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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 1999
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 APRIL 28, 1999
(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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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......................................................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................22
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
ASSETS:
Current assets:
Cash $ 229 $ 103
Accounts receivable 19,924 17,837
Inventories 9,903 10,170
Prepaid expenses and other assets 2,306 2,063
Deferred income taxes 2,025 2,025
---------- ----------
Total current assets 34,387 32,198
---------- ----------
Plant and equipment:
Land 1,549 1,549
Buildings 23,786 23,753
Equipment 92,067 90,306
---------- ----------
117,402 115,608
Accumulated depreciation 55,439 52,871
---------- ----------
Plant and equipment, net 61,963 62,737
---------- ----------
Excess of cost over net assets of businesses acquired, net 8,699 8,778
---------- ----------
Other assets, net 4,359 4,612
---------- ----------
$ 109,408 $ 108,325
========== ==========
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)
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 12,332 $ 11,291
Accrued expenses 8,392 9,345
Short-term debt 14,839 12,995
Current portion of long-term debt 44,464 6,597
---------- ----------
Total current liabilities 80,027 40,228
---------- ----------
Long-term debt, excluding current portion 35,092 74,953
---------- ----------
Deferred income taxes and other long-term liabilities 2,239 2,220
---------- ----------
Redeemable preferred stock, $100 par value, at
redemption value 750 750
Excess of redemption value over par value (375) (375)
---------- ----------
Redeemable preferred stock at par value 375 375
---------- ----------
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 12,227 12,235
Accumulated deficit (21,422) (22,556)
Cost of common stock in treasury, 85,915 shares (217) (217)
---------- ----------
Total stockholders' deficit (8,325) (9,451)
---------- ----------
$ 109,408 $ 108,325
========== ==========
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 MARCH 31
----------------------------------
1999 1998
---- ----
Net sales $ 34,496 $ 32,197
Cost of sales 29,404 27,412
--------- ---------
Gross profit 5,092 4,785
Selling and administrative expenses 3,066 2,803
--------- ---------
Income from operations 2,026 1,982
Interest expense 2,342 2,402
--------- ---------
Loss before income taxes and extraordinary item (316) (420)
Income tax credit (79) -
--------- ---------
Net loss before extraordinary item (237) (420)
Extraordinary gain on repurchase of long-term debt, net of
applicable income taxes 1,371 -
--------- ---------
Net income/(loss) $ 1,134 $ (420)
========= =========
Basic and diluted net income/(loss) per common share:
Net loss before extraordinary item $ (0.06) $ (0.10)
Extraordinary gain 0.32 -
--------- ---------
Net income/(loss) $ 0.26 $ (0.10)
========= =========
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
-----------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income/(loss) $ 1,134 $ (420)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary gain on repurchase of long-term debt (1,828) -
Depreciation 2,640 2,306
Amortization included in operating expense 435 300
Amortization included in interest expense 50 50
Changes in operating assets and liabilities that
provided/(used) cash:
Trade receivables (2,087) 310
Inventories 267 (820)
Prepaid expenses and other assets (243) 630
Trade accounts payable 1,041 (837)
Accrued expenses (953) (830)
Other 58 14
---------- ----------
Net cash provided by operating activities 514 703
---------- ----------
INVESTING ACTIVITIES:
Purchases of plant and equipment (1,888) (3,387)
Decrease in equipment deposits 63 36
Proceeds from sales of equipment 6 64
Expenditures for tooling owned by customers (204) (130)
Other - 8
---------- ----------
Net cash used by investing activities (2,023) (3,409)
---------- ----------
FINANCING ACTIVITIES:
Net increase in short-term debt 1,844 2,115
Proceeds from issuance of long-term debt 9,292 2,041
Repayment of long-term debt (7,478) (1,483)
Repurchase of long-term debt (1,980) -
Other (43) (8)
---------- ----------
Net cash provided by financing activities 1,635 2,665
---------- ----------
Net increase/(decrease) in cash 126 (41)
Cash at beginning of period 103 208
---------- ----------
Cash at end of period $ 229 $ 167
========== ==========
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 in Note 1 to the
consolidated financial statements in the Company's annual report on Form 10-K
for the year ended December 31, 1998.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at March 31, 1999, and the Company's results
of operations and cash flows for the three-month periods ended March 31, 1999
and 1998. All such adjustments were of a normal recurring nature.
