-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZgI93QAVetEX8zROH4ZPQXPc5cdZjz7PwuiWLy4UzIAkRkObZFntiJ6mSYf4Mjb 9E6ycLFysab4PsdaYiZz4w== 0000950152-98-004696.txt : 19980518 0000950152-98-004696.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950152-98-004696 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON PRECISION CORP CENTRAL INDEX KEY: 0000012570 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED RUBBER PRODUCTS, NEC [3060] IRS NUMBER: 221830121 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03252 FILM NUMBER: 98626539 BUSINESS ADDRESS: STREET 1: 767 THIRD AVE 29TH FL CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123194657 MAIL ADDRESS: STREET 1: 30195 CHAGRIN BLVD STREET 2: SUITE 208W CITY: CLEVELAND STATE: OH ZIP: 44124-5755 FORMER COMPANY: FORMER CONFORMED NAME: BLASIUS INDUSTRIES INC DATE OF NAME CHANGE: 19890116 10-Q 1 LEXINGTON PRECISION CORPORATION FORM 10-Q 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 MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-3252 LEXINGTON PRECISION CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-1830121 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 767 THIRD AVENUE, NEW YORK, NY 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (212) 319-4657 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE (FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT DATE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ COMMON STOCK, $0.25 PAR VALUE, 4,263,036 SHARES AS OF MAY 7, 1998 (INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE) ================================================================================ 2 LEXINGTON PRECISION CORPORATION QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements............................................................................2 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................................................17
-1- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 --------- --------- ASSETS: Current assets: Cash $ 167 $ 208 Trade receivables 17,269 17,579 Inventories 9,851 9,031 Prepaid expenses and other assets 2,620 3,438 Deferred income taxes 1,572 1,572 --------- --------- Total current assets 31,479 31,828 --------- --------- Plant and equipment: Land 1,533 1,533 Buildings 23,540 23,426 Equipment 82,007 78,922 --------- --------- 107,080 103,881 Accumulated depreciation (46,636) (44,451) --------- --------- Plant and equipment, net 60,444 59,430 --------- --------- Excess of cost over net assets of businesses acquired, net 9,015 9,094 --------- --------- Other assets, net 3,775 3,772 --------- --------- $ 104,713 $ 104,124 ========= =========
See notes to consolidated financial statements. (continued on next page) -2- 4 LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (CONTINUED) (THOUSANDS OF DOLLARS) (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 --------- --------- LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Trade accounts payable $ 11,791 $ 12,628 Accrued expenses 7,665 8,495 Short-term debt 10,955 8,840 Current portion of long-term debt 6,458 6,040 --------- --------- Total current liabilities 36,869 36,003 --------- --------- Long-term debt, excluding current portion 72,762 72,622 --------- --------- Deferred income taxes and other long-term liabilities 1,757 1,746 --------- --------- Redeemable preferred stock, $100 par value, at redemption value 840 840 Excess of redemption value over par value (420) (420) --------- --------- Redeemable preferred stock at par value 420 420 --------- --------- Stockholders' deficit: Common stock, $0.25 par value, 10,000,000 shares authorized, 4,348,951 shares issued 1,087 1,087 Additional paid-in-capital 12,305 12,313 Accumulated deficit (20,270) (19,850) Cost of common stock in treasury, 85,915 shares (217) (217) --------- --------- Total stockholders' deficit (7,095) (6,667) --------- --------- $ 104,713 $ 104,124 ========= =========
See notes to consolidated financial statements. -3- 5 LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 -------------------------- 1998 1997 -------- -------- Net sales $ 32,197 $ 28,592 Cost of sales 27,412 23,815 -------- -------- Gross profit 4,785 4,777 Selling and administrative expenses 2,803 2,877 -------- -------- Income from operations 1,982 1,900 Interest expense 2,402 2,150 -------- -------- Loss before income taxes (420) (250) Provision for income taxes -- -- -------- -------- Net loss (420) (250) Preferred stock dividends 8 9 Allocated portion of excess of redemption value over par value of preferred stock to be redeemed during year 11 11 -------- -------- Net loss attributable to common stockholders $ (439) $ (270) ======== ======== Net loss per common share: Basic $ (0.10) $ (0.06) ======== ======== Diluted $ (0.10) $ (0.06) ======== ========
