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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
COMMON STOCK, $0.25 PAR VALUE, 4,263,036 SHARES AS OF MAY 7, 1998
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<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......................................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 167 $ 208
Trade receivables 17,269 17,579
Inventories 9,851 9,031
Prepaid expenses and other assets 2,620 3,438
Deferred income taxes 1,572 1,572
--------- ---------
Total current assets 31,479 31,828
--------- ---------
Plant and equipment:
Land 1,533 1,533
Buildings 23,540 23,426
Equipment 82,007 78,922
--------- ---------
107,080 103,881
Accumulated depreciation (46,636) (44,451)
--------- ---------
Plant and equipment, net 60,444 59,430
--------- ---------
Excess of cost over net assets of businesses acquired, net 9,015 9,094
--------- ---------
Other assets, net 3,775 3,772
--------- ---------
$ 104,713 $ 104,124
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 11,791 $ 12,628
Accrued expenses 7,665 8,495
Short-term debt 10,955 8,840
Current portion of long-term debt 6,458 6,040
--------- ---------
Total current liabilities 36,869 36,003
--------- ---------
Long-term debt, excluding current portion 72,762 72,622
--------- ---------
Deferred income taxes and other long-term liabilities 1,757 1,746
--------- ---------
Redeemable preferred stock, $100 par value, at redemption
value 840 840
Excess of redemption value over par value (420) (420)
--------- ---------
Redeemable preferred stock at par value 420 420
--------- ---------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,305 12,313
Accumulated deficit (20,270) (19,850)
Cost of common stock in treasury, 85,915 shares (217) (217)
--------- ---------
Total stockholders' deficit (7,095) (6,667)
--------- ---------
$ 104,713 $ 104,124
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $ 32,197 $ 28,592
Cost of sales 27,412 23,815
-------- --------
Gross profit 4,785 4,777
Selling and administrative expenses 2,803 2,877
-------- --------
Income from operations 1,982 1,900
Interest expense 2,402 2,150
-------- --------
Loss before income taxes (420) (250)
Provision for income taxes -- --
-------- --------
Net loss (420) (250)
Preferred stock dividends 8 9
Allocated portion of excess of redemption value over par
value of preferred stock to be redeemed during year 11 11
-------- --------
Net loss attributable to common stockholders $ (439) $ (270)
======== ========
Net loss per common share:
Basic $ (0.10) $ (0.06)
======== ========
Diluted $ (0.10) $ (0.06)
======== ========
</TABLE>
See notes to consolidated financial statements.
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LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (420) $ (250)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation 2,306 1,953
Amortization included in operating expense 300 321
Amortization included in interest expense 50 38
Deferred income taxes
Changes in operating assets and
liabilities that provided/(used) cash:
Trade receivables 310 2,345
Inventories (820) (249)
Prepaid expenses and other assets 630 247
Trade accounts payable (837) (3,566)
Accrued expenses (830) (2,246)
Other 14 10
-------- --------
Net cash provided/(used) by operating activities 703 (1,397)
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (3,387) (4,798)
Decrease in equipment deposits 36 387
Proceeds from sales of equipment 64 6
Expenditures for tooling owned by customers (130) (265)
Other 8 (61)
-------- --------
Net cash used by investing activities (3,409) (4,731)
-------- --------
FINANCING ACTIVITIES:
Net increase in short-term debt 2,115 4,101
Proceeds from issuance of long-term debt 2,041 31,829
Repayment of long-term debt (1,483) (29,640)
Other (8) (263)
-------- --------
Net cash provided by financing activities 2,665 6,027
-------- --------
Net decrease in cash (41) (101)
Cash at beginning of period 208 187
-------- --------
Cash at end of period $ 167 $ 86
======== ========
</TABLE>
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"). The financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
the financial statements do not include all the information and footnotes
included in the Company's annual consolidated financial statements. Significant
accounting policies followed by the Company are set forth, except as described
below, in Note 1 to the consolidated financial statements in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at March 31, 1998, and the Company's results
of operations and cash flows for the three-month periods ended March 31, 1998
and 1997. All such adjustments were of a normal recurring nature.