The results of operations for the first quarter of 1999 are not
necessarily indicative of the results to be expected for the full year or for
any succeeding quarter.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Indebtedness
totaling $38,129,000 matures during the first and second quarters of 2000. The
Company's operations will not generate cash sufficient to satisfy such
obligations at their maturities. The Company may attempt to refinance these
obligations (and possibly other indebtedness that has later maturity dates) by
issuing new debt securities in the private or public market. The Company has
commenced discussions with investment banking firms relating to the issuance of
new debt securities to refinance substantially all of the Company's existing
debt. Although there can be no assurance that the Company will undertake such an
offering, or that any such offering will be successful, based on the discussions
to date, current market conditions in the market for non-investment grade debt,
and the Company's historical and projected operating results, cash flows, and
capital structure, the Company believes that it will be able to issue new debt
securities with terms and interest rates reasonably satisfactory to the Company
and in sufficient amounts to refinance substantially all of its outstanding debt
securities prior to their maturity dates. At the present time, the aggregate
principal amount of debt securities to be offered for sale and the specific
terms of such securities have not been determined. If a public offering of
securities is made, such offering will be made only by means of a prospectus. If
a private offering of securities is made, the securities offered will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
If, for any reason, the anticipated sale of such debt securities is not
successful, the Company may, in the alternative, attempt to extend the maturity
dates of its existing debt securities or to exchange new debt securities that
have maturity dates later than 2000 for existing debt securities that mature in
2000. The Company's ability to refinance, extend, or exchange these securities
on or before their maturity dates will depend on many factors, including, but
not limited to, conditions in the market for non-investment grade debt.
Accordingly, there can be no assurance that the Company will be successful in
refinancing, extending, or exchanging such securities. To date, the Company has
not attempted to refinance, extend, or exchange the debt securities that mature
in 2000. In the event that the Company is not successful in refinancing,
extending, or exchanging such debt securities, defaults may occur under the
agreements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
relating to such securities. If a default occurs, it may trigger other defaults
pursuant to cross-default provisions under other indebtedness of the Company.
Holders of indebtedness on which defaults exist would be entitled to accelerate
the maturity thereof, to cease making any further advances otherwise permitted
under the related credit facilities, to seek to foreclose upon any assets
securing such indebtedness, and to pursue other remedies. If any such actions
were to be taken, the Company might be required to consider alternatives,
including seeking relief from its creditors. Any such action by creditors could
have a material adverse effect upon the Company. The consolidated financial
statements do not include any adjustments that might result should the Company
be unable to refinance, extend, or exchange these obligations on or before their
maturity dates.
NOTE 2 -- INVENTORIES
Inventories at March 31, 1999, and December 31, 1998, are set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
1999 1998
--------------- ----------------
Finished goods $ 3,509 $ 4,272
Work in process 3,277 2,834
Raw materials and purchased parts 3,117 3,064
-------- --------
$ 9,903 $ 10,170
======== ========
NOTE 3 -- ACCRUED EXPENSES
At March 31, 1999, and December 31, 1998, accrued expenses included
accrued interest expense of $875,000 and $1,971,000, respectively.
NOTE 4 -- DEBT
At March 31, 1999, and December 31, 1998, short-term debt consisted of
loans outstanding under the Company's revolving line of credit. At March 31,
1999, 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%. In January 1999, the revolving line of credit was amended to extend the
expiration date to April 1, 2002. Although the expiration date of the revolving
line of credit is April 1, 2002, these loans have been 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.
