorption of fixed overhead caused by
reduced net sales at 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) the write-down of equipment held
for sale, and (iv) increased depreciation, which totaled $779,000, or 8.2% of
net sales, during the third quarter of 1997, compared to $629,000, or 6.0% of
net sales, during the third quarter of 1996. Reduced selling and administrative
expenses resulted primarily from a reduction in commissions paid to sales
representatives who were terminated during the last quarter of 1996 and the
first quarter of 1997.
During 1996, the Company commenced a program to try to increase net
sales, profitability, and operating cash flow of the Metals Group. Actions to be
taken included (i) hiring of new technical and
-12-
14
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 additional
in-house sales personnel, (iv) purchases of additional equipment and
construction of an additional 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 at a number of facilities with the objective of
obtaining QS 9000 certification in 1997. The management of the Company believes
that certain of these actions have had, and may continue to have, an adverse
affect on the profitability of the Company in the short term.
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 $541,000 and $482,000
during the third quarters of 1997 and 1996, respectively.
INTEREST EXPENSE
During the third quarters of 1997 and 1996, interest expense totaled
$2,275,000 and $2,177,000, respectively. The increase during the third quarter
of 1997 was caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At September 30, 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
net deferred taxes during the third quarter of 1997.
The income tax provision recorded during the three months ended
September 30, 1997, was primarily attributable to alternative minimum taxes and
to the reversal of a portion of a credit resulting from the recognition in 1996
of the projected utilization of federal operating loss carryforwards in 1997.
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF 1997 VERSUS FIRST NINE MONTHS OF
1996
RUBBER GROUP
During the first nine months of 1997 and 1996, net sales of automotive
components represented 90.4% and 88.4%, respectively, of the Rubber Group's
total net sales.
The following table sets forth the operating results of the Rubber Group
for the first nine months of 1997 and 1996 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------
1997 1996
----------------- ----------------
Net sales $ 59,674 100.0% $ 55,770 100.0%
Cost of sales 47,395 79.4 44,174 79.2
-------- ------ ------- ------
Gross profit 12,279 20.6 11,596 20.8
Selling and administrative expenses 3,749 6.3 3,531 6.3
-------- ------ ------- ------
Income from operations $ 8,530 14.3% $ 8,065 14.5%
======== ====== ======= ======
-13-
15
During the first nine months of 1997, net sales of the Rubber Group
increased by $3,904,000, or 7.0%, compared to the first nine months of 1996.
This increase was primarily due to increased net sales of connector seals and
insulators for automotive wiring systems and increased net sales of tooling,
offset, in part, by reduced net sales of medical components and price reductions
on certain automotive components.
During the first nine months of 1997, income from operations totaled
$8,530,000, an increase of $465,000, or 5.8%, compared to the first nine months
of 1996. Cost of sales as a percentage of net sales increased during the first
nine months of 1997 primarily because of (i) increased depreciation and
amortization, which totaled $5,244,000, or 8.8% of net sales, during the first
nine months of 1997, compared to $4,242,000, or 7.6% of net sales, during the
first nine months of 1996, and (ii) increased indirect labor expense resulting
primarily from (a) the hiring of technical and supervisory personnel in
conjunction with the start-up of production of a new style of connector seal and
(b) continuing start-up expenses incurred at Lexington Technologies. Selling and
administrative expenses as a percentage of net sales were unchanged during the
first nine months of 1997 compared to the first nine months of 1996.
METALS GROUP
During the first nine months of 1997 and 1996, net sales of automotive
components represented 40.4% and 34.0%, respectively, of the Metals Group's
total net sales.
The following table sets forth the operating results of the Metals Group
for the first nine months of 1997 and 1996 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------
1997 1996
----------------- ----------------
Net sales $ 27,673 100.0% $ 29,496 100.0%
Cost of sales 25,564 92.4 26,038 88.3
-------- ------ ------- ------
Gross profit 2,109 7.6 3,458 11.7
Selling and administrative expenses 3,251 11.7 3,315 11.2
-------- ------ ------- ------
Income/(loss) from operations $ (1,142) (4.1)% $ 143 0.5%
======== ====== ======= ======
During the first nine months of 1997, net sales of the Metals Group
decreased by $1,823,000, or 6.2%, compared to the first nine months of 1996.
This reduction resulted primarily from lower net sales of a variety of
components at Lexington Machining and Lexington Die Casting, offset, in part, by
an increase in net sales of airbag components by Lexington Safety Components.