The results of operations for the first quarter of 1998 are not
necessarily indicative of the results to be expected for the full year or for
any succeeding quarter.
Effective January 1, 1998, the Company adopted "Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS
130 established standards for the reporting and display of changes in
stockholders' equity during a period that are not included in reported net
income for such period, excluding changes resulting from transactions with
owners. During the first quarter of 1998, the Company did not have any items of
income or loss requiring disclosure under the provisions of FAS 130.
NOTE 2 -- INVENTORIES
Inventories at March 31, 1998, and December 31, 1997, are set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Finished goods $ 4,057 $ 3,654
Work in process 2,373 1,658
Raw materials and purchased parts 3,421 3,719
-------- -------
$ 9,851 $ 9,031
======== =======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At March 31, 1998, and December 31, 1997, accrued expenses included
accrued interest expense of $942,000 and $1,964,000, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
At March 31, 1998, and December 31, 1997, short-term debt consisted of
loans outstanding under the Company's revolving line of credit. At March 31,
1998, $1,601,000 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. At March 31, 1998, loans outstanding under the revolving line of credit
accrued interest at the prime rate plus 0.25% and the London Interbank Offered
Rate ("LIBOR") plus 2.75%.
Long-term debt at March 31, 1998, and December 31, 1997, is set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Long-term secured debt:
Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ 1,601(1) $ --
Term loan payable in increasing monthly principal installments, final
maturity in 2000, 12% 1,421 1,573
Term loans payable in equal monthly principal installments based on a
180-month amortization schedule, final maturities in 2001, 8.37% 3,095 3,153
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 3,144 3,330
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9.37% 1,484 1,511
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9% 2,883 2,933
Term loan payable in 60 equal monthly installments, final maturity in
2003, prime rate plus 0.25% 908 468
Term loans payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 583(2) 613(2)
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 21,676(2) 22,580(2)
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,674 1,742
------- -------
Total long-term secured debt $38,469 $37,903
------- -------
</TABLE>
(continued on next page)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Long-term unsecured debt:
10.5% senior note, due 2000 $ 7,500 $ 7,500
12.75% senior subordinated notes, due 2000 31,720 31,720
14% junior subordinated convertible notes, due 2000, convertible into
440,000 shares of common stock 1,000 1,000
14% junior subordinated nonconvertible notes, due 2000 347 347
Other unsecured obligations 184 192
------- -------
Total long-term unsecured debt 40,751 40,759
------- -------
Total long-term debt 79,220 78,662
Less current portion 6,458 6,040
------- -------
Total long-term debt, excluding current portion $72,762 $72,622
======= =======
</TABLE>
(1) Refinanced under long-term agreements before the consolidated
financial statements for the period were issued. Amounts
classified as secured or unsecured and amounts reflected in
current portion are based upon the terms of the new borrowings.
(2) Maturity date can be accelerated by the lender if the Company's
revolving line of credit expires prior to the stated maturity date
of the term loan.
The loans outstanding under the Company's revolving line of credit and
the secured term loans listed above are collateralized by substantially all of
the assets of the Company, including trade receivables, inventories, equipment,
certain real estate, and the stock of one of the Company's subsidiaries.
RESTRICTIVE COVENANTS
Certain of the Company's financing arrangements contain covenants with
respect to the maintenance of minimum levels of working capital, net worth, and
cash flow coverage and impose limitations on the Company's ratio of debt to
equity. The covenants also place certain restrictions on the Company's business
and operations, including the incurrence or assumption of additional debt, the
sale of all or substantially all of the Company's assets, the funding of capital
expenditures, the purchase of common stock, the redemption of preferred stock,
and the payment of cash dividends. In addition, substantially all of the
Company's financing agreements include cross-default provisions.
