<PAGE> 1
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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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK, $0.25 PAR VALUE, 4,263,036 SHARES AS OF AUGUST 8, 1997
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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<PAGE> 2
LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
Item 1. Financial Statements........................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................11
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........................................19
Item 6. Exhibits and Reports on Form 8-K...........................................................19
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 60 $ 187
Trade receivables 15,847 16,820
Inventories 9,302 8,899
Prepaid expenses and other assets 3,457 3,211
Deferred income taxes 1,728 1,728
-------- --------
Total current assets 30,394 30,845
-------- --------
Property, plant, and equipment:
Land 1,533 1,533
Buildings 22,445 19,915
Equipment 73,294 68,232
-------- --------
97,272 89,680
Less accumulated depreciation 40,078 36,380
-------- --------
Property, plant, and equipment, net 57,194 53,300
-------- --------
Excess of cost over net assets of businesses acquired, net 9,252 9,410
-------- --------
Other assets, net 3,499 3,475
-------- --------
$100,339 $ 97,030
======== ========
</TABLE>
See notes to consolidated financial statements. (continued on next page)
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<PAGE> 4
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 10,984 $ 14,334
Accrued expenses 8,792 8,282
Short-term debt 12,049 7,326
Current portion of long-term debt 5,646 5,225
--------- ---------
Total current liabilities 37,471 35,167
--------- ---------
Long-term debt, excluding current portion 66,353 65,148
--------- ---------
Deferred income taxes and other long-term liabilities 1,326 1,307
--------- ---------
Redeemable preferred stock, $100 par value,
at redemption value 930 930
Less excess of redemption value over par value 465 465
--------- ---------
Redeemable preferred stock at par value 465 465
--------- ---------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000
shares authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,376 12,395
Accumulated deficit (18,522) (18,322)
Cost of common stock in treasury, 85,915 shares (217) (217)
--------- ---------
Total stockholders' deficit (5,276) (5,057)
--------- ---------
$ 100,339 $ 97,030
========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 30,413 $ 28,081 $ 59,005 $ 55,979
Cost of sales 24,973 23,169 48,788 45,911
-------- -------- -------- --------
Gross profit 5,440 4,912 10,217 10,068
Selling and administrative expenses 2,968 2,779 5,845 5,443
-------- -------- -------- --------
Income from operations 2,472 2,133 4,372 4,625
Interest expense 2,279 2,109 4,429 4,063
-------- -------- -------- --------
Income/(loss) before income taxes 193 24 (57) 562
Provision for income taxes 143 79 143 260
-------- -------- -------- --------
Net income/(loss) 50 (55) (200) 302
Preferred stock dividends 9 10 19 20
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year 11 11 22 22
-------- -------- -------- --------
Net income/(loss) attributable to common
stockholders $ 30 $ (76) $ (241) $ 260
======== ======== ======== ========
Net income/(loss) per common share:
Primary $ 0.01 $ (0.02) $ (0.06) $ 0.06
======== ======== ======== ========
Fully diluted $ 0.01 $ (0.02) $ (0.06) $ 0.06
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) $ (200) $ 302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,912 3,280
Amortization -- operating expense 646 553
Amortization -- interest expense 75 146
Deferred income taxes -- 110
Changes in operating assets and liabilities that
provided/(used) cash:
Trade receivables 973 (1,619)
Inventories (403) (623)
Prepaid expenses and other assets (246) (1,447)
Trade accounts payable (3,350) 2,042
Accrued expenses 510 414
Other 100 64
-------- --------
Net cash provided by operating activities 2,017 3,222
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (7,861) (9,559)
Decrease in equipment deposits 148 170
Proceeds from sales of equipment 21 57
Expenditures for tooling owned by customers (476) (260)
-------- --------
Net cash used by investing activities (8,168) (9,592)
-------- --------
FINANCING ACTIVITIES:
Net increase in short-term debt 4,723 3,803
Proceeds from issuance of long-term debt 33,950 9,725
Repayment of long-term debt (32,327) (6,603)
Other (322) (186)
-------- --------
Net cash provided by financing activities 6,024 6,739
-------- --------
Net increase/(decrease) in cash (127) 369
Cash at beginning of period 187 118
-------- --------
Cash at end of period $ 60 $ 487
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiary (collectively,
the "Company"). The financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
the financial statements do not include all the information and footnotes
normally included in the Company's annual consolidated financial statements
prepared in accordance with generally accepted accounting principles.
