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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 SEPTEMBER 30, 1998
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 9, 1998
(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......................................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
ASSETS:
Current assets:
Cash $ 209 $ 208
Accounts receivable 16,646 17,579
Inventories 9,649 9,031
Prepaid expenses and other assets 2,669 3,438
Deferred income taxes 1,572 1,572
---------- ----------
Total current assets 30,745 31,828
---------- ----------
Plant and equipment:
Land 1,540 1,533
Buildings 23,670 23,426
Equipment 88,698 78,922
---------- ----------
113,908 103,881
Accumulated depreciation (50,818) (44,451)
---------- ----------
Plant and equipment, net 63,090 59,430
---------- ----------
Excess of cost over net assets of businesses acquired, net 8,857 9,094
---------- ----------
Other assets, net 4,199 3,772
---------- ----------
$ 106,891 $ 104,124
========== ==========
See notes to consolidated financial statements. (continued on next page)
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 12,526 $ 12,628
Accrued expenses 8,444 8,495
Short-term debt 14,541 8,840
Current portion of long-term debt 6,071 6,040
---------- ----------
Total current liabilities 41,582 36,003
---------- ----------
Long-term debt, excluding current portion 71,849 72,622
---------- ----------
Deferred income taxes and other long-term liabilities 1,773 1,746
---------- ----------
Redeemable preferred stock, $100 par value, at redemption
value 840 840
Excess of redemption value over par value (420) (420)
---------- ----------
Redeemable preferred stock at par value 420 420
---------- ----------
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 12,288 12,313
Accumulated deficit (21,891) (19,850)
Cost of common stock in treasury, 85,915 shares (217) (217)
---------- ----------
Total stockholders' deficit (8,733) (6,667)
---------- ----------
$ 106,891 $ 104,124
========== ==========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 29,404 $ 28,342 $ 92,625 $ 87,347
Cost of sales 25,713 24,171 79,215 72,959
--------- -------- --------- --------
Gross profit 3,691 4,171 13,410 14,388
Selling and administrative expenses 2,466 2,787 8,132 8,632
--------- -------- --------- --------
Income from operations 1,225 1,384 5,278 5,756
Interest expense 2,469 2,275 7,319 6,704
--------- -------- --------- --------
Loss before income taxes (1,244) (891) (2,041) (948)
Provision for income taxes - 120 - 263
--------- -------- --------- --------
Net loss (1,244) (1,011) (2,041) (1,211)
Preferred stock dividends 8 9 25 28
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 $ (1,263) $ (1,031) $ (2,100) $ (1,273)
========= ======== ========= ========
Net loss per common share:
Basic $ (0.30) $ (0.24) $ (0.49) $ (0.30)
========= ======== ========= ========
Diluted $ (0.30) $ (0.24) $ (0.49) $ (0.30)
========= ======== ========= ========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net loss $ (2,041) $ (1,211)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation 7,333 6,243
Amortization included in operating expense 1,006 983
Amortization included in interest expense 148 112
Deferred income taxes - 211
Changes in operating assets and liabilities:
Accounts receivable 933 1,700
Inventories (618) 28
Prepaid expenses and other assets 351 (156)
Trade accounts payable (102) (1,080)
Accrued expenses (51) (616)
Other (95) 379
---------- ----------
Net cash provided by operating activities 6,864 6,593
---------- ----------
INVESTING ACTIVITIES:
Purchases of plant and equipment (11,738) (11,802)
Net decrease/(increase) in equipment deposits 106 (187)
Proceeds from sales of equipment, net 422 63
Expenditures for tooling owned by customers (1,231) (669)
Other 648 23
---------- ----------
Net cash used by investing activities (11,793) (12,572)
---------- ----------
FINANCING ACTIVITIES:
Net increase/(decrease) in short-term debt 5,701 (3,430)
Proceeds from issuance of long-term debt 3,741 43,492
Repayment of long-term debt (4,483) (33,713)
Other (29) (386)
---------- ----------
Net cash provided by financing activities 4,930 5,963
---------- ----------
Net decrease in cash 1 (16)
Cash at beginning of period 208 187
---------- ----------
Cash at end of period $ 209 $ 171
========== ==========
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 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, 1997.
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, 1998, the Company's results
of operations for the three-month and nine-month periods ended September 30,
1998 and 1997, and the Company's cash flows for the nine-month periods ended
September 30, 1998 and 1997. All such adjustments were of a normal recurring
nature.
