<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK, $0.25 PAR VALUE, 4,263,036 SHARES AS OF AUGUST 5, 1998
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
================================================================================
<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.................................................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......................20
Item 5. Other Events..............................................................21
Item 6. Exhibits and Reports on Form 8-K..........................................21
</TABLE>
-1-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 171 $ 208
Trade receivables 15,975 17,579
Inventories 10,465 9,031
Prepaid expenses and other assets 2,152 3,438
Deferred income taxes 1,572 1,572
--------- ---------
Total current assets 30,335 31,828
--------- ---------
Plant and equipment:
Land 1,533 1,533
Buildings 23,639 23,426
Equipment 86,556 78,922
--------- ---------
111,728 103,881
Accumulated depreciation (48,808) (44,451)
--------- ---------
Plant and equipment, net 62,920 59,430
--------- ---------
Excess of cost over net assets of businesses acquired, net 8,936 9,094
--------- ---------
Other assets, net 3,798 3,772
--------- ---------
$ 105,989 $ 104,124
========= =========
</TABLE>
See notes to consolidated financial statements. (continued on next page)
-2-
<PAGE> 4
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Trade accounts payable $ 12,014 $ 12,628
Accrued expenses 9,168 8,495
Short-term debt 10,664 8,840
Current portion of long-term debt 6,074 6,040
--------- ---------
Total current liabilities 37,920 36,003
--------- ---------
Long-term debt, excluding current portion 73,365 72,622
--------- ---------
Deferred income taxes and other long-term liabilities 1,765 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 12,296 12,313
Accumulated deficit (20,647) (19,850)
Cost of common stock in treasury, 85,915 shares (217) (217)
--------- ---------
Total stockholders' deficit (7,481) (6,667)
--------- ---------
$ 105,989 $ 104,124
========= =========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 5
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 31,024 $ 30,413 $ 63,221 $ 59,005
Cost of sales 26,090 24,973 53,502 48,788
-------- -------- -------- --------
Gross profit 4,934 5,440 9,719 10,217
Selling and administrative expenses 2,863 2,968 5,666 5,845
-------- -------- -------- --------
Income from operations 2,071 2,472 4,053 4,372
Interest expense 2,448 2,279 4,850 4,429
-------- -------- -------- --------
Income/(loss) before income taxes (377) 193 (797) (57)
Provision for income taxes - 143 - 143
-------- -------- -------- --------
Net income/(loss) (377) 50 (797) (200)
Preferred stock dividends 9 9 17 19
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 $ (397) $ 30 $ (836) $ (241)
======== ======== ======== ========
Net income/(loss) per common share:
Basic $ (0.09) $ 0.01 $ (0.20) $ (0.06)
======== ======== ======== ========
Diluted $ (0.09) $ 0.01 $ (0.20) $ (0.06)
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 6
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (797) $ (200)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation 4,763 4,012
Amortization included in operating expense 632 646
Amortization included in interest expense 99 75
Changes in operating assets and liabilities that
provided/(used) cash:
Trade receivables 1,604 973
Inventories (1,434) (403)
Prepaid expenses and other assets 943 (384)
Trade accounts payable (614) (3,350)
Accrued expenses 673 510
Other 16 100
-------- --------
Net cash provided by operating activities 5,885 1,979
-------- --------
INVESTING ACTIVITIES:
Purchases of plant and equipment (8,849) (7,961)
Decrease in equipment deposits 244 148
Proceeds from sales of equipment, net 183 21
Expenditures for tooling owned by customers (427) (476)
Other 343 138
-------- --------
Net cash used by investing activities (8,506) (8,130)
-------- --------
FINANCING ACTIVITIES:
Net increase in short-term debt 1,824 4,723
Proceeds from issuance of long-term debt 3,741 33,950
Repayment of long-term debt (2,964) (32,327)
Other (17) (322)
-------- --------
Net cash provided by financing activities 2,584 6,024
-------- --------
Net decrease in cash (37) (127)
Cash at beginning of period 208 187
-------- --------
Cash at end of period $ 171 $ 60
======== ========
</TABLE>
See notes to consolidated financial statements.
-5-
<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 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 June 30, 1998, the Company's results of
operations for the three-month and six-month periods ended June 30, 1998 and
1997, and the Company's cash flows for the six-month periods ended June 30, 1998
and 1997. All such adjustments were of a normal recurring nature.
The results of operations for the three-month and six-month periods
ended June 30, 1998, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
Effective January 1, 1998, the Company adopted "Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS
130 established standards for the reporting and display of changes in
stockholders' equity during a period that are not included in reported net
income for such period, excluding changes resulting from transactions with
owners. During the first six months of 1998, the Company did not have any items
of income or loss requiring disclosure under the provisions of FAS 130.
NOTE 2 -- INVENTORIES
Inventories at June 30, 1998, and December 31, 1997, are set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Finished goods $ 4,053 $ 3,654
Work in process 2,557 1,658
Raw materials and purchased parts 3,855 3,719
--------- -------
$ 10,465 $ 9,031
========= =======
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At June 30, 1998, and December 31, 1997, accrued expenses included
accrued interest expense of $1,945,000 and $1,964,000, respectively.
-6-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -- DEBT
At June 30, 1998, and December 31, 1997, short-term debt consisted of
loans outstanding under the Company's revolving line of credit. At June 30,
1998, loans outstanding under the revolving line of credit accrued interest at
the prime rate plus 0.25% and the London Interbank Offered Rate ("LIBOR") plus
2.75%.
Long-term debt at June 30, 1998, and December 31, 1997, is set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Long-term secured debt:
Term loan payable in increasing monthly principal installments, final
maturity in 2000, 12% $ - $ 1,573
Term loan, due 2000, 12% 1,370 -
Term loans payable in equal monthly principal installments based on a
180-month amortization schedule, final maturities in 2001, 8.37% 3,038 3,153
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9.37% 1,458 1,511
Term loan payable in equal monthly principal installments based on a
180-month amortization schedule, final maturity in 2002, 9% 2,832 2,933
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 2,957 3,330
Term loans payable in equal monthly principal installments, final
maturities in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 553(1) 613(1)
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% 863 468
Term loan payable in equal monthly principal installments, final
maturity in 2003, LIBOR plus 2.75% 1,548 -
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,606 1,742
Term loans payable in equal monthly principal installments, final
maturities in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 20,773(1) 22,580(1)
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate plus 0.25% and LIBOR plus 2.75% 1,700 -
--------- --------
Total long-term secured debt $ 38,698 $ 37,903
--------- --------
</TABLE>
(continued on next page)
-7-
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
<TABLE>
<CAPTION>
JUNE 30, 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 174 192
--------- --------
Total long-term unsecured debt 40,741 40,759
--------- --------
Total long-term debt 79,439 78,662
Less current portion 6,074 6,040
--------- --------
Total long-term debt, excluding current portion $ 73,365 $ 72,622
========= ========
</TABLE>
(1) Maturity date can be accelerated by the lender if the Company's
revolving line of credit expires prior to the stated maturity date
of the term loan.