Significant accounting policies followed by the Company are set forth, except as
described below, in Note 1 to the consolidated financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 1996, which
was filed with the Securities and Exchange Commission.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at June 30, 1997, and the Company's results of
operations and cash flows for the three-month and six-month periods ended
June 30, 1997 and 1996. All such adjustments were of a normal recurring nature.
The results of operations for the second quarter of 1997 are not
necessarily indicative of the results to be expected for the full year or for
any succeeding quarter.
NOTE 2 -- INVENTORIES
Inventories at June 30, 1997, and December 31, 1996, are set forth below
(dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ---------------
<S> <C> <C>
Finished goods $ 3,519 $ 3,615
Work in process 2,543 2,360
Raw materials and purchased parts 3,240 2,924
------ ------
$ 9,302 $ 8,899
====== ======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At June 30, 1997, and December 31, 1996, accrued expenses included
accrued interest expense of $1,803,000 and $1,754,000, respectively.
NOTE 4 -- DEBT
At June 30, 1997, and December 31, 1996, short-term debt consisted of
loans outstanding under the Company's revolving line of credit. At December 31,
1996, $6,856,000, of loans outstanding under the revolving line of credit were
classified as long-term debt because they were refinanced under long-term
agreements before the consolidated financial statements for the period were
issued.
-6-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term debt at June 30, 1997, and December 31, 1996, is set forth
below (in thousands of dollars):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- --------------
<S> <C> <C>
Long-term secured debt:
Revolving line of credit, prime rate plus 1% and LIBOR plus 3.25% $ - $ 6,856(1)
Term loans payable in equal monthly principal installments, final
maturities in 2000, 75% of prime rate - 4,767(2)
Term loan payable in increasing monthly principal installments,
final maturity in 2000, 12% 1,863 2,136
Term loans payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturities in 2001, 8.37% 3,272 3,389
Term loan payable in equal monthly principal installments, final
maturity in 2001, prime rate plus 0.25% and LIBOR plus 2.75% at June 30,
1997, prime rate plus 0.75% and LIBOR plus 3.00% at
December 31, 1996 1,877 1,560
Term loan payable in equal monthly principal installments, final
maturity in 2002, LIBOR plus 2.75% 2,531 -
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity 2002, 9.37% 1,564 -
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule commencing September 1, 1997,
final maturity in 2002, prime rate plus 0.75% 2,543(3) -
Term loans payable in equal monthly principal installments, final
maturities in 2002 and 2003, prime rate plus 1% and LIBOR plus
3.25% - 17,626(2)
Term loans payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% at June 30,
1997, prime rate plus 1% and LIBOR plus 3.25% at December 31, 1996 673(4) 734(4)
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 24,386(4) -
------- --------
Total long-term secured debt 38,709 37,068
------- --------
</TABLE>
(continued on next page)
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<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- --------------
<S> <C> <C>
Long-term unsecured debt:
12.75% Senior subordinated notes, due 2000 $ 31,720 $ 31,717
14% Junior subordinated convertible notes, due 2000, convertible
into 440,000 shares of common stock 1,000 1,000
14% Junior subordinated nonconvertible notes, due 2000 347 347
Other unsecured obligations 223 241
------- --------
Total long-term unsecured debt 33,290 33,305
------- --------
Total long-term debt 71,999 70,373
Less current portion 5,646 5,225
------- --------
Total long-term debt, excluding current portion $ 66,353 $ 65,148
======= ========
<FN>
(1) Classified as long-term debt because the loans were refinanced under
long-term agreements before the consolidated financial statements for the
period were issued.
(2) Refinanced under long-term agreements before the consolidated financial
statements for the respective periods were issued. Current portions are
based upon the terms of the new borrowings.
(3) Represents borrowings under a construction line of credit and related
permanent financing. Interest rate converted to a fixed rate of 9% per
annum, effective August 1, 1997.
(4) Maturity date can be accelerated by the lender if the Company's revolving
line of credit expires prior to the stated maturity date of the term loan.
</TABLE>
The loans outstanding under the Company's revolving line of credit and
the secured term loans listed above are collateralized by substantially all of
the assets of the Company, including trade receivables, inventories, equipment,
certain real estate, and the stock of the Company's subsidiary.