The results of operations for the three-month and nine-month periods
ended September 30, 1998, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
Effective January 1, 1998, the Company adopted "Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS
130 established standards for the reporting and display of changes in
stockholders' equity during a period that are not included in reported net
income for such period, excluding changes resulting from transactions with
owners. During the first nine months of 1998, the Company did not have any items
of income or loss requiring disclosure under the provisions of FAS 130.
NOTE 2 -- INVENTORIES
Inventories at September 30, 1998, and December 31, 1997, are set forth
below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ----------------
Finished goods $ 3,674 $ 3,654
Work in process 2,772 1,658
Raw materials and purchased parts 3,203 3,719
--------- -------
$ 9,649 $ 9,031
========= =======
NOTE 3 -- ACCRUED EXPENSES
At September 30, 1998, and December 31, 1997, accrued expenses included
accrued interest expense of $963,000 and $1,964,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
At September 30, 1998, and December 31, 1997, short-term debt consisted
of loans outstanding under the Company's revolving line of credit. At
September 30, 1998, loans outstanding under the revolving line of credit
accrued interest at the prime rate plus 0.25% and the London Interbank Offered
Rate ("LIBOR") plus 2.75%.
Long-term debt at September 30, 1998, and December 31, 1997, is set
forth below (dollar amounts in thousands):
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
Long-term secured debt:
Term loan payable in increasing monthly principal installments, final
maturity in 2000, 12% $ - $ 1,573
Term loan, due 2000, 12% 1,370 -
Term loans payable in equal monthly principal installments based on a
180-month amortization schedule, final maturities in 2001, 8.37% 2,980 3,153
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9.37% 1,431 1,511
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9% 2,781 2,933
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 2,771 3,330
Term loans payable in equal monthly principal installments, final
maturities in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 523(1) 613(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% 818 468
Term loan payable in equal monthly principal installments, final
maturity in 2003, LIBOR plus 2.75% 1,468 -
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,538 1,742
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 19,869(1) 22,580(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate plus 0.25% and LIBOR plus 2.75% 1,639(1) -
--------- --------
Total long-term secured debt $ 37,188 $ 37,903
--------- --------
(continued on next page)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
Long-term unsecured debt:
10.5% senior note, due 2000 $ 7,500 $ 7,500
12.75% senior subordinated notes, due 2000 31,720 31,720
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 165 192
--------- --------
Total long-term unsecured debt 40,732 40,759
--------- --------
Total long-term debt 77,920 78,662
Less current portion 6,071 6,040
--------- --------
Total long-term debt, excluding current portion $ 71,849 $ 72,622
========= ========
(1) 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 accounts receivable, 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 impose limitations on the Company's ratio of debt to
equity. The covenants also 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. In addition, substantially all of the
Company's financing agreements include cross-default provisions.
NOTE 5 -- PROVISION FOR INCOME TAXES
At September 30, 1998, and December 31, 1997, the Company's net
deferred tax asset was offset by a valuation allowance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- NET LOSS PER COMMON SHARE
The calculations of basic and diluted net loss per common share for the
three-month and nine-month periods ended September 30, 1998 and 1997, are set
forth below (in thousands, except per share amounts). Because the pro forma
conversion of each of the Company's potentially dilutive securities (the 14%
junior subordinated convertible notes and the $8 cumulative convertible
redeemable preferred stock, series B) was antidilutive, such pro forma
conversion was not included in the calculation of diluted net loss per common
share set forth below.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
Net loss $ (1,244) $ (1,011) $ (2,041) $ (1,211)
Preferred stock dividends 8 9 25 28
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 (numerator) $ (1,263) $ (1,031) $ (2,100) $ (1,273)
========= ========= ======== ========
Weighted-average common shares (denominator) 4,263 4,263 4,263 4,263
========= ========= ======== ========
Basic and diluted net loss per common
Share $ (0.30) $ (0.24) $ (0.49) $ (0.30)
========= ========= ======== ========
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 believes that the outcome of such actions
will not have a material adverse effect upon its financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
OF OPERATIONS
OVERVIEW
Various statements in this Item 2 that are not historical facts are
"forward-looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Forward-looking statements usually can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "anticipates," "estimates," or the negative
thereof. They may include discussions of strategy, which involve risks and
uncertainties, and they typically are based upon projections and estimates, as
distinct from past or historical facts and events. Forward-looking statements
are subject to a number of risks, uncertainties, contingencies, and other
factors that could cause the actual results or performance of the Company to be
materially different from the future results or performance expressed in or
implied by such statements. Such risks and uncertainties for the Company 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, unforeseen product liability claims, changes
in economic conditions, changes in the competitive environment, changes in the
capital markets, labor interruptions at the Company or at its customers,
disruptions that may be caused by year 2000 software and/or hardware problems,
whether the Company will be able to obtain additional borrowings and/or to
refinance its existing indebtedness, 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. Consequently, the inclusion herein of
forward-looking statements should not be regarded as a representation that any
such projections or estimates will be realized, and actual results may vary
materially. There can be no assurance that any of the forward-looking statements
contained herein will prove to be accurate. All forward-looking statements,
projections, or estimates attributable to the Company are expressly qualified by
the foregoing cautionary statements.
