-----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, QnlC8S8iBaYSbEDQ7PjY/ddkXHeV01XWq0Y97HYjUHuraG3B+dtk4VJ8WcLVa6IS WcWLkMgocjHTtL+P7nkwRQ== 0000950152-99-006972.txt : 19990817 0000950152-99-006972.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950152-99-006972 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692201 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 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 JUNE 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 AUGUST 6, 1999 (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...........................................14 Item 3. Quantitative and Qualitative Disclosures about Market Risk..........25 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.................26 Item 6. Exhibits and Reports on Form 8-K....................................26 3
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED) JUNE 30, DECEMBER 31, 1999 1998 ------------ ----------- ASSETS: Current assets: Cash $ 309 $ 103 Accounts receivable 20,953 17,837 Inventories 9,906 10,170 Prepaid expenses and other assets 2,116 2,063 Deferred income taxes 2,025 2,025 -------- -------- Total current assets 35,309 32,198 -------- -------- Plant and equipment: Land 1,534 1,549 Buildings 23,164 23,753 Equipment 91,682 90,306 -------- -------- 116,380 115,608 Accumulated depreciation 54,576 52,871 -------- -------- Plant and equipment, net 61,804 62,737 -------- -------- Excess of cost over net assets of businesses acquired, net 8,620 8,778 -------- -------- Other assets, net 4,564 4,612 -------- -------- $110,297 $108,325 ======== ========
See notes to consolidated financial statements. (continued on next page) -2- 4
LEXINGTON PRECISION CORPORATION CONSOLIDATED BALANCE SHEET (CONTINUED) (THOUSANDS OF DOLLARS) (UNAUDITED) JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ LIABILITIES AND STOCKHOLDERS' DEFICIT: Current liabilities: Trade accounts payable $ 9,210 $ 11,291 Accrued expenses 10,013 9,345 Short-term debt 17,619 12,995 Current portion of long-term debt 46,013 6,597 --------- --------- Total current liabilities 82,855 40,228 --------- --------- Long-term debt, excluding current portion 32,647 74,953 --------- --------- Deferred income taxes and other long-term liabilities 2,237 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 12,220 12,235 Accumulated deficit (20,907) (22,556) Cost of common stock in treasury, 85,915 shares (217) (217) --------- --------- Total stockholders' deficit (7,817) (9,451) --------- --------- $ 110,297 $ 108,325 ========= =========
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 SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 36,042 $ 31,024 $ 70,538 $ 63,221 Cost of sales 29,691 26,090 59,095 53,502 -------- -------- -------- -------- Gross profit 6,351 4,934 11,443 9,719 Selling and administrative expenses 3,257 2,863 6,323 5,666 -------- -------- -------- -------- Income from operations 3,094 2,071 5,120 4,053 Interest expense 2,408 2,448 4,750 4,850 -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item 686 (377) 370 (797) Income tax provision 171 -- 92 -- -------- -------- -------- -------- Net income (loss) before extraordinary item 515 (377) 278 (797) Extraordinary gain on repurchase of long-term debt, net of applicable income taxes -- -- 1,371 -- -------- -------- -------- -------- Net income (loss) $ 515 $ (377) $ 1,649 $ (797) ======== ======== ======== ======== Basic net income (loss) per common share: Net income (loss) before extraordinary item $ 0.12 $ (0.09) $ 0.06 $ (0.20) Extraordinary gain -- -- 0.32 -- -------- -------- -------- -------- Net income (loss) $ 0.12 $ (0.09) $ 0.38 $ (0.20) ======== ======== ======== ======== Diluted net income (loss) per common share: Net income (loss) before extraordinary item $ 0.11 $ (0.09) $ 0.06 $ (0.20) Extraordinary gain -- -- 0.32 -- -------- -------- -------- -------- Net income (loss) $ 0.11 $ (0.09) $ 0.38 $ (0.20) ======== ======== ======== ========
See notes to consolidated financial statements. -4- 6
LEXINGTON PRECISION CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 --------------------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES: Net income (loss) $ 1,649 $ (797) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain on repurchase of long-term debt (1,828) -- Depreciation 5,394 4,763 Amortization included in operating expense 837 632 Amortization included in interest expense 108 99 Changes in operating assets and liabilities that provided (used) cash: Trade receivables (3,116) 1,604 Inventories 264 (1,434) Prepaid expenses and other assets (53) 943 Trade accounts payable (2,081) (614) Accrued expenses 668 673 Other 423 16 -------- -------- Net cash provided by operating activities 2,265 5,885 -------- -------- INVESTING ACTIVITIES: Purchases of plant and equipment (5,005) (8,849) Decrease in equipment deposits 142 244 Proceeds from sales of equipment 20 183 Expenditures for tooling owned by customers (512) (427) Other -- 343 -------- -------- Net cash used by investing activities (5,355) (8,506) -------- -------- FINANCING ACTIVITIES: Net increase in short-term debt 4,624 1,824 Proceeds from issuance of long-term debt 10,244 3,741 Repayment of long-term debt (9,326) (2,964) Repurchase of long-term debt (1,980) -- Other (266) (17) -------- -------- Net cash provided by financing activities 3,296 2,584 -------- -------- Net increase (decrease) in cash 206 (37) Cash at beginning of period 103 208 -------- -------- Cash at end of period $ 309 $ 171 ======== ========