See notes to consolidated financial statements. -4- 6 LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 --------------------------- 1998 1997 -------- -------- OPERATING ACTIVITIES: Net loss $ (420) $ (250) Adjustments to reconcile net loss to net cash provided/(used) by operating activities: Depreciation 2,306 1,953 Amortization included in operating expense 300 321 Amortization included in interest expense 50 38 Deferred income taxes Changes in operating assets and liabilities that provided/(used) cash: Trade receivables 310 2,345 Inventories (820) (249) Prepaid expenses and other assets 630 247 Trade accounts payable (837) (3,566) Accrued expenses (830) (2,246) Other 14 10 -------- -------- Net cash provided/(used) by operating activities 703 (1,397) -------- -------- INVESTING ACTIVITIES: Purchases of plant and equipment (3,387) (4,798) Decrease in equipment deposits 36 387 Proceeds from sales of equipment 64 6 Expenditures for tooling owned by customers (130) (265) Other 8 (61) -------- -------- Net cash used by investing activities (3,409) (4,731) -------- -------- FINANCING ACTIVITIES: Net increase in short-term debt 2,115 4,101 Proceeds from issuance of long-term debt 2,041 31,829 Repayment of long-term debt (1,483) (29,640) Other (8) (263) -------- -------- Net cash provided by financing activities 2,665 6,027 -------- -------- Net decrease in cash (41) (101) Cash at beginning of period 208 187 -------- -------- Cash at end of period $ 167 $ 86 ======== ========
See notes to consolidated financial statements. -5- 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 March 31, 1998, and the Company's results of operations and cash flows for the three-month periods ended March 31, 1998 and 1997. All such adjustments were of a normal recurring nature. The results of operations for the first quarter of 1998 are not necessarily indicative of the results to be expected for the full year or for any succeeding quarter. Effective January 1, 1998, the Company adopted "Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS 130 established standards for the reporting and display of changes in stockholders' equity during a period that are not included in reported net income for such period, excluding changes resulting from transactions with owners. During the first quarter of 1998, the Company did not have any items of income or loss requiring disclosure under the provisions of FAS 130. NOTE 2 -- INVENTORIES Inventories at March 31, 1998, and December 31, 1997, are set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ Finished goods $ 4,057 $ 3,654 Work in process 2,373 1,658 Raw materials and purchased parts 3,421 3,719 -------- ------- $ 9,851 $ 9,031 ======== =======
NOTE 3 -- ACCRUED EXPENSES At March 31, 1998, and December 31, 1997, accrued expenses included accrued interest expense of $942,000 and $1,964,000, respectively. -6- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4 -- DEBT At March 31, 1998, and December 31, 1997, short-term debt consisted of loans outstanding under the Company's revolving line of credit. At March 31, 1998, $1,601,000 of loans outstanding under the revolving line of credit were classified as long-term debt because they were refinanced under long-term agreements before the consolidated financial statements for the period were issued. At March 31, 1998, loans outstanding under the revolving line of credit accrued interest at the prime rate plus 0.25% and the London Interbank Offered Rate ("LIBOR") plus 2.75%. Long-term debt at March 31, 1998, and December 31, 1997, is set forth below (dollar amounts in thousands):
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ Long-term secured debt: Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ 1,601(1) $ -- Term loan payable in increasing monthly principal installments, final maturity in 2000, 12% 1,421 1,573 Term loans payable in equal monthly principal installments based on a 180-month amortization schedule, final maturities in 2001, 8.37% 3,095 3,153 Term loans payable in equal monthly principal installments, final maturities in 2002, LIBOR plus 2.75% 3,144 3,330 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9.37% 1,484 1,511 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9% 2,883 2,933 Term loan payable in 60 equal monthly installments, final maturity in 2003, prime rate plus 0.25% 908 468 Term loans payable in equal monthly principal installments, final maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 583(2) 613(2) Term loans payable in equal monthly principal installments, final maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 21,676(2) 22,580(2) Term loan payable in equal monthly principal installments, final maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,674 1,742 ------- ------- Total long-term secured debt $38,469 $37,903 ------- -------
(continued on next page) -7- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued from prior page)
MARCH 31, DECEMBER 31, 1998 1997 ------- ------- Long-term unsecured debt: 10.5% senior note, due 2000 $ 7,500 $ 7,500 12.75% senior subordinated notes, due 2000 31,720 31,720 14% junior subordinated convertible notes, due 2000, convertible into 440,000 shares of common stock 1,000 1,000 14% junior subordinated nonconvertible notes, due 2000 347 347 Other unsecured obligations 184 192 ------- ------- Total long-term unsecured debt 40,751 40,759 ------- ------- Total long-term debt 79,220 78,662 Less current portion 6,458 6,040 ------- ------- Total long-term debt, excluding current portion $72,762 $72,622 ======= =======