RESULTS OF OPERATIONS -- THIRD QUARTER OF 1998 VERSUS THIRD QUARTER OF 1997
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.
During the third quarters of 1998 and 1997, automotive industry customers of the
Rubber Group represented 90.5% and 89.8%, respectively, of the Rubber Group's
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.
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The following table sets forth the operating results of the Rubber
Group for the third quarters of 1998 and 1997 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1998 1997
------------------ ------------------
Net sales $ 21,160 100.0% $ 18,885 100.0%
Cost of sales 17,358 82.0 15,461 81.9
--------- ------- --------- -------
Gross profit 3,802 18.0 3,424 18.1
Selling and administrative expenses 1,482 7.0 1,305 6.9
--------- ------- --------- -------
Income from operations $ 2,320 11.0% $ 2,119 11.2%
========= ======= ========= =======
During the third quarter of 1998, net sales of the Rubber Group
increased by $2,275,000, or 12.0%, compared to the third quarter of 1997. This
increase was primarily due to increased unit sales of insulators for automotive
wiring systems, offset, in part, by price reductions on certain components. In
addition, net sales during the third quarter of 1998 were adversely affected by
the strike that occurred at two General Motors parts plants and the resulting
shut down of General Motors assembly plants during June and July 1998.
During the third quarter of 1998, income from operations totaled
$2,320,000, an increase of $201,000, or 9.5%, compared to the third quarter of
1997. Although income from operations increased during the third quarter of 1998
compared to the third quarter of 1997, the Company estimates that the strike at
two General Motors parts plants and the resulting shut down of General Motors
assembly plants during June and July 1998 reduced the Rubber Group's income from
operations by approximately $450,000 during the third quarter of 1998. The
increase in cost of sales as a percentage of net sales, compared to the third
quarter of 1997, resulted primarily from increased wage and benefit costs and
increased repair and maintenance costs resulting, in part, from the
unanticipated repair or write-off of certain tooling. Selling and administrative
expenses as a percentage of net sales increased during the third quarter of
1998, compared to the third quarter of 1997, primarily because of the hiring of
additional personnel, and the opening, in September of 1997, of a sales office
in Germany.
During the third quarter of 1998, depreciation and amortization at the
Rubber Group totaled $1,873,000, or 8.9% of net sales, compared to $1,745,000,
or 9.2% of net sales, during the third quarter of 1997.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die
castings and machines aluminum, brass, and steel components. During the third
quarter of 1998 and 1997, net sales to automotive industry customers represented
68.9% and 41.8%, respectively, of the Metals Group's 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 Metals Group and the
Company.
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The following table sets forth the operating results of the Metals
Group for the third quarters of 1998 and 1997 (dollar amounts in thousands):
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1998 1997
------------------ ------------------
Net sales $ 8,244 100.0% $ 9,457 100.0%
Cost of sales 8,355 101.3 8,710 92.1
-------- ------- --------- -------
Gross profit/(loss) (111) (1.3) 747 7.9
Selling and administrative expenses 509 6.2 941 10.0
-------- ------- --------- -------
Loss from operations $ (620) (7.5)% $ (194) (2.1)%
======== ======= ========= =======
During the third quarter of 1998, net sales of the Metals Group
decreased by $1,213,000, or 12.8%, compared to the third quarter of 1997. This
reduction resulted from lower net sales of a variety of components at Lexington
Machining and Lexington Die Casting caused, in part, by the planned elimination
of certain customers who generated short-run production and by a slowdown in
sales of components to remaining customers of the Metals Group.
