<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3252
LEXINGTON PRECISION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-1830121
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NY 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(212) 319-4657
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT DATE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
COMMON STOCK, $0.25 PAR VALUE, 4,263,036 SHARES AS OF NOVEMBER 12, 1999
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
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<PAGE> 2
LEXINGTON PRECISION CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................26
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 186 $ 103
Accounts receivable 21,700 17,837
Inventories 10,030 10,170
Prepaid expenses and other assets 1,671 2,063
Deferred income taxes 2,025 2,025
---------- ----------
Total current assets 35,612 32,198
---------- ----------
Plant and equipment:
Land 1,534 1,549
Buildings 23,394 23,753
Equipment 94,906 90,306
---------- ----------
119,834 115,608
Accumulated depreciation 57,356 52,871
---------- ----------
Plant and equipment, net 62,478 62,737
---------- ----------
Excess of cost over net assets of businesses acquired, net 8,541 8,778
---------- ----------
Other assets, net 4,007 4,612
---------- ----------
$ 110,638 $ 108,325
========== ==========
</TABLE>
See notes to consolidated financial statements. (continued on next page)
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<PAGE> 4
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEET (CONTINUED)
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 10,223 $ 11,291
Accrued expenses 9,529 9,345
Short-term debt 19,244 12,995
Current portion of long-term debt 45,591 6,597
---------- ----------
Total current liabilities 84,587 40,228
---------- ----------
Long-term debt, excluding current portion 30,954 74,953
---------- ----------
Deferred income taxes and other long-term liabilities 2,245 2,220
---------- ----------
Redeemable preferred stock, $100 par value, at
redemption value 750 750
Excess of redemption value over par value (375) (375)
---------- ----------
Redeemable preferred stock at par value 375 375
---------- ----------
Stockholders' deficit:
Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,348,951 shares issued 1,087 1,087
Additional paid-in-capital 12,212 12,235
Accumulated deficit (20,605) (22,556)
Cost of common stock in treasury, 85,915 shares (217) (217)
---------- ----------
Total stockholders' deficit (7,523) (9,451)
---------- ----------
$ 110,638 $ 108,325
========== ==========
</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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 34,218 $ 29,404 $ 104,756 $ 92,625
Cost of sales 28,550 25,713 87,645 79,215
--------- -------- ----------- --------
Gross profit 5,668 3,691 17,111 13,410
Selling and administrative expenses 2,916 2,466 9,239 8,132
--------- -------- ----------- --------
Income from operations 2,752 1,225 7,872 5,278
Interest expense 2,456 2,469 7,206 7,319
--------- -------- ----------- --------
Income (loss) before income taxes and
extraordinary item 296 (1,244) 666 (2,041)
Income tax provision 74 - 166 -
--------- -------- ----------- --------
Net income (loss) before extraordinary item 222 (1,244) 500 (2,041)
Extraordinary gain on repurchase of long-term debt,
net of applicable income taxes 80 - 1,451 -
--------- -------- ----------- --------
Net income (loss) $ 302 $ (1,244) $ 1,951 $ (2,041)
========= ======== =========== ========
Basic and diluted net income (loss) per common share:
Net income (loss) before extraordinary item $ 0.05 $ (0.30) $ 0.10 $ (0.49)
Extraordinary gain 0.02 - 0.34 -
--------- -------- ----------- --------
Net income (loss) $ 0.07 $ (0.30) $ 0.44 $ (0.49)
========= ======== =========== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,951 $ (2,041)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary gain on repurchase of long-term debt (1,935) -
Depreciation 8,119 7,333
Amortization included in operating expense 1,250 1,006
Amortization included in interest expense 179 148
Changes in operating assets and liabilities that
provided (used) cash:
Accounts receivable (3,863) 933
Inventories 140 (618)
Prepaid expenses and other assets 392 351
Trade accounts payable (1,068) (102)
Accrued expenses 184 (51)
Other 429 (95)
---------- ----------
Net cash provided by operating activities 5,778 6,864
---------- ----------
INVESTING ACTIVITIES:
Purchases of plant and equipment (8,245) (11,738)
Decrease in equipment deposits 497 106
Proceeds from sales of equipment 27 422
Expenditures for tooling owned by customers (757) (1,231)
Other - 648
---------- ----------
Net cash used by investing activities (8,478) (11,793)
---------- ----------
FINANCING ACTIVITIES:
Net increase in short-term debt 6,249 5,701
Proceeds from issuance of long-term debt 10,587 3,741
Repayment of long-term debt (11,284) (4,483)
Repurchase of long-term debt (2,373) -
Other (396) (29)
---------- ----------
Net cash provided by financing activities 2,783 4,930
---------- ----------
Net increase in cash 83 1
Cash at beginning of period 103 208
---------- ----------
Cash at end of period $ 186 $ 209
========== ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The unaudited interim consolidated financial statements include the
accounts of Lexington Precision Corporation and its subsidiaries (collectively,
the "Company"). The financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
the financial statements do not include all the information and footnotes
included in the Company's annual consolidated financial statements. Significant
accounting policies followed by the Company are set forth in Note 1 to the
consolidated financial statements in the Company's annual report on Form 10-K
for the year ended December 31, 1998.
In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company at September 30, 1999, the Company's results
of operations for the three-month and nine-month periods ended September 30,
1999 and 1998, and the Company's cash flows for the nine-month periods ended
September 30, 1999 and 1998. All such adjustments were of a normal recurring
nature.
The results of operations for the three-month and nine-month periods
ended September 30, 1999, are not necessarily indicative of the results to be
expected for the full year or for any succeeding quarter.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Indebtedness
totaling $37,629,000 matures during the first and second quarters of 2000. The
Company's operations will not generate cash sufficient to satisfy such
obligations at their maturities. During 1999, the Company was in the process of
preparing for a $100 million offering of debt securities, which it planned to
complete during 1999 in order to refinance substantially all of the indebtedness
of the Company, including the maturing indebtedness. Because of conditions in
the market for non-investment grade debt, the Company, with input from its
investment bankers, has concluded that it is unlikely that the Company's
proposed offering can be completed prior to the due dates of the Company's
maturing indebtedness. The Company and the holders of a significant portion of
its maturing indebtedness have agreed to enter into discussions regarding
extensions of the maturities of such indebtedness. There can be no assurance
that the Company will be able to negotiate extensions or refinancings of its
maturing indebtedness. In the event that the Company is not successful in
refinancing or extending such debt securities, defaults may occur under the
agreements relating to such securities. If a default occurs, it may trigger
other defaults pursuant to cross-default provisions under other indebtedness of
the Company. Holders of indebtedness on which defaults exist would be entitled
to accelerate the maturity thereof, to cease making any further advances
otherwise permitted under the related credit facilities, to seek to foreclose
upon any assets securing such indebtedness, and to pursue other remedies. If any
such actions were to be taken, the Company might be required to consider
alternatives, including seeking relief from its creditors. Any such action by
creditors could have a material adverse effect upon the Company. The
consolidated financial statements do not include any adjustments that might
result should the Company be unable to refinance, extend, or exchange the
maturing obligations on or before their maturity dates.
-6-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- INVENTORIES
Inventories at September 30, 1999, and December 31, 1998, are set forth
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Finished goods $ 3,677 $ 4,272
Work in process 3,172 2,834
Raw materials and purchased parts 3,181 3,064
--------- --------
$ 10,030 $ 10,170
========= ========
</TABLE>
NOTE 3 -- ACCRUED EXPENSES
At September 30, 1999, and December 31, 1998, accrued expenses included
accrued interest expense of $877,000 and $1,971,000, respectively.
NOTE 4 -- DEBT
At September 30, 1999, and December 31, 1998, short-term debt consisted
of loans outstanding under the Company's revolving line of credit. At December
31, 1998, $3,850,000 of loans outstanding under the revolving line of credit
were classified as long-term debt because they were refinanced under long-term
loan agreements before the consolidated financial statements for the period were
issued. At September 30, 1999, loans outstanding under the revolving line of
credit accrued interest at the prime rate plus 0.25% and the London Interbank
Offered Rate ("LIBOR") plus 2.75%. Effective October 1, 1999, the rates of
interest charged on loans outstanding under the revolving line of credit were
reduced by 25 basis points, to either the prime rate or LIBOR plus 2.5%, at the
Company's option. At September 30, 1999, LIBOR was 5.4%.
-7-
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term debt at September 30, 1999, and December 31, 1998, is set
forth below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Long-term secured debt:
Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ - $ 3,850(1)
Term loan, due 2000, 12% 1,370 1,370
Term loans payable in equal monthly principal installments based on
180-month amortization schedules, final maturities in 2001, 8.37% 2,746 2,921
Term loans payable in equal monthly principal installments, final
maturities in 2002, LIBOR plus 2.75% 2,024 2,584
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9.37% 1,324 1,404
Term loan payable in equal monthly principal installments based on
a 180-month amortization schedule, final maturity in 2002, 9% 2,581 2,732
Term loans payable in equal monthly principal installments, final
maturity in 2002, prime rate plus 0.25% and LIBOR plus 2.75% 2,368(2) (3) -
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% 636(2) 770
Term loan payable in equal monthly principal installments, final
maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 402(2) (3) 492
Term loans payable in equal monthly principal installments, final
maturity in 2004, LIBOR plus 2.75% 1,562 -
Term loan payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,267(2) 1,471
Term loans payable in equal monthly principal installments, final
maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 14,436(2) (3) 18,967
Term loan payable in equal monthly principal installments, final
maturity in 2005, LIBOR plus 2.75% 1,147 1,388
Term loan payable in equal monthly principal installments, final
maturity in 2005, prime rate plus 0.25% and LIBOR plus 2.75% 1,397(2) (3) 1,579
Term loan payable in equal monthly principal installments, final
maturity in 2006, prime rate plus 0.25% 539(2) -
Term loans payable in equal monthly principal installments, final
maturity in 2006, prime rate plus 0.25% and LIBOR plus 2.75% 6,356(2) (3) 1,300
--------- --------
Total long-term secured debt $ 40,155 $ 40,828
--------- --------
</TABLE>
(continued on next page)
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<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Long-term unsecured debt:
10.5% senior note, due 2000 $ 7,500 $ 7,500
12.75% senior subordinated notes, due 2000 27,412 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 131 155
--------- --------
Total long-term unsecured debt 36,390 40,722
--------- --------
Total long-term debt 76,545 81,550
Less current portion 45,591 6,597
--------- --------
Total long-term debt, excluding current portion $ 30,954 $ 74,953
========= ========
</TABLE>
(1) Refinanced under long-term agreements before the consolidated
financial statements for the period were issued. Amounts reflected
in current portion are based upon the terms of the new borrowings.
(2) Effective October 1, 1999, the rates of interest charged on
these loans were reduced by 25 basis points, to the prime rate or
LIBOR plus 2.5%.
(3) 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.
At September 30, 1999, the prime rate was 8.25% and LIBOR was 5.4%.
The loans outstanding under the Company's revolving line of credit and
the secured term loans listed above are collateralized by substantially all of
the assets of the Company, including accounts receivable, inventories,
equipment, certain real estate, and the stock of its wholly-owned subsidiary,
Lexington Rubber Group, Inc.
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 other covenants that 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.
-9-
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 -- INCOME TAXES
During the first nine months of 1999, the Company recorded income tax
expense of $650,000, which consisted of estimated federal alternative minimum
tax and state income tax. Of this amount, $484,000 related to the extraordinary
gain on the repurchase of long-term debt, which is shown net of such income tax
expense in the consolidated statement of operations.
At September 30, 1999, and December 31, 1998, the excess of the
Company's deferred income tax assets over its deferred income tax liabilities
was fully offset by a valuation allowance.
NOTE 6 -- NET INCOME (LOSS) PER COMMON SHARE
The calculations of basic and diluted net income or loss per common
share for the three-month and nine-month periods ended September 30, 1999 and
1998, are set forth below (in thousands, except per share amounts). The pro
forma conversion of the Company's potentially dilutive securities (the 14%
junior subordinated convertible notes and the $8 cumulative convertible
redeemable preferred stock, series B), before giving effect to the extraordinary
gain, was not dilutive for the three-month or nine-month periods ended September
30, 1999 and 1998. As a result, the calculations of diluted net income or loss
per common share set forth below do not reflect any pro forma conversion.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerators:
Net income (loss) before extraordinary item $ 222 $ (1,244) $ 500 $ (2,041)
Preferred stock dividends (8) (8) (23) (25)
Excess of redemption value over par value of
preferred stock redeemed during year (11) (11) (34) (34)
-------- -------- -------- --------
Numerator for basic and diluted net income (loss)
per share--income available to common stockholders
before extraordinary item 203 (1,263) 443 (2,100)
Extraordinary gain, net of applicable income taxes 80 - 1,451 -
-------- -------- -------- --------
Numerator for basic and dilutive net income (loss)
per share--income available to common
stockholders after extraordinary item $ 283 $ (1,263) $ 1,894 $ (2,100)
======== ======== ======== ========
</TABLE>
(continued on next page)
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<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(continued from prior page)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic and diluted net income (loss)
per share--weighted-average common shares 4,263 4,263 4,263 4,263
======== ======== ======== ========
Basic and diluted net income (loss) per common share:
Net income (loss) before extraordinary item $ 0.05 $ (0.30) $ 0.10 $ (0.49)
Extraordinary gain 0.02 - 0.34 -
-------- -------- -------- --------
Net income (loss) $ 0.07 $ (0.30) $ 0.44 $ (0.49)
======== ======== ======== ========
</TABLE>
-11-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 -- SEGMENTS
Information relating to the Company's operating segments and its
corporate office for the three-month and nine-month periods ended September 30,
1999 and 1998, is summarized below (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
Rubber Group $ 25,123 $ 21,160 $ 76,289 $ 68,236
Metals Group 9,095 8,244 28,467 24,389
---------- ---------- ---------- ----------
Total net sales $ 34,218 $ 29,404 $ 104,756 $ 92,625
========== ========== ========== ==========
INCOME (LOSS) FROM OPERATIONS:
Rubber Group $ 3,390 $ 2,320 $ 10,823 $ 9,978
Metals Group (125) (620) (1,114) (3,213)
Corporate office (513) (475) (1,837) (1,487)
---------- ---------- ---------- ----------
Total income from operations $ 2,752 $ 1,225 $ 7,872 $ 5,278
========== ========== ========== ==========
ASSETS:
Rubber Group $ 71,402 $ 65,899 $ 71,402 $ 65,899
Metals Group 37,144 39,360 37,144 39,360
Corporate office 2,092 1,632 2,092 1,632
---------- ---------- ---------- ----------
Total assets $ 110,638 $ 106,891 $ 110,638 $ 106,891
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Rubber Group $ 2,000 $ 1,873 $ 6,025 $ 5,476
Metals Group 1,125 1,055 3,312 2,839
Corporate office 84 65 211 172
---------- ---------- ---------- ----------
Total depreciation and amortization $ 3,209 $ 2,993 $ 9,548 $ 8,487
========== ========== ========== ==========
CAPITAL EXPENDITURES:
Rubber Group $ 2,636 $ 1,944 $ 6,192 $ 6,595
Metals Group 600 939 1,979 5,077
Corporate office 4 6 74 66
---------- ---------- ---------- ----------
Total capital expenditures $ 3,240 $ 2,889 $ 8,245 $ 11,738
========== ========== ========== ==========
</TABLE>
-12-
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 -- EXTRAORDINARY ITEM
During the three-month and nine-month periods ended September 30, 1999,
the Company repurchased $500,000 and $4,308,000 principal amount of its 12.75%
senior subordinated notes, respectively. The Company recorded extraordinary
gains, net of applicable income taxes, of $80,000 and $1,451,000 during the
respective periods.
NOTE 9 -- PLANT CLOSURE
In May 1999, the Company closed a 21,000 square foot diecasting
facility in Manchester, New York. For the three-month periods ended September
30, 1999 and 1998, the Manchester facility had net sales of $41,000 and
$522,000, respectively. For the third quarter of 1999, the Manchester facility
had income from operations of $28,000, compared to a loss from operations of
$31,000 during the third quarter of 1998. For the nine-month periods ended
September 30, 1999 and 1998, the Manchester facility had net sales of $935,000
and $1,780,000, respectively, and losses from operations of $186,000 and
$133,000, respectively. At September 30, 1999, the Manchester facility had net
assets, before deducting indebtedness secured by the assets of the Manchester
facility, of $174,000.
The Company presently anticipates that it will complete the disposal of
the assets of the facility prior to June 30, 2000. During May 1999, the Company
recorded expenses related to the closure and disposal of the facility in the
amount of $590,000. During the second and third quarters of 1999, the Company
charged $216,000 to the Manchester shutdown reserve and, during the third
quarter of 1999, the Company reduced its estimate of the cost to close and
dispose of the facility by $22,000. At September 30, 1999, the adjusted cost to
close and dispose of the facility totaled $568,000, of which $522,000 was
charged to cost of sales and $46,000 was charged to selling and administrative
expenses. The expense included $335,000 for the write-down of plant and
equipment, $110,000 of employee severance payments, and $123,000 of other plant
closing costs. At September 30, 1999, the unused shutdown reserve totaled
$352,000.
-13-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Various statements in this Item 2 that are not historical facts are
"forward-looking statements," as such term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements usually can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "anticipates," "estimates," "projects," or
the negative thereof. They may include discussions of strategy, which involves
risks and uncertainties, and they typically are based upon projections and
estimates, as distinct from past or historical facts and events.
Forward-looking statements are subject to a number of risks,
uncertainties, contingencies, and other factors that could cause the actual
results or performance of the Company to be materially different from the future
results or performance expressed in or implied by such statements. Such risks
and uncertainties for the Company include increases and decreases in business
awarded to the Company by its various customers, unanticipated price reductions
for the Company's products as a result of competition, unanticipated operating
results and cash flows, increases or decreases in capital expenditures,
unforeseen product liability claims, changes in economic conditions, changes in
the competitive environment, changes in the capital markets, labor interruptions
at the Company or at its customers, disruptions that may be caused by year 2000
software or hardware problems, and the inability of the Company to obtain
additional borrowings or to refinance its existing indebtedness.
Because the Company operates with substantial financial leverage and
limited liquidity, the impact of any negative event may have a greater adverse
effect upon the Company than if the Company operated with lower financial
leverage and greater liquidity.
The results of operations for any particular fiscal period of the
Company are not necessarily indicative of the results to be expected for any one
or more succeeding fiscal periods. Consequently, the use of forward-looking
statements should not be regarded as a representation that any such projections
or estimates will be realized, and actual results may vary materially. There can
be no assurance that any of the forward-looking statements contained herein will
prove to be accurate.
All forward-looking statements, projections, or estimates attributable
to the Company are expressly qualified by the foregoing cautionary statements.
RESULTS OF OPERATIONS -- THIRD QUARTER OF 1999 VERSUS THIRD QUARTER OF 1998
The Company manufactures, to customer specifications, component parts
through two operating segments, the Rubber Group and the Metals Group. The
Rubber Group consists of four divisions, Lexington Connector Seals, Lexington
Insulators, Lexington Medical, and Lexington Technologies. The Metals Group
consists of three divisions, Lexington Die Casting and the Arizona and New York
Divisions of Lexington Machining.
-14-
<PAGE> 16
RUBBER GROUP
The Rubber Group manufactures silicone and organic rubber components
primarily for automotive industry customers. Any material reduction in the level
of activity in the automotive industry may have a material adverse effect on the
results of operations of the Rubber Group and the Company.
The following table sets forth the operating results of the Rubber
Group for the third quarters of 1999 and 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 25,123 100.0% $ 21,160 100.0%
Cost of sales 20,222 80.5 17,358 82.0
--------- ------- --------- -------
Gross profit 4,901 19.5 3,802 18.0
Selling and administrative expenses 1,511 6.0 1,482 7.0
--------- ------- --------- -------
Income from operations $ 3,390 13.5% $ 2,320 11.0%
========= ======= ========= =======
</TABLE>
During the third quarter of 1999, net sales of the Rubber Group
increased by $3,963,000, or 18.7%, compared to the third quarter of 1998. This
increase was primarily due to increased unit sales of seals for automotive
wiring systems, and, to a lesser extent, increased unit sales of insulators for
automotive ignition wire sets, offset, in part, by price reductions on certain
automotive components. The increase in unit sales of seals for automotive wiring
systems was, in part, a result of depressed unit sales of seals in the third
quarter of 1998 due to labor stoppages at two General Motors parts plants that
resulted in shutdowns of a number of General Motors assembly plants.
During the third quarter of 1999, income from operations totaled
$3,390,000, an increase of $1,070,000, or 46.1%, compared to the third quarter
of 1998. Cost of sales as a percentage of net sales decreased during the third
quarter of 1999 compared to the third quarter of 1998, primarily due to a
reduction in material cost as a percentage of net sales, which resulted
primarily from (1) a change in product mix, (2) operating improvements, and (3)
an increase in the percentage of tools manufactured internally. Cost of sales
for the third quarter of 1999 included a credit of $142,000 resulting from a
special rebate from the State of Ohio Bureau of Workers' Compensation that
represented an adjustment to the Company's share of excess funds distributed by
the Bureau during the second quarter of 1998.
Selling and administrative expenses as a percentage of net sales
decreased during the third quarter of 1999 compared to the third quarter of
1998, primarily because those expenses are partially fixed in nature.
During the third quarter of 1999, depreciation and amortization at the
Rubber Group totaled $2,000,000, or 8.0% of net sales, compared to $1,873,000,
or 8.9% of net sales, during the third quarter of 1998. During the third quarter
of 1999, earnings before interest, taxes, depreciation, and amortization
("EBITDA"), including the special rebate, was $5,390,000, an increase of
$1,197,000 compared to the third quarter of 1998. (EBITDA is not a measure of
performance under generally accepted accounting principles. While EBITDA should
not be used as a substitute for net income, cash flows from operating
activities, or other operating or cash flow statement data prepared in
accordance with generally accepted accounting principles, EBITDA is used by
certain investors as supplemental information to evaluate a company's financial
performance, including its ability to incur and/or service debt. The definition
of EBITDA used in this Form 10-Q may not be the same as the definition of EBITDA
used by other companies.)
-15-
<PAGE> 17
METALS GROUP
The Metals Group manufactures aluminum die castings and machines
aluminum, brass, and steel components primarily for automotive industry
customers. Any material reduction in the level of activity in the automotive
industry may have a material adverse effect on the results of operations of the
Metals Group and the Company.
Since 1997, the Company has been implementing a strategy designed to
improve the profitability and growth potential of the Metals Group by
eliminating the production of a large number of diverse, short-run components
and by building productive capacity to manufacture higher-volume components for
customers in target markets. The repositioning has entailed a shift to a new
customer base and has required that the Company's manufacturing facilities be
structured and equipped to run high-volume parts efficiently and accurately. The
repositioning of the Metals Group has caused the Company to experience
underabsorption of fixed overhead resulting from the cut-back in short-run
business. Additionally, the Metals Group has incurred expenses for the
implementation of improved quality systems, expenses related to moving equipment
and upgrading buildings, costs related to establishing relationships with major
new customers, and costs resulting from inefficiencies experienced during the
rollout of new products. These factors and the fact that new high-volume
business is limited at this stage of the transition adversely affected the
results of operations of the Metals Group during 1998 and the first nine months
of 1999.
In May 1999, the Company closed a 21,000 square foot die casting
facility in Manchester, New York. For the three-month periods ended September
30, 1999 and 1998, the Manchester facility had net sales of $41,000 and
$522,000, respectively. For the third quarter of 1999, the Manchester facility
had income from operations of $28,000, compared to a loss from operations of
$31,000 during the third quarter of 1998. For the nine-month periods ended
September 30, 1999 and 1998, the Manchester facility had net sales of $935,000
and $1,780,000, respectively, and losses from operations of $186,000 and
$133,000, respectively. At September 30, 1999, the Manchester facility had net
assets, before deducting indebtedness secured by the assets of the Manchester
facility, of $174,000.
The following table sets forth the operating results of the Metals
Group for the third quarters of 1999 and 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 9,095 100.0% $ 8,244 100.0%
Cost of sales 8,328 91.6 8,355 101.3
-------- ------- --------- -------
Gross profit (loss) 767 8.4 (111) (1.3)
Selling and administrative expenses 892 9.8 509 6.2
-------- ------- --------- -------
Loss from operations $ (125) (1.4)% $ (620) (7.5)%
======== ======= ========= =======
</TABLE>
During the third quarter of 1999, net sales of the Metals Group
increased by $851,000, or 10.3%, compared to the third quarter of 1998. This
increase resulted primarily from increased net sales of automotive components
and increased tooling sales, offset, in part, by the effects of the shutdown of
the Manchester facility.
-16-
<PAGE> 18
The Metals Group recorded a loss from operations of $125,000 during the
third quarter of 1999, compared to a loss from operations of $620,000 during the
third quarter of 1998. Cost of sales as a percentage of net sales decreased from
101.3% during the third quarter of 1998 to 91.6% during the third quarter of
1999, primarily due to (1) increased absorption of fixed manufacturing overhead,
which resulted from higher sales levels, and (2) a reduction in direct labor
costs as a percentage of net sales, which resulted from improved operating
efficiencies and increased utilization of skilled equipment operators who had
been retained during prior periods of lower sales volume.
Selling and administrative expenses as a percentage of net sales
increased during the third quarter of 1999, primarily because of costs related
to the installation of new information systems and because selling and
administrative expenses for the third quarter of 1998 were reduced due to the
settlement of litigation for an amount that was less than had been previously
reserved.
During the third quarter of 1999, depreciation and amortization at the
Metals Group totaled $1,125,000, or 12.4% of net sales, compared to $1,055,000,
or 12.8% of net sales, during the third quarter of 1998. EBITDA for the third
quarter of 1999 was $1,000,000, an increase of $565,000 compared to the third
quarter 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 $513,000 and $475,000
during the third quarters of 1999 and 1998, respectively.
During the third quarters of 1999 and 1998, depreciation at the
corporate office totaled $13,000 and $16,000, respectively, and amortization of
deferred financing expenses totaled $71,000 and $49,000, respectively.
INTEREST EXPENSE
During the third quarters of 1999 and 1998, interest expense totaled
$2,456,000 and $2,469,000, respectively.
INCOME TAXES
During the third quarter of 1999, the Company recorded income tax
expense of $101,000, which consisted of estimated federal alternative minimum
tax and state income tax.
At September 30, 1999, and December 31, 1998, the excess of the
Company's deferred income tax assets over its deferred income tax liabilities
was fully offset by a valuation allowance.
-17-
<PAGE> 19
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF 1999 VERSUS FIRST NINE MONTHS OF
1998
RUBBER GROUP
The following table sets forth the operating results of the Rubber
Group for the first nine months of 1999 and 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 76,289 100.0% $ 68,236 100.0%
Cost of sales 60,664 79.5 53,749 78.8
--------- ------- --------- -------
Gross profit 15,625 20.5 14,487 21.2
Selling and administrative expenses 4,802 6.3 4,509 6.6
--------- ------- --------- -------
Income from operations $ 10,823 14.2% $ 9,978 14.6%
========= ======= ========= =======
</TABLE>
During the first nine months of 1999, net sales of the Rubber Group
increased by $8,053,000, or 11.8%, compared to the first nine months of 1998.
This increase was primarily due to increased unit sales of seals for automotive
wiring systems and, to a lesser extent, increased unit sales of insulators for
automotive ignition wire sets and components for medical devices, offset, in
part, by reduced sales of tooling and by price reductions on certain automotive
components.
During the first nine months of 1999, income from operations totaled
$10,823,000, an increase of $845,000, or 8.5%, compared to the first nine months
of 1998. The Rubber Group's operating results for the first nine months of 1999
and 1998 included credits to cost of sales of $142,000 and $622,000,
respectively, resulting from special rebates from the State of Ohio Bureau of
Workers' Compensation, which represented the Company's share of excess funds
distributed by the Bureau. Excluding the special rebates from the Rubber Group's
operating results for the first nine months of 1999 and 1998, income from
operations increased by $1,325,000 or 14.2%, and cost of sales as a percentage
of net sales was unchanged at 79.7%.
Selling and administrative expenses as a percentage of net sales
decreased during the first nine months of 1999 compared to the first nine months
of 1998, primarily because those expenses are partially fixed in nature.
During the first nine months of 1999, depreciation and amortization at
the Rubber Group totaled $6,025,000, or 7.9% of net sales, compared to
$5,476,000, or 8.0% of net sales, during the first nine months of 1998. During
the first nine months of 1999, EBITDA was $16,848,000, an increase of $1,394,000
compared to first nine months of 1998. Excluding the special rebate, EBITDA for
the first nine months of 1999 was $16,706,000.
-18-
<PAGE> 20
METALS GROUP
The following table sets forth the operating results of the Metals
Group for the first nine months of 1999 and 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 28,467 100.0% $ 24,389 100.0%
Cost of sales 26,981 94.8 25,466 104.4
--------- ------- -------- -------
Gross profit (loss) 1,486 5.2 (1,077) (4.4)
Selling and administrative expenses 2,600 9.1 2,136 8.8
--------- ------- -------- -------
Loss from operations $ (1,114) (3.9)% $ (3,213) (13.2)%
========= ======= ======== =======
</TABLE>
During the first nine months of 1999, net sales of the Metals Group
increased by $4,078,000, or 16.7%, compared to the first nine months of 1998.
This increase resulted primarily from increased unit sales of automotive
components and increased tooling sales, offset, in part, by the effects of the
shutdown of the Manchester facility.
The Metals Group incurred a loss from operations of $1,114,000 during
the first nine months 1999, compared to a loss from operations of $3,213,000
during the first nine months 1998. Excluding the $568,000 of closure costs
related to the Manchester facility, the Metals Group incurred a loss from
operations of $546,000 during the first nine months of 1999. Excluding the
$522,000 of closure expenses charged to cost of sales, cost of sales as a
percentage of net sales decreased from 104.4% during the first nine months of
1998 to 92.9% during the first nine months of 1999, primarily due to (1)
increased absorption of fixed manufacturing overhead, which resulted from higher
sales levels, and (2) a reduction in direct labor costs as a percentage of net
sales, which resulted from improved operating efficiencies and increased
utilization of skilled equipment operators who had been retained during prior
periods of lower sales volume.
Selling and administrative expenses as a percentage of net sales
increased during the first nine months of 1999, primarily because of costs
related to the installation of new information systems during 1999 and because
selling and administrative expenses for the first nine months of 1998 were
reduced due to the settlement of litigation for an amount that was less than had
been previously reserved.
During the first nine months of 1999, depreciation and amortization at
the Metals Group totaled $3,312,000, or 11.6% of net sales, compared to
$2,839,000, or 11.6% of net sales, during the first nine months of 1998. During
the first nine months of 1999, EBITDA was $2,198,000, an increase of $2,572,000
compared to the first nine months of 1998. Excluding the $568,000 of closure
expenses related to the Manchester facility, EBITDA for the first nine months of
1999 was $2,766,000.
CORPORATE OFFICE
Corporate office expenses, which are consolidated with selling and
administrative expenses of the Rubber Group and the Metals Group in the
Company's consolidated financial statements, totaled $1,837,000 and $1,487,000
during the first nine months of 1999 and 1998, respectively. The increase in
corporate office expenses during the first nine months of 1999 resulted
primarily from the accrual of
-19-
<PAGE> 21
management incentive compensation. No management incentive compensation was
accrued for corporate office personnel during the first nine months of 1998.
During the first nine months 1999 and 1998, depreciation at the
corporate office totaled $32,000 and $24,000, respectively, and amortization of
deferred financing expense totaled $179,000 and $148,000, respectively.
INTEREST EXPENSE
During the first nine months of 1999 and 1998, interest expense totaled
$7,206,000 and $7,319,000, respectively.
EXTRAORDINARY GAIN
During the first nine months of 1999, the Company recorded an
extraordinary gain, net of estimated income tax expense, of $1,451,000 on the
repurchase of $4,308,000 principal amount of its 12.75% senior subordinated
notes.
INCOME TAXES
During the first nine months of 1999, the Company recorded income tax
expense of $650,000, which consisted of estimated federal alternative minimum
tax and state income tax. Of this amount $484,000 relates to the extraordinary
gain on the repurchase of long-term debt, which is shown net of such income tax
expense in the consolidated statement of operations.
At September 30, 1999, and December 31, 1998, the excess of the
Company's deferred income tax assets over its deferred income tax liabilities
was fully offset by a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first nine months of 1999, the operating activities of the
Company provided $5,778,000 of cash.
Accounts receivable increased by $3,863,000. This increase was caused
primarily by the increase in net sales and by the timing of payments from the
Company's largest customer. Trade accounts payable decreased by $1,068,000. This
decrease was caused primarily by a reduction in average days outstanding and by
a $294,000 reduction in payables related to the purchase of plant, equipment,
and customer-owned tooling.
INVESTING ACTIVITIES
During the first nine months of 1999, the investing activities of the
Company used $8,478,000 of cash, primarily for capital expenditures. Capital
expenditures attributable to the Rubber Group, the Metals Group, and the
corporate office totaled $6,192,000, $1,979,000, and $74,000, respectively. The
Company presently projects that capital expenditures will total approximately
$11,300,000 during 1999, and that substantially all such capital expenditures
will be for equipment. Capital expenditures for the Rubber Group, the Metals
Group, and the corporate office are projected to total $7,900,000, $3,300,000,
and $100,000, respectively. At September 30, 1999, the Company had outstanding
commitments to purchase plant and equipment of $4,751,000, of which $1,701,000
is expected to be expended during the fourth
-20-
<PAGE> 22
quarter of 1999, $1,643,000 is expected to be expended in 2000, and $1,407,000
is expected to be expended in 2001.
FINANCING ACTIVITIES
During the first nine months of 1999, the financing activities of the
Company provided $2,783,000 of cash.
During the first nine months of 1999, the Company obtained new term
loans in the aggregate amount of $10,587,000, which refinanced $2,090,000 of
existing term loans and $8,497,000 of loans outstanding under the Company's
revolving line of credit. Also, during the first nine months of 1999, the
Company repurchased $4,308,000 principal amount of its 12.75% senior
subordinated notes for $2,373,000; the purchases were financed through
borrowings under the Company's revolving line of credit.
LIQUIDITY
The Company finances its operations with cash from operating activities
and a variety of financing arrangements, including term loans and loans under a
revolving line of credit, which expires on April 1, 2002. The Company's ability
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 the
Company's accounts receivable and inventories. In January 1999, one of the
Company's lenders provided the Company with an equipment line of credit in the
amount of $5,000,000, which can be used to finance a portion of the cost of
certain equipment. On August 2, 1999, the Company borrowed $845,000 under this
line of credit, leaving $4,155,000 available to finance future equipment
purchases. Effective October 1, 1999, the rates of interest charged on loans
outstanding under the revolving line of credit and on certain term loans with
variable rates of interest were reduced by 25 basis points, to the prime rate
and LIBOR plus 2.5%, as applicable.
The Company operates with substantial financial leverage and limited
liquidity. During the first nine months of 1999, the Company's aggregate
indebtedness, excluding trade accounts payable, increased by $1,244,000 to
$95,789,000. During the fourth quarter of 1999, interest and scheduled principal
payments are projected to be approximately $2,400,000 and $2,100,000,
respectively.
The Company had a net working capital deficit of $48,975,000 at
September 30, 1999, compared to a net working capital deficit of $8,030,000 at
December 31, 1998. The increase occurred primarily because 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 $37,629,000,
mature during the first half of 2000 and have been classified at September 30,
1999, as current liabilities in the Company's consolidated financial statements.
Loans of $19,244,000 and $12,995,000 outstanding under the revolving line of
credit were classified as short-term debt at September 30, 1999 and December 31,
1998, respectively. Although the expiration date of the revolving line of credit
is April 1, 2002, these loans have been classified as current liabilities
because the Company's cash receipts are automatically used to reduce such loans
on a daily basis, by means of a lock-box sweep arrangement, and the lender has
the ability to modify certain terms of the revolving line of credit without the
prior approval of the Company.
At November 12, 1999, availability under the Company's revolving line
of credit totaled $2,844,000 before outstanding checks of $977,000 were
deducted.
-21-
<PAGE> 23
Substantially all of the assets of the Company and its subsidiary,
Lexington Rubber Group, Inc., are pledged as collateral for certain of the
Company's indebtedness. 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 other covenants that place certain
restrictions on the Company's business and operations, including covenants
relating to the incurrence or assumption of additional debt, the level of
past-due trade accounts payable, the sale of all or substantially all of the
Company's assets, the purchase of plant and equipment, the purchase of common
stock, the redemption of preferred stock, and the payment of cash dividends. In
addition, substantially all of the Company's financing agreements include
cross-default provisions.
From time to time, certain of the financial covenants contained in the
Company's various loan agreements have been amended in order to maintain or
otherwise ensure current or future compliance by the Company.
Based upon its most current forecast, the Company believes, although
there can be no assurance, that its cash flows from operations and borrowings
under its revolving line of credit and its equipment lines of credit will be
adequate to meet its working capital and debt service requirements and to fund
projected capital expenditures through January 31, 2000. If cash flows from
operations or availability under the Company's lines of credit fall below
expectations, the Company may be forced to delay planned capital expenditures,
reduce operating expenses, extend trade accounts payable balances beyond terms
that the Company believes are customary in the industries in which it operates,
and/or consider other alternatives designed to improve the Company's liquidity.
Certain of such actions could have a material adverse effect upon the Company.
As discussed previously, indebtedness totaling $37,629,000 matures
during the first and second quarters of 2000. The Company's operations will not
generate cash sufficient to satisfy such obligations at their maturities. During
1999, the Company was in the process of preparing for a $100 million offering of
debt securities, which it planned to complete during 1999 in order to refinance
substantially all of the indebtedness of the Company, including the maturing
indebtedness. Because of conditions in the market for non-investment grade debt,
the Company, with input from its investment bankers, has concluded that it is
unlikely that the Company's proposed offering can be completed prior to the due
dates of the Company's maturing indebtedness. The Company and the holders of a
significant portion of its maturing indebtedness have agreed to enter into
discussions regarding extensions of the maturities of such indebtedness. There
can be no assurance that the Company will be able to negotiate extensions or
refinancings of its maturing indebtedness. In the event that the Company is not
successful in refinancing or extending such debt securities, defaults may occur
under the agreements relating to such securities. If a default occurs, it may
trigger other defaults pursuant to cross-default provisions under other
indebtedness of the Company. Holders of indebtedness on which defaults exist
would be entitled to accelerate the maturity thereof, to cease making any
further advances otherwise permitted under the related credit facilities, to
seek to foreclose upon any assets securing such indebtedness, and to pursue
other remedies. If any such actions were to be taken, the Company might be
required to consider alternatives, including seeking relief from its creditors.
Any such action by creditors could have a material adverse effect upon the
Company. The consolidated financial statements do not include any adjustments
that might result should the Company be unable to refinance, extend, or exchange
the maturing obligations on or before their maturity dates.
-22-
<PAGE> 24
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. 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 a party 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. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued
"Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which is effective for all
fiscal periods beginning after June 15, 1999. The statement provides standards
for the recognition and measurement of derivative and hedging activities. The
Company believes that the adoption of FAS 133 during the first quarter of 2000
will not affect the results of operations or financial position of the Company.
YEAR 2000
The Company's compliance plan for software and/or hardware failures due
to processing errors potentially arising from calculations using the year 2000
date is set forth in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, in the Company's annual report on Form 10-K
for the year ended December 31, 1998.
As of September 30, 1999, the Company has completed its year 2000
readiness program to identify, repair or replace, and test any of its
information technology (software and hardware) (collectively, IT systems) and
non-IT systems, which include embedded technology such as microprocessors
commonly found in modern manufacturing equipment. The Company has also
substantially completed its plan to evaluate the year 2000 readiness of its
major trading partners, including customers and suppliers of materials and
services. In particular, the Company sent comprehensive year 2000 readiness
questionaires to all such partners, and approximately 96% of the Company's major
trading partners have responded. To date, all such respondents have indicated
that they are, or reasonably believe that they will be, year 2000 ready prior to
January 1, 2000. Nevertheless, there can be no assurance that all of the
Company's major trading partners are, or will be, year 2000 ready.
Based upon the Company's review of its IT and non-IT systems to date,
the Company believes that there are no material internal issues regarding its
year 2000 compliance that will not be resolved through normal equipment and
software upgrades that will be made through 1999. Although the Company does not
have a system in place for tracking costs related to its year 2000 readiness
plan, the Company believes that through September 30, 1999, approximately
$500,000 has been spent to assess, modify, or replace non-compliant systems and
that an additional $50,000 will be spent during the three months ending December
31, 1999, to modify or replace non-compliant systems.
-23-
<PAGE> 25
The Company has developed a contingency plan to provide for alternate
methods of processing business information if any of the Company's information
processing systems experiences a year 2000 problem, to attempt to safeguard the
assets of the Company if a utility fails to provide heating fuel or electrical
power, and if deemed appropriate and available, identify alternate sources of
supply for materials and services.
As a major supplier of certain automotive components to Tier 1 and
original equipment automotive manufacturers, the Company believes that its most
reasonably likely worst case scenario resulting from a year 2000 problem would
be the shut down of the factories of one of its suppliers or customers. The
costs resulting from such a shutdown could have a material adverse effect upon
the results of operations and financial position of the Company. The Company has
little or no ability to deal with a risk such as this, which is beyond its
control.
The status of the Company's year 2000 readiness effort as of September
30, 1999, is set forth in the table below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
RESOLUTION PHASES
-------------------------------------------------------------------------------------------
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INFORMATION 100% complete 98% complete 98% complete 98% complete
TECHNOLOGY
E
X --------------------------------------------------------------------------------------------------------------
P
O OPERATING 100% complete 98% complete 98% complete 98% complete
S EQUIPMENT WITH
U EMBEDDED CHIPS
R OR SOFTWARE
E
--------------------------------------------------------------------------------------------------------------
T
Y PRODUCTS 100% complete 100% complete 100% complete 100% complete
P --------------------------------------------------------------------------------------------------------------
E
THIRD PARTY 96% complete Contingency plans Contingency plans Contingency plans
as deemed necessary as deemed necessary as deemed necessary
are in place are in place are in place
--------------------------------------------------------------------------------------------------------------
</TABLE>
While the Company believes its planning efforts are adequate to address
its internal year 2000 concerns, there can be no assurance that the systems of
the Company's major trading partners, on which the Company's systems and
operations rely, will be year 2000 compliant. If a significant number of the
Company's major trading partners experience failures in their computer systems
or operations due to year 2000 non-compliance, such events could have a material
adverse effect on the Company's business, revenues, and results of operations.
Furthermore, if for any reason the Company or any of its major trading partners
fails to complete appropriate remediation programs or fails to complete
remediation programs on a timely basis, such failure could have a material
adverse effect on the Company's business, revenues, and results of operations.
-24-
<PAGE> 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest in or trade market risk sensitive
instruments. The Company also does not have any foreign operations or any
significant amount of foreign sales and therefore believes that its exposure to
foreign currency exchange rate risk is minimal.
At September 30, 1999, the Company had $51,378,000 of outstanding
floating rate debt at interest rates of prime plus 0.25% (prime, effective
October 1, 1999) and LIBOR plus 2.75% (LIBOR plus 2.50%, effective October 1,
1999). Currently the Company does not purchase derivative financial instruments
to hedge or reduce its interest rate risk. As a result, a change in either the
lender's prime rate or LIBOR would affect the rate at which the Company borrows
funds under these respective agreements.
At September 30, 1999, the Company had $44,411,000 of fixed rate
long-term debt outstanding with a weighted-average interest rate of 11.78%, of
which $37,629,000 becomes due during the first and second quarters of 2000. If
the Company is able to refinance or extend the maturing debt, it may be at
interest rates that are significantly higher than the weighted-average interest
rate on the Company's existing fixed rate debt. Also refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity" in Part I, Item 2.
-25-
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith:
10-1 Amendment to Financing Agreements dated October 1, 1999,
between the Company and Congress Financial Corporation
10-2 Amendment to Financing Agreements dated October 1, 1999,
between Lexington Rubber Group, Inc. and Congress
Financial Corporation
27-1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the third quarter of 1999.
-26-
<PAGE> 28
LEXINGTON PRECISION CORPORATION
FORM 10-Q
SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXINGTON PRECISION CORPORATION
(Registrant)
November 12, 1999 By: /s/ Michael A. Lubin
- ----------------- ---------------------
Date Michael A. Lubin
Chairman of the Board
November 12, 1999 By: /s/ Warren Delano
- ----------------- ---------------------
Date Warren Delano
President
November 12, 1999 By: /s/ Dennis J. Welhouse
- ----------------- ---------------------
Date Dennis J. Welhouse
Senior Vice President and
Chief Financial Officer
-27-
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Location
- ------ ------- --------
<S> <C> <C>
10-1 Amendment to Financing Agreements Filed with this Form 10-Q
dated October 1, 1999, between the Company
and Congress Financial Corporation
10-2 Amendment to Financing Agreements Filed with this Form 10-Q
dated October 1, 1999, between Lexington
Rubber Group, Inc. and Congress Financial
Corporation
27-1 Financial Data Schedule Filed with this Form 10-Q
</TABLE>
<PAGE> 1
Exhibit 10.1
as of October 1, 1999
Lexington Precision Corporation
767 Third Avenue
New York, New York 10017
Re: Amendment to Financing Agreements
---------------------------------
Gentlemen:
Reference is made to certain financing agreements dated January 11,
1990 between Lexington Precision Corporation ("LPC") and Congress Financial
Corporation ("Congress"), including, but not limited to, an Accounts Financing
Agreement [Security Agreement], as amended (the "Accounts Agreement"), and all
supplements thereto and all other related financing and security agreements
(collectively, all of the foregoing, as the same have heretofore or
contemporaneously been or may be hereafter, amended, replaced, extended,
modified or supplemented, the "Financing Agreements").
In connection with the financing arrangements pursuant to the Accounts
Agreement and the other Financing Agreements, the parties hereto hereby agree
to amend the Financing Agreements, as set forth below:
1. DEFINITIONS:
------------
(a) The definition of "Interest Rate" contained in the
letter agreement re: Amendment to Financing Agreements, dated January 31, 1995,
between LPC and Congress, as amended by the letter agreement re: Amendment to
Financing Agreements, dated March 11, 1997, between LPC and Congress, is hereby
deleted in its entirety and replaced with the following:
"INTEREST RATE" shall mean, as to Prime Rate Loans, a rate
equal to the Prime Rate and, as to Eurodollar Rate Loans, a rate of two and
one-half (2 1/2%) percent per annum in excess of the Adjusted Eurodollar Rate
(based on the Eurodollar Rate applicable for the Interest Period selected by
LPC as in effect three (3) Business Days after the date of receipt by Congress
of the request of LPC for such Eurodollar Rate Loans in accordance with the
terms hereof, whether such rate is higher or lower than any rate previously
quoted to LPC); PROVIDED, THAT, Interest Rate shall mean the rate of two (2%)
percent per annum in excess of the Prime Rate as to Prime Rate
<PAGE> 2
Loans and the rate of four and one-half (4 1/2%) percent per annum in excess of
the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Congress' option,
without notice, (a) for the period on and after the effective date of
termination or non-renewal hereof, or the date of the occurrence of any Event
of Default, and for so long as such Event of Default is continuing as
determined by Congress and until such time as all Obligations are indefeasibly
paid in full (notwithstanding entry of any judgment against LPC) and (b) on the
Revolving Loans at any time outstanding in excess of the amounts available to
LPC under the Accounts Agreement and supplements thereto, which excess(es)
continue to exist or arise after three (3) days' telephonic or written notice
to LPC of any such excess(es) (whether or not such excess(es), arise or are
made with or without Congress' knowledge or consent and whether made before or
after an Event of Default); PROVIDED, FURTHER, THAT, the higher Interest Rate
under the immediately preceding proviso shall be inapplicable in the case of
any excess(es) described in clause (b) thereof if and to the extent that
Congress shall, at Congress' option, have agreed not to charge the higher
Interest Rate otherwise permitted to be charged under such proviso, as
evidenced by a writing expressly so stating and signed by Congress.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by LPC to Congress pursuant to the Financing Agreements, LPC hereby
represents, warrants and covenants with and to Congress as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists or has occurred and is
continuing on the date of this Amendment.
(b) This Amendment has been duly executed and delivered by
LPC and is in full force and effect as of the date hereof, and the agreements
and obligations of LPC contained herein constitute the legal, valid and binding
obligations of LPC enforceable against LPC in accordance with their terms.
3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. Anything contained
in this Amendment to the contrary notwithstanding, the terms and provisions of
this Amendment shall only become effective upon the satisfaction of the
following additional conditions precedent:
(a) Congress shall have received an executed original or
executed original counterparts (as the case may be) of this Amendment;
(b) All representations and warranties contained herein,
in the Accounts Agreement and in the other Financing Agreements shall be true
and correct in all material respects; and
-2-
<PAGE> 3
(c) No Event of Default shall have occurred and no event
shall have occurred or condition be existing which, with notice or passage of
time or both, would constitute an Event of Default.
4. EFFECT OF THIS AMENDMENT. Except as modified pursuant hereto,
the Accounts Agreement and all supplements to the Accounts Agreement and all
other Financing Agreements, are hereby specifically ratified, restated and
confirmed by the parties hereto as of the date hereof and no existing defaults
or Events of Default have been waived in connection herewith. To the extent of
conflict between the terms of this Amendment and the Accounts Agreement or any
of the other Financing Agreements, the terms of this Amendment control.
5. FURTHER ASSURANCES. LPC shall execute and deliver such
additional documents and take such additional actions as may reasonably be
requested by Congress to effectuate the provisions and purposes of this
Amendment.
6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York without reference
to its principles of conflicts of law.
By the signatures hereto of the duly authorized officers, the parties
hereto mutually covenant, warrant and agree as set forth herein.
Very truly yours,
CONGRESS FINANCIAL CORPORATION
By: Herbert C. Korn
-----------------------------------
Title: Assistant Vice President
--------------------------------
AGREED AND ACCEPTED:
LEXINGTON PRECISION CORPORATION
By: Warren Delano
-----------------------------
Title: President
-------------------------
-3-
<PAGE> 1
Exhibit 10.2
as of October 1, 1999
Lexington Rubber Group, Inc., formerly
known as Lexington Components, Inc.
767 Third Avenue
New York, New York 10017
Re: Amendment to Financing Agreements
---------------------------------
Gentlemen:
Reference is made to certain financing agreements dated January 11,
1990 between Lexington Rubber Group, Inc. ("LRG"), formerly known as Lexington
Components, Inc., and Congress Financial Corporation ("Congress"), including,
but not limited to, an Accounts Financing Agreement [Security Agreement], as
amended (the "Accounts Agreement"), and all supplements thereto and all other
related financing and security agreements (collectively, all of the foregoing,
as the same have heretofore or contemporaneously been or may be hereafter,
amended, replaced, extended, modified or supplemented, the "Financing
Agreements").
In connection with the financing arrangements pursuant to the Accounts
Agreement and the other Financing Agreements, the parties hereto hereby agree
to amend the Financing Agreements, as set forth below:
1. DEFINITIONS:
------------
(a) The definition of "Interest Rate" contained in the
letter agreement re: Amendment to Financing Agreements, dated January 31, 1995,
between LRG and Congress, as amended by the letter agreement re: Amendment to
Financing Agreements, dated March 11, 1997, between LRG and Congress, is hereby
deleted in its entirety and replaced with the following:
"INTEREST RATE" shall mean, as to Prime Rate Loans, a rate
equal to the Prime Rate and, as to Eurodollar Rate Loans, a rate of two and
one-half (2 1/2%) percent per annum in excess of the Adjusted Eurodollar Rate
(based on the Eurodollar Rate applicable for the Interest Period selected by
LRG as in effect three (3) Business Days after the date of receipt by Congress
of the request of LRG for such Eurodollar Rate Loans in accordance with the
terms hereof, whether such rate is higher or lower than any rate previously
quoted to LRG); PROVIDED, THAT, Interest Rate shall mean the rate of two (2%)
percent per annum in excess of the Prime Rate as to Prime Rate
<PAGE> 2
Loans and the rate of four and one-half (4 1/2%) percent per annum in excess of
the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Congress' option,
without notice, (a) for the period on and after the effective date of
termination or non-renewal hereof, or the date of the occurrence of any Event
of Default, and for so long as such Event of Default is continuing as
determined by Congress and until such time as all Obligations are indefeasibly
paid in full (notwithstanding entry of any judgment against LRG) and (b) on the
Revolving Loans at any time outstanding in excess of the amounts available to
LRG under the Accounts Agreement and supplements thereto, which excess(es)
continue to exist or arise after three (3) days' telephonic or written notice
to LRG of any such excess(es) (whether or not such excess(es), arise or are
made with or without Congress' knowledge or consent and whether made before or
after an Event of Default); PROVIDED, FURTHER, THAT, the higher Interest Rate
under the immediately preceding proviso shall be inapplicable in the case of
any excess(es) described in clause (b) thereof if and to the extent that
Congress shall, at Congress' option, have agreed not to charge the higher
Interest Rate otherwise permitted to be charged under such proviso, as
evidenced by a writing expressly so stating and signed by Congress.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by LRG to Congress pursuant to the Financing Agreements, LRG hereby
represents, warrants and covenants with and to Congress as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists or has occurred and is
continuing on the date of this Amendment.
(b) This Amendment has been duly executed and delivered by
LRG and is in full force and effect as of the date hereof, and the agreements
and obligations of LRG contained herein constitute the legal, valid and binding
obligations of LRG enforceable against LRG in accordance with their terms.
3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. Anything contained
in this Amendment to the contrary notwithstanding, the terms and provisions of
this Amendment shall only become effective upon the satisfaction of the
following additional conditions precedent:
(a) Congress shall have received an executed original or
executed original counterparts (as the case may be) of this Amendment;
(b) All representations and warranties contained herein,
in the Accounts Agreement and in the other Financing Agreements shall be true
and correct in all material respects; and
-2-
<PAGE> 3
(c) No Event of Default shall have occurred and no event
shall have occurred or condition be existing which, with notice or passage of
time or both, would constitute an Event of Default.
4. EFFECT OF THIS AMENDMENT. Except as modified pursuant hereto,
the Accounts Agreement and all supplements to the Accounts Agreement and all
other Financing Agreements, are hereby specifically ratified, restated and
confirmed by the parties hereto as of the date hereof and no existing defaults
or Events of Default have been waived in connection herewith. To the extent of
conflict between the terms of this Amendment and the Accounts Agreement or any
of the other Financing Agreements, the terms of this Amendment control.
5. FURTHER ASSURANCES. LRG shall execute and deliver such
additional documents and take such additional actions as may reasonably be
requested by Congress to effectuate the provisions and purposes of this
Amendment.
6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York without reference
to its principles of conflicts of law.
By the signatures hereto of the duly authorized officers, the parties
hereto mutually covenant, warrant and agree as set forth herein.
Very truly yours,
CONGRESS FINANCIAL CORPORATION
By: Herbert C. Korn
-----------------------------
Title: Assistant Vice President
--------------------------
AGREED AND ACCEPTED:
LEXINGTON PRECISION CORPORATION
By: Warren Delano
---------------------------------
Title: President
------------------------------
-3-
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 186
<SECURITIES> 0
<RECEIVABLES> 21,700
<ALLOWANCES> 0
<INVENTORY> 10,030
<CURRENT-ASSETS> 35,612
<PP&E> 119,834
<DEPRECIATION> 57,356
<TOTAL-ASSETS> 110,638
<CURRENT-LIABILITIES> 84,587
<BONDS> 30,954
375
0
<COMMON> 1,087
<OTHER-SE> (7,523)
<TOTAL-LIABILITY-AND-EQUITY> 110,638
<SALES> 104,756
<TOTAL-REVENUES> 104,756
<CGS> 87,645
<TOTAL-COSTS> 87,645
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,206
<INCOME-PRETAX> 666
<INCOME-TAX> 166
<INCOME-CONTINUING> 500
<DISCONTINUED> 0
<EXTRAORDINARY> 1,451
<CHANGES> 0
<NET-INCOME> 1,951
<EPS-BASIC> .44
<EPS-DILUTED> .44
</TABLE>