RESTRICTIVE COVENANTS
Certain of the Company's financing arrangements contain covenants with
respect to the maintenance of minimum levels of working capital, net worth, and
cash flow coverage and place certain restrictions on the Company's business and
operations, including the incurrence or assumption of additional debt, the sale
of all or substantially all of the Company's assets, the funding of capital
expenditures, the purchase of common stock, the redemption of preferred stock,
and the payment of cash dividends.
NOTE 5 -- PROVISION FOR INCOME TAXES
At June 30, 1997, and December 31, 1996, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in net deferred taxes or
the valuation allowance during the first six months of 1997.
The income tax provisions recorded during the three-month and six-month
periods ended June 30, 1997 and 1996, were primarily attributable to state
income taxes and alternative minimum taxes and were calculated using the
then-projected effective tax rates for the years ending December 31, 1997 and
1996, respectively.
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- NET INCOME OR NET LOSS PER COMMON SHARE
The calculations of primary and fully diluted net income or net loss per
common share for the three months ended June 30, 1997 and 1996, and the six
months ended June 30, 1997 and 1996, are set forth below (in thousands, except
per share amounts). Because the pro forma conversion of the Company's 14% junior
subordinated convertible notes was calculated to be antidilutive for each of the
periods shown, the reported fully diluted net income or net loss per common
share for all periods equals the primary net income or net loss per common
share.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,244 4,263 4,236
Common equivalent shares -- incentive stock options - - - -
------ ------ ------ ------
Weighted average common and common equivalent shares 4,263 4,244 4,263 4,236
====== ====== ====== ======
Net income/(loss) $ 50 $ (55) $ (200) $ 302
Preferred stock dividends (9) (10) (19) (20)
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year (11) (11) (22) (22)
------ ------ ------ ------
Primary net income/(loss) attributable to common
stockholders $ 30 $ (76) $ (241) $ 260
====== ====== ====== ======
Primary net income/(loss) per common share $ 0.01 $ (0.02) $ (0.06) $ 0.06
====== ====== ====== ======
FULLY DILUTED NET INCOME/(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during period 4,263 4,263 4,263 4,263
Pro forma conversion of 14% junior subordinated convertible
notes 440 440 440 440
Common equivalent shares-- incentive stock options - - - -
------ ------ ------ ------
Weighted average common and common equivalent shares 4,703 4,703 4,703 4,703
====== ====== ====== ======
Net income/(loss) $ 50 $ (55) $ (200) $ 302
Preferred stock dividends (9) (10) (19) (20)
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year (11) (11) (22) (22)
Pro forma elimination of interest expense on the 14% junior
subordinated convertible notes, net of applicable income
taxes 26 27 52 54
------ ------ ------ ------
Fully diluted net income/(loss) attributable to common
stockholders $ 56 $ (49) $ (189) $ 314
====== ====== ====== ======
Fully diluted net income/(loss) per common share $ 0.01 $ (0.02) $ (0.06) $ 0.06
====== ====== ====== ======
</TABLE>
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<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In February 1997, the Financial Accounting Standards Board issued
"Financial Accounting Standard No. 128, Earnings per Share" ("FAS 128"), which
is effective for fiscal periods ending after December 15, 1997. Earlier
application is not permitted. FAS 128 will require the presentation of basic and
diluted earnings per share. Basic earnings per share is based on the
weighted-average number of common shares outstanding during each period, and
diluted earnings per share includes the dilutive effect of stock options,
convertible securities, and other potentially dilutive securities. FAS 128 will
require companies to report all earnings per share amounts using the revised
method of calculation. The Company believes that the adoption of FAS 128 will
not affect the earnings per share data reported by the Company during 1996 and
1997.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities, including actions naming the Company as one of numerous potentially
responsible parties under applicable environmental laws for restoration costs at
waste-disposal sites, as a third-party defendant in cost-recovery actions
pursuant to applicable environmental laws, and as a defendant or potential
defendant in various other matters. It is the Company's policy to record
accruals for such matters when a loss is deemed probable and the amount of such
loss can be reasonably estimated. The various actions to which the Company is or
may be a party in the future are at various stages of completion; although there
can be no assurance as to the outcome of existing or potential litigation, in
the event such litigation were commenced, based upon the information currently
available to the Company, the Company currently believes that the outcome of
such actions would not have a material adverse effect upon its financial
position.