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9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term debt at March 31, 1999, and December 31, 1998, is set forth
below (dollar amounts in thousands):
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
Long-term secured debt:
Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ - $ 3,850(1)
Term loan, due 2000, 12% 1,370 1,370
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.37% 2,863 2,921
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 2,397 2,584
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,378 1,404
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,682 2,732
Term loans payable in equal monthly principal installments, final
maturity in 2002, prime rate plus 0.25% and LIBOR plus 2.75% 2,750(2) -
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% 726 770
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 462(2) 492(2)
Term loan payable in equal monthly principal installments, final
maturity in 2004, LIBOR plus 2.75% 1,222 -
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,403 1,471
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 16,041(2) 18,967(2)
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2.75% 1,308 1,388
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate plus 0.25% and LIBOR plus 2.75% 1,518(2) 1,579(2)
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate plus 0.25% 580 -
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate plus 0.25% and LIBOR plus 2.75% 1,269(2) 1,300(2)
Term loans payable in equal monthly principal installments, final
maturity in 2006, prime rate plus 0.25% and LIBOR plus 2.75% 4,683(2) -
--------- --------
Total long-term secured debt $ 42,652 $ 40,828
--------- --------
(continued on next page)
-8-
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
Long-term unsecured debt:
10.5% senior note, due 2000 $ 7,500 $ 7,500
12.75% senior subordinated notes, due 2000 27,912 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 145 155
--------- --------
Total long-term unsecured debt 36,904 40,722
--------- --------
Total long-term debt 79,556 81,550
Less current portion 44,464 6,597
--------- --------
Total long-term debt, excluding current portion $ 35,092 $ 74,953
========= ========
(1) Refinanced under long-term agreements before the consolidated
financial statements for the period were issued. 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 accounts receivable, inventories,
equipment, certain real estate, and the stock of its wholly-owned subsidiary,
Lexington Rubber Group, Inc. (formerly known as Lexington Components, Inc.).
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. 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. During May 1999, a covenant related to the maintenance of net
working capital was amended.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- INCOME TAXES
During the first quarter of 1999, the Company recorded income tax
expense, consisting of federal alternative minimum tax and state income tax, of
$378,000. Income tax expense of $457,000 on the extraordinary gain was offset by
a tax credit in the amount of $79,000.
At March 31, 1999, and December 31, 1998, the excess of the Company's
deferred income tax assets over its deferred income tax liabilities was fully
offset by a valuation allowance.
NOTE 6 -- NET INCOME/(LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common
share for the three-month periods ended March 31, 1999 and 1998, are set forth
below (in thousands, except per share amounts). The pro forma conversion of the
Company's potentially dilutive securities (the 14% junior subordinated
convertible notes and the $8 cumulative convertible redeemable preferred stock,
series B), before giving effect to the extraordinary gain, was antidilutive. As
a result, the calculation of diluted net income or loss per common share set
forth below does not reflect any pro forma conversion.
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
---- ----
Net loss before extraordinary item $ (237) $ (420)
Preferred stock dividends (8) (8)
Excess of redemption value over par value of preferred
stock redeemed during year (11) (11)
-------- --------
Net loss before extraordinary item (256) (439)
Extraordinary gain 1,371 -
-------- --------
Net income /(loss) attributable to common stockholders $ 1,115 $ (439)
======== ========
Weighted-average common shares 4,263 4,263
======== ========
Basic and diluted income /(loss) per common share:
Net loss before extraordinary item $ (0.06) $ (0.10)
Extraordinary gain 0.32 -
-------- --------
Basic and diluted net income/(loss) $ 0.26 $ (0.10)
======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- SEGMENTS
Information relating to the Company's operating segments and the
corporate office for the first quarters of 1999 and 1998 is summarized below
(dollar amounts in thousands):
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
---- ----
NET SALES:
Rubber Group $ 24,960 $ 23,834
Metals Group 9,536 8,363
---------- ----------
Total net sales $ 34,496 $ 32,197
========== ==========
INCOME/(LOSS) FROM OPERATIONS:
Rubber Group $ 3,316 $ 3,735
Metals Group (695) (1,259)
Corporate office (595) (494)
---------- ----------
Total income from operations $ 2,026 $ 1,982
========== ==========
ASSETS:
Rubber Group $ 68,198 $ 65,468
Metals Group 38,656 37,214
Corporate office 2,554 2,031
---------- ----------
Total assets $ 109,408 $ 104,713
========== ==========
DEPRECIATION AND AMORTIZATION:
Rubber Group $ 1,964 $ 1,757
Metals Group 1,106 846
Corporate office 55 53
---------- ----------
Total depreciation and amortization $ 3,125 $ 2,656
========== ==========
CAPITAL EXPENDITURES:
Rubber Group $ 1,024 $ 1,993
Metals Group 815 1,391
Corporate office 49 3
---------- ----------
Total capital expenditures $ 1,888 $ 3,387
========== ==========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities, 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.