NOTE 5 -- PROVISION FOR INCOME TAXES
At March 31, 1998, and December 31, 1997, the excess of the Company's
deferred tax assets over its deferred tax liabilities was offset by a valuation
allowance. There was no material change in net deferred taxes during the first
quarter of 1998.
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- NET LOSS PER COMMON SHARE
The calculations of basic and diluted net loss per common share for the
three-month periods ended March 31, 1998 and 1997 are set forth below (in
thousands, except per share amounts). Because the pro forma conversion of each
of the Company's potentially dilutive securities (the 14% junior subordinated
convertible notes and the $8 cumulative convertible redeemable preferred stock,
series B) was antidilutive, the pro forma conversion was not included in the
calculation of diluted net loss set forth below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1998 1997
---- ----
Numerator:
<S> <C> <C>
Net loss $ (420) $ (250)
Preferred stock dividends (8) (9)
Allocated portion of excess of redemption
value over par value of preferred
stock to be redeemed during year (11) (11)
-------- --------
Income available to common stockholders $ (439) $ (270)
======== ========
Weighted-average common shares 4,263 4,263
======== ========
Basic and diluted net loss per common share $ (0.10) $ (0.06)
======== ========
</TABLE>
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities, including actions naming the Company as one of numerous potentially
responsible parties under applicable environmental laws for restoration costs at
waste-disposal sites, as a third-party defendant in cost-recovery actions
pursuant to applicable environmental laws, and as a defendant or potential
defendant in various other matters. It is the Company's policy to record
accruals for such matters when a loss is deemed probable and the amount of such
loss can be reasonably estimated. The various actions to which the Company is or
may be a party in the future are at various stages of completion. Although there
can be no assurance as to the outcome of existing or potential litigation, in
the event such litigation were commenced, based upon the information currently
available to the Company, the Company believes that the outcome of such actions
will not have a material adverse effect upon its financial position.
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<PAGE> 11
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" or the negative thereof. They
may include discussions of strategy, which involve risks and uncertainties, and
they typically are based upon projections and estimates, as distinct from past
or historical facts and events. Forward-looking statements are subject to a
number of risks, uncertainties, contingencies, and other factors that could
cause the actual results or performance of the Company to be materially
different from the future results or performance expressed in or implied by such
statements. Such risks and uncertainties for the Company include increases and
decreases in business awarded to the Company by its various customers,
unanticipated price reductions for the Company's products as a result of
competition, unanticipated operating results and cash flows, increases or
decreases in capital expenditures, unforeseen product liability claims, changes
in economic conditions, changes in the competitive environment, changes in the
capital markets, labor interruptions at the Company or at its customers, and a
number of other factors. Because the Company operates with substantial financial
leverage and limited liquidity, the impact of any negative event may have a
greater adverse effect upon the Company than if the Company operated with lower
financial leverage and greater liquidity. The results of operations for any
particular fiscal period of the Company are not necessarily indicative of the
results to be expected for any one or more succeeding fiscal periods.
Consequently, the inclusion of forward-looking statements should not be regarded
as a representation that these projections and 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 attributable to the Company are expressly qualified
by the foregoing cautionary statements.
RESULTS OF OPERATIONS -- FIRST QUARTER OF 1998 VERSUS FIRST QUARTER OF 1997
The Company manufactures, to customer specifications, component parts
through two business segments, the Rubber Group and the Metals Group.
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components.
During the first quarters of 1998 and 1997, automotive industry customers of the
Rubber Group represented 91.0% and 91.2%, respectively, of the Rubber Group's
net sales. Any material reduction in the level of activity in the automotive
industry may have a material adverse effect on the results of operations of the
Rubber Group and the Company.