(1) Refinanced under long-term agreements before the consolidated financial statements for the period were issued. Amounts classified as secured or unsecured and amounts reflected in current portion are based upon the terms of the new borrowings. (2) Maturity date can be accelerated by the lender if the Company's revolving line of credit expires prior to the stated maturity date of the term loan. The loans outstanding under the Company's revolving line of credit and the secured term loans listed above are collateralized by substantially all of the assets of the Company, including trade receivables, inventories, equipment, certain real estate, and the stock of one of the Company's subsidiaries. RESTRICTIVE COVENANTS Certain of the Company's financing arrangements contain covenants with respect to the maintenance of minimum levels of working capital, net worth, and cash flow coverage and impose limitations on the Company's ratio of debt to equity. The covenants also place certain restrictions on the Company's business and operations, including the incurrence or assumption of additional debt, the sale of all or substantially all of the Company's assets, the funding of capital expenditures, the purchase of common stock, the redemption of preferred stock, and the payment of cash dividends. In addition, substantially all of the Company's financing agreements include cross-default provisions. NOTE 5 -- PROVISION FOR INCOME TAXES At March 31, 1998, and December 31, 1997, the excess of the Company's deferred tax assets over its deferred tax liabilities was offset by a valuation allowance. There was no material change in net deferred taxes during the first quarter of 1998. -8- 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 6 -- NET LOSS PER COMMON SHARE The calculations of basic and diluted net loss per common share for the three-month periods ended March 31, 1998 and 1997 are set forth below (in thousands, except per share amounts). Because the pro forma conversion of each of the Company's potentially dilutive securities (the 14% junior subordinated convertible notes and the $8 cumulative convertible redeemable preferred stock, series B) was antidilutive, the pro forma conversion was not included in the calculation of diluted net loss set forth below.
THREE MONTHS ENDED MARCH 31 ------------------------- 1998 1997 ---- ---- Numerator: Net loss $ (420) $ (250) Preferred stock dividends (8) (9) Allocated portion of excess of redemption value over par value of preferred stock to be redeemed during year (11) (11) -------- -------- Income available to common stockholders $ (439) $ (270) ======== ======== Weighted-average common shares 4,263 4,263 ======== ======== Basic and diluted net loss per common share $ (0.10) $ (0.06) ======== ========
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- 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Various statements in this Item 2 that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995). Forward-looking statements usually can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates" or the negative thereof. They may include discussions of strategy, which involve risks and uncertainties, and they typically are based upon projections and estimates, as distinct from past or historical facts and events. Forward-looking statements are subject to a number of risks, uncertainties, contingencies, and other factors that could cause the actual results or performance of the Company to be materially different from the future results or performance expressed in or implied by such statements. Such risks and uncertainties for the Company include increases and decreases in business awarded to the Company by its various customers, unanticipated price reductions for the Company's products as a result of competition, unanticipated operating results and cash flows, increases or decreases in capital expenditures, unforeseen product liability claims, changes in economic conditions, changes in the competitive environment, changes in the capital markets, labor interruptions at the Company or at its customers, and a number of other factors. Because the Company operates with substantial financial leverage and limited liquidity, the impact of any negative event may have a greater adverse effect upon the Company than if the Company operated with lower financial leverage and greater liquidity. The results of operations for any particular fiscal period of the Company are not necessarily indicative of the results to be expected for any one or more succeeding fiscal periods. Consequently, the inclusion of forward-looking statements should not be regarded as a representation that these projections and estimates will be realized, and actual results may vary materially. There can be no assurance that any of the forward-looking statements contained herein will prove to be accurate. All forward-looking statements attributable to the Company are expressly qualified by the foregoing cautionary statements. RESULTS OF OPERATIONS -- FIRST QUARTER OF 1998 VERSUS FIRST QUARTER OF 1997 The Company manufactures, to customer specifications, component parts through two business segments, the Rubber Group and the Metals Group. RUBBER GROUP The Rubber Group manufactures silicone and organic rubber components. During