The loans outstanding under the Company's revolving line of credit and
the secured term loans listed above are collateralized by substantially all of
the assets of the Company, including 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 June 30, 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
six months of 1998.
-8-
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 -- NET INCOME/(LOSS) PER COMMON SHARE
The calculations of basic and diluted net income/(loss) per common
share for the three-month and six-month periods ended June 30, 1998 and 1997,
are set forth below (in thousands, except per share amounts). Because the pro
forma conversion of each of the Company's potentially dilutive securities (the
14% junior subordinated convertible notes and the $8 cumulative convertible
redeemable preferred stock, series B) was antidilutive, such pro forma
conversion was not included in the calculation of diluted net income/(loss) per
common share set forth below.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30 JUNE 30
------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income/(loss) $ (377) $ 50 $ (797) $ (200)
Preferred stock dividends (9) (9) (17) (19)
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 (numerator) $ (397) $ 30 $ (836) $ (241)
======= ======== ======== ========
Weighted-average common shares (denominator) 4,263 4,263 4,263 4,263
======= ======== ======== ========
Basic and diluted net income/(loss) per common
share $ (.09) $ .01 $ (.20) $ (.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.
-9-
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
OF OPERATIONS
OVERVIEW
Various statements in this Item 2 that are not historical facts are
"forward-looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995). Forward-looking statements usually can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "anticipates" 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 any such projections or estimates included herein will
be realized, and actual results may vary materially. There can be no assurance
that any of the forward-looking statements contained herein will prove to be
accurate. All forward-looking statements, projections, or estimates attributable
to the Company are expressly qualified by the foregoing cautionary statements.
RESULTS OF OPERATIONS -- SECOND QUARTER OF 1998 VERSUS SECOND 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 second quarters of 1998 and 1997, automotive industry customers of
the Rubber Group represented 90.6% and 90.1%, 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.
-10-
<PAGE> 12
The following table sets forth the operating results of the Rubber
Group for the second quarters of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 23,242 100.0% $ 21,306 100.0%
Cost of sales 17,769 76.4 16,533 77.6
--------- ------- --------- -------
Gross profit 5,473 23.6 4,773 22.4
Selling and administrative expenses 1,550 6.7 1,224 5.7
--------- ------- --------- -------
Income from operations $ 3,923 16.9% $ 3,549 16.7%
========= ======= ========= =======
</TABLE>
During the second quarter of 1998, net sales of the Rubber Group
increased by $1,936,000, or 9.1%, compared to the second quarter of 1997. This
increase was primarily due to increased unit sales of insulators for automotive
wiring systems and, to a lesser extent, increased sales of medical components
and tooling, offset, in part, by price reductions on certain components.
During the second quarter of 1998, income from operations totaled
$3,923,000, an increase of $374,000, or 10.5%, compared to the second quarter of
1997. Income from operations during the second quarter included a credit of
$622,000 resulting from a special rebate from the State of Ohio Bureau of
Workers' Compensation. The rebate represented the Company's share of a
distribution of excess funds accumulated by the Bureau.
Excluding the rebate, during the second quarter of 1998, income from
operations totaled $3,301,000, a decrease of $248,000, or 7.0%, compared to the
second quarter of 1997. Cost of sales as a percentage of net sales, excluding
the rebate, was 79.1%. The increase in cost of sales as a percentage of net
sales, compared to the second quarter of 1997, resulted primarily from increased
wage and benefit costs, the unanticipated write-off of certain tooling, and
increased depreciation and amortization expense. Selling and administrative
expenses as a percentage of net sales increased during the second quarter of
1998, compared to the second quarter of 1997, primarily because of the hiring of
additional personnel, the opening, in September of 1997, of a sales office in
Germany, and costs associated with the installation of new computer systems at
Lexington Connector Seals.
During the second quarter of 1998, depreciation and amortization at the
Rubber Group totaled $1,846,000, or 7.9% of net sales, compared to $1,625,000,
or 7.6% of net sales, during the second quarter of 1997.
Effects of General Motors Corporation Strike and Shutdown:
Delphi Packard Electric Systems, a division of General Motors
Corporation, ("Delphi Packard Electric"), is the Company's largest customer. In
1997, net sales to Delphi Packard Electric represented 22.3% of the Company's
total net sales. The strike at two General Motor's plants and the resulting shut
down of General Motors assembly plants during June and July 1998 had an
immaterial effect on the Company's net sales and operating profit for the second
quarter of 1998. The Company believes that the impact of the strike on the
Company's third quarter results will be more significant, although net sales to
Delphi Packard Electric will depend, in part, on how quickly General Motors can
restart its production lines and on the degree to which sales of General Motors
vehicles are reduced as a result of low inventory levels caused by the strike.
Although many factors will affect actual results, the Company
-11-
<PAGE> 13
currently estimates that the strike may reduce the Company's operating income by
approximately $350,000 during the third quarter of 1998. The Company believes
that a meaningful portion of this reduction in operating income might be made up
during the fourth quarter of 1998 as a result of General Motor's efforts to
increase production, rebuild inventory, and generate sales.
General Motors has recently announced its intention to spin off Delphi
Automotive Systems, of which Delphi Packard Electric is a division. Although
there can be no assurance, the Company does not believe that such spin off or
similar transaction would have a material effect on the Company.
METALS GROUP
The Metals Group manufactures aluminum, magnesium, and zinc die
castings and machines aluminum, brass, and steel components. During the second
quarter of 1998 and 1997, net sales to automotive industry customers represented
50.6% and 39.6%, respectively, of the Metals Group's net sales.
The following table sets forth the operating results of the Metals
Group for the second quarters of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 7,782 100.0% $ 9,107 100.0%
Cost of sales 8,321 106.9 8,440 92.7
-------- ------- --------- -------
Gross profit/(loss) (539) (6.9) 667 7.3
Selling and administrative expenses 795 10.2 1,210 13.3
-------- ------- --------- -------
Loss from operations $ (1,334) (17.1)% $ (543) (6.0)%
======== ======= ========= =======
</TABLE>
During the second quarter of 1998, net sales of the Metals Group
decreased by $1,325,000, or 14.5%, compared to the second quarter of 1997. This
reduction resulted from lower net sales of a variety of components at Lexington
Die Casting and Lexington Machining caused, in part, by the planned elimination
of certain customers who generated short-run production.