During the third quarter of 1998, the Metals Group incurred a loss from
operations of $620,000, compared to a loss from operations of $194,000 during
the third quarter of 1997. Cost of sales as a percentage of net sales increased
during the third quarter of 1998, primarily due to underabsorption of fixed
overhead caused by low sales levels. Despite lower sales, overhead expenses
during the third quarter of 1998 increased by $125,000 compared to the third
quarter of 1997, primarily because of increased depreciation and amortization
and costs related to the retention of experienced equipment operators during a
period of low sales. Selling and administrative expenses decreased during the
third quarter of 1998 compared to the third quarter of 1997, primarily because
of the settlement of certain litigation for less than had been previously
estimated by the Company and the elimination of commissions previously paid to
sales representatives who were terminated during the last quarter of 1996 and
the first quarter of 1997.
During the third quarter of 1998, depreciation and amortization at the
Metals Group totaled $1,055,000, or 12.8% of net sales, compared to $818,000, or
8.6% of net sales, during the third quarter of 1997.
During 1997 and 1998, the Company has been attempting to improve the
profitability and growth potential of the Metals Group by eliminating the
production of a large number of diverse, short-run components and by
repositioning productive capacity to manufacture higher-volume components in
target markets. The repositioning entails a shift to a new customer base and
requires that the Company's manufacturing facilities be structured and equipped
to run high-volume parts efficiently and accurately. The repositioning of the
Metals Group has caused the Company to experience underabsorption of fixed
overhead resulting from the cut-back in short-run business. The Metals Group has
incurred expenses for the implementation of improved quality systems, expenses
related to moving and reinstalling equipment, non-capitalized costs related to
building upgrades, costs related to establishing relationships with major new
customers, and costs resulting from inefficiencies experienced during the
rollout of new production parts. These factors and the fact that new high-volume
business is limited at this stage of the transition have adversely affected the
operating profit and cash flow of the Metals Group during 1997 and the first
three quarters of 1998, and are expected to continue to adversely affect the
Metals Group throughout the remainder of 1998 and the first quarter of 1999.
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CORPORATE OFFICE
During the third quarters of 1998 and 1997, 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 $475,000 and $541,000, respectively.
During the third quarter of 1998 and 1997, depreciation at the
corporate office totaled $16,000 and $5,000, respectively.
INTEREST EXPENSE
During the third quarters of 1998 and 1997, interest expense totaled
$2,469,000 and $2,275,000, respectively. The increase was caused primarily by an
increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At September 30, 1998, and December 31, 1997, the Company's net
deferred tax asset was offset by a valuation allowance. There was no change in
net deferred taxes during the third quarter of 1998.
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF 1998 VERSUS FIRST NINE MONTHS OF
1997
RUBBER GROUP
During the first nine months of 1998 and 1997, net sales to automotive
industry customers represented 90.7% and 90.4%, respectively, of the Rubber
Group's net sales.
The following table sets forth the operating results of the Rubber
Group for the first nine months of 1998 and 1997 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1998 1997
------------------ ------------------
Net sales $ 68,236 100.0% $ 59,674 100.0%
Cost of sales 53,749 78.8 47,395 79.4
--------- ------- --------- -------
Gross profit 14,487 21.2 12,279 20.6
Selling and administrative expenses 4,509 6.6 3,749 6.3
--------- ------- --------- -------
Income from operations $ 9,978 14.6% $ 8,530 14.3%
========= ======= ========= =======
During the first nine months of 1998, net sales of the Rubber Group
increased by $8,562,000, or 14.3%, compared to the first nine months of 1997.
This increase was primarily due to increased unit sales of insulators for
automotive wiring systems and, to a lesser extent, increased sales of connector
seals for automotive wiring systems, medical components, and tooling, offset, in
part, by price reductions on certain components.
During the first nine months of 1998, income from operations totaled
$9,978,000, an increase of $1,448,000, or 17.0%, compared to the first nine
months of 1997. Income from operations during the first nine months of 1998
included a credit of $622,000 resulting from a special rebate from the State of
Ohio
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Bureau of Workers' Compensation. The rebate represented the Company's share of a
distribution of excess funds accumulated by the Bureau.