NOTE 9 -- EXTRAORDINARY ITEM
During the first quarter of 1999, the Company recorded an extraordinary
gain, net of income tax expense, of $1,371,000 on the repurchase of $3,808,000
principal amount of its 12.75% senior subordinated notes.
NOTE 10 -- SUBSEQUENT EVENT
In May 1999, the Company decided to close its 21,000 square foot
diecasting facility in Manchester, New York. The Manchester facility had net
sales of $448,000 and $641,000 and losses from operations of $105,000 and
$19,000 for the three-month periods ended March 31, 1999 and 1998, respectively.
During 1998, the Manchester facility had net sales of $2,258,000 and a loss from
operations of $297,000. At March 31, 1999, the Manchester facility had net
assets, before deducting indebtedness for money borrowed, of $974,000. Although
the Company has not yet adopted a formal plan for the disposition of the
Manchester facility, the Company presently anticipates that it will complete the
closure and disposal during 1999 and estimates that it will incur a loss on the
closure and disposal in the range of $500,000 to $700,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Various statements in this Item 2 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," "projects," 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 (1) increases and decreases in
business awarded to the Company by its various customers, (2) unanticipated
price reductions for the Company's products as a result of competition, (3)
unanticipated operating results and cash flows, (4) increases or decreases in
capital expenditures, (5) unforeseen product liability claims, (6) changes in
economic conditions, (7) changes in the competitive environment, (8) changes in
the capital markets, (9) labor interruptions at the Company or at its customers,
(10) disruptions that may be caused by year 2000 software and/or hardware
problems, (11) the inability of the Company to obtain additional borrowings
and/or to refinance its existing indebtedness, and (12) 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 use 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 -- FIRST QUARTER OF 1999 VERSUS FIRST QUARTER OF 1998
The Company manufactures, to customer specifications, component parts
through two operating segments, the Rubber Group and the Metals Group. The
Rubber Group consists of four divisions, Lexington Connector Seals, Lexington
Insulators, Lexington Medical, and Lexington Technologies. The Metals Group
consists of three divisions, Lexington Die Casting and the Arizona and New York
Divisions of Lexington Machining.
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RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. 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 Rubber Group
received the General Motors Corporation "Supplier of the Year" award for 1995,
1996, and 1997.
The following table sets forth the operating results of the Rubber
Group for the first quarters of 1999 and 1998 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
1999 1998
------------------ ------------------
Net sales $ 24,960 100.0% $ 23,834 100.0%
Cost of sales 20,022 80.2 18,622 78.1
--------- ------- --------- -------
Gross profit 4,938 19.8 5,212 21.9
Selling and administrative expenses 1,622 6.5 1,477 6.2
--------- ------- --------- -------
Income from operations $ 3,316 13.3% $ 3,735 15.7%
========= ======= ========= =======
During the first quarter of 1999, net sales of the Rubber Group
increased by $1,126,000, or 4.7%, compared to the first quarter of 1998. This
increase was primarily due to increased unit sales of insulators for automotive
ignition wire sets and, to a lesser extent, increased unit sales of seals for
automotive wiring systems and components for medical devices, offset, in part,
by reduced sales of tooling and by price reductions on certain automotive
components.
During the first quarter of 1999, income from operations totaled
$3,316,000, a decrease of $419,000, or 11.2%, compared to the first quarter of
1998. Cost of sales as a percentage of net sales increased during 1999,
primarily because of production problems with certain components, including
related inspection costs, and increased depreciation and amortization expense.
The Company believes that a number of the production problems experienced during
the first quarter have been or will soon be substantially remedied through
process improvements, some of which have required investment in new equipment.