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 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 June 30, 1999, the Company's results of operations for the three-month and six-month periods ended June 30, 1999 and 1998, and the Company's cash flows for the six-month periods ended June 30, 1999 and 1998. All such adjustments were of a normal recurring nature. The results of operations for the three-month and six-month periods ended June 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 $38,129,000 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. The Company may attempt to refinance these obligations (and possibly other indebtedness that has later maturity dates) by issuing new debt securities in the private or public market. If, for any reason, the Company is not able to, or determines not to, sell such debt securities, the Company may, in the alternative, attempt to extend the maturity dates of its existing debt securities or to exchange new debt securities that have maturity dates later than 2000 for existing debt securities that mature in 2000. The Company's ability to refinance, extend, or exchange these securities on or before their maturity dates will depend on many factors, including, but not limited to, conditions in the market for non-investment grade debt. Accordingly, there can be no assurance that the Company will be successful in refinancing, extending, or exchanging such securities. In the event that the Company is not successful in refinancing, extending, or exchanging 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 these obligations on or before their maturity dates. The Company has commenced discussions with investment banking firms relating to the issuance of new debt securities to refinance substantially all of the Company's existing debt. There can be no assurance that the Company will undertake such an offering, or that any such offering will be successful. If a public offering of securities is made, such offering will be made only by means of a prospectus. If a -6- 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) private offering of securities is made, the securities offered will not be registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. NOTE 2 -- INVENTORIES Inventories at June 30, 1999, and December 31, 1998, are set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 1999 1998 ------------- ------------ Finished goods $ 3,539 $ 4,272 Work in process 3,078 2,834 Raw materials and purchased parts 3,289 3,064 --------- --------- $ 9,906 $ 10,170 ========= =========
NOTE 3 -- ACCRUED EXPENSES At June 30, 1999, and December 31, 1998, accrued expenses included accrued interest expense of $1,772,000 and $1,971,000, respectively. NOTE 4 -- DEBT At June 30, 1999, and December 31, 1998, short-term debt consisted of loans outstanding under the Company's revolving line of credit. At June 30, 1999, and December 31, 1998, $952,000 and $3,850,000, respectively, 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 respective periods were issued. At June 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%. -7- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Long-term debt at June 30, 1999, and December 31, 1998, is set forth below (dollar amounts in thousands):
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Long-term secured debt: Revolving line of credit, prime rate plus 0.25% and LIBOR plus 2.75% $ 952(1) $ 3,850(1) Term loan, due 2000, 12% 1,370 1,370 Term loans payable in equal monthly principal installments based on a 180-month amortization schedule, final maturities in 2001, 8.37% 2,804 2,921 Term loans payable in equal monthly principal installments, final maturities in 2002, LIBOR plus 2.75% 2,210 2,584 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9.37% 1,351 1,404 Term loan payable in equal monthly principal installments based on a 180-month amortization schedule, final maturity in 2002, 9% 2,631 2,732 Term loans payable in equal monthly principal installments, final maturity in 2002, prime rate plus 0.25% and LIBOR plus 2.75% 2,597 - Term loan payable in equal monthly principal installments, final maturity in 2003, prime rate plus 0.25% 681 770 Term loan payable in equal monthly principal installments, final maturity in 2003, prime rate plus 0.25% and LIBOR plus 2.75% 432(2) 492 Term loan payable in equal monthly principal installments, final maturity in 2004, LIBOR plus 2.75% 1,181 - Term loan payable in equal monthly principal installments, final maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 1,335 1,471 Term loans payable in equal monthly principal installments, final maturity in 2004, prime rate plus 0.25% and LIBOR plus 2.75% 15,239(2) 18,967 Term loan payable in equal monthly principal installments, final maturity in 2005, LIBOR plus 2.75% 1,228 1,388 Term loan payable in equal monthly principal installments, final maturity in 2005, prime rate plus 0.25% and LIBOR plus 2.75% 1,458(2) 1,579 Term loan payable in equal monthly principal installments, final maturity in 2006, prime rate plus 0.25% 559 - Term loans payable in equal monthly principal installments, final maturity in 2006, prime rate plus 0.25% and LIBOR plus 2.75% 5,737(2) 1,300 --------- -------- Total long-term secured debt $ 41,765 $ 40,828 --------- --------