the first quarters of 1998 and 1997, automotive industry customers of the Rubber Group represented 91.0% and 91.2%, respectively, of the Rubber Group's net sales. Any material reduction in the level of activity in the automotive industry may have a material adverse effect on the results of operations of the Rubber Group and the Company. -10- 12 The following table sets forth the operating results of the Rubber Group for the first quarters of 1998 and 1997 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 ----------------------------------------- 1998 1997 ------------------ ------------------ Net sales $ 23,834 100.0% $ 19,483 100.0% Cost of sales 18,622 78.1 15,401 79.0 --------- ------- --------- ------- Gross profit 5,212 21.9 4,082 21.0 Selling and administrative expenses 1,477 6.2 1,220 6.3 --------- ------- --------- ------- Income from operations $ 3,735 15.7% $ 2,862 14.7% ========= ======= ========= =======
During the first quarter of 1998, net sales of the Rubber Group increased by $4,351,000, or 22.3%, compared to the first quarter of 1997. This increase was primarily due to increased unit sales of insulators and connector seals for automotive wiring systems and, to a lesser extent, increased sales of medical components and tooling, offset, in part, by price reductions on certain automotive components. During the first quarter of 1998, income from operations totaled $3,735,000, an increase of $873,000, or 30.5%, compared to the first quarter of 1997. Cost of sales as a percentage of net sales decreased during the first quarter of 1998 primarily because such expenses are partially fixed in nature. Nevertheless, material costs as a percentage of net sales increased primarily because of increased tooling sales and increased shipments of components requiring more expensive materials. Depreciation and amortization charged to factory overhead expense totaled $1,644,000, or 6.9% of net sales, during the first quarter of 1998, compared to $1,415,000, or 7.3% of net sales, during the first quarter of 1997. Selling and administrative expenses as a percentage of net sales decreased during the first quarter of 1998, compared to the first quarter of 1997, primarily because such expenses are partially fixed in nature. During the first quarters of 1998 and 1997, selling and administrative expenses included depreciation and amortization of $113,000 and $112,000, respectively. METALS GROUP The Metals Group manufactures aluminum, magnesium, and zinc die castings and machines aluminum, brass, and steel components. During the first quarter of 1998 and 1997, net sales to automotive industry customers represented 48.0% and 39.9%, respectively, of the Metals Group's net sales. The following table sets forth the operating results of the Metals Group for the first quarters of 1998 and 1997 (dollar amounts in thousands):
THREE MONTHS ENDED MARCH 31 ----------------------------------------- 1998 1997 ------------------ ------------------ Net sales $ 8,363 100.0% $ 9,109 100.0% Cost of sales 8,790 105.1 8,414 92.4 -------- ----- --------- ---- Gross profit/(loss) (427) (5.1) 695 7.6 Selling and administrative expenses 832 9.9 1,100 12.1 -------- ----- --------- ---- Loss from operations $ (1,259) (15.0)% $ (405) (4.5)% ======== ===== ========= ====
-11- 13 During the first quarter of 1998, net sales of the Metals Group decreased by $746,000, or 8.2%, compared to the first quarter of 1997. This reduction resulted from lower net sales of a variety of components at Lexington Die Casting and Lexington Machining caused primarily by the Company's planned elimination of certain customers who generated short-run production and by reduced demand for certain high-volume products due to obsolescence and the mild winter weather. These reductions were offset, in part, by an increase in net sales of airbag components by Lexington Safety Components. During the first quarter of 1998, the Metals Group incurred a loss from operations of $1,259,000, compared to a loss from operations of $405,000 during the first quarter of 1997. Cost of sales as a percentage of net sales increased during the first quarter of 1998, primarily due to underabsorption of fixed overhead caused by low sales levels at Lexington Die Casting, Lexington Machining, and Lexington Safety Components. Despite lower sales, overhead expenses increased primarily because of increased depreciation, which totaled $795,000, or 9.5% of net sales, during the first quarter of 1998, compared to $707,000, or 7.8% of net sales, during the first quarter of 1997, and increased indirect labor costs that resulted, in part, from the hiring of additional technical and professional staff during the last nine months of 1997. Selling and administrative expenses decreased during the first quarter of 1998, primarily because of the elimination of commissions previously paid to sales representatives who were terminated during the last quarter of 1996 and the first quarter of 1997. During the first quarters of 1998 and 1997, selling and administrative expenses included depreciation and amortization of $51,000 and $34,000, respectively. During 1997 and 1998, the Company has been attempting to improve the long-term competitive position, profitability, and