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<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Various statements in this Item 2 are based upon projections and
estimates, as distinct from past or historical facts and events. These
forward-looking statements are subject to a number of risks, uncertainties, and
contingencies that could cause actual results to be materially different. Such
risks and uncertainties include increases and decreases in business awarded to
the Company by its various customers, unanticipated operating results and cash
flows, increases or decreases in capital expenditures, changes in economic
conditions, changes in the competitive environment, changes in the capital
markets, labor interruptions at the Company or at its customers, and a number of
other factors. Because the Company operates with substantial financial leverage
and limited liquidity, the impact of any negative event may have a greater
adverse effect upon the Company than if the Company operated with lower
financial leverage and greater liquidity. The results of operations for any
particular fiscal period of the Company are not necessarily indicative of the
results to be expected for any one or more succeeding fiscal periods.
RESULTS OF OPERATIONS -- SECOND QUARTER OF 1997 VERSUS SECOND QUARTER OF 1996
The Company manufactures, to customer specifications, component parts
through two business segments, the Rubber Group and the Metals Group.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components.
The Rubber Group consists of four operating companies: Lexington Connector
Seals, Lexington Insulators, Lexington Medical, and Lexington Technologies.
During the second quarters of 1997 and 1996, net sales of automotive components
represented 90.1% and 88.5%, respectively, of the Rubber Group's total net
sales. Any material reduction in the level of activity in the automotive
industry may have a material adverse effect on the results of operations of the
Rubber Group and the Company.
The following table sets forth the operating results of the Rubber Group
for the second quarters of 1997 and 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
----------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 21,306 100.0% $ 18,775 100.0%
Cost of sales 16,533 77.6 14,787 78.8
-------- ------ ------- ------
Gross profit 4,773 22.4 3,988 21.2
Selling and administrative expenses 1,224 5.7 1,250 6.7
-------- ------ ------- ------
Income from operations $ 3,549 16.7% $ 2,738 14.5%
======== ====== ======= ======
</TABLE>
During the second quarter of 1997, net sales of the Rubber Group
increased by $2,531,000, or 13.5%, compared to the second quarter of 1996. This
increase was primarily due to increased unit sales of connector seals and
insulators for automotive wiring systems and increased sales of tooling, offset,
in part, by reduced sales of medical components and price reductions on certain
automotive components.
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<PAGE> 13
During the second quarter of 1997, income from operations increased by
$811,000, or 29.6%, compared to the second quarter of 1996. Cost of sales
increased at a slower rate than net sales during the second quarter of 1997. The
resulting reduction in cost of sales as a percentage of net sales was limited,
in part, by (i) increased sales of tooling which generally have lower margins
than sales of components, (ii) increased indirect labor expense resulting
primarily from (a) the hiring of technical and supervisory personnel in
conjunction with the start-up of production of a new style of connector seal and
(b) continuing start-up expenses incurred at Lexington Technologies, and
(iii) increased depreciation and amortization, which totaled $1,694,000 during
the second quarter of 1997, compared to $1,423,000 during the second quarter of
1996. Selling and administrative expenses as a percentage of net sales decreased
during the second quarter of 1997 compared to the second quarter of 1996
primarily because most selling and administrative expenses grew at a slower rate
than net sales.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die castings
and machines aluminum, brass, and steel components. The Metals Group consists of
three operating companies: Lexington Die Casting, Lexington Machining, and
Lexington Safety Components. During the second quarters of 1997 and 1996, net
sales of automotive components represented 39.6% and 28.5%, respectively, of the
Metals Group's total net sales.
The following table sets forth the operating results of the Metals Group
for the second quarters of 1997 and 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
----------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 9,107 100.0% $ 9,306 100.0%
Cost of sales 8,440 92.7 8,382 90.1
-------- ------ ------- ------
Gross profit 667 7.3 924 9.9
Selling and administrative expenses 1,210 13.3 1,007 10.8
-------- ------ ------- ------
Loss from operations $ (543) (6.0)% $ (83) (0.9)%
======== ====== ======= ======
</TABLE>
During the second quarter of 1997, net sales of the Metals Group
decreased by $199,000, or 2.1%, compared to the second quarter of 1996. This
reduction resulted primarily from lower net sales of a variety of components at
Lexington Machining, offset, in part, by an increase of $1,156,000 in net sales
of airbag components at Lexington Safety Components.