During the second quarter of 1998, the Metals Group incurred a loss
from operations of $1,334,000, compared to a loss from operations of $543,000
during the second quarter of 1997. Cost of sales as a percentage of net sales
increased during the second 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 during the second quarter of 1998 increased by $100,000 compared to the
second quarter of 1997, primarily because of increased depreciation and
amortization and increased indirect labor costs. To a lesser extent, material
and direct labor costs as a percentage of net sales also increased during the
second quarter of 1998 compared to the second quarter of 1997, primarily because
of changes in product mix, lower production efficiencies resulting from the
start-up of new products, and costs related to the retention of experienced
equipment operators during a period of low sales. Selling and administrative
expenses decreased during the second quarter of 1998 compared to the second
quarter of 1997, primarily because of reduced accruals for litigation expenses
and the elimination of commissions previously paid to sales representatives who
were terminated during the last quarter of 1996 and the first quarter of 1997.
-12-
<PAGE> 14
During the second quarter of 1998, depreciation and amortization at the
Metals Group totaled $938,000, or 12.1% of net sales, compared to $754,000, or
8.3% of net sales, during the second quarter of 1997.
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 and the fact that new high-volume business is limited at
this stage of the transition have adversely affected the operating profit and
cash flow of the Metals Group during 1997 and the first and second quarters of
1998, and are expected to continue to adversely affect the Metals Group
throughout the remainder of 1998.
CORPORATE OFFICE
During the second quarters of 1998 and 1997, corporate office expenses,
which are consolidated with selling and administrative expenses of the Rubber
Group and the Metals Group in the Company's consolidated financial statements,
totaled $518,000 and $534,000, respectively.
During the second quarter of 1998 and 1997, depreciation at the
corporate office totaled $5,000.
INTEREST EXPENSE
During the second quarters of 1998 and 1997, interest expense totaled
$2,448,000 and $2,279,000, respectively. The increase was caused primarily by an
increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At June 30, 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 second
quarter of 1998.
RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF 1998 VERSUS FIRST SIX MONTHS OF
1997
RUBBER GROUP
During the first six months of 1998 and 1997, net sales to automotive
industry customers represented 90.8% and 90.6%, respectively, of the Rubber
Group's net sales.
-13-
<PAGE> 15
The following table sets forth the operating results of the Rubber
Group for the first six months of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 47,076 100.0% $ 40,789 100.0%
Cost of sales 36,391 77.3 31,934 78.3
--------- ------- --------- -------
Gross profit 10,685 22.7 8,855 21.7
Selling and administrative expenses 3,027 6.4 2,444 6.0
--------- ------- --------- -------
Income from operations $ 7,658 16.3% $ 6,411 15.7%
========= ======= ========= =======
</TABLE>
During the first six months of 1998, net sales of the Rubber Group
increased by $6,287,000, or 15.4%, compared to the first six months of 1997.
This increase was primarily due to increased unit sales of insulators for
automotive wiring systems and, to a lesser extent, increased sales of tooling,
connector seals for automotive wiring systems, and medical components, offset,
in part, by price reductions on certain components.
During the first six months of 1998, income from operations totaled
$7,658,000, an increase of $1,247,000, or 19.5%, compared to the first six
months 1997. Income from operations during the first six months of 1998 included
a credit of $622,000 resulting from a special rebate from the State of Ohio
Bureau of Workers' Compensation. The rebate represented the Company's share of a
distribution of excess funds accumulated by the Bureau.
Excluding the rebate, during the first six months of 1998, income from
operations totaled $7,036,000, an increase of $625,000, or 9.7%, compared to the
first six months of 1997. Cost of sales as a percentage of net sales, excluding
the rebate, was 78.6%, or slightly higher than the comparable percentage during
the first six months of 1997. During the first six months of 1998, the Rubber
Group's operating profit margin was limited by increased tooling sales, which
generate little or no profit, the unanticipated write-off of certain tooling,
and increased wage and benefit costs resulting from the hiring of additional
technical personnel. Selling and administrative expenses as a percentage of net
sales increased during the first six months of 1998, compared to the first six
months of 1997, primarily because of the hiring of additional personnel, the
opening, in September of 1997, of a sales office in Germany, and costs
associated with the installation of new computer systems at Lexington Connector
Seals.
During the first six months of 1998, depreciation and amortization at
the Rubber Group totaled $3,603,000, or 7.7% of net sales, compared to
$3,152,000, or 7.7% of net sales, during the second quarter of 1997.
METALS GROUP
During the first six months of 1998 and 1997, net sales to automotive
industry customers represented 49.2% and 39.7%, respectively, of the Metal
Group's net sales.
-14-
<PAGE> 16
The following table sets forth the operating results of the Metals
Group for the first six months of 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C> <C> <C>
Net sales $ 16,145 100.0% $ 18,216 100.0%
Cost of sales 17,111 106.0 16,854 92.5
--------- ------- ---------- -------
Gross profit/(loss) (966) (6.0) 1,362 7.5
Selling and administrative expenses 1,627 10.1 2,310 12.7
--------- ------- ---------- -------
Loss from operations $ (2,593) (16.1)% $ (948) (5.2)%
========= ======= ========== =======
</TABLE>
During the first six months of 1998, net sales of the Metals Group
decreased by $2,071,000, or 11.4%, compared to the first six months of 1997.
This reduction resulted from lower net sales of a variety of components at
Lexington Die Casting and Lexington Machining caused, in part, by the planned
elimination of certain customers who generated short-run production. Net sales
were also reduced, in part, by reduced demand for certain products due to the
mild winter weather.
During the first six months of 1998, the Metals Group incurred a loss
from operations of $2,593,000, compared to a loss from operations of $948,000
during the first six months of 1997. Cost of sales as a percentage of net sales
increased during the first six months 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 by $468,000 during the first six months of 1998 compared to
the first six months of 1997, primarily because of increased depreciation and
amortization and increased indirect labor costs. To a lesser extent, material
and direct labor costs as a percentage of net sales also increased during the
first six months of 1998 compared to the first six months of 1997, primarily
because of changes in product mix, lower production efficiencies resulting from
the start-up of new products, and costs related to the retention of experienced
equipment operators during a period of low sales. Selling and administrative
expenses decreased during the first six months of 1998, primarily because of the
elimination of commissions previously paid to sales representatives who were
terminated during the last quarter of 1996 and the first quarter of 1997 and
reduced accruals for litigation expenses.