Excluding the rebate, during the first nine months of 1998, income from
operations totaled $9,356,000, an increase of $826,000, or 9.7%, compared to the
first nine months of 1997. Cost of sales as a percentage of net sales, excluding
the rebate, was 79.7%, or slightly higher than the comparable percentage during
the first nine months of 1997. During the first nine months of 1998, the Rubber
Group's operating profit margin was limited by increased tooling sales, which
generate little or no profit, increased maintenance costs resulting, in part,
from the repair or write-off of certain tooling, and higher then expected costs
associated with the startup of new business. Selling and administrative expenses
as a percentage of net sales increased during the first nine months of 1998,
compared to the first nine months of 1997, primarily because of the hiring of
additional sales personnel and the opening, in September 1997, of a sales office
in Germany.
During the first nine months of 1998, depreciation and amortization at
the Rubber Group totaled $5,476,000, or 8.0% of net sales, compared to
$4,897,000, or 8.2% of net sales, during the third quarter of 1997.
METALS GROUP
During the first nine months of 1998 and 1997, net sales to automotive
industry customers represented 52.5% and 40.4%, respectively, of the Metal
Group's net sales.
The following table sets forth the operating results of the Metals
Group for the first nine months of 1998 and 1997 (dollar amounts in thousands):
NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------
1998 1997
------------------- ------------------
Net sales $ 24,389 100.0% $ 27,673 100.0%
Cost of sales 25,466 104.4 25,564 92.4
--------- ------- ---------- -------
Gross profit/(loss) (1,077) (4.4) 2,109 7.6
Selling and administrative expenses 2,136 8.8 3,251 11.7
--------- ------- ---------- -------
Loss from operations $ (3,213) (13.2)% $ (1,142) (4.1)%
========= ======= ========== =======
During the first nine months of 1998, net sales of the Metals Group
decreased by $3,284,000, or 11.9%, compared to the first nine months of 1997.
This reduction resulted primarily from lower net sales of a variety of
components at Lexington Die Casting and Lexington Machining caused, in part, by
the planned elimination of certain customers who generated short-run production
and by a slowdown in sales of components to remaining customers of the Metals
Group.
During the first nine months of 1998, the Metals Group incurred a loss
from operations of $3,213,000, compared to a loss from operations of $1,142,000
during the first nine months of 1997. Cost of sales as a percentage of net sales
increased during the first nine months of 1998, primarily due to underabsorption
of fixed overhead caused by low sales levels. Despite lower sales, overhead
expenses increased by $593,000 during the first nine months of 1998 compared to
the first nine months of 1997, primarily because of increased depreciation and
amortization and increased indirect labor costs. To a lesser extent, material
and direct labor costs as a percentage of net sales also increased during the
first
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nine months of 1998 compared to the first nine months of 1997, primarily because
of changes in product mix, lower production efficiencies resulting from the
start-up of new products, and costs related to the retention of experienced
equipment operators during a period of low sales. Selling and administrative
expenses decreased during the first nine months of 1998, primarily because of
the elimination of commissions previously paid to sales representatives who were
terminated during the last quarter of 1996 and the first quarter of 1997 and the
settlement of certain litigation for less than had been previously estimated by
the Company.
During the first nine months of 1998, depreciation and amortization at
the Metals Group totaled $2,839,000, or 11.6% of net sales, compared to
$2,313,000, or 8.4% of net sales, during the third quarter of 1997.
CORPORATE OFFICE
During the first nine months of 1998 and 1997, 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 $1,487,000 and $1,632,000, respectively.
During the first nine months of 1998 and 1997, depreciation at the
corporate office totaled $24,000 and $16,000, respectively.
INTEREST EXPENSE
During the first nine months of 1998 and 1997, interest expense totaled
$7,319,000 and $6,704,000, respectively. The increase was caused primarily by an
increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At September 30, 1998, and December 31, 1997, the Company's net
deferred tax asset was offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first nine months of 1998, the operating activities of the
Company provided $6,864,000 of cash.
Accounts receivable decreased by $933,000 primarily because of a
reduction in past due accounts receivable, and inventory increased by $618,000
primarily because the Company is attempting to increase service levels for
certain key customers.
INVESTING ACTIVITIES
During the first nine months of 1998, the investing activities of the
Company used $11,793,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$6,556,000 and $5,077,000, respectively. The Company presently projects that
capital expenditures will total approximately $15,000,000 during 1998, including
$14,700,000 for equipment and $300,000 for buildings. At September 30, 1998, the
Company had commitments
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outstanding for capital expenditures totaling approximately $1,900,000. Although
there can be no assurance, the Company anticipates that the funds needed for
capital expenditures during the fourth quarter of 1998 will be provided by cash
flows from operations, borrowings available to the Company under existing
financing arrangements, and additional borrowings that the Company believes it
will be able to obtain when needed. (See also "Liquidity" in this Item 2.)