Selling and administrative expenses as a percentage of net sales
increased during the first quarter of 1999 compared to the first quarter of
1998, primarily because of increased depreciation and other expenses associated
with the Company's new computer systems, increased customer development expense,
and higher legal expenses.
During the first quarter of 1999, depreciation and amortization at the
Rubber Group totaled $1,964,000, or 7.9% of net sales, compared to $1,757,000,
or 7.4% of net sales, during the first quarter of 1998. Earnings before
interest, taxes, depreciation, and amortization ("EBITDA") decreased to
$5,280,000 in the first quarter of 1999 from $5,492,000 in the first quarter of
1998. (EBITDA is not a measure of performance under generally accepted
accounting principles. While EBITDA should not be used as a substitute for net
income, cash flows from operating activities, or other operating or cash flow
statement data prepared in accordance with generally accepted accounting
principles, management believes that it may be used by certain investors as
supplemental information to evaluate a company's financial performance,
including its ability to incur and/or service debt. In addition, the definition
of
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16
EBITDA used in this Form 10-Q may not be the same as the definition of EBITDA
used by other companies.)
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die
castings and machines aluminum, brass, and steel components primarily for
automotive industry customers. 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.
Since 1997, the Company has been implementing a strategy designed 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
for customers in target markets. The repositioning has entailed a shift to a new
customer base and has required 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 products. These factors and
the fact that new, high-volume business is limited at this stage of the
transition adversely affected the results of operations and cash flow of the
Metals Group during the first quarters of 1998 and 1999.
The following table sets forth the operating results of the Metals
Group for the first quarters of 1999 and 1998 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31
-----------------------------------------
1999 1998
------------------ ------------------
Net sales $ 9,536 100.0% $ 8,363 100.0%
Cost of sales 9,382 98.4 8,790 105.1
-------- ------- --------- -------
Gross profit/(loss) 154 1.6 (427) (5.1)
Selling and administrative expenses 849 8.9 832 9.9
-------- ------- --------- -------
Loss from operations $ (695) (7.3)% $ (1,259) (15.0)%
======== ======= ========= =======
During the first quarter of 1999, net sales of the Metals Group
increased by $1,173,000, or 14.0%, compared to the first quarter of 1998. This
increase resulted primarily from increased net sales at Lexington Die Casting.
During the first quarter of 1999, the Metals Group incurred a loss from
operations of $695,000, compared to a loss from operations of $1,259,000 during
the first quarter of 1998. Cost of sales as a percentage of net sales decreased
during 1999, primarily due to (1) increased absorption of fixed manufacturing
overhead caused by higher sales levels and (2) reduced direct labor costs
resulting from improved efficiencies and increased utilization of skilled
equipment operators who had been retained during prior periods of low sales
volumes, offset, in part, by (3) increased depreciation and amortization
expenses.
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Selling and administrative expenses decreased as a percentage of net
sales during the first quarter of 1999 compared to the first quarter of 1998,
primarily because those expenses are partially fixed in nature.
During the first quarter of 1999, depreciation and amortization at the
Metals Group totaled $1,106,000, or 11.6% of net sales, compared to $846,000, or
10.1% of net sales, during the first quarter of 1998. EBITDA increased to
$411,000 in the first quarter of 1999 from negative $413,000 in the first
quarter of 1998.
In May 1999, the Company decided to close the Metals Group's 21,000
square foot diecasting facility in Manchester, New York. The Manchester facility
had net sales of $448,000 and $641,000 and losses from operations of $105,000
and $19,000 for the three-month periods ended March 31, 1999 and 1998,
respectively. During 1998, the Manchester facility had net sales of $2,258,000
and a loss from operations of $297,000. At March 31, 1999, the Manchester
facility had net assets, before deducting indebtedness for money borrowed, of
$974,000. Although the Company has not yet adopted a formal plan for the
disposition of the Manchester facility, the Company presently anticipates that
it will complete the closure and disposal during 1999 and estimates that it will
incur a loss on the closure and disposal in the range of $500,000 to $700,000.
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 $595,000 and $494,000
during the first quarters of 1999 and 1998, respectively. The increase in
corporate office expenses during the first quarter of 1999 resulted primarily
from the accrual of management incentive awards. No management incentive awards
were accrued for corporate office personnel during the first quarter of 1998.