During the first six months of 1998, depreciation and amortization at
the Metals Group totaled $1,784,000, or 11.0% of net sales, compared to
$1,495,000, or 8.2% of net sales, during the second quarter of 1997.
CORPORATE OFFICE
During the first six months of 1998 and 1997, corporate office
expenses, which are consolidated with selling and administrative expenses of the
Rubber Group and the Metals Group in the Company's consolidated financial
statements, totaled $1,012,000 and $1,091,000, respectively.
During the first six months of 1998 and 1997, depreciation at the
corporate office totaled $8,000 and $11,000, respectively.
-15-
<PAGE> 17
INTEREST EXPENSE
During the first six months of 1998 and 1997, interest expense totaled
$4,850,000 and $4,429,000, respectively. The increase was caused primarily by an
increase in average borrowings outstanding.
PROVISION FOR INCOME TAXES
At June 30, 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
six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first six months of 1998, the operating activities of the
Company provided $5,885,000 of cash.
Inventory increased by $1,434,000 primarily because the Company is
attempting to increase service levels for certain key customers. Trade accounts
payable decreased by $614,000, primarily because trade accounts payable related
to the purchase of plant, equipment, and customer-owned tooling decreased by
$501,000.
INVESTING ACTIVITIES
During the first six months of 1998, the investing activities of the
Company used $8,506,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group and the Metals Group totaled
$4,661,000 and $4,188,000, respectively. The Company presently projects that
capital expenditures will total approximately $15,000,000 during 1998, including
$14,700,000 for equipment and $300,000 for buildings. At June 30, 1998, the
Company had commitments outstanding for capital expenditures totaling
approximately $3,046,000. 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 when needed. (See also "Liquidity" in
this Item 2.)
FINANCING ACTIVITIES
During the first six months of 1998, the financing activities of the
Company provided $2,584,000 of cash.
During the first six months of 1998, the Company borrowed $3,741,000
under its equipment lines of credit to refinance amounts outstanding under the
Company's revolving line of credit that had been used to provide interim
financing for equipment purchases. During the first six months of 1998,
equipment financings included a term loan that bears interest at the London
Interbank Offered Rate ("LIBOR") plus 2.75% and is repayable in 60 equal monthly
principal installments of $27,000 and a term loan that bears interest at LIBOR
plus 2.75% or prime rate plus 0.25% and is repayable in 84 equal monthly
principal installments of $20,000.
-16-
<PAGE> 18
During the second quarter of 1998, the Company and the holder of the
Company's 12% term note amended such note by accelerating the maturity date from
April 30, 2000, to January 31, 2000 and by eliminating all principal payments
prior to such maturity date.
Borrowings under the Company's revolving line of credit increased by
$1,824,000 during the first six months 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.
The Company operates with substantial financial leverage and limited
liquidity. As a result of increased borrowings during the first six months of
1998, aggregate indebtedness of the Company, excluding trade accounts payable,
increased by $2,601,000 to $90,103,000. During the second half of 1998, interest
and scheduled principal payments are projected to be approximately $5,000,000
and $3,100,000, respectively.
The Company had a net working capital deficit of $7,585,000 at June 30,
1998. Loans of $10,664,000, which were outstanding under the revolving line of
credit, were classified as short-term debt at June 30, 1998. Although the
expiration date of the revolving line of credit is April 1, 2000, the loans were
classified as current liabilities because the Company's cash receipts are
automatically used to reduce such loans on a daily basis, by means of a lock-box
sweep arrangement, and the lender has the ability to modify certain terms of the
revolving line of credit without the prior approval of the Company.
At August 12, 1998, availability under the Company's revolving line of
credit totaled $2,151,000 before outstanding checks of $2,149,000 were deducted.
The Company is currently negotiating with its lender to increase the
availability under the Company's revolving line of credit by providing the
Company with higher advance rates on its trade receivables and inventory.
Although there can be no assurance, the Company believes its advance rates under
the revolving line of credit will be increased and that as a result, its
availability under the revolving line of credit will increase by approximately
$2,000,000, based on the Company's current levels of trade receivables and
inventory.
The Company currently has equipment lines of credit in the aggregate
amount of $1,800,000 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
tangible net worth. The covenants also place certain restrictions on the
Company's business and operations, including the incurrence or assumption of
additional debt, the sale of all or substantially all of the Company's assets,
the funding of capital expenditures, the purchase of common stock, the
redemption of preferred stock, and the payment of cash dividends. In addition,
substantially all of the Company's financing agreements include cross-default
provisions.
-17-
<PAGE> 19
From time to time, the Company has amended financial covenants
contained in the various loan agreements to which it is a party in order to
maintain or otherwise ensure compliance with such covenants. During the first
quarter of 1998, the Company amended a covenant that limited the Company's ratio
of debt to tangible net worth. In addition, in August 1998, the Company amended
certain net worth covenants and deferred, until September 30, 1999, and amended
a covenant that limits the Company's ratio of debt to tangible net worth.
Furthermore, because certain of the Company's indebtedness matures in the first
half of 2000, those amounts will be classified as short-term liabilities of the
Company during the first and second quarters of 1999, if they are outstanding at
that time. In August 1998, certain working capital and cash flow covenants were
amended so as to avoid any defaults caused by such reclassification. (Notes
maturing in 2000 include the Company's 12% term note in the amount of
$1,370,000, which matures on January 31, 2000, the Company's 10.5% senior note
in the amount of $7,500,000 and 12.75% senior subordinated notes in the amount
of $31,720,000, which mature on February 1, 2000, and the Company's 14% junior
subordinated notes in the amount of $1,347,000, which mature on May 1, 2000.)
Based on the Company's current forecast and as a result of the amendments to
financial covenants obtained by the Company during August 1998, the Company does
not currently project any defaults under loan covenants.
The Company projects that, in addition to cash flow from operations,
new borrowings in the amount of approximately $5,600,000 will be required
through June 30, 1999, to meet the Company's working capital and debt service
requirements and to fund capital expenditures currently anticipated by the
Company. Although no assurance can be given, 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, and/or consider other alternatives designed to improve the
Company's liquidity. Certain of such actions could have a material adverse
effect upon the Company.
As previously discussed, the Company's 12% term note, 10.5% senior
note, 12.75% senior subordinated notes, and 14% junior subordinated notes, which
have an aggregate principal balance of $41,937,000, mature during the first and
second quarters of 2000, and, in addition, 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.
-18-
<PAGE> 20
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.