During the second quarter of 1997, the Metals Group incurred a loss from
operations of $543,000, compared to a loss of $83,000 during the second quarter
of 1996. While material and direct labor costs as a percentage of net sales
decreased during the second quarter of 1997, manufacturing overhead as a
percentage of net sales increased primarily because of (i) underabsorption of
fixed overhead caused by reduced sales at Lexington Machining, (ii) start-up
expenses related to the production of new airbag components and the installation
of new metal machining equipment at Lexington Safety Components, (iii) increased
depreciation, which totaled $720,000 during the second quarter of 1997, compared
to $607,000 during the second quarter of 1996, and (iv) increased indirect labor
costs resulting, in part, from the hiring of additional technical and
professional staff. Increased selling and administrative expenses resulted
primarily from the hiring of additional technical and professional staff,
increased legal fees, and the accrual of certain litigation expenses.
-12-
<PAGE> 14
During 1996, the Company commenced a program to try to increase net
sales, profitability, and operating cash flow of the Metals Group. Actions taken
included (i) hiring of new technical and professional staff with the goal of
improving the Metals Group's manufacturing processes, quality systems, and
administrative capabilities, (ii) formation of Lexington Safety Components as a
separate business unit with its own management team, (iii) elimination of sales
representatives and hiring of additional in-house sales personnel,
(iv) purchases of additional equipment and construction of an additional 44,000
square feet of manufacturing and office space at Lexington Safety Components,
(v) reduction of low-volume, unprofitable production, (vi) focus on
higher-volume business in target markets, and (vii) enhancement of quality
systems at a number of facilities with the objective of obtaining QS 9000
certification in 1997. The management of the Company believes that certain of
these actions have had, and may continue to have, an adverse affect on the
profitability of the Company in the short term.
CORPORATE OFFICE
Corporate office expenses, which are consolidated with selling and
administrative expenses of the Rubber Group and the Metals Group in the
Company's consolidated financial statements, totaled $534,000 and $522,000
during the second quarters of 1997 and 1996, respectively.
INTEREST EXPENSE
During the second quarters of 1997 and 1996, interest expense totaled
$2,279,000 and $2,109,000, respectively. The increase during the second quarter
of 1997 was caused primarily by an increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At June 30, 1997, and December 31, 1996, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in net deferred taxes or
the valuation allowance during the second quarter of 1997.
The income tax provisions recorded during the second quarters of 1997
and 1996 were primarily attributable to state income taxes and alternative
minimum taxes and were calculated using the then-projected effective tax rates
for the years ending December 31, 1997 and 1996, respectively.
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF 1997 VERSUS FIRST SIX MONTHS OF
1996
RUBBER GROUP
The following table sets forth the operating results of the Rubber Group
for the first six months of 1997 and 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 40,789 100.0% $ 36,926 100.0%
Cost of sales 31,934 78.3 29,059 78.7
-------- ------ ------- ------
Gross profit 8,855 21.7 7,867 21.3
Selling and administrative expenses 2,444 6.0 2,306 6.2
-------- ------ ------- ------
Income from operations $ 6,411 15.7% $ 5,561 15.1%
======== ====== ======= ======
</TABLE>
-13-
<PAGE> 15
During the first six months of 1997, net sales of the Rubber Group
increased by $3,863,000, or 10.5%, compared to the first six months of 1996.
This increase was primarily due to increased unit sales of connector seals and
insulators for automotive wiring systems, offset, in part, by reduced sales of
medical components and price reductions on certain automotive components. During
the first six months of 1997 and 1996, net sales of automotive components
represented 90.6% and 88.7%, respectively, of the Rubber Group's total net
sales.
During the first six months of 1997, income from operations totaled
$6,411,000, an increase of $850,000, or 15.3%, compared to the first six months
of 1996. Cost of sales as a percentage of net sales increased at a slower rate
than net sales during the second quarter of 1997. The improvement in cost of
sales as a percentage of net sales, was limited, in part, by (i) increased
indirect labor expense resulting primarily from (a) the hiring of technical and
supervisory personnel in conjunction with the start-up of production of a new
style of connector seal and (b) continuing start-up expenses incurred at
Lexington Technologies, and (ii) increased depreciation and amortization, which
totaled $3,332,000 during the first six months of 1997, compared to $2,754,000
during the first six months of 1996. Selling and administrative expenses as a
percentage of net sales decreased during the first six months of 1997 compared
to the first six months of 1996 primarily because most selling and
administrative expenses grew at a slower rate than net sales.