(continued on next page) -8- 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued from prior page) JUNE 30, DECEMBER 31, 1999 1998 ------------ ---------- Long-term unsecured debt: 10.5% senior note, due 2000 $ 7,500 $ 7,500 12.75% senior subordinated notes, due 2000 27,912 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 136 155 ------- ------- Total long-term unsecured debt 36,895 40,722 ------- ------- Total long-term debt 78,660 81,550 Less current portion 46,013 6,597 ------- ------- Total long-term debt, excluding current portion $32,647 $74,953 ======= ======= (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) 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 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. During May 1999, a covenant related to the maintenance of net working capital was amended. NOTE 5 -- INCOME TAXES During the first six months of 1999, the Company recorded income tax expense of $549,000, which consisted of estimated federal alternative minimum tax and state income tax. Of this amount, -9- 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) $457,000 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 June 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 six-month periods ended June 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 period ended June 30, 1998, or the six-month periods ended June 30, 1999 and 1998. As a result, the calculation of diluted net income or loss per common share set forth below for those periods does not reflect any pro forma conversion.
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 ------------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Numerator: Net income (loss) before extraordinary item $ 515 $ (377) $ 278 $ (797) Preferred stock dividends (7) (9) (15) (17) Excess of redemption value over par value of preferred stock redeemed during year (11) (11) (22) (22) -------- ------- ------- -------- Numerator for basic net income (loss) per share--income available to common stockholders before extraordinary item 497 (397) 241 (836) Effect of assumed conversion of dilutive securities: 14% junior convertible notes 26 - - - -------- ------- ------- -------- Numerator for diluted net income (loss) per share--income available to common stockholders after assumed conversions and before extraordinary item 523 (397) 241 (836) Extraordinary gain - - 1,371 - -------- ------- ------- -------- Numerator for net income (loss) per share--income available to common stockholders after extraordinary item and assumed conversions $ 523 $ (397) $ 1,612 $ (836) ======== ======= ======= ========
(continued on next page) -10- 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued from prior page) THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- Denominator: Denominator for basic net income (loss) per share--weighted-average common shares 4,263 4,263 4,263 4,263 Effect of assumed conversion of dilutive securities: 14% junior convertible notes 440 -- -- -- --------- --------- --------- --------- Denominator for diluted net income (loss) per share and extraordinary gain--weighted-average common shares with assumed conversions 4,703 4,263 4,263 4,263 ========= ========= ========= ========= Basic net income (loss) per common share: Net income (loss) before extraordinary item $ 0.12 $ (0.09) $ 0.06 $ (0.20) Extraordinary gain -- -- 0.32 -- --------- --------- --------- --------- Basic net income (loss) $ 0.12 $ (0.09) $ 0.38 $ (0.20) ========= ========= ========= ========= Diluted net income (loss) per common share: Net income (loss) before extraordinary item $ 0.11 $ (0.09) $ 0.06 $ (0.20) Extraordinary gain -- -- 0.32 -- --------- --------- --------- --------- Diluted net income (loss) $ 0.11 $ (0.09) $ 0.38 $ (0.20) ========= ========= ========= =========
-11- 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 six-month periods ended June 30, 1999 and 1998 is summarized below (dollar amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- NET SALES: Rubber Group $ 26,206 $ 23,242 $ 51,166 $ 47,076 Metals Group 9,836 7,782 19,372 16,145 --------- --------- --------- --------- Total net sales $ 36,042 $ 31,024 $ 70,538 $ 63,221 ========= ========= ========= ========= INCOME (LOSS) FROM OPERATIONS: Rubber Group $ 4,117 $ 3,923 $ 7,433 $ 7,658 Metals Group (294) (1,334) (989) (2,593) Corporate office (729) (518) (1,324) (1,012) --------- --------- --------- --------- Total income from operations $ 3,094 $ 2,071 $ 5,120 $ 4,053 ========= ========= ========= ========= ASSETS: Rubber Group $ 69,635 $ 65,894 $ 69,635 $ 65,894 Metals Group 37,651 38,906 37,651 38,906 Corporate office 3,011 1,189 3,011 1,189 --------- --------- --------- --------- Total assets $ 110,297 $ 105,989 $ 110,297 $ 105,989 ========= ========= ========= ========= DEPRECIATION AND AMORTIZATION: Rubber Group $ 2,061 $ 1,846 $ 4,025 $ 3,603 Metals Group 1,081 938 2,187 1,784 Corporate office 72 54 127 107 --------- --------- --------- --------- Total depreciation and amortization $ 3,214 $ 2,838 $ 6,339 $ 5,494 ========= ========= ========= ========= CAPITAL EXPENDITURES: Rubber Group $ 2,532 $ 2,658 $ 3,556 $ 4,651 Metals Group 564 2,747 1,379 4,138 Corporate office 21 57 70 60 --------- --------- --------- --------- Total capital expenditures $ 3,117 $ 5,462 $ 5,005 $ 8,849 ========= ========= ========= =========