cash flow of the Metals Group by eliminating the production of a large number of diverse, short-run components and repositioning productive capacity to manufacture higher-volume components in target markets. The repositioning entails a shift to a new customer base and requires that the Company's manufacturing facilities be structured and equipped to run high-volume parts efficiently and accurately. The repositioning of the Metals Group has caused the Company to experience underabsorption of fixed overhead resulting from the cut-back in short-run business and to incur expenses for the implementation of improved quality systems, expenses related to moving and reinstalling equipment, non-capitalized costs related to building upgrades, costs related to the establishment of relationships with major new customers, and costs related to inefficiencies resulting from the rollout of new production parts. These factors have adversely affected the operating profit and cash flow of the Metals Group during 1997, the first quarter of 1998, and April and May 1998 are expected to continue to adversely affect the Metals Group throughout the remainder of 1998. CORPORATE OFFICE Corporate office expenses, which are consolidated with selling and administrative expenses of the Rubber Group and the Metals Group in the Company's consolidated financial statements, totaled $494,000 and $557,000 during the first quarters of 1998 and 1997, respectively. INTEREST EXPENSE During the first quarters of 1998 and 1997, interest expense totaled $2,402,000 and $2,150,000, respectively. The increase during the first quarter of 1998 was caused primarily by an increase in average borrowings outstanding. -12- 14 PROVISION FOR INCOME TAXES At March 31, 1998, and December 31, 1997, the excess of the Company's deferred tax assets over its deferred tax liabilities was offset by a valuation allowance. There was no material change in net deferred taxes during the first quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the first quarter of 1998, the operating activities of the Company provided $703,000 of cash. Inventory increased by $820,000, primarily because of increased sales levels, trade accounts payable decreased by $837,000, primarily because trade accounts payable related to the purchase of plant, equipment, and customer-owned tooling decreased by $1,293,000, and accrued expenses decreased by $830,000, primarily because of payment of interest on the Company's 12.75% senior subordinated notes, payment of an accrued profit sharing contribution to the Company's retirement and savings plan for the 1997 plan year, and payment of accrued incentive bonus awards earned during 1997. INVESTING ACTIVITIES During the first quarter 1998, the investing activities of the Company used $3,409,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group and the Metals Group totaled $1,995,000 and $1,392,000, respectively. The Company presently projects that capital expenditures will total approximately $13,700,000 during 1998, including $13,100,000 for equipment and $600,000 for buildings. At March 31, 1998, the Company had commitments outstanding for capital expenditures totaling approximately $2,944,000. Although there can be no assurance, the Company anticipates that the funds needed for capital expenditures in 1998 will be provided by cash flows from operations, borrowings available to the Company under existing financing arrangements, and additional borrowings that the Company believes it will be able to obtain. (See also "Liquidity" in this Item 2.) FINANCING ACTIVITIES During the first quarter of 1998, the financing activities of the Company provided $2,665,000 of cash. During the first quarter of 1998, the Company borrowed $440,000 under an equipment line of credit to purchase equipment for its North Canton, Ohio, facility. The new borrowings plus $468,000 borrowed under the equipment line of credit in September 1997, constitute one term loan that bears interest at prime plus 0.25% and is repayable in 60 equal monthly principal installments commencing March 1, 1998. At March 31, 1998, $1,601,000 of loans outstanding under the Company's revolving line of credit were classified as long-term debt because they were refinanced under long-term agreements before the consolidated financial statements for the first quarter were issued. In April 1998, the Company borrowed $1,601,000 under an equipment line of credit to purchase equipment for its Rochester, New York, and Casa Grande, Arizona, facilities. The borrowings refinanced amounts outstanding under the Company's revolving line of credit that had been used to provide interim -13- 15 financing for the equipment. The new term loan bears interest at the London Interbank Offered Rate plus 2.75% and is repayable in 60 equal monthly principal installments of $27,000. Borrowings under the Company's revolving line of credit increased by $3,716,000 during the first quarter of 1998. LIQUIDITY The Company finances its operations with cash from operating activities and a variety of financing arrangements, including term loans and loans under the Company's revolving line of credit. The ability of the Company to borrow under its revolving line of