METALS GROUP
The following table sets forth the operating results of the Metals Group
for the first six months of 1997 and 1996 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 18,216 100.0% $ 19,053 100.0%
Cost of sales 16,854 92.5 16,852 88.4
-------- ------ ------- ------
Gross profit 1,362 7.5 2,201 11.6
Selling and administrative expenses 2,310 12.7 1,998 10.5
-------- ------ ------- ------
Income/(loss) from operations $ (948) (5.2)% $ 203 1.1%
======== ====== ======= ======
</TABLE>
During the first six months of 1997, net sales of the Metals Group
decreased by $837,000, or 4.4%, compared to the first six months of 1996. This
reduction resulted primarily from lower net sales of a variety of components at
Lexington Machining and lower net sales of components for computers and business
machines at Lexington Die Casting, offset, in part, by an increase in net sales
of airbag components at Lexington Safety Components. During the first six months
of 1997 and 1996, net sales of automotive components represented 39.7% and
29.9%, respectively, of the Metals Group's total net sales.
During the first six months of 1997, the Metals Group incurred a loss
from operations of $948,000, compared to income from operations of $203,000
during the first six months of 1996. While material and direct labor costs as a
percentage of net sales decreased during the first six months of 1997,
manufacturing overhead as a percentage of net sales increased primarily because
of (i) underabsorption of fixed overhead caused by reduced sales at Lexington
Machining and Lexington Die Casting, (ii) start-up expenses related to the
production of new airbag components and the installation of new metal machining
equipment at Lexington Safety Components, (iii) increased depreciation, which
totaled $1,430,000 during the first six months of 1997, compared to $1,187,000
during the first six months of 1996, and (iv) increased indirect labor costs
resulting, in part, from the hiring of additional technical and professional
staff. Increased selling and administrative expenses resulted primarily from the
hiring of additional technical and professional staff and the accrual of certain
litigation expenses.
-14-
<PAGE> 16
CORPORATE OFFICE
Corporate office expenses, which are consolidated with selling and
administrative expenses of the Rubber Group and the Metals Group in the
Company's consolidated financial statements, totaled $1,091,000 and $1,139,000
during the first six months of 1997 and 1996, respectively.
INTEREST EXPENSE
During the first six months of 1997 and 1996, interest expense totaled
$4,429,000 and $4,063,000, respectively. The increase during the first six
months of 1997 was caused primarily by an increase in average borrowings
outstanding.
PROVISION FOR INCOME TAXES
At June 30, 1997, and December 31, 1996, the excess of the Company's
deferred tax assets over its deferred tax liabilities was substantially offset
by a valuation allowance. There was no material change in net deferred taxes or
the valuation allowance during the first six months of 1997.
The income tax provisions recorded during the first six months of 1997
and 1996 were primarily attributable to state income taxes and alternative
minimum taxes and were calculated using the then-projected effective tax rates
for the years ending December 31, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first six months of 1997, the operating activities of the
Company provided $2,017,000 of cash.
From December 31, 1996, to June 30, 1997, trade receivables decreased by
$973,000 primarily because in January 1997 the Company received a payment of
$1,612,000 that was due in December 1996 from its largest customer.
From December 31, 1996, to June 30, 1997, trade accounts payable
decreased by $3,350,000. At June 30, 1997, the Company's trade accounts payable
included approximately $3,187,000 relating to the purchase of property,
equipment, and customer-owned tooling, compared to $4,305,000 relating to such
purchases at December 31, 1996. After excluding trade accounts payable balances
related to the purchase of property, equipment, and customer-owned tooling,
trade accounts payable decreased by $2,232,000. Funds used to reduce the
Company's trade accounts payable balances were obtained from financing
arrangements entered into by the Company during the first six months of 1997.
The reduction in balances brought the Company's trade accounts payable to a
level that the Company believes is customary in the industries in which it
operates.