-12- 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 8 -- EXTRAORDINARY ITEM During the first quarter of 1999, the Company recorded an extraordinary gain, net of estimated income tax expense, of $1,371,000 on the repurchase of $3,808,000 principal amount of its 12.75% senior subordinated notes. NOTE 9 -- PLANT CLOSURE In May 1999, the Company closed a 21,000 square foot diecasting facility in Manchester, New York. For the six-month periods ended June 30, 1999 and 1998, the Manchester facility had net sales of $894,000 and $1,258,000, respectively, and losses from operations of $214,000 and $102,000, respectively. At June 30, 1999, the Manchester facility had net assets, before deducting indebtedness secured by the assets of the Manchester facility, of $224,000. The Company presently anticipates that it will complete the disposal of the assets of the facility during 1999. During the second quarter of 1999, the Company recorded expenses related to the closure and disposal of the facility in the amount of $590,000, of which $535,000 was charged to cost of sales and $55,000 was charged to selling and administrative expenses. The expenses included $335,000 for the write-down of plant and equipment, $107,000 of employee severance payments, and $148,000 of other plant closing costs. -13- 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 (1) increases and decreases in business awarded to the Company by its various customers, (2) unanticipated price reductions for the Company's products as a result of competition, (3) unanticipated operating results and cash flows, (4) increases or decreases in capital expenditures, (5) unforeseen product liability claims, (6) changes in economic conditions, (7) changes in the competitive environment, (8) changes in the capital markets, (9) labor interruptions at the Company or at its customers, (10) disruptions that may be caused by year 2000 software or hardware problems, and (11) 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 -- SECOND QUARTER OF 1999 VERSUS SECOND 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- 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 second quarters of 1999 and 1998 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 ----------------------------------------- 1999 1998 ------------------ ------------------ Net sales $ 26,206 100.0% $ 23,242 100.0% Cost of sales 20,420 77.9 17,769 76.5 --------- ------- --------- ------- Gross profit 5,786 22.1 5,473 23.5 Selling and administrative expenses 1,669 6.4 1,550 6.7 --------- ------- --------- ------- Income from operations $ 4,117 15.7% $ 3,923 16.9% ========= ======= ========= =======
During the second quarter of 1999, net sales of the Rubber Group increased by $2,964,000, or 12.8%, compared to the second quarter of 1998. This increase was primarily due to increased unit sales of seals for automotive wiring systems and insulators for automotive ignition wire sets and, to a lesser extent, increased unit sales of components for medical devices, offset, in part, by reduced sales of tooling and by price reductions on certain automotive components. During the second quarter of 1999, income from operations totaled $4,117,000, an increase of $194,000, or 4.9%, compared to the second quarter of 1998. The Rubber Group's operating results for the second quarter of 1998 included a credit to cost of sales of $622,000 resulting from a special rebate from the State of Ohio Bureau of Workers' Compensation, which represented the Company's share of a distribution of excess funds accumulated by the Bureau. Excluding the special rebate from the Rubber Group's operating results for the second quarter of 1998, income from operations increased by $816,000, or 24.7%. Cost of sales as a percentage of net sales increased during the second quarter of 1999 compared to the second quarter of 1998, principally as a result of the rebate, which reduced cost of sales as a percentage of net sales during the second quarter of 1998 by 2.7 percentage points. The effect of the rebate was offset by a reduction in tooling sales, which generate little or no gross profit, and a reduction in direct labor cost as a percentage of net sales, which resulted primarily from improved operating efficiencies. Excluding the special rebate, cost of sales as a percentage of net sales decreased from 79.1% to 77.9%. Selling and administrative expenses as a percentage of net sales decreased during the second quarter of 1999 compared to the second quarter of 1998, primarily because those expenses are partially fixed in nature. During the second quarter of 1999, depreciation and amortization at the Rubber Group totaled $2,061,000, or 7.9% of net sales, compared to $1,846,000, or 7.9% of net sales, during the second quarter of 1998. During the second quarter of 1999, earnings before interest, taxes, depreciation, and amortization ("EBITDA") was $6,178,000, an increase of $409,000 compared to the second quarter of 1998. Excluding the special rebate, EBITDA increased by $1,031,000. (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 -15- 17 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.) METALS GROUP The Metals Group manufactures aluminum and magnesium 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. The Metals Group has incurred expenses for the implementation of improved quality systems, expenses related to moving and reinstalling equipment, expenses related to building upgrades, 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 and cash flow of the Metals Group during 1998 and the first six months of 1999. In May 1999, the Company closed a 21,000 square foot diecasting facility in Manchester, New York. For the six-month periods ended June 30, 1999 and 1998, the Manchester facility had net sales of $894,000 and $1,258,000, respectively, and