FINANCING ACTIVITIES
During the first nine months of 1998, the financing activities of the
Company provided $4,930,000 of cash.
During the first nine months of 1998, the Company borrowed $3,741,000
under its equipment lines of credit to refinance amounts outstanding under the
Company's revolving line of credit that had been used to provide interim
financing for equipment purchases. The equipment financings included (i)
borrowings of $440,000 that when combined with $468,000 borrowed during
September 1997 constituted one term loan that bears interest at prime plus 0.25%
and is repayable in 60 equal monthly principal installments of $15,000, (ii) a
term loan in the original principal amount of $1,601,000 that bears interest at
the London Interbank Offered Rate ("LIBOR") plus 2.75% and is repayable in 60
equal monthly principal installments of $27,000, and (iii) a term loan in the
original principal amount of $1,700,000 that bears interest at LIBOR plus 2.75%
or prime rate plus 0.25% and is repayable in 84 equal monthly principal
installments of $20,000.
Borrowings under the Company's revolving line of credit increased by
$5,701,000 during the first nine months of 1998, in part, because the Company
utilized the revolving line of credit to fund certain capital expenditures that
have not been refinanced by borrowings under the Company's equipment line of
credit or through other financing.
During the third quarter of 1998, the Company and the holder of the
Company's 12% term note amended the note by changing the maturity date to
January 31, 2000, from April 30, 2000, and by deferring all principal payments
until maturity.
During October 1998, the accounts receivable and inventory availability
formulas that govern the amount the Company is permitted to borrow under its
revolving line of credit were amended. As a result of the higher advance rates,
the Company's availability under the revolving line of credit increased by
approximately $1,700,000 on the date of the amendment.
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 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 accounts
receivable 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
1998, aggregate indebtedness of the Company, excluding trade accounts payable,
increased by $4,959,000 to $92,461,000. During 1998, interest and scheduled
principal payments are projected to be approximately $9,800,000 and $6,100,000,
respectively.
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The Company had a net working capital deficit of $10,837,000 at
September 30, 1998. Loans of $14,541,000, which were outstanding under the
revolving line of credit, were classified as short-term debt at September 30,
1998. Although the expiration date of the revolving line of credit is April 1,
2000, the loans were classified as current liabilities because the Company's
cash receipts are automatically used to reduce such loans on a daily basis, by
means of a lock-box sweep arrangement, and the lender has the ability to modify
certain terms of the revolving line of credit without the prior approval of the
Company.
At November 9, 1998, availability under the Company's revolving line of
credit totaled $2,613,000 before outstanding checks of $2,366,000 were deducted.
The Company has an equipment line of credit that allows the Company to
finance a portion of the cost of certain equipment. Remaining availability under
the equipment line of credit totaled approximately $1,800,000 at November 9,
1998. The Company has recently requested that the availability be increased to
$6,000,000. No assurance can be given that the increase will be agreed to by the
lender. The Company believes that $1,800,000 currently outstanding under the
Company's revolving line of credit can be refinanced under the existing
equipment line of credit and in excess of $1,700,000 of additional outstandings
could be similarly refinanced if availability under the equipment line of credit
were increased.
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 impose limitations on the Company's ratio of debt to
tangible net worth. The covenants also 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. In addition,
substantially all of the Company's financing agreements include cross-default
provisions.
From time to time, the Company has amended financial covenants
contained in the various loan agreements to which it is a party in order to
maintain or otherwise ensure compliance with such covenants. During the first
quarter of 1998, the Company amended a covenant that limited the Company's ratio
of debt to tangible net worth. In August 1998, the Company amended certain net
worth covenants and amended again the covenant that limits the Company's ratio
of debt to tangible net worth. Furthermore, because certain of the Company's
long-term indebtedness matures in the first half of 2000, those amounts will be
classified as short-term liabilities of the Company during the first and second
quarters of 1999, if they are outstanding at that time. In August 1998, certain
working capital and cash flow covenants were amended so as to avoid any defaults
that would have been caused by such reclassification. (Notes maturing in 2000
include the Company's 12% term note in the amount of $1,370,000, which matures
on January 31, 2000, the Company's 10.5% senior note in the amount of $7,500,000
and 12.75% senior subordinated notes in the amount of $31,720,000, which mature
on February 1, 2000, and the Company's 14% junior subordinated notes in the
amount of $1,347,000, which mature on May 1, 2000.) Based on the Company's
current forecast, the Company does not currently project any defaults under loan
covenants.