During the first quarters of 1999 and 1998, depreciation at the
corporate office totaled $5,000 and $3,000, respectively.
INTEREST EXPENSE
During the first quarters of 1999 and 1998, interest expense totaled
$2,342,000 and $2,402,000, respectively. The decrease during the first quarter
of 1999 was primarily a result of the repurchase, of $3,808,000 principal amount
of 12.75% senior subordinated notes during January 1999, which was financed with
borrowings under the Company's revolving line of credit.
EXTRAORDINARY GAIN
In January 1999, the Company repurchased $3,808,000 principal amount of
its 12.75% senior subordinated notes for $1,980,000 plus accrued interest. The
Company recognized an extraordinary gain on the repurchase, net of estimated
taxes, of $1,371,000.
INCOME TAXES
During the first quarter of 1999, the Company recorded income tax
expense, consisting of federal alternative minimum tax and state income tax, of
$378,000. Income tax expense of $457,000 on the extraordinary gain was offset by
a tax credit in the amount of $79,000.
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At March 31, 1999, and December 31, 1998, the excess of the Company's
deferred income tax assets over its deferred income tax liabilities was fully
offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 1999, the operating activities of the
Company provided $514,000 of cash.
Accounts receivable increased by $2,087,000, primarily due to the
timing of payments from the Company's largest customer. Trade accounts payable
increased by $1,041,000, primarily because payables related to the purchase of
plant, equipment, and customer-owned tooling increased by $612,000 during the
first quarter of 1999, from $1,888,000 at December 31, 1998, to $2,500,000 at
March 31, 1999. Accrued expenses decreased by $953,000, primarily because of the
payment of interest on the Company's 12.75% senior subordinated notes, the
payment of an accrued profit sharing contribution to the Company's retirement
and savings plan for the 1998 plan year, and the payment of accrued incentive
bonus awards earned during 1998.
INVESTING ACTIVITIES
During the first quarter of 1999, the investing activities of the
Company used $2,023,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group, the Metals Group, and the
corporate office totaled $1,024,000, $815,000, and $49,000, respectively. The
Company presently projects that capital expenditures will total approximately
$13,500,000 in 1999, including $13,100,000 for equipment and $400,000 for land
and buildings. Capital expenditures for the Rubber Group, the Metals Group, and
the corporate office are projected to total $9,000,000, $4,400,000, and
$100,000, respectively. At March 31, 1999, the Company had commitments
outstanding for capital expenditures totaling approximately $2,305,000. Although
no assurance can be given, the Company anticipates that the funds needed for
capital expenditures in 1999 will be provided by cash flows from operations and
borrowings available to the Company under its revolving line of credit and its
equipment lines of credit. (See also "Liquidity" in this Item 7.)
FINANCING ACTIVITIES
During the first quarter of 1999, the financing activities of the
Company provided $1,635,000 of cash.
During the first quarter of 1999, the Company obtained new term loans
in the aggregate amount of $9,292,000, which refinanced $2,090,000 of existing
term loans and $7,202,000 of loans outstanding under the Company's revolving
line of credit. Also, during the quarter, the Company repurchased $3,808,000
principal amount of its 12.75% senior subordinated notes for $1,980,000; the
purchase was financed through borrowings under the Company's 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 the Company to borrow
under its revolving line of credit is subject to, among other things,
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covenant compliance and certain availability formulas based on the levels of
accounts receivable and inventories of the Company. In January 1999, the
revolving line of credit was amended to extend its expiration date to April 1,
2002. Also in January 1999, one of the Company's lenders provided the Company
with an equipment line of credit in the amount of $5,000,000, which can be used
to finance a portion of the cost of certain equipment. At March 31, 1999, the
Company had not borrowed under the line of credit. In March 1999, another of the
Company's lenders provided the Company with an equipment line of credit in the
amount of $1,822,000. At March 31, 1999, the Company had borrowed $1,222,000
under the line of credit.
The Company operates with substantial financial leverage and limited
liquidity. During the first quarter of 1998, the Company's aggregate
indebtedness, excluding trade accounts payable, decreased by $150,000 to
$94,395,000. During 1999, interest and scheduled principal payments are
projected to be approximately $9,400,000 and $7,500,000, respectively.