losses from operations of $214,000 and $102,000, respectively. At June 30, 1999, the Manchester facility had net assets, before deducting indebtedness secured by the assets of the Manchester facility, of $224,000. The Company presently anticipates that it will complete the disposal of the assets of the facility during 1999. During the second quarter of 1999, the Company recorded expenses related to the closure and disposal of the facility in the amount of $590,000, of which $535,000 was charged to cost of sales and $55,000 was charged to selling and administrative expenses. The expenses included $335,000 for the write-down of plant and equipment, $107,000 of employee severance payments, and $148,000 of other plant closing costs. The following table sets forth the operating results of the Metals Group for the second quarters of 1999 and 1998 (dollar amounts in thousands):
THREE MONTHS ENDED JUNE 30 ----------------------------------------- 1999 1998 ------------------ ------------------ Net sales $ 9,836 100.0% $ 7,782 100.0% Cost of sales 9,271 94.3 8,321 106.9 -------- ------- --------- ------- Gross profit (loss) 565 5.7 (539) (6.9) Selling and administrative expenses 859 8.7 795 10.2 -------- ------- --------- ------- Loss from operations $ (294) (3.0)% $ (1,334) (17.1)% ======== ======= ========= =======
-16- 18 During the second quarter of 1999, net sales of the Metals Group increased by $2,054,000, or 26.4%, compared to the second quarter of 1998. This increase resulted primarily from increased net sales of automotive components at Lexington Die Casting and increased net sales of automotive airbag components at the Arizona Division of Lexington Machining. Excluding the $590,000 of closure expenses related to the Manchester facility, the Metals Group recorded income from operations of $296,000 during the second quarter of 1999, compared to a loss from operations of $1,334,000 during the second quarter of 1998. Excluding the $535,000 of Manchester closure expenses charged to cost of sales, cost of sales as a percentage of net sales decreased from 106.9% during the second quarter of 1998 to 88.8% during the second quarter of 1999, primarily due to (1) increased absorption of fixed manufacturing overhead, which resulted from higher sales levels, (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, (3) a reduction in employee benefit costs, which resulted from an improved loss history, and (4) a reduction in operating supply costs, which resulted primarily from in-house production of perishable tooling. Such reductions were offset, in part, by an increase in material costs as a percentage of net sales, which resulted from increased sales of tooling at Lexington Die Casting, and by increased depreciation and amortization expenses. Selling and administrative expenses as a percentage of net sales decreased during the second quarter of 1999, primarily because those expenses are partially fixed in nature. Excluding the $55,000 of Manchester closure expenses charged to selling and administrative expenses, selling and administrative expenses were 8.2% of net sales during the second quarter of 1999. During the second quarter of 1999, depreciation and amortization at the Metals Group totaled $1,081,000, or 11.0% of net sales, compared to $938,000, or 12.1% of net sales, during the second quarter of 1998. EBITDA increased to $787,000 an increase of $1,183,000 compared to the second quarter of 1998. Excluding the $590,000 of closure expenses related to the Manchester facility, EBITDA was $1,377,000. 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 $729,000 and $518,000 during the second quarters of 1999 and 1998, respectively. The increase in corporate office expenses during the second quarter of 1999 resulted primarily from the accrual of management incentive compensation. No management incentive compensation was accrued for corporate office personnel during the second quarter of 1998. During the second quarters of 1999 and 1998, depreciation at the corporate office totaled $14,000 and $5,000, respectively. INTEREST EXPENSE During the second quarters of 1999 and 1998, interest expense totaled $2,408,000 and $2,448,000, respectively. -17- 19 INCOME TAXES During the second quarter of 1999, the Company recorded income tax expense of $171,000, which consisted of estimated federal alternative minimum tax and state income tax. At June 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. RESULTS OF OPERATIONS -- FIRST SIX MONTHS OF 1999 VERSUS FIRST SIX MONTHS OF 1998 RUBBER GROUP The following table sets forth the operating results of the Rubber Group for the first six months of 1999 and 1998 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ----------------------------------------- 1999 1998 ------------------ ------------------ Net sales $ 51,166 100.0% $ 47,076 100.0% Cost of sales 40,442 79.0 36,391 77.3 --------- ------- --------- ------- Gross profit 10,724 21.0 10,685 22.7 Selling and administrative expenses 3,291 6.4 3,027 6.4 --------- ------- --------- ------- Income from operations $ 7,433 14.5% $ 7,658 16.3% ========= ======= ========= =======