During the first nine months of 1997, the Metals Group incurred a loss
from operations of $1,142,000, compared to income from operations of $143,000
during the first nine months of 1996. While material and direct labor costs as a
percentage of net sales decreased during the first nine months of 1997,
manufacturing overhead as a percentage of net sales increased primarily because
of (i) underabsorption of fixed overhead caused by reduced sales at Lexington
Machining and Lexington Die Casting, (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 $2,080,000, or 7.5% of net sales, during the first nine months of 1997,
compared to $1,816,000, or 6.2% of net sales, during the first nine months of
1996, and (iv) increased indirect labor costs resulting, in part, from the
hiring of additional technical and professional staff. Reduced selling and
administrative expenses resulted primarily from a reduction of commissions paid
to sales representatives who were terminated during the last quarter of 1996
-14-
16
and the first quarter of 1997, offset, in part, by increased personnel expense
and the accrual of certain litigation expenses.
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 $1,632,000 and $1,621,000
during the first nine months of 1997 and 1996, respectively.
INTEREST EXPENSE
During the first nine months of 1997 and 1996, interest expense totaled
$6,704,000 and $6,240,000, respectively. The increase during the first nine
months of 1997 was caused primarily by an increase in average borrowings
outstanding.
PROVISION FOR INCOME TAXES
At September 30, 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
net deferred taxes during the first nine months of 1997.
The income tax provision recorded during the first nine months of 1997
was primarily attributable to alternative minimum taxes and the reversal of a
portion of a credit resulting from the recognition in 1996 of the projected
utilization of federal operating loss carryforwards in 1997.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first nine months of 1997, the operating activities of the
Company provided $6,616,000 of cash.
From December 31, 1996, to September 30, 1997, trade receivables
decreased by $1,700,000 primarily because in January 1997 the Company received a
payment of $1,612,000 that was due in December 1996 from its largest customer.
From December 31, 1996, to September 30, 1997, trade accounts payable
decreased by $1,080,000. Trade accounts payable related to the purchase of
plant, equipment, and customer-owned tooling decreased by $2,600,000 while all
other trade accounts payable increased by $1,520,000.
INVESTING ACTIVITIES
During the first nine months of 1997, the investing activities of the
Company used $12,595,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$5,361,000 and $6,441,000, respectively. The Company presently expects that
capital expenditures will total approximately $16,200,000 during 1997, including
$12,500,000 for equipment and $3,700,000 for buildings. At September 30, 1997,
the Company had commitments outstanding for capital expenditures totaling
approximately $3,600,000.
-15-
17
FINANCING ACTIVITIES
During the first nine months of 1997, the financing activities of the
Company provided $5,963,000 of cash.
During the first nine months of 1997, the Company obtained new term
loans in the aggregate amount of $43,492,000. Proceeds from the new term loans
financed $2,473,000 of capital expenditures and refinanced $22,790,000 of
existing term loans and $18,229,000 of loans outstanding under the revolving
line of credit. Certain information concerning new borrowings completed during
the third quarter of 1997 is set forth below.
- In July 1997, the Company borrowed the remaining $457,000 available
under a $3,000,000 construction line of credit for its Casa Grande,
Arizona, facility. In August 1997, the borrowings under the
construction line of credit converted 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. At the time of conversion, the rate of
interest on the loan changed from prime rate plus 0.75% to a fixed
rate of 9%.
- In August 1997, the Company borrowed $1,117,000 under an equipment
line of credit to purchase equipment for its Casa Grande, Arizona,
facility. The borrowings financed capital expenditures of $713,000 and
refinanced amounts outstanding under the Company's revolving line of
credit totaling $404,000, which had been used to provide partial
interim financing for the purchase of the equipment pending completion
of the term loan financing. The new term loan bears interest at LIBOR
plus 2.75% and is payable in 60 equal monthly principal installments
of $19,000.
- In September 1997, the Company borrowed $468,000 under an equipment
line of credit to purchase equipment for its North Canton, Ohio,
facility. The borrowings refinanced amounts outstanding under the
Company's revolving line of credit totaling $468,000, which had been
used to provide interim financing for the purchase of the equipment
pending completion of the term loan financing. The new borrowings bear
interest at prime rate plus 0.75%. The first of 60 equal monthly
principal payments is scheduled to be made on the earlier of March 1,
1998, or the first day of the second month following the date on which
the remaining $482,000 of remaining availability is borrowed under the
equipment line of credit.