The Company had a net working capital deficit of $45,640,000 at March
31, 1999, compared to a net working capital deficit of $8,030,000 at December
31, 1998. The increase in the net working capital deficit resulted from the fact
that the Company's 12% term note, 10.5% senior note, and 12.75% senior
subordinated notes, which have an aggregate principal balance of $36,872,000,
mature during the first quarter of 2000 and have been classified as current
liabilities in the Company's March 31, 1999, consolidated financial statements.
In addition, although not classified as a current liability at March 31, 1999,
the Company's 14% junior subordinated notes in the aggregate principal amount of
$1,347,000 mature on May 1, 2000. Loans of $14,839,000 and $12,995,000
outstanding under the revolving line of credit were classified as short-term
debt at March 31, 1999 and December 31, 1998, respectively. Although the
expiration date of the revolving line of credit is April 1, 2002, these loans
have been 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 May 13, 1999, availability under the Company's revolving line of
credit totaled $2,340,000 before outstanding checks of $688,000 were deducted.
Substantially all of the assets of the Company and its subsidiary,
Lexington Rubber Group Inc., are pledged as collateral for certain of the
Company's indebtedness. In addition, 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. The covenants also place
certain restrictions on the Company's business and operations, including
covenants relating to the incurrence or assumption of additional debt, the level
of past-due trade accounts payable, the sale of all or substantially all of the
Company's assets, the purchase of plant and equipment, 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, certain of the financial covenants contained in the
Company's various loan agreements have been amended in order to maintain or
otherwise ensure current or future compliance by the Company. In May 1999, a
covenant related to the maintenance of net working capital was amended.
Based upon its most current forecast, the Company believes, although
there can be no assurance, that its cash flows from operations and borrowings
under its revolving line of credit and its equipment lines of credit will be
adequate to meet its working capital and debt service requirements and to fund
projected capital expenditures through December 31, 1999. If cash flows from
operations or availability
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under the Company's lines of credit fall below expectations, the Company may be
forced to delay planned 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, indebtedness totaling $38,129,000 matures
during the first and second quarters of 2000. The Company's operations will not
generate cash sufficient to satisfy such obligations at their maturities. The
Company may attempt to refinance these obligations (and possibly other
indebtedness that has later maturity dates) by issuing new debt securities in
the private or public market. The Company has commenced discussions with
investment banking firms relating to the issuance of new debt securities to
refinance substantially all of the Company's existing debt. Although there can
be no assurance that the Company will undertake such an offering, or that any
such offering will be successful, based on the discussions to date, current
market conditions in the market for non-investment grade debt, and the Company's
historical and projected operating results, cash flows, and capital structure,
the Company believes that it will be able to issue new debt securities with
terms and interest rates reasonably satisfactory to the Company and in
sufficient amounts to refinance substantially all of its outstanding debt
securities prior to their maturity dates. At the present time, the aggregate
principal amount of debt securities to be offered for sale and the specific
terms of such securities have not been determined. If a public offering of
securities is made, such offering will be made only by means of a prospectus. If
a private offering of securities is made, the securities offered will not be
registered under the Securities Act of 1933 and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
If, for any reason, the anticipated sale of such debt securities is not
successful, the Company may, in the alternative, attempt to extend the maturity
dates of its existing debt securities or to exchange new debt securities that
have maturity dates later than 2000 for existing debt securities that mature in
2000. The Company's ability to refinance, extend, or exchange these securities
on or before their maturity dates will depend on many factors, including, but
not limited to, conditions in the market for non-investment grade debt.
Accordingly, there can be no assurance that the Company will be successful in
refinancing, extending, or exchanging such securities. In the event that the
Company is not successful in refinancing, extending, or exchanging such debt
securities, defaults may occur under the agreements relating to such securities.