During the first six months of 1999, net sales of the Rubber Group increased by $4,090,000, or 8.7%, compared to the first six months of 1998. This increase was primarily due to increased unit sales of seals for automotive wiring systems and insulators for automotive ignition wire sets and, to a lesser extent, increased unit sales of components for medical devices, offset, in part, by reduced sales of tooling and by price reductions on certain automotive components. During the first six months of 1999, income from operations totaled $7,433,000, a decrease of $225,000, or 2.9%, compared to the first six months of 1998. The Rubber Group's operating results for the first six months of 1998 included a credit to cost of sales of $622,000 resulting from a special rebate from the State of Ohio Bureau of Workers' Compensation, which represented the Company's share of a distribution of excess funds accumulated by the Bureau. Excluding the special rebate from the Rubber Group's operating results for the first six months of 1998, income from operations increased by $397,000 or 5.6%. Cost of sales as a percentage of net sales increased during the first six months of 1999 compared to the first six months of 1998, principally as a result of the rebate, which reduced cost of sales as a percentage of net sales during the first six months of 1998 by 1.3%. Excluding the special rebate, cost of sales as a percentage of net sales increased from 78.6% to 79.0%. Selling and administrative expenses as a percentage of net sales were unchanged during the first six months of 1999 compared to the first six months of 1998. During the first six months of 1999, depreciation and amortization at the Rubber Group totaled $4,025,000, or 7.9% of net sales, compared to $3,603,000, or 7.7% of net sales, during the first six months of 1998. During the first six months of 1999, EBITDA was $11,458,000, an increase of $197,000 compared to first six months of 1998. Excluding the special rebate, EBITDA increased by $819,000. -18- 20 METALS GROUP The following table sets forth the operating results of the Metals Group for the first six months of 1999 and 1998 (dollar amounts in thousands):
SIX MONTHS ENDED JUNE 30 ---------------------------------------- 1999 1998 ----------------- ----------------- Net sales $ 19,372 100.0% $ 16,145 100.0% Cost of sales 18,653 96.3 17,111 106.0 --------- ------- -------- ------- Gross profit (loss) 719 3.7 (966) (6.0) Selling and administrative expenses 1,708 8.8 1,627 10.1 --------- ------- -------- ------- Loss from operations $ (989) (5.1)% $ (2,593) (16.1)% ========= ======= ======== =======
During the first six months of 1999, net sales of the Metals Group increased by $3,227,000, or 20.0%, compared to the first six months of 1998. This increase resulted primarily from increased net sales of automotive components at Lexington Die Casting and to a lesser extent from increased net sales of automotive airbag components at the Arizona Division of Lexington Machining. Excluding the $590,000 of closure expenses related to the Manchester facility, the Metals Group incurred a loss from operations of $399,000 during the first six months 1999, compared to a loss from operations of $2,593,000 during the first six months 1998. Excluding the $535,000 of the Manchester closure expenses charged to cost of sales, cost of sales as a percentage of net sales decreased from 106.0% during the first six months of 1998 to 93.5% during the first six months of 1999, primarily due to (1) increased absorption of fixed manufacturing overhead, which resulted from higher sales levels, (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, (3) a reduction in employee benefit costs, which resulted from an improved loss history, and (4) a reduction in operating supply costs, which resulted primarily from in-house production of perishable tooling. Such reductions were offset, in part, by an increase in material costs as a percentage of net sales, which resulted from increased sales of tooling at Lexington Die Casting, and by increased depreciation and amortization expenses. Selling and administrative expenses as a percentage of net sales decreased during the first six months of 1999, primarily because those expenses are partially fixed in nature. During the first six months of 1999, depreciation and amortization at the Metals Group totaled $2,187,000, or 11.3% of net sales, compared to $1,784,000, or 11.0% of net sales, during the first six months of 1998. EBITDA increased to $1,198,000 an increase of $2,007,000 compared to the first six months of 1998. Excluding the $590,000 of closure expenses related to the Manchester facility, EBITDA was $1,788,000. 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 $1,324,000 and $1,012,000 during the first six months of 1999 and 1998, respectively. The increase in corporate office expenses during the first six months of 1999 resulted primarily from the accrual of -19- 21 management incentive compensation. No management incentive compensation was accrued for corporate office personnel during the second quarter of 1998. During the first six months 1999 and 1998, depreciation at the corporate office totaled $19,000 and $8,000, respectively. INTEREST EXPENSE During the first six months of 1999 and 1998, interest expense totaled $4,750,000 and $4,850,000, respectively. EXTRAORDINARY GAIN During the first six months of 1999, the Company recorded an extraordinary gain, net of estimated income tax expense, of $1,371,000 on the repurchase of $3,808,000 principal amount of its 12.75% senior subordinated notes. INCOME TAXES During the first six months of 1999, the Company recorded income tax expense of $549,000, which consisted of estimated federal alternative minimum tax and state income tax. Of this amount $457,000 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 June 