INVESTING ACTIVITIES
During the first six months of 1997, the investing activities of the
Company used $8,168,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$2,917,000 and $4,944,000, respectively. The Company presently expects that
capital expenditures will total approximately $17,700,000 during 1997, including
$15,500,000 for equipment and
-15-
<PAGE> 17
$2,200,000 for buildings. At June 30, 1997, the Company had commitments
outstanding for capital expenditures totaling approximately $2,700,000.
FINANCING ACTIVITIES
During the first six months of 1997, the financing activities of the
Company provided $6,024,000 of cash.
During the first six months of 1997, the Company obtained new term loans
in the aggregate amount of $33,950,000. Proceeds from the new term loans
refinanced $22,790,000 of existing term loans, $9,857,000 of loans outstanding
under the revolving line of credit, and $1,303,000 of capital expenditures.
Certain information concerning the new term loans is set forth below.
- The Company borrowed $2,543,000 under a $3,000,000 construction line
of credit for an addition to its Casa Grande, Arizona, facility. The
borrowings refinanced a term loan of $322,000, refinanced loans
outstanding under the Company's revolving line of credit of $918,000,
and financed capital expenditures of $1,303,000.
- The Company borrowed $1,900,000 secured by certain equipment and other
assets of the Company. Proceeds from the new term loan refinanced an
existing term loan of $1,440,000 and loans outstanding under the
Company's revolving line of credit of $460,000. The new term loan
bears interest at prime rate plus 0.25% and LIBOR plus 2.75% and is
payable in 84 monthly principal installments of $23,000.
From December 31, 1996, to June 30, 1997, borrowings under the Company's
revolving line of credit decreased by $2,133,000 primarily because the Company
refinanced loans outstanding under the revolving line of credit with funds
obtained from new loans. At December 31, 1996, $6,856,000 of loans outstanding
under the revolving line of credit were classified as long-term debt because
they were refinanced under long-term agreements before the consolidated
financial statements for the period were issued.
In July 1997, the Company borrowed the remaining $457,000 available
under the construction line of credit. In August 1997, the borrowings under the
construction line of credit converted to a term loan payable in 59 equal monthly
principal installments of $17,000 with a final payment of $2,017,000 due in
2002. At the time of conversion the rate of interest on the loan changed from
prime plus 0.75% to a fixed rate of 9%.
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 covenant compliance and to
certain availability formulas based on the levels of trade receivables and
inventories of the Company.
The Company operates with substantial financial leverage and limited
liquidity. As a result of increased borrowings during the first six months of
1997, aggregate indebtedness of the Company, excluding trade accounts payable,
increased by $6,349,000 to $84,048,000. During 1997, interest and principal
payments are projected to total approximately $8,700,000 and $5,500,000,
respectively.
-16-
<PAGE> 18
At August 11, 1997, availability under the Company's revolving line of
credit totaled $1,463,000 before deducting outstanding checks of approximately
$564,000.
The Company had a net working capital deficit of $7,077,000 at June 30,
1997. Loans outstanding under the revolving line of credit classified as
short-term debt at June 30, 1997, totaled $12,049,000. Although the expiration
date of the revolving line of credit is April 1, 2000, these loans are
classified as current liabilities because the Company's cash receipts are
automatically used to reduce the loans outstanding under the revolving line of
credit on a daily basis, by means of a lock-box sweep agreement, and the lender
has the ability to modify certain terms of the revolving line of credit without
the prior approval of the Company.
The Company estimates that, during the second half of 1997 and the first
three months of 1998, new loans of approximately $9,000,000 will be necessary to
permit the Company to adequately fund projected working capital needs, debt
service requirements, and capital expenditures. The Company is currently
projecting that it will require loans of approximately $2,000,000 in excess of
its current lines of credit during the nine-month period.
Although no assurance can be given, the Company currently believes that,
for the remainder of 1997 and the first six months of 1998, cash flows from
operations, borrowings available to the Company under existing financing
agreements, and borrowings which the Company believes will be available under
new financing agreements should be adequate to meet its projected working
capital and debt service requirements and fund capital expenditures currently
planned by the Company. If cash flows from operations or availability under
existing or new financing agreements fall below expectations, the Company may be
forced to delay planned capital expenditures, reduce operating expenses, and/or
extend trade accounts payable balances beyond terms which the Company believes
are customary in the industries in which it operates. Any such actions could
have an adverse effect upon the Company.