credit is subject to, among other things, covenant compliance and certain availability formulas based on the levels of trade receivables and inventories of the Company. From time to time, the Company has amended financial covenants contained in the various loan agreements to which it is a party in order to maintain or otherwise ensure compliance with such covenants, including an amendment effected during the first quarter of 1998 to change a ratio of debt to tangible net worth (as each such term is defined in the loan agreements) from 4.50:1.00 to 4.75:1.00. The Company operates with substantial financial leverage and limited liquidity. As a result of increased borrowings during the first quarter of 1998, aggregate indebtedness of the Company, excluding trade accounts payable, increased by $2,673,000 to $90,175,000. During 1998, interest and scheduled principal payments are projected to be approximately $9,500,000 and $6,500,000, respectively. The Company had a net working capital deficit of $5,390,000 at March 31, 1998. Loans of $10,955,000, which were outstanding under the revolving line of credit, were classified as short-term debt at March 31, 1998. Although the expiration date of the revolving line of credit is April 1, 2000, the loans were classified as current liabilities because the Company's cash receipts are automatically used to reduce such loans on a daily basis, by means of a lock-box sweep arrangement, and the lender has the ability to modify certain terms of the revolving line of credit without the prior approval of the Company. At May 7, 1998, availability under the Company's revolving line of credit totaled $1,471,000 before outstanding checks of $979,000 were deducted. The Company currently has equipment lines of credit in the aggregate amount of $4,100,000 that can be used to finance all or a portion of the cost of certain equipment. Certain of the Company's financing arrangements contain covenants with respect to the maintenance of minimum levels of working capital, net worth, and cash flow coverage and impose limitations on the Company's ratio of debt to equity. The covenants also place certain restrictions on the Company's business and operations, including the incurrence or assumption of additional debt, the sale of all or substantially all of the Company's assets, the funding of capital expenditures, the purchase of common stock, the redemption of preferred stock, and the payment of cash dividends. In addition, substantially all of the Company's financing agreements include cross-default provisions. Based upon information presently available to the Company, the Company believes that it is likely to incur losses at the Metals Group during the second and third quarters of 1998 that may cause the Company to become in default of certain financial covenants under certain borrowing arrangements if the covenants are not amended or waived. In particular, the Company may become in default of a covenant requiring that the Company maintain a ratio of cash flow to the current portion of long-term debt (as each such term is defined in the loan agreements) of not less than 1.25:1.00 and the covenant requiring that the -14- 16 Company maintain the previously discussed ratio of debt to tangible net worth of not greater than 4.75:1.00 during the remainder of 1998. If a default occurs, it may trigger other defaults pursuant to cross-default provisions under other indebtedness of the Company. In the event of any such default or cross-default, the lenders in respect of indebtedness to which such provision relates would be entitled to accelerate the maturity of such indebtedness, to cease making any further advances otherwise permitted under the related credit facilities, to seek to foreclose upon any assets securing such indebtedness and, to pursue other remedies. Any such event could have a material adverse effect upon the Company. In any such event, the Company may be required to consider alternatives, including seeking relief from its creditors. Although there can be no assurance, the Company presently believes that, based on preliminary conversations with its lenders, it will be able to obtain the required waivers or otherwise amend such covenants, should waiver or amendment of the covenants prove to be necessary. The Company anticipates that, in addition to its projected cash flow from operations, new borrowings in the amount of approximately $4,200,000 will be required during the remainder of 1998 to meet the Company's projected working capital and debt service requirements and to fund capital expenditures currently anticipated by the Company. Although no assurance can be given, assuming that the Company obtains the amendment or waiver of certain financial covenants as discussed above, the Company currently believes that cash flows from operations, borrowings available to the Company under existing financing arrangements, and additional borrowings that the Company believes it will be able to obtain should be adequate to meet its projected working capital and debt service requirements and to fund capital expenditures currently anticipated by the Company during the remainder of 1998 and thereafter. If cash flows from operations or availability