The Company estimates that, in addition to cash flow from operations
and borrowings under the revolving line of credit, new borrowings in the amount
of approximately $5,600,000 will be required through September 30, 1999, to meet
the Company's working capital and debt service requirements and to fund capital
expenditures currently anticipated by the Company. Although no assurance can be
given,
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the Company currently believes that cash flows from operations, borrowings
available to the Company under existing financing arrangements, and additional
borrowings that the Company believes it will be able to obtain should be
adequate to meet its projected working capital and debt service requirements and
to fund capital expenditures currently anticipated by the Company through
September 30, 1999. If cash flows from operations or availability under existing
and new financing agreements fall below expectations, the Company may be forced
to delay anticipated capital expenditures, reduce operating expenses, extend
trade accounts payable balances beyond terms that the Company believes are
customary in the industries in which it operates, and/or consider other
alternatives designed to improve the Company's liquidity. Certain of such
actions could have a material adverse effect upon the Company.
As previously discussed, the Company's 12% term note, 10.5% senior
note, 12.75% senior subordinated notes, and 14% junior subordinated notes, which
have an aggregate principal balance of $41,937,000, mature during the first and
second quarters of 2000, and the Company's revolving line of credit expires on
April 1, 2000. The Company's operations will not generate cash sufficient to
satisfy such obligations at their maturity or expiration. The Company may
attempt to refinance all or a portion of these obligations (and possibly other
indebtedness that has later maturity dates) by issuing new debt in the private
or public market. The Company may also attempt to reach agreements with certain
noteholders to amend the terms of debt instruments to extend the maturity dates
thereof or, as an alternative, to exchange new debt obligations having maturity
dates later than 2000 for existing debt obligations that mature in 2000. The
Company's ability to refinance, amend, or exchange these obligations on or
before their maturity or expiration dates will depend on many factors,
including, but not limited to, conditions in the high yield debt market.
Accordingly, there can be no assurance that the Company will be successful in
refinancing, amending, or exchanging such obligations. To date the Company has
not attempted to refinance, amend, or exchange the obligations maturing in 2000.
In the event that the Company is not successful in refinancing, amending, or
exchanging such obligations, defaults may occur under the agreements relating to
such obligations. If a default occurs, it may trigger other defaults pursuant to
cross-default provisions under other indebtedness of the Company. In the event
of any such default or cross-default, the holders of the obligations to which
such provision relates would be entitled to accelerate the maturity of such
obligations, to cease making any further advances otherwise permitted under the
related credit facilities, to seek to foreclose upon any assets securing such
obligations, and to pursue other remedies. Any such event could have a material
adverse effect upon the Company. In any such event, the Company may be required
to consider alternatives, including seeking relief from its creditors.
ACQUISITIONS
The Company is seeking to acquire assets and businesses related to its
current operations in order to expand 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
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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
believes that the outcome of such actions will not have a material adverse
effect upon its financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted "Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS
130 established standards for the reporting and display of changes in
stockholders' equity during a period that are not included in reported net
income for such period, excluding changes resulting from transactions with
owners. During the first nine months of 1998, the Company did not have any items
of income or loss requiring disclosure under the provisions of FAS 130.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"), which is effective for
fiscal periods beginning after December 15, 1997. FAS 131 established standards
for the way public enterprises report information about operating segments in
annual and interim financial statements, including related disclosures about
products, geographic areas, and major customers. FAS 131 requires financial
information to be reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
adoption of FAS 131 by the Company during the fourth quarter of 1998 will not
have a material effect on the Company's financial position or results of
operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for fiscal
periods beginning after June 15, 1999. Because the Company does not currently
use or otherwise anticipate using derivatives or other hedging activities prior
to the adoption of FAS 133, the management of the Company currently believes
that the adoption of FAS 133 should not have an impact on the Company's
financial position or results of operation.