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<PAGE> 12
The following table sets forth the operating results of the Rubber Group
for the first quarters of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 23,834 100.0% $ 19,483 100.0%
Cost of sales 18,622 78.1 15,401 79.0
--------- ------- --------- -------
Gross profit 5,212 21.9 4,082 21.0
Selling and administrative expenses 1,477 6.2 1,220 6.3
--------- ------- --------- -------
Income from operations $ 3,735 15.7% $ 2,862 14.7%
========= ======= ========= =======
</TABLE>
During the first quarter of 1998, net sales of the Rubber Group
increased by $4,351,000, or 22.3%, compared to the first quarter of 1997. This
increase was primarily due to increased unit sales of insulators and connector
seals for automotive wiring systems and, to a lesser extent, increased sales of
medical components and tooling, offset, in part, by price reductions on certain
automotive components.
During the first quarter of 1998, income from operations totaled
$3,735,000, an increase of $873,000, or 30.5%, compared to the first quarter of
1997. Cost of sales as a percentage of net sales decreased during the first
quarter of 1998 primarily because such expenses are partially fixed in nature.
Nevertheless, material costs as a percentage of net sales increased primarily
because of increased tooling sales and increased shipments of components
requiring more expensive materials. Depreciation and amortization charged to
factory overhead expense totaled $1,644,000, or 6.9% of net sales, during the
first quarter of 1998, compared to $1,415,000, or 7.3% of net sales, during the
first quarter of 1997. Selling and administrative expenses as a percentage of
net sales decreased during the first quarter of 1998, compared to the first
quarter of 1997, primarily because such expenses are partially fixed in nature.
During the first quarters of 1998 and 1997, selling and administrative expenses
included depreciation and amortization of $113,000 and $112,000, respectively.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die castings
and machines aluminum, brass, and steel components. During the first quarter of
1998 and 1997, net sales to automotive industry customers represented 48.0% and
39.9%, respectively, of the Metals Group's net sales.
The following table sets forth the operating results of the Metals Group
for the first quarters of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 8,363 100.0% $ 9,109 100.0%
Cost of sales 8,790 105.1 8,414 92.4
-------- ----- --------- ----
Gross profit/(loss) (427) (5.1) 695 7.6
Selling and administrative expenses 832 9.9 1,100 12.1
-------- ----- --------- ----
Loss from operations $ (1,259) (15.0)% $ (405) (4.5)%
======== ===== ========= ====
</TABLE>
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<PAGE> 13
During the first quarter of 1998, net sales of the Metals Group
decreased by $746,000, or 8.2%, compared to the first quarter of 1997. This
reduction resulted from lower net sales of a variety of components at Lexington
Die Casting and Lexington Machining caused primarily by the Company's planned
elimination of certain customers who generated short-run production and by
reduced demand for certain high-volume products due to obsolescence and the mild
winter weather. These reductions were offset, in part, by an increase in net
sales of airbag components by Lexington Safety Components.
During the first quarter of 1998, the Metals Group incurred a loss from
operations of $1,259,000, compared to a loss from operations of $405,000 during
the first quarter of 1997. Cost of sales as a percentage of net sales increased
during the first quarter of 1998, primarily due to underabsorption of fixed
overhead caused by low sales levels at Lexington Die Casting, Lexington
Machining, and Lexington Safety Components. Despite lower sales, overhead
expenses increased primarily because of increased depreciation, which totaled
$795,000, or 9.5% of net sales, during the first quarter of 1998, compared to
$707,000, or 7.8% of net sales, during the first quarter of 1997, and increased
indirect labor costs that resulted, in part, from the hiring of additional
technical and professional staff during the last nine months of 1997. Selling
and administrative expenses decreased during the first quarter of 1998,
primarily because of the elimination of commissions previously paid to sales
representatives who were terminated during the last quarter of 1996 and the
first quarter of 1997. During the first quarters of 1998 and 1997, selling and
administrative expenses included depreciation and amortization of $51,000 and
$34,000, respectively.