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 six months of 1998, the Company did not have any items
of income or loss requiring disclosure under the provisions of FAS 130.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"), which is effective for
fiscal periods beginning after December 15, 1997. FAS 131 established standards
for the way public enterprises report information about operating segments in
annual and interim financial statements, including related disclosures about
products, geographic areas, and major customers. FAS 131 requires financial
information to be reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
adoption of FAS 131 by the Company during the fourth quarter of 1998 will not
have a material effect on the Company's consolidated financial position or
results of operations.
YEAR 2000 CONVERSION
Software failures due to processing errors potentially arising from
calculations using the Year 2000 date are a known risk. The Company recognizes
the risk and is addressing the need to ensure that its operations will not be
adversely affected by loss of the availability and integrity of financial
systems and the reliability of operational systems due to Year 2000 software
failures. Based upon a review of its technology and software, the Company has
concluded that there are no material issues regarding its Year 2000 compliance
that will not be resolved through normal equipment and software upgrades and
replacements that will be made through 1999. While the Company believes its
planning efforts are adequate to address its Year 2000 concerns, there can be no
assurance that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
adverse effect on the Company.
-19-
<PAGE> 21
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 13, 1998.
(b) The matters voted upon at the Annual Meeting and the results of
the voting on each matter are set forth below:
(i) A proposal to amend Article III, Section 1 of the
Company's Bylaws to declassify the Company's Board of
Directors by eliminating the provision in the Bylaws that
provides that the Company's Board of Directors shall be
divided into three classes, as nearly equal in number as
possible, and that directors shall be elected for terms of
three years on a staggered basis.
<TABLE>
<S> <C>
Votes for the proposal 3,268,961
Votes against the proposal 9,517
Abstentions 10,220
(ii) A proposal to elect five directors (Messrs. William B.
Conner, Warren Delano, Kenneth I. Greenstein, Michael A.
Lubin, and Phillips E. Patton).
Mr. Conner:
Votes for Mr. Conner 4,008,248
Votes withheld from Mr. Conner 11,610
Mr. Delano:
Votes for Mr. Delano 4,008,348
Votes withheld from Mr. Delano 11,510
Mr. Greenstein:
Votes for Mr. Greenstein 4,008,248
Votes withheld from Mr. Greenstein 11,610
Mr. Lubin:
Votes for Mr. Lubin 4,008,348
Votes withheld from Mr. Lubin 11,510
Mr. Patton:
Votes for Mr. Patton 4,008,348
Votes withheld from Mr. Patton 11,510
(iii) The ratification of Ernst & Young LLP as independent
auditors of the Company for the year ending December 31,
1998.
Votes for Ernst & Young LLP 4,007,306
Votes against Ernst & Young LLP 2,910
Abstentions 9,642
</TABLE>
Except for the by-law amendment proposal (as to which there were
731,610 broker non-votes), there were no broker non-votes in
respect of the foregoing matters.
-20-
<PAGE> 22
ITEM 5. OTHER EVENTS
The Securities and Exchange Commission (the "SEC") has amended recently
its Rule 14a-4, which governs the use by the Company of discretionary voting
authority with respect to certain shareholder proposals. SEC rule 14a-4(c)(1)
provides that, if the proponent of a shareholders proposal fails to notify the
Company at least 45 days prior to the month and day of mailing the prior year's
proxy statement, the proxies of the Company's management would be permitted to
use their discretionary authority at the Company's next annual meeting of
shareholders if the proposal were raised at the meeting without any discussion
of the matter in the proxy statement. The Company hereby notifies all
shareholders of the Company that after March 7, 1999, any shareholder proposal
submitted outside the process of SEC Rule 14a-8 will be considered untimely for
purposes of SEC Rules 14a-4 and 14a-5(e).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 New Equipment Term Note dated June 26, 1998, from the
Company in favor of Congress Financial Corporation
10-2 Second Amendment Agreement dated May 1, 1998, from
Lexington Components, Inc. in favor of Paul H. Pennell
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 second quarter of 1998.
-21-
<PAGE> 23
LEXINGTON PRECISION CORPORATION
FORM 10-Q
JUNE 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
August 13, 1998 By: /s/ Michael A. Lubin
- --------------- --------------------------------
Date Michael A. Lubin
Chairman of the Board
August 13, 1998 By: /s/ Warren Delano
- --------------- --------------------------------
Date Warren Delano
President
August 13, 1998 By: /s/ Dennis J. Welhouse
- --------------- --------------------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-22-
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
NUMBER EXHIBIT LOCATION
<S> <C> <C>
10-1 New Equipment Term Note dated June 26, 1998, Filed with this Form 10-Q
from the Company in favor of Congress
Financial Corporation
10-2 Second Amendment Agreement dated May 1, Filed with this Form 10-Q
1998, from Lexington Components, Inc. in favor
of Paul H. Pennell
27-1 Financial Data Schedule Filed with this Form 10-Q
</TABLE>
<PAGE> 1
Exhibit 10-1
NEW EQUIPMENT TERM NOTE
$1,700,000 June 26, 1998
FOR VALUE RECEIVED, LEXINGTON COMPONENTS, INC., a Delaware corporation
(the "Debtor"), hereby unconditionally promises to pay to the order of CONGRESS
FINANCIAL CORPORATION, a Delaware corporation, as successor by merger to
Congress Financial Corporation, a California corporation (the "Payee"), at the
offices of Payee at 1133 Avenue of the Americas, New York, New York 10036, or at
such other place as the Payee or any holder hereof may from time to time
designate, the principal sum of ONE MILLION SEVEN HUNDRED THOUSAND DOLLARS
($1,700,000) in lawful money of the United States of America and in immediately
available funds, in eighty-four (84) consecutive monthly installments (or
earlier as hereinafter referred to) on the first day of each month commencing
July 1, 1998, of which the first eighty-three (83) installments shall each be in
the amount of TWENTY THOUSAND TWO HUNDRED DOLLARS ($20,200), and the last (i.e.
eighty-fourth (84th)) installment shall be in the amount of the entire unpaid
balance of this Note.
Debtor hereby further promises to pay interest to the order of Payee on
the unpaid principal balance hereof at the Interest Rate. Such interest shall be
paid in like money at said office or place from the date hereof, commencing on
the first day of the month next following the date hereof, and on the first day
of each month thereafter until the indebtedness evidenced by this Note is paid
in full. Interest payable upon and during the continuance of an Event of Default
or following the effective date of termination or non-renewal of the Financing
Agreements shall be payable upon demand.