If a default occurs, it may trigger other defaults pursuant to cross-default
provisions under other indebtedness of the Company. Holders of indebtedness on
which defaults exist would be entitled to accelerate the maturity thereof, to
cease making any further advances otherwise permitted under the related credit
facilities, to seek to foreclose upon any assets securing such indebtedness, and
to pursue other remedies. If any such actions were to be taken, the Company
might be required to consider alternatives, including seeking relief from its
creditors. Any such action by creditors could have a material adverse effect
upon the Company. The consolidated financial statements do not include any
adjustments that might result should the Company be unable to refinance, extend,
or exchange these obligations on or before their maturity dates.
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.
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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.
ORGANIZATIONAL CHANGES
On March 31, 1999, the Company changed the name of its wholly-owned
subsidiary, Lexington Components, Inc., to Lexington Rubber Group, Inc. and
contributed the stock of its wholly-owned subsidiary, Lexington Precision GmbH
and the assets, liabilities, and business operations of its Lexington
Technologies division to Lexington Rubber Group, Inc.
RECENTLY ISSUED ACCOUNTING STANDARDS
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 all
fiscal periods beginning after June 15, 1999. The statement provides standards
for the recognition and measurement of derivative and hedging activities. The
Company believes that the adoption of FAS 133 during the first quarter of 2000
will not affect the results of operations or financial position of the Company.
YEAR 2000
The Company's compliance plan for software and/or hardware failures due
to processing errors potentially arising from calculations using the year 2000
date is set forth in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the Company's annual report on Form 10-K
for the year ended December 31, 1998.
Although the Company has not yet developed specific contingency plans,
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. The Company expects to have contingency
plans in place by the third quarter of 1999.
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The status of the Company's year 2000 readiness effort as of March 31,
1999, is set forth in the table below:
------------------------------------------------------------------------------------------
RESOLUTION PHASES
------------------------------------------------------------------------------------------
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- --------------------------------------------------------------------------------------------------------------------
INFORMATION 100% complete 70% complete Expected completion Expected completion
TECHNOLOGY second quarter 1999 second quarter 1999
E -------------------------------------------------------------------------------------------------------------
X
P OPERATING 100% complete 85% complete Expected completion Expected completion
O EQUIPMENT WITH second quarter 1999 second quarter 1999
S EMBEDDED CHIPS
U OR SOFTWARE
R
E -------------------------------------------------------------------------------------------------------------
T PRODUCTS 100% complete 100% complete 100% complete 100% complete
Y -------------------------------------------------------------------------------------------------------------
P
E THIRD PARTY 75% complete Developing Expected completion Expected completion
contingency plans third quarter 1999 third quarter 1999
as appropriate
- --------------------------------------------------------------------------------------------------------------------
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. Furthermore, if, for
any reason, the Company or its major trading partners fail to complete
appropriate remediation programs or fail to complete remediation programs on a
timely basis, such failure could have a material adverse effect on the business
and revenues of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information about market risk, refer to "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity" in
Part I, Item 2.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Amendment to Financing Agreements dated March 31, 1999,
between the Company and Congress Financial Corporation
10-2 Term Promissory Note dated March 31, 1999, between the
Company and Congress Financial Corporation
10-3 Amendment to Financing Agreements dated March 31, 1999,
between Lexington Components, Inc. and Congress Financial
Corporation
10-4 Term Promissory Note dated March 31, 1999, 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 first quarter of 1999.
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LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 14, 1999 By: /s/ Michael A. Lubin
- ------------ ---------------------
Date Michael A. Lubin
Chairman of the Board
May 14, 1999 By: /s/ Warren Delano
- ------------ ------------------
Date Warren Delano
President
May 14, 1999 By: /s/ Dennis J. Welhouse
- ------------ -----------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Exhibit Location
-------- ------- --------
10-1 Amendment to Financing Agreements Filed with this Form 10-Q
dated March 31, 1999, between the Company
and Congress
10-2 Term Promissory Note dated March 31, 1999, Filed with this Form 10-Q
between the Company and Congress
10-3 Amendment to Financing Agreements Filed with this Form 10-Q
dated March 31, 1999, between Lexington
Components, Inc. and Congress
10-4 Term Promissory Note dated March 31, 1999, Filed with this Form 10-Q
between Lexington Components, Inc. and
Congress
27-1 Financial Data Schedule Filed with this Form 10-Q