During 1997 and 1998, the Company has been attempting to improve the
long-term competitive position, profitability, and cash flow of the Metals Group
by eliminating the production of a large number of diverse, short-run components
and repositioning productive capacity to manufacture higher-volume components in
target markets. The repositioning entails a shift to a new customer base and
requires that the Company's manufacturing facilities be structured and equipped
to run high-volume parts efficiently and accurately. The repositioning of the
Metals Group has caused the Company to experience underabsorption of fixed
overhead resulting from the cut-back in short-run business and to incur 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 the establishment of relationships with major new customers,
and costs related to inefficiencies resulting from the rollout of new production
parts. These factors have adversely affected the operating profit and cash flow
of the Metals Group during 1997, the first quarter of 1998, and April and May
1998 are expected to continue to adversely affect the Metals Group throughout
the remainder of 1998.
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 $494,000 and $557,000
during the first quarters of 1998 and 1997, respectively.
INTEREST EXPENSE
During the first quarters of 1998 and 1997, interest expense totaled
$2,402,000 and $2,150,000, respectively. The increase during the first quarter
of 1998 was caused primarily by an increase in average borrowings outstanding.
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<PAGE> 14
PROVISION FOR INCOME TAXES
At March 31, 1998, and December 31, 1997, the excess of the Company's
deferred tax assets over its deferred tax liabilities was offset by a valuation
allowance. There was no material change in net deferred taxes during the first
quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 1998, the operating activities of the
Company provided $703,000 of cash.
Inventory increased by $820,000, primarily because of increased sales
levels, trade accounts payable decreased by $837,000, primarily because trade
accounts payable related to the purchase of plant, equipment, and customer-owned
tooling decreased by $1,293,000, and accrued expenses decreased by $830,000,
primarily because of payment of interest on the Company's 12.75% senior
subordinated notes, payment of an accrued profit sharing contribution to the
Company's retirement and savings plan for the 1997 plan year, and payment of
accrued incentive bonus awards earned during 1997.
INVESTING ACTIVITIES
During the first quarter 1998, the investing activities of the Company
used $3,409,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$1,995,000 and $1,392,000, respectively. The Company presently projects that
capital expenditures will total approximately $13,700,000 during 1998, including
$13,100,000 for equipment and $600,000 for buildings. At March 31, 1998, the
Company had commitments outstanding for capital expenditures totaling
approximately $2,944,000. Although there can be no assurance, the Company
anticipates that the funds needed for capital expenditures in 1998 will be
provided by cash flows from operations, borrowings available to the Company
under existing financing arrangements, and additional borrowings that the
Company believes it will be able to obtain. (See also "Liquidity" in this Item
2.)
FINANCING ACTIVITIES
During the first quarter of 1998, the financing activities of the
Company provided $2,665,000 of cash.
During the first quarter of 1998, the Company borrowed $440,000 under an
equipment line of credit to purchase equipment for its North Canton, Ohio,
facility. The new borrowings plus $468,000 borrowed under the equipment line of
credit in September 1997, constitute one term loan that bears interest at prime
plus 0.25% and is repayable in 60 equal monthly principal installments
commencing March 1, 1998.
At March 31, 1998, $1,601,000 of loans outstanding under the Company's
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 first quarter were issued.
In April 1998, the Company borrowed $1,601,000 under an equipment line
of credit to purchase equipment for its Rochester, New York, and Casa Grande,
Arizona, facilities. The borrowings refinanced amounts outstanding under the
Company's revolving line of credit that had been used to provide interim
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<PAGE> 15
financing for the equipment. The new term loan bears interest at the London
Interbank Offered Rate plus 2.75% and is repayable in 60 equal monthly principal
installments of $27,000.
Borrowings under the Company's revolving line of credit increased by
$3,716,000 during the first quarter of 1998.
LIQUIDITY
The Company finances its operations with cash from operating activities
and a variety of financing arrangements, including term loans and loans under
the Company's revolving line of credit. The ability of the Company to borrow
under its revolving line of credit is subject to, among other things, covenant
compliance and certain availability formulas based on the levels of trade
receivables and inventories of the Company. From time to time, the Company has
amended financial covenants contained in the various loan agreements to which it
is a party in order to maintain or otherwise ensure compliance with such
covenants, including an amendment effected during the first quarter of 1998 to
change a ratio of debt to tangible net worth (as each such term is defined in
the loan agreements) from 4.50:1.00 to 4.75:1.00.