under existing and new financing agreements fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, extend trade accounts payable balances beyond terms that the Company believes are customary in the industries in which it operates, consider other alternatives designed to improve the Company's liquidity, or obtain relief from its obligations. Certain of such actions could have a material adverse effect upon the Company. The Company's 10.5% senior note, 12.75% senior subordinated notes, and 14% junior subordinated notes, which have an aggregate principal balance of $40,567,000, mature on February 1, 2000, and the Company's revolving line of credit expires on April 1, 2000. Although the Company currently believes that it has or will have the ability to refinance these obligations on or before their maturity or expiration dates, there are many factors that will affect the Company's ability to do so. Accordingly, there can be no assurance that the Company will be successful in refinancing such obligations. ACQUISITIONS The Company is seeking to acquire assets and businesses related to its current operations in order to expand its existing operations. Depending on the size, terms, and other aspects of such acquisitions, the Company may be required to obtain additional financing and, in some cases, the consents of its existing lenders. The Company's ability to effect acquisitions may be dependent upon its ability to obtain such financing and, to the extent applicable, consents. COMMITMENTS AND CONTINGENCIES The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities, including actions naming the Company as one of numerous potentially responsible parties under applicable environmental laws for restoration costs at -15- 17 waste-disposal sites, as a third-party defendant in cost-recovery actions pursuant to applicable environmental laws, and as a defendant or potential defendant in various other matters. It is the Company's policy to record accruals for such matters when a loss is deemed probable and the amount of such loss can be reasonably estimated. The various actions to which the Company is or may be a party in the future are at various stages of completion. Although there can be no assurance as to the outcome of existing or potential litigation, in the event such litigation were commenced, based upon the information currently available to the Company, the Company believes that the outcome of such actions will not have a material adverse effect upon its financial position. RECENTLY ISSUED ACCOUNTING STANDARDS STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted "Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income" ("FAS 130"). FAS 130 established standards for the reporting and display of changes in stockholders' equity during a period that are not included in reported net income for such period, excluding changes resulting from transactions with owners. During the first quarter of 1998, the Company did not have any items of income or loss requiring disclosure under the provisions of FAS 130. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"), which is effective for fiscal periods beginning after December 15, 1997. FAS 131 established standards for the way public enterprises report information about operating segments in annual and interim financial statements, including related disclosures about products, geographic areas, and major customers. FAS 131 requires financial information to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The adoption of FAS 131 by the Company during the fourth quarter of 1998 will not have a material effect on the Company's consolidated financial position or results of operations. -16- 18 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed herewith: 10-1 Promissory Note dated March 31, 1998, from the Company in favor of The CIT Group/Equipment Financing, Inc. 27-1 Financial Data Schedule (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the first quarter of 1998. -17- 19 LEXINGTON PRECISION CORPORATION FORM 10-Q MARCH 31, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LEXINGTON PRECISION CORPORATION (Registrant) May 13, 1998 By: /s/ Michael A. Lubin ------------- --------------------------------- Date Michael A. Lubin Chairman of the Board May 13, 1998 By: /s/ Warren Delano ------------- --------------------------------- Date Warren Delano President May 13, 1998 By: /s/ Dennis J. Welhouse ------------- --------------------------------- Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -18- 20 EXHIBIT INDEX Exhibit Number Exhibit Location - ------- ------- -------- 10-1 Promissory Note dated March 31, 1998, Filed with this from Lexington Precision Corporation Form 10-Q in favor of The CIT Group/Equipment Financing, Inc. 27-1 Financial Data Schedule Filed with this Form 10-Q EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 PROMISSORY NOTE $1,601,152.00 New York, New York March 31, 1998 FOR VALUE RECEIVED, LEXINGTON PRECISION CORPORATION ("Debtor") promises to pay to the order of THE CIT GROUP/EQUIPMENT FINANCING, INC. ("CIT"), at such address as CIT may designate, in lawful money of the United States, the principal sum of ONE MILLION SIX HUNDRED ONE THOUSAND ONE HUNDRED FIFTY TWO