YEAR 2000
Software and/or hardware failures due to processing errors potentially
arising from calculations using the year 2000 date are a known risk. The Company
recognizes the risk and, in order to ensure that its operations will not be
adversely affected by year 2000 software or hardware problems, the Company has a
year 2000 compliance plan that includes: (i) a company-wide inventory of all
information technology (software and hardware) (collectively, "IT systems") and
all non-IT systems, which include embedded technology such as microprocessors
commonly found in modern manufacturing equipment;
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(ii) an evaluation of the readiness of major trading partners, including
suppliers of materials and services and customers; (iii) documenting the year
2000 compliance of the Company's IT and non-IT systems through appropriate
testing; (iv) replacement of non-compliant systems as necessary; (v) testing
replaced systems for year 2000 compliance as necessary; and (vi) developing
contingency plans as appropriate. The Company's year 2000 compliance plan calls
for all formal documentation and testing of IT and non-IT systems to be
completed by March 31, 1999. At November 9, 1998, inventory activities are
estimated to be 50% complete and formal assessment activities are estimated to
be 25% complete. The Company has recently begun the process of contacting its
major trading partners to determine if their operations are year 2000 compliant.
The Company expects to complete this process during the first quarter of 1999.
Although the Company does not have a system in place for tracking costs
related to its year 2000 compliance plan, the Company believes that costs
incurred to date by the Company to assess, modify, or replace non-compliant
systems have not been material. Furthermore, the Company anticipates that, based
on the information currently available, future costs to modify or replace
non-compliant systems will not be material. Such costs are being accounted for
as part of normal, ongoing operations. The Company has not developed a specific
contingency plan to address the worst case year 2000 scenario, but it may
develop one after it has assessed the year 2000 readiness of its major trading
partners since the Company believes that any such worst case scenario would most
likely result from the lack of year 2000 readiness at of one or more of those
major trading partners.
Based upon the Company's review of its IT and non-IT systems to date,
the Company believes that there are no material internal issues regarding its
year 2000 compliance that will not be resolved through normal equipment and
software upgrades that will be made through 1999. While the Company believes its
planning efforts are adequate to address its internal year 2000 concerns, there
can be no assurance that the systems of the Company's major trading partners, on
which the Company's systems and operations rely, will be year 2000 compliant. If
a significant number of the Company's major trading partners experience failures
in their computer systems or operations due to year 2000 non-compliance, such
events could have a material adverse affect on the business and revenues of the
Company.
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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 No. 1 to Loan and Security Agreement dated June
30, 1998, between Lexington Precision Corporation and The
CIT Group/Equipment Financing, Inc.
10-2 Amendment No. 3 to Credit Facility and Security Agreement
dated June 30, 1998, between Lexington Precision
Corporation, Lexington Components, Inc., and Bank One, NA
10-3 Amendment to Financing Agreements and Consent dated August
13, 1998, between Lexington Precision Corporation and
Congress Financial Corporation
10-4 Amendment to Financing Agreements and Consent dated August
13, 1998, between Lexington Components, Inc. and Congress
Financial Corporation
10-5 Amendment to Financing Agreements and Consent dated October
20, 1998, between Lexington Precision Corporation and
Congress Financial Corporation
10-6 Amendment to Financing Agreements and Consent dated October
20, 1998, between Lexington Components, Inc. and Congress
Financial Corporation
27-1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third quarter of 1998.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 30, 1998
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 11, 1998 By: /s/ Michael A. Lubin
- ----------------- ------------------------------
Date Michael A. Lubin
Chairman of the Board
November 11, 1998 By: /s/ Warren Delano
- ----------------- ------------------------------
Date Warren Delano
President
November 11, 1998 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 No. 1 to Loan and Security Filed with this Form 10-Q
Agreement dated June 30, 1998, between
Lexington Precision Corporation and The
CIT Group/Equipment Financing, Inc.
10-2 Amendment No. 3 to Credit Facility and Security Filed with this Form 10-Q
Agreement dated June 30, 1998, between
Lexington Precision Corporation, Lexington
Components, Inc. and Bank One, NA
10-3 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated August 13, 1998, between
Lexington Precision Corporation and Congress
Financial Corporation
10-4 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated August 13, 1998, between
Lexington Components, Inc. and Congress
Financial Corporation
10-5 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated Ocotber 20, 1998, between
Lexington Precision Corporation and Congress
Financial Corporation
10-6 Amendment to Financing Agreements and Filed with this Form 10-Q
Consent dated October 20, 1998, between
Lexington Components, Inc. and Congress
Financial Corporation
27-1 Financial Data Schedule Filed with this Form 10-Q