For purposes hereof, (a) the term "Interest Rate" shall mean, as to
Prime Rate Loans, a rate of one-quarter of one (1/4%) percent per annum in
excess of the Prime Rate, and as to Eurodollar Rate Loans, a rate of two and
three-quarters (2 3/4%) percent per annum in excess of the Adjusted Eurodollar
Rate; PROVIDED, THAT, at Payee's option, the Interest Rate shall mean a rate of
two and one-quarter (2 1/4%) percent per annum in excess of the Prime Rate as to
Prime Rate Loans and a rate of four and three-quarters (4 3/4%) percent per
annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans,
upon and during the continuance of an Event of Default or following the
effective date of termination or non-renewal of the Financing Agreements, and
(b) the term "Prime Rate" shall mean the rate from time to time publicly
announced by First Union National Bank, or its successors, as its prime rate,
whether or not such announced rate is the best rate available at such bank.
Unless otherwise defined herein, all capitalized terms used herein shall
<PAGE> 2
have the meanings assigned thereto in the Accounts Agreement (as hereinafter
defined) and the other Financing Agreements.
The Interest Rate payable hereunder as to Prime Rate Loans shall
increase or decrease by an amount equal to each increase or decrease,
respectively, in such Prime Rate, effective on the first day of the month after
any change in such Prime Rate, based on the Prime Rate in effect on the last day
of the month in which any such change occurs. Interest shall be calculated on
the basis of a three hundred sixty (360) day year and actual days elapsed. In no
event shall the interest charged hereunder exceed the maximum permitted under
the laws of the State of New York or other applicable law.
This Note is issued pursuant to the terms and provisions of the letter
agreement re: Amendment to Financing Agreements, dated as of March 11, 1997
between Debtor and Payee (the "Amendment") to evidence a "New Equipment Term
Loan" (as defined in the New Equipment Term Loan Agreement as referred to in and
as modified by the Amendment) made by Payee to Debtor. This Note is secured by
the "Collateral" described in the Accounts Financing Agreement [Security
Agreement], dated January 11, 1990, by and between Payee and Debtor, as amended
(the "Accounts Agreement") and any agreement, document or instrument now or at
any time hereafter executed and/or delivered in connection therewith or related
thereto (the foregoing, as the same now exist or may hereafter be amended,
modified, supplemented, renewed, extended, restated or replaced, are hereinafter
collectively referred to as the "Financing Agreements") and is entitled to all
of the benefits and rights thereof and of the Financing Agreements. At the time
any payment is due hereunder, at its option, Payee may charge the amount thereof
to any account of Debtor maintained by Payee.
If any principal or interest payment is not made when due hereunder,
and such failure shall continue for three (3) days, or if any other Event of
Default (as defined in the Accounts Agreement) shall occur for any reason, or if
the Financing Agreements shall be terminated or not renewed for any reason
whatsoever, then and in any such event, in addition to all rights and remedies
of Payee under the Financing Agreements, applicable law or otherwise, all such
rights and remedies being cumulative, not exclusive and enforceable
alternatively, successively and concurrently, Payee may, at its option, declare
any or all of Debtor's obligations, liabilities and indebtedness owing to Payee
under the Financing Agreements (the "Obligations"), including, without
limitation, all amounts owing under this Note, to be due and payable, whereupon
the then unpaid balance hereof together with all interest accrued thereon, shall
forthwith become due and payable, together with interest accruing thereafter at
the then applicable rate stated above until the indebtedness evidenced by this
Note is paid in full, plus the costs and expenses of
-2-
<PAGE> 3
collection hereof, including, but not limited to, reasonable attorneys' fees.
Debtor (i) waives diligence, demand, presentment, protest and notice of
any kind, (ii) agrees that it will not be necessary for any holder hereof to
first institute suit in order to enforce payment of this Note and (iii) consents
to any one or more extensions or postponements of time of payment, release,
surrender or substitution of collateral security, or forbearance or other
indulgence, without notice or consent. Upon the occurrence of any Event of
Default and during the continuance thereof, Payee shall have the right, but not
the obligation to setoff against this Note all money owed by Payee to Debtor.
Payee shall not be required to resort to any Collateral for payment,
but may proceed against Debtor and any guarantors or endorsers hereof in such
order and manner as Payee may choose. None of the rights of Payee shall be
waived or diminished by any failure or delay in the exercise thereof.
Debtor hereby waives the right to a trial by jury and all rights of
setoff and rights to interpose counterclaims and cross-claims in any litigation
or proceeding arising in connection with this Note, the Accounts Agreement, the
other Financing Agreements, the Obligations or the Collateral, other than
compulsory counterclaims, the non-assertion of which would result in a permanent
waiver. Debtor hereby irrevocably consents to the non-exclusive jurisdiction of
the Supreme Court of the State of New York and of the United States District
Court for the Southern District of New York for all purposes in connection with
any action or proceeding arising out of or relating to this Note, the Accounts
Agreement, the other Financing Agreements, the Obligations or the Collateral and
further consents that any process or notice of motion or other application to
said Courts or any judge thereof, or any notice in connection with any
proceeding hereunder may be served (i) inside or outside the State of New York
by registered or certified mail, return receipt requested, and service or notice
so served shall be deemed complete five (5) days after the same shall have been
posted or (ii) in such other manner as may be permissible under the rules of
said Courts. Within thirty (30) days after such mailing, Debtor shall appear in
answer to such process or notice of motion or other application to said Courts,
failing which Debtor shall be deemed in default and judgment may be entered by
Payee against Debtor for the amount of the claim and other relief requested
therein.
The execution and delivery of this Note has been authorized by the
Board of Directors of Debtor.
This Note, the other Obligations and the Collateral shall be governed
by and construed in accordance with the laws of the
-3-
<PAGE> 4
State of New York and shall be binding upon the successors and assigns of Debtor
and inure to the benefit of Payee and its successors, endorsees and assigns. If
any term or provision of this Note shall be held invalid, illegal or
unenforceable, the validity of all other terms and provisions hereof shall in no
way be affected thereby.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the Payee or the holder hereof.
Whenever used herein, the terms "Debtor" and "Payee" shall be deemed to
include their respective successors and assigns.
LEXINGTON COMPONENTS, INC.
ATTEST:
By: Warren Delano
Dennis J. Welhouse ------------------------------
- -------------------------
Assistant Secretary Title: President
--------------------------
[Corporate Seal]
-4-
<PAGE> 1
Exhibit 10-2
State of South Carolina,
COUNTY OF YORK
-------------------
LEXINGTON COMPONENTS, INC.
AND
PAUL H. PENNELL
----------------------
SECOND
AMENDMENT AGREEMENT
-------------------
I hereby certify that the within Amendment
Agreement was filed for record in my office
at _____ M. o'clock on the ____ day of
June, 1998, and was immediately entered
upon the proper indexes and duly recorded
in Book _____ of Real Estate Mortgages,
page _____________ .
R.M.C./Clerk of Court
York County, South Carolina
<PAGE> 2
SECOND AMENDMENT AGREEMENT
SECOND AMENDMENT AGREEMENT dated as of this 23rd day of June, 1998, to
be effective on May 1, 1998, between Lexington Components, Inc., a Delaware
corporation ("LCI"), formerly known as EPI Acquisitions Corp. ("EPI"), and Paul
H. Pennell ("Pennell").
WHEREAS, EPI and Pennell entered into certain financing agreements
pursuant to that certain Asset Purchase Agreement dated as of November 30, 1988
(the "Purchase Agreement") between EPI and Pennell;
WHEREAS, such financing agreements consist of a Promissory Note dated
November 30, 1988 from EPI to Pennell in the original principal amount of
$3,530,000, (the "Note"; the Note, as amended by this Amendment Agreement, is
referred to as the "Amended Note"), a Mortgage dated as of November 30, 1988
from EPI to Pennell (the "Mortgage") and a Security Agreement dated as of
November 30, 1988 between EPI and Pennell (the "Security Agreement"; the Note,
the Mortgage and the Security Agreement, as the same have heretofore or
contemporaneously been amended, modified or supplemented, are herein
collectively referred to as the "Financing Agreements");
WHEREAS, the Note was amended by that certain Amendment Agreement dated
as of November 30, 1991, and recorded with the Clerk of Court of York County,
South Carolina as Book 355 at Page 195 on December 16, 1991.
WHEREAS, pursuant to the terms thereof, the principal amount of the
Note and the term thereof have been amended as a result of that certain Release
and Notice Agreement dated as of March 31, 1993 between LCI and Pennell, and
there is outstanding, as of the effective date hereof, $1,370,015.65 principal
amount thereunder, with a maturity of April 30, 2000;
WHEREAS, LCI and Pennell desire to further amend the Note in the manner
set forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, LCI and Pennell, intending to be
legally bound, hereby agree as follows:
1. AMENDMENT OF NOTE. (a) The first paragraph on page 1 of the Note, as
amended, is hereby amended by deleting from the third and fourth lines thereof
the words "FOUR MILLION FIVE HUNDRED EIGHTY THOUSAND ONE HUNDRED EIGHTY-FIVE AND
17/100 DOLLARS ($4,580,185.17)" and substituting therefor the words "ONE MILLION
THREE HUNDRED SEVENTY THOUSAND FIFTEEN AND 65/100 DOLLARS ($1,370,015.65)."
(b) The Note, as amended, is hereby further amended by deleting
therefrom the second and third paragraphs on page 1 thereof in their entirety
and substituting therefor the following paragraph:
<PAGE> 3
The principal of and interest on this Note shall be
payable as follows:
(i) Monthly interest only payments in the amount of
$13,700.16 each shall be payable on the last day of each month
commencing May 31, 1998 and on the last day of each month
thereafter until January 31, 2000. Simple interest on the
principal amount hereunder shall accrue at the rate of 12% per
annum until the principal balance is paid in full;
(ii) The principal sum of the Note, together with all
accrued and unpaid interest thereon, if any, shall be due and
payable on January 31, 2000; and
(iii) Any payment which is required to be made on a
Saturday, Sunday or legal holiday shall be payable on the next
succeeding day which is not a Saturday, Sunday or legal
holiday.
(c) Pennell shall cause the following legend to be
placed prominently on the Note:
THIS NOTE HAS BEEN AMENDED BY A SECOND
AMENDMENT AGREEMENT DATED EFFECTIVE AS
OF MAY 1, 1998, A COPY OF WHICH IS AVAILABLE
FOR INSPECTION AT THE OFFICES OF BUYER AT
767 LEXINGTON AVENUE, 29TH FLOOR, NEW
YORK, NEW YORK.
(d) To the extent that this Second Amendment
Agreement amends the Note, the Note is hereby amended. All references to the
Note in the Purchase Agreement and the Financing Agreements or any other
agreement or document relating to the Financing Agreements shall be deemed to
refer to the Amended Note.
2. FURTHER ASSURANCES. Each of the parties hereto shall execute and
deliver such additional documents and take such additional actions as may be
requested by the other party to effectuate the provisions and purposes of this
Second Amendment Agreement. In connection therewith, LCI shall cause Lexington
Precision Corporation to execute and deliver to Pennell a consent in the form of
EXHIBIT A hereto (the "Consent").
3. NOTICES. The parties agree that all notices, demands, requests or
communications to be made under or pursuant to the Mortgage or the Security
Agreement shall hereafter be made in the manner set forth in the Mortgage or the
Security Agreement, as applicable, to the following addresses or to such other
addresses as either party may specify in writing to the other:
2
<PAGE> 4
If to Pennell:
Mr. Paul H. Pennell
6508 Beechwood Road
Amelia Island, Florida 32034
With a copy to:
Nexsen Pruet Jacobs & Pollard
1441 Main Street, Suite 1500
Columbia, South Carolina 29202
Attention: G. Marcus Knight, Esq.
If to LCI:
Lexington Components, Inc.
767 Third Avenue 29th Floor
New York, New York 10017
Attention: President
With a copy to:
Nixon, Hargrave, Devans & Doyle
437 Madison Avenue, 24th Floor
New York, New York 10022
Attention: Richard F. Langan, Jr.. Esq.
4. MORTGAGE. For purposes of notifying persons of the amendment of the
Note and the effect thereof upon the Mortgage, it is intended that this Second
Amendment Agreement shall be filed with the real estate mortgages of York
County, South Carolina. For purposes of the foregoing, EXHIBIT B hereto sets
forth a description of the real property to which the Mortgage relates.
5. REPRESENTATIONS AND WARRANTIES. LCI hereby represents and warrants
to Pennell that: (a) LCI has full power and authority to execute and deliver
this Second Amendment Agreement; (b) this Second Amendment Agreement constitutes
the legal, valid and binding obligation of LCI, enforceable against LCI in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting enforceability of creditors' rights generally or equitable principles
at the time in effect; (c) the execution, delivery and performance by LCI of
this Second Amendment Agreement have been duly authorized by all requisite
corporate action of LCI ; and (d) the execution and delivery by LCI of this
Second Amendment Agreement and the performance by LCI of the Amended Note will
not (i) violate any law or regulation or the Certificate of Incorporation or
By-laws of LCI, (ii) violate or constitute (with due notice or lapse of time or
both) a default under any indenture, agreement, license or other instrument to
which LCI is a party or by which
3
<PAGE> 5
it or any of its properties may be bound, (iii) violate any order of any court,
tribunal or governmental agency binding upon LCI or its properties, (iv) result
in the creation or imposition of any Lien of any nature whatsoever upon any
properties or assets of LCI other than pursuant to the Financing Agreements, or
(v) require any license, consent or approval of any governmental agency or
regulatory authority.
6. MISCELLANEOUS. (a) This Second Amendment Agreement shall be governed
by and construed and interpreted in accordance with the laws of the State of New
York without reference to its principles of conflicts of law.
(b) Except as expressly amended hereby, all terms and
conditions of the Financing Agreements and all rights of Pennell and obligations
of LCI thereunder and under all related documents, shall remain in full force
and effect.
(c) LCI hereby agrees to pay on demand all costs and expenses
(including without limitation the reasonable fees and expenses of counsel to
Pennell) incurred by Pennell in connection with the negotiation, preparation,
execution and delivery of this Second Amendment Agreement and all related
documents.
(d) This Amendment Agreement may be executed by one or more of
the parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment Agreement as of the date first above written.
IN THE PRESENCE OF:
LEXINGTON COMPONENTS, INC. (SEAL)
M. Rosensweet By: Warren Delano
- -------------------------------------- -----------------------------
Witness (as to Lexington Warren Delano
Components, Inc.) President
Michele T. Roth
- --------------------------------------
Witness (as to Lexington
Components, Inc.)
Phyllis Pennell Paul H. Pennell (SEAL)
- -------------------------------------- -------------------------------
Witness (as to Paul H. Pennell) Paul H. Pennell
Fred B. Thrift
- --------------------------------------
Witness (as to Paul H. Pennell)
4
<PAGE> 6
CONSENT
The undersigned guarantor hereby consents to the Second Amendment
Agreement dated effective as of May 1, 1998 between LEXINGTON COMPONENTS, INC.
("LCI"), formerly known as EPI Acquisitions Corp. ("EPI"), and PAUL H. PENNELL
("Pennell") and ratifies and confirms the terms of its Guaranty dated November
30, 1988 as applicable to all present and future indebtedness, liabilities and
obligations of LCI to Pennell including, without limitation, all indebtedness,
liabilities and obligations under the amended promissory note dated November 30,
1988 in the original principal amount of $3,530,000 issued by EPI in favor of
Pennell (the "Note"), which principal amount has been decreased to $1,370,015.65
as of May 1, 1998 pursuant to the terms and conditions of the Note, as amended
by the foregoing Second Amendment Agreement. The undersigned also acknowledges
and agrees that all references in the Guaranty to the Note shall be deemed to
refer to the Note as amended pursuant to the foregoing Second Amendment
Agreement.
(SEAL) LEXINGTON PRECISION CORPORATION
(formerly known as Blasius Industries, Inc.)
By: Warren Delano
--------------------------------------
Warren Delano
President
5
<PAGE> 7
EXHIBIT B
All that certain piece, parcel or tract of land lying, being and situate in
Ebenezer Township, York County, S.C. in Section II of the Rock Hill Airport
Industrial Park, on the northwestern side of Bryant Boulevard, a short distance
south of but not abutting on Homestead Road, and being more particularly
described as follows: Beginning at an iron on the Northwestern edge of Bryant
Boulevard at the commencement of its curve of intersection with a 70 foot
reserved strip, such strip lying between premises herein conveyed and property
of Williams, Yanutola, and Yeargin; and running thence with the northwestern
edge of Bryant Boulevard in a southwesterly direction along a curve having a
radius of 970 feet for a distance of 387.21 feet to an iron; thence continuing
with said street S38 degrees 32'59"W 381.19 feet to an iron; thence N87 degrees
05'37"W 350 feet to an iron sitting in the line of the property of David N.
Fischer; thence crossing previously closed and abandoned Cross Wind Runway N02
degrees 54'23"E 562.46 feet to an iron on the aforementioned 70 foot reserved
strip; thence with said reserved strip N79 degrees 33'39"E 688.13 feet to an
iron at the commencement of the curve of its intersection with Bryant Boulevard;
thence following the curve of said intersection in a clockwise direction along a
curve having a radius of 50 feet for an arc distance of 101.33 feet to the
beginning; being shown and designated as Tract A, Section II, Rock Hill Airport
Industrial Park, containing 8.406 acres, more or less, as shown upon plat
prepared for EPI Acquisitions Corp., by Fred J. Hager Surveying and Mapping
dated November 30, 1988.
6
<PAGE> 8
STATE OF NEW YORK :
COUNTY OF NEW YORK : PROBATE
PERSONALLY appeared before me the undersigned witness and made oath
that (s)he saw the within named Lexington Components, Inc., by its officer(s),
sign, affix the corporate seal, and as the act and deed of Lexington Components,
Inc. deliver the within written Second Amendment Agreement that (s)he witnessed
the execution thereof by Lexington Components, Inc.
SWORN to before me this
23rd day of June, 1998
(SEAL)
Tonya M. Ippolito M. Rosensweet
- -------------------------------- ------------------------------
NOTARY PUBLIC FOR NEW YORK Witness
My Commission Expires: April 4, 2000
7
<PAGE> 9
STATE OF FLORIDA :
COUNTY OF NASSAU : PROBATE
PERSONALLY appeared before me the undersigned witness and made oath
that (s)he saw the within named Paul H. Pennell sign and deliver the within
written Amendment Agreement, that (s)he witnessed the execution thereof by Paul
H. Pennell.
SWORN to before me this
22 day of June, 1998.
(SEAL)
Merena C. Jones Fred B. Thrift
- ------------------------------------ ------------------------------
NOTARY PUBLIC FOR FLORIDA Witness
My Commission Expires:
8
<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> JUN-30-1998
<CASH> 171
<SECURITIES> 0
<RECEIVABLES> 15,975
<ALLOWANCES> 0
<INVENTORY> 10,465
<CURRENT-ASSETS> 30,335
<PP&E> 111,728
<DEPRECIATION> 48,808
<TOTAL-ASSETS> 105,989
<CURRENT-LIABILITIES> 37,920
<BONDS> 73,365
420
0
<COMMON> 1,087
<OTHER-SE> (8,568)
<TOTAL-LIABILITY-AND-EQUITY> 105,989
<SALES> 31,024
<TOTAL-REVENUES> 31,024
<CGS> 26,090
<TOTAL-COSTS> 26,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,448
<INCOME-PRETAX> (377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