From December 31, 1996, to September 30, 1997, borrowings under the
Company's revolving line of credit decreased by $2,786,000 primarily because the
Company refinanced loans outstanding under the revolving line of credit with
funds obtained from new term loans. At September 30, 1997, and December 31,
1996, $7,500,000 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 period were issued.
On October 29, 1997, the Company entered into a term loan financing
pursuant to which it issued $7,500,000 principal amount of its 10.5% senior
unsecured notes to an institutional investor. The notes mature in their entirety
on February 1, 2000. Proceeds from the financing were used to refinance loans
outstanding under the Company's secured revolving line of credit.
LIQUIDITY
The Company finances its operations with cash from operating activities
and a variety of financing arrangements, including term loans and loans under
the Company's revolving line of credit. The ability of
-16-
18
the Company to borrow under its revolving line of credit is subject to, among
other things, covenant compliance and certain availability formulas based on the
levels of trade receivables and inventories of the Company.
The Company operates with substantial financial leverage and limited
liquidity. As a result of increased borrowings during the first nine months of
1997, aggregate indebtedness of the Company, excluding trade accounts payable,
increased by $6,352,000 to $84,051,000. During 1997, interest and principal
payments are projected to total approximately $8,700,000 and $5,600,000,
respectively.
The Company had a net working capital deficit of $1,637,000 at September
30, 1997. Loans outstanding under the revolving line of credit classified as
short-term debt at September 30, 1997, totaled $3,896,000. Although the
expiration date of the revolving line of credit is April 1, 2000, 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.
At November 10, 1997, availability under the Company's revolving line of
credit totaled $8,921,000 before deducting outstanding checks of approximately
$2,783,000. The Company currently has equipment lines of credit in the aggregate
amount of $6,247,000 that can be used to finance a portion of the cost of
certain types of future equipment purchases.
Although no assurance can be given, the Company currently believes that
cash flows from operations, borrowings available to the Company under existing
financing agreements, and additional borrowings that the Company believes it
will be able to obtain when required should be adequate to meet its projected
working capital and debt service requirements and fund capital expenditures
currently anticipated by the Company for the remainder of 1997 and for 1998. If
cash flows from operations or availability under existing or new financing
agreements fall below expectations, the Company may be forced to delay planned
capital expenditures, reduce operating expenses, and/or extend trade accounts
payable balances beyond terms that the Company believes are customary in the
industries in which it operates. Any such actions could have an adverse effect
upon the Company.
On February 1, 2000, $31,720,000 principal amount of the Company's
12.75% senior subordinated notes, $7,500,000 principal amount of its 10.5%
senior unsecured notes, and $1,347,000 principal amount of its 14% junior
unsecured notes mature. Although the Company currently believes that it has or
will have the ability to refinance these obligations on or before their due
date, there are many factors that will affect the Company's ability to satisfy
its payment obligations at maturity or to consummate a refinancing of such
obligations. Accordingly, there can be no assurance that the Company will be
successful in satisfying or refinancing such payment obligations.
Certain of the Company's financing arrangements, which are secured by
substantially all of the Company's assets and the stock of one of its
subsidiaries, 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.
-17-
19
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.
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 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 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 litigation, in
the event such litigation were commenced, based upon the information currently
available to the Company, the Company currently believes that the outcome of
such actions would 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 Company does not believe that the recalculation
of earnings per share data will have any impact on the reported earnings per
share data reported during 1996 or 1997.
-18-
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Promissory Note dated August 29, 1997, from Lexington
Precision Corporation to The CIT Group/Equipment Financing,
Inc.
10-2 Note Purchase Agreement dated October 27, 1997, between
Lexington Precision Corporation and Nomura Holding America,
Inc.
10-3 10.5% Senior Unsecured Note due February 1, 2000, from
Lexington Precision Corporation to Nomura Holding America,
Inc.
27-1 Financial Data Schedule
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third quarter of 1997.
-19-
21
LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 30, 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)
November 12, 1997 By: /s/ Michael A. Lubin
- ----------------- -------------------------
Date Michael A. Lubin
Chairman of the Board
November 12, 1997 By: /s/ Warren Delano
- ----------------- ------------------
Date Warren Delano
President
November 12, 1997 By: /s/ Dennis J. Welhouse
- ----------------- -------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-20-