The Company operates with substantial financial leverage and limited
liquidity. As a result of increased borrowings during the first quarter of 1998,
aggregate indebtedness of the Company, excluding trade accounts payable,
increased by $2,673,000 to $90,175,000. During 1998, interest and scheduled
principal payments are projected to be approximately $9,500,000 and $6,500,000,
respectively.
The Company had a net working capital deficit of $5,390,000 at March 31,
1998. Loans of $10,955,000, which were outstanding under the revolving line of
credit, were classified as short-term debt at March 31, 1998. Although the
expiration date of the revolving line of credit is April 1, 2000, the loans were
classified as current liabilities because the Company's cash receipts are
automatically used to reduce such loans on a daily basis, by means of a lock-box
sweep arrangement, and the lender has the ability to modify certain terms of the
revolving line of credit without the prior approval of the Company.
At May 7, 1998, availability under the Company's revolving line of
credit totaled $1,471,000 before outstanding checks of $979,000 were deducted.
The Company currently has equipment lines of credit in the aggregate amount of
$4,100,000 that can be used to finance all or a portion of the cost of certain
equipment.
Certain of the Company's financing arrangements contain covenants with
respect to the maintenance of minimum levels of working capital, net worth, and
cash flow coverage and impose limitations on the Company's ratio of debt to
equity. The covenants also place certain restrictions on the Company's business
and operations, including the incurrence or assumption of additional debt, the
sale of all or substantially all of the Company's assets, the funding of capital
expenditures, the purchase of common stock, the redemption of preferred stock,
and the payment of cash dividends. In addition, substantially all of the
Company's financing agreements include cross-default provisions.
Based upon information presently available to the Company, the Company
believes that it is likely to incur losses at the Metals Group during the second
and third quarters of 1998 that may cause the Company to become in default of
certain financial covenants under certain borrowing arrangements if the
covenants are not amended or waived. In particular, the Company may become in
default of a covenant requiring that the Company maintain a ratio of cash flow
to the current portion of long-term debt (as each such term is defined in the
loan agreements) of not less than 1.25:1.00 and the covenant requiring that the
-14-
<PAGE> 16
Company maintain the previously discussed ratio of debt to tangible net worth of
not greater than 4.75:1.00 during the remainder of 1998. If a default occurs, it
may trigger other defaults pursuant to cross-default provisions under other
indebtedness of the Company. In the event of any such default or cross-default,
the lenders in respect of indebtedness to which such provision relates would be
entitled to accelerate the maturity of such indebtedness, 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. Any such event could have a material adverse effect upon the
Company. In any such event, the Company may be required to consider
alternatives, including seeking relief from its creditors. Although there can be
no assurance, the Company presently believes that, based on preliminary
conversations with its lenders, it will be able to obtain the required waivers
or otherwise amend such covenants, should waiver or amendment of the covenants
prove to be necessary.
The Company anticipates that, in addition to its projected cash flow
from operations, new borrowings in the amount of approximately $4,200,000 will
be required during the remainder of 1998 to meet the Company's projected working
capital and debt service requirements and to fund capital expenditures currently
anticipated by the Company. Although no assurance can be given, assuming that
the Company obtains the amendment or waiver of certain financial covenants as
discussed above, the Company currently believes that cash flows from operations,
borrowings available to the Company under existing financing arrangements, and
additional borrowings that the Company believes it will be able to obtain should
be adequate to meet its projected working capital and debt service requirements
and to fund capital expenditures currently anticipated by the Company during the
remainder of 1998 and thereafter. If cash flows from operations or availability
under existing and new financing agreements 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, consider other
alternatives designed to improve the Company's liquidity, or obtain relief from
its obligations. Certain of such actions could have a material adverse effect
upon the Company.
The Company's 10.5% senior note, 12.75% senior subordinated notes, and
14% junior subordinated notes, which have an aggregate principal balance of
$40,567,000, mature on February 1, 2000, and the Company's revolving line of
credit expires on April 1, 2000. Although the Company currently believes that it
has or will have the ability to refinance these obligations on or before their
maturity or expiration dates, there are many factors that will affect the
Company's ability to do so. Accordingly, there can be no assurance that the
Company will be successful in refinancing such obligations.
ACQUISITIONS
The Company is seeking to acquire assets and businesses related to its
current operations in order to expand its existing operations. Depending on the
size, terms, and other aspects of such acquisitions, the Company may be required
to obtain additional financing and, in some cases, the consents of its existing
lenders. The Company's ability to effect acquisitions may be dependent upon its
ability to obtain such financing and, to the extent applicable, consents.
COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal proceedings covering
a wide range of matters that arise in the ordinary course of its business
activities, including actions naming the Company as one of numerous potentially
responsible parties under applicable environmental laws for restoration costs at
-15-
<PAGE> 17
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted "Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS
130 established standards for the reporting and display of changes in
stockholders' equity during a period that are not included in reported net
income for such period, excluding changes resulting from transactions with
owners. During the first quarter of 1998, the Company did not have any items of
income or loss requiring disclosure under the provisions of FAS 130.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued "Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for fiscal
periods beginning after December 15, 1997. FAS 131 established standards for the
way public enterprises report information about operating segments in annual and
interim financial statements, including related disclosures about products,
geographic areas, and major customers. FAS 131 requires financial information to
be reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The adoption of
FAS 131 by the Company during the fourth quarter of 1998 will not have a
material effect on the Company's consolidated financial position or results of
operations.
-16-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Promissory Note dated March 31, 1998, from the Company in
favor of The CIT Group/Equipment Financing, Inc.
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 1998.
-17-
<PAGE> 19
LEXINGTON PRECISION CORPORATION
FORM 10-Q
MARCH 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
May 13, 1998 By: /s/ Michael A. Lubin
------------- ---------------------------------
Date Michael A. Lubin
Chairman of the Board
May 13, 1998 By: /s/ Warren Delano
------------- ---------------------------------
Date Warren Delano
President
May 13, 1998 By: /s/ Dennis J. Welhouse
------------- ---------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-18-
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Exhibit Location
- ------- ------- --------
10-1 Promissory Note dated March 31, 1998, Filed with this
from Lexington Precision Corporation Form 10-Q
in favor of The CIT Group/Equipment
Financing, Inc.
27-1 Financial Data Schedule Filed with this
Form 10-Q
<PAGE> 1
Exhibit 10.1
PROMISSORY NOTE
$1,601,152.00 New York, New York
March 31, 1998
FOR VALUE RECEIVED, LEXINGTON PRECISION CORPORATION ("Debtor") promises
to pay to the order of THE CIT GROUP/EQUIPMENT FINANCING, INC. ("CIT"), at such
address as CIT may designate, in lawful money of the United States, the
principal sum of ONE MILLION SIX HUNDRED ONE THOUSAND ONE HUNDRED FIFTY TWO and
no/100 DOLLARS ($1,601,152.00) in sixty (60) consecutive monthly installments,
commencing on May 1, 1998, with the following installments on the first day of
each month thereafter until payment in full of this Note. The first fifty nine
(59) monthly installments shall be level payments of principal each in the
amount of $26,685.87, and the sixtieth (60th) and final payment shall be a
payment of principal in the amount of $26,685.87. Debtor shall pay interest
together with each such installment of principal, in like money, from the date
hereof until payment in full, on the unpaid principal balance hereof at an
interest rate per annum equal to two and seventy five hundredths percent (2.75%)
above the LIBOR Rate. Each payment shall be applied first to the payment of any
unpaid interest on the principal sum and them to payment of principal. Interest
shall be calculated on the basis of a 360-day year and actual number of days
elapsed. Any amount not paid when due under this Note shall bear late charges,
thereon, calculated at the Late Charge Rate, from the due date thereof until
such amount shall be paid in full. Any payment received after the maturity of
any installment of principal shall be applied first to the payment of unpaid
late charges, second to the payment of any unpaid interest on said principal,
and third to the payment of principal.