Certain of the Company's financing arrangements, which are secured by
substantially all of the Company's assets and the stock of its subsidiary,
contain covenants with respect to the maintenance of minimum levels of working
capital, net worth, and cash flow coverage and place certain restrictions on the
Company's business and operations, including the incurrence or assumption of
additional debt, the sale of all or substantially all of the Company's assets,
the funding of capital expenditures, the purchase of common stock, the
redemption of preferred stock, and the payment of cash dividends.
ACQUISITIONS
The Company is seeking to acquire assets and businesses related to its
current operations with the intention of expanding its existing operations.
Depending on the size, terms, and other aspects of such acquisitions, the
Company may be required to obtain additional financing and, in some cases, the
consents of its existing lenders. The Company's ability to effect acquisitions
may be dependent upon its ability to obtain such financing and, to the extent
applicable, consents.
COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities, including actions naming the Company as one of numerous potentially
responsible parties under applicable environmental laws for restoration costs at
waste-disposal sites, as a third-party defendant in cost-recovery actions
pursuant to applicable environmental laws, and as a defendant or potential
defendant in various other matters. It is the Company's policy to record
accruals for such matters when a loss is deemed probable and the amount of such
loss can be reasonably estimated. The various actions to which the Company is or
may be a party in the future are at various stages
-17-
<PAGE> 19
of completion; although there can be no assurance as to the outcome of existing
or potential litigation, in the event such litigation were commenced, based upon
the information currently available to the Company, the Company currently
believes that the outcome of such actions would not have a material adverse
effect upon its financial position.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued "Statement of Position
No. 96-1, Environmental Remediation Liabilities" ("SOP 96-1"), which clarifies
the existing authoritative guidance on loss contingencies that apply in
determining environmental liabilities. Adoption of SOP 96-1 during the first
quarter of 1997 by the Company was not material to the Company's results of
operations.
FINANCIAL ACCOUNTING STANDARD NO. 128, EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
"Financial Accounting Standard No. 128, Earnings per Share" ("FAS 128"), which
is effective for fiscal periods ending after December 15, 1997. Earlier
application is not permitted. FAS 128 requires the presentation of basic and
diluted earnings per share. Basic earnings per share is based on the
weighted-average number of common shares outstanding during each period, and
diluted earnings per share includes the dilutive effect of stock options,
convertible securities, and other potentially dilutive securities. Upon
adoption, FAS 128 requires the Company to restate all previously reported
earnings per share amounts. The Company does not believe that the recalculation
of earnings per share data will have any impact on the reported earnings per
share data reported during 1996 or 1997.
-18-
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
May 15, 1997.
(b) The matters voted upon at the Annual Meeting and the results of
the voting on each matter are set forth below:
(i) The election of Michael A. Lubin as a director of the
Company for a term expiring in 2000.
Votes for Mr. Lubin 2,872,498
Votes withheld from Mr. Lubin 11,191
(ii) The ratification of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31,
1997.
Votes for Ernst & Young LLP 2,867,217
Votes against Ernst & Young LLP 4,826
Abstentions 11,646
There were no broker non-votes in respect of the
foregoing matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibit is filed herewith:
27-1 Financial Data Schedule
(b) REPORTS OF FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the second quarter of 1997.
-19-
<PAGE> 21
LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
August 11, 1997 By: /s/ Michael A. Lubin
- --------------- ----------------------------
Date Michael A. Lubin
Chairman of the Board
August 11, 1997 By: /s/ Warren Delano
- --------------- ----------------------------
Date Warren Delano
President
August 11, 1997 By: /s/ Dennis J. Welhouse
- --------------- ----------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 15,847
<ALLOWANCES> 0
<INVENTORY> 9,302
<CURRENT-ASSETS> 30,394
<PP&E> 97,272
<DEPRECIATION> 40,078
<TOTAL-ASSETS> 100,339
<CURRENT-LIABILITIES> 37,471
<BONDS> 66,353
<COMMON> 1,087
465
0
<OTHER-SE> (6,363)
<TOTAL-LIABILITY-AND-EQUITY> 100,339
<SALES> 59,005
<TOTAL-REVENUES> 59,005
<CGS> 48,788
<TOTAL-COSTS> 48,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,429
<INCOME-PRETAX> (57)
<INCOME-TAX> 143
<INCOME-CONTINUING> (200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (200)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