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 six months of 1999, the operating activities of the Company provided $2,265,000 of cash. Accounts receivable increased by $3,116,000. This increase was caused primarily by the increase in net sales and by a change in the timing of payments from the Company's largest customer. Trade accounts payable decreased by $2,081,000. This decrease was caused primarily by a reduction in average days outstanding and by a $700,000 reduction in payables related to the purchase of plant, equipment, and customer-owned tooling, which resulted from a reduction in capital expenditures compared to the first six months of 1998. INVESTING ACTIVITIES During the first six months of 1999, the investing activities of the Company used $5,355,000 of cash, primarily for capital expenditures. Capital expenditures attributable to the Rubber Group, the Metals Group, and the corporate office totaled $3,556,000, $1,379,000, and $70,000, respectively. The Company presently projects that capital expenditures will total approximately $13,500,000 in 1999, including $13,100,000 for equipment and $400,000 for land and buildings. Capital expenditures for the Rubber Group, the Metals Group, and the corporate office are projected to total $9,000,000, $4,400,000, and $100,000, respectively. At June 30, 1999, the Company had outstanding commitments to purchase plant and equipment of $1,594,000. -20- 22 FINANCING ACTIVITIES During the first six months of 1999, the financing activities of the Company provided $3,296,000 of cash. During the first six months of 1999, the Company obtained new term loans in the aggregate amount of $10,244,000, which refinanced $2,090,000 of existing term loans and $8,154,000 of loans outstanding under the Company's revolving line of credit. Also, during the first six months, the Company repurchased $3,808,000 principal amount of its 12.75% senior subordinated notes for $1,980,000; the purchase was 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. 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, the revolving line of credit was amended to extend its expiration date to April 1, 2002. Also 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. In March 1999, another of the Company's lenders provided the Company with an equipment line of credit in the amount of $1,822,000. On July 29, 1999, the Company borrowed $450,000 under this line of credit, utilizing substantially all of the remaining availability under this equipment line of credit. The Company operates with substantial financial leverage and limited liquidity. During the first six months of 1999, the Company's aggregate indebtedness, excluding trade accounts payable, increased by $1,734,000 to $96,279,000. During the second half of 1999, interest and scheduled principal payments are projected to be approximately $4,700,000 and $4,000,000, respectively. The Company had a net working capital deficit of $47,546,000 at June 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 $38,219,000, mature during the first half of 2000 and have been classified at June 30, 1999, as current liabilities in the Company's consolidated financial statements. Loans of $17,619,000 and $12,995,000 outstanding under the revolving line of credit were classified as short-term debt at June 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 August 12, 1999, availability under the Company's revolving line of credit totaled $1,825,000 before outstanding checks of $1,356,000 were deducted. 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, -21- 23 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. In May 1999, a covenant related to the maintenance of net working capital was amended. 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 December 31, 1999. 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 $38,129,000 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. The Company may attempt to refinance these obligations (and possibly other indebtedness that has later maturity dates) by issuing new debt securities in the private or public market. If, for any reason, the Company is not able to, or determines not to, sell such debt securities, the Company may, in the alternative, attempt to extend the maturity dates of its existing debt securities or to exchange new debt securities that have maturity dates later than 2000 for existing debt securities that mature in 2000. The Company's ability to refinance, extend, or exchange these securities on or before their maturity dates will depend on many factors, including, but not limited to, conditions in the market for non-investment grade debt. Accordingly, there can be no assurance that the Company will be successful in refinancing, extending, or exchanging such securities. In the event that the Company is not successful in refinancing, extending, or exchanging 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 these obligations on or before their maturity dates. The Company has commenced discussions with investment banking firms relating to the issuance of new debt securities to refinance substantially all of the Company's existing debt. There can be no assurance that the Company will undertake such an offering, or that any such offering will be successful. If a public offering of securities is made, such offering will be made only by means of a prospectus. If a private offering of securities is made, the securities offered will not be registered under the Securities Act -22- 24 of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. 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 June 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 94% 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. In spite of such assurances, the Company cannot guarantee that all of its 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 June 30, 1999, approximately $350,000 has been spent to assess, modify, -23- 25 or replace non-compliant systems and that an additional $300,000 will be spent during the six months ending December 31, 1999, to modify or replace non-compliant systems. 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 June 30, 1999, is set forth in the table below:
------------------------------------------------------------------------------------------- RESOLUTION PHASES ------------------------------------------------------------------------------------------- ASSESSMENT REMEDIATION TESTING IMPLEMENTATION - --------------------------------------------------------------------------------------------------------------------- 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 94% 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 - ---------------------------------------------------------------------------------------------------------------------
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 affect on the Company's business, revenues and results of operations. Furthermore, if for any reason the Company or any of its major trading partners fail to complete appropriate remediation programs or fail to complete remediation -24- 26 programs on a timely basis, such failure could have a material adverse effect on the Company's business, revenues and results of operations. 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 June 30, 1999, the Company had $51,228,000 of outstanding floating rate debt at interest rates of prime plus 0.25% and the London Inter-bank Offered Rate ("LIBOR") plus 2.75%. 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 June 30, 1999, the Company had $45,051,000 of fixed rate long-term debt outstanding with a weighted-average interest rate of 11.78%, of which $38,129,000 becomes due during the first and second quarters of 2000. The Company may attempt to refinance these obligations by issuing new debt securities in the private or public market. If, for any reason, the Company is unable to sell such debt securities, the Company may, in the alternative, attempt to extend the maturity dates of its existing debt securities or to exchange new debt securities that have maturity dates later than 2000 for existing debt securities that mature in 2000. The rate of interest at which the Company may be able to refinance, extend, or exchange the securities coming due during the first and second quarters of 2000 will depend on many factors, including, but not limited to, the rate of interest for non-investment grade debt, and may be 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- 27 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Stockholders of the Company was held on May 18, 1999. (b) The matters voted upon at the Annual Meeting and the results of the voting on each matter are set forth below: (i) A proposal to elect four directors (Messrs. William B. Conner, Warren Delano, Kenneth I. Greenstein, and Michael A. Lubin). Mr. Conner: Votes for Mr. Conner 3,934,344 Votes withheld from Mr. Conner 17,819 Mr. Delano: Votes for Mr. Delano 3,933,924 Votes withheld from Mr. Delano 18,239 Mr. Greenstein: Votes for Mr. Greenstein 3,934,344 Votes withheld from Mr. Greenstein 17,819 Mr. Lubin: Votes for Mr. Lubin 3,933,924 Votes withheld from Mr. Lubin 18,239 (ii) The ratification of Ernst & Young LLP as independent auditors of the Company for the year ending December 31, 1999. Votes for Ernst & Young LLP 3,946,473 Votes against Ernst & Young LLP 2,291 Abstentions 3,399 There were no broker non-votes in respect of the foregoing matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The following exhibits are filed herewith: 10-1 Promissory Note dated July 29, 1999, between the Company and The CIT Group/Equipment Financing, Inc. 10-2 New Equipment Note dated July 30, 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 second quarter of 1999. -26- 28 LEXINGTON PRECISION CORPORATION FORM 10-Q JUNE 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) August 13, 1999 By: /s/ Michael A. Lubin - --------------- --------------------------- Date Michael A. Lubin Chairman of the Board August 13, 1999 By: /s/ Warren Delano - --------------- --------------------------- Date Warren Delano President August 13, 1999 By: /s/ Dennis J. Welhouse - --------------- ----------------------- Date Dennis J. Welhouse Senior Vice President and Chief Financial Officer -27- 29
EXHIBIT INDEX Exhibit Number Exhibit Location ------ ------- -------- 10-1 Promissory Note dated July 29, 1999, Filed with this Form 10-Q between the Company and The CIT Group/Equipment Financing, Inc. 10-2 New Equipment Note dated July 30, 1999, Filed with this Form 10-Q between Lexington Rubber Group, Inc. and Congress Financial Corporation 27-1 Financial Data Schedule Filed with this Form 10-Q
EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10-1 PROMISSORY NOTE New York, New York $450,000.00 July 29, 1999 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 FOUR HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($450,000.00) in sixty (60) consecutive monthly installments, commencing on SEPTEMBER 1, 1