This Note is one of the Notes referred to in the Loan and Security
Agreement dated as of March 19, 1997, between Debtor and CIT (herein, as the
same may from time to time be amended, supplemented or otherwise modified,
called the "Agreement"), is secured as provided in the Agreement, and is subject
to prepayment only as provided therein, and the holder hereof is entitled to the
benefits thereof.
Terms defined in the Agreement shall have the same meaning when used in
this Note, unless the context shall otherwise require.
Except as provided in Section 6 of the Agreement, Debtor hereby waives
presentment, demand of payment, notice of dishonor, and any and all other
notices or demands in connection with the delivery, acceptance, performance,
default of enforcement of this Note and hereby consents to any extensions of
time, renewals, releases of any party to this Note, waivers or modifications
that may be granted or consented to by the holder of this Note.
Upon the occurrence and during the continuance of any one or more of
the Events of Default specified in the Agreement, the amounts then remaining
unpaid on this Note, together with any interest accrued, may be declared to be
(or, with respect to certain Events of Default, automatically shall become)
immediately due and payable as provided therein.
In the event that any holder shall institute any action for the
enforcement or the collection of this Note, there shall be immediately due and
payable, in addition to the unpaid balance hereof, all late charges and all
reasonable costs and expenses of such action, including reasonable attorneys'
fees. In accordance with the provisions of the Agreement, Debtor and CIT waive
trial by jury and any litigation relating to or in connection with this Note in
which they shall be adverse parties and Debtor hereby waives the right to
interpose any setoff counterclaim or defense of any nature or description
whatsoever, but Debtor shall have the right to assert in an independent action
against CIT any such defense, offset or counterclaim (including any compulsory
counterclaim) which it may have which has not otherwise been waived pursuant to
the Agreement.
<PAGE> 2
Debtor agrees that its liabilities hereunder are absolute and
unconditional without regard to the liability of any other party, and that no
delay on the part of the holder hereof in exercising any power or right
hereunder shall operate a waiver thereof; nor shall any single or partial
exercise of any power or right hereunder preclude other or further exercise
thereof or the exercise of any other power or right.
If at any time this transaction would be usurious under applicable law,
then regardless of any provision contained in the Agreement, in this Note or any
other agreement made in connection with this transaction, it is agreed that (a)
the total of all consideration which constitutes interest under applicable law
that is contracted for, charged or received upon the Agreement, this Note or any
such other agreement shall under no circumstances exceed the maximum rate of
interest authorized by applicable law and any excess shall be credited to Debtor
and (b) if CIT elects to accelerate the maturity of, or if CIT permits Debtor to
prepay the indebtedness described in, this Note, any amounts which because of
such action would constitute interest may never include more than the maximum
rate of interest authorized by applicable law and any excess interest, if any,
shall be credited to Debtor automatically as of the date of acceleration or
prepayment.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK.
LEXINGTON PRECISION CORPORATION
By: Warren Delano
-----------------------------
Title: President
-------------------------
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 167
<SECURITIES> 0
<RECEIVABLES> 17,269
<ALLOWANCES> 0
<INVENTORY> 9,851
<CURRENT-ASSETS> 31,479
<PP&E> 107,080
<DEPRECIATION> 46,636
<TOTAL-ASSETS> 104,713
<CURRENT-LIABILITIES> 36,869
<BONDS> 72,762
420
0
<COMMON> 1,087
<OTHER-SE> (8,182)
<TOTAL-LIABILITY-AND-EQUITY> 104,713
<SALES> 32,197
<TOTAL-REVENUES> 32,197
<CGS> 27,412
<TOTAL-COSTS> 27,412
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,402
<INCOME-PRETAX> (420)
<INCOME-TAX> 0
<INCOME-CONTINUING> (420)
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<NET-INCOME> (420)
<EPS-PRIMARY> (.10)
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