and no/100 DOLLARS ($1,601,152.00) in sixty (60) consecutive monthly installments, commencing on May 1, 1998, with the following installments on the first day of each month thereafter until payment in full of this Note. The first fifty nine (59) monthly installments shall be level payments of principal each in the amount of $26,685.87, and the sixtieth (60th) and final payment shall be a payment of principal in the amount of $26,685.87. Debtor shall pay interest together with each such installment of principal, in like money, from the date hereof until payment in full, on the unpaid principal balance hereof at an interest rate per annum equal to two and seventy five hundredths percent (2.75%) above the LIBOR Rate. Each payment shall be applied first to the payment of any unpaid interest on the principal sum and them to payment of principal. Interest shall be calculated on the basis of a 360-day year and actual number of days elapsed. Any amount not paid when due under this Note shall bear late charges, thereon, calculated at the Late Charge Rate, from the due date thereof until such amount shall be paid in full. Any payment received after the maturity of any installment of principal shall be applied first to the payment of unpaid late charges, second to the payment of any unpaid interest on said principal, and third to the payment of principal. This Note is one of the Notes referred to in the Loan and Security Agreement dated as of March 19, 1997, between Debtor and CIT (herein, as the same may from time to time be amended, supplemented or otherwise modified, called the "Agreement"), is secured as provided in the Agreement, and is subject to prepayment only as provided therein, and the holder hereof is entitled to the benefits thereof. Terms defined in the Agreement shall have the same meaning when used in this Note, unless the context shall otherwise require. Except as provided in Section 6 of the Agreement, Debtor hereby waives presentment, demand of payment, notice of dishonor, and any and all other notices or demands in connection with the delivery, acceptance, performance, default of enforcement of this Note and hereby consents to any extensions of time, renewals, releases of any party to this Note, waivers or modifications that may be granted or consented to by the holder of this Note. Upon the occurrence and during the continuance of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note, together with any interest accrued, may be declared to be (or, with respect to certain Events of Default, automatically shall become) immediately due and payable as provided therein. In the event that any holder shall institute any action for the enforcement or the collection of this Note, there shall be immediately due and payable, in addition to the unpaid balance hereof, all late charges and all reasonable costs and expenses of such action, including reasonable attorneys' fees. In accordance with the provisions of the Agreement, Debtor and CIT waive trial by jury and any litigation relating to or in connection with this Note in which they shall be adverse parties and Debtor hereby waives the right to interpose any setoff counterclaim or defense of any nature or description whatsoever, but Debtor shall have the right to assert in an independent action against CIT any such defense, offset or counterclaim (including any compulsory counterclaim) which it may have which has not otherwise been waived pursuant to the Agreement. 2 Debtor agrees that its liabilities hereunder are absolute and unconditional without regard to the liability of any other party, and that no delay on the part of the holder hereof in exercising any power or right hereunder shall operate a waiver thereof; nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof or the exercise of any other power or right. If at any time this transaction would be usurious under applicable law, then regardless of any provision contained in the Agreement, in this Note or any other agreement made in connection with this transaction, it is agreed that (a) the total of all consideration which constitutes interest under applicable law that is contracted for, charged or received upon the Agreement, this Note or any such other agreement shall under no circumstances exceed the maximum rate of interest authorized by applicable law and any excess shall be credited to Debtor and (b) if CIT elects to accelerate the maturity of, or if CIT permits Debtor to prepay the indebtedness described in, this Note, any amounts which because of such action would constitute interest may never include more than the maximum rate of interest authorized by applicable law and any excess interest, if any, shall be credited to Debtor automatically as of the date of acceleration or prepayment. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. LEXINGTON PRECISION CORPORATION By: Warren Delano ----------------------------- Title: President ------------------------- EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 167 0 17,269 0 9,851 31,479 107,080 46,636 104,713 36,869 72,762 420 0 1,087 (8,182) 104,713 32,197 32,197 27,412 27,412 0 0 2,402 (420) 0 (420) 0 0 0 (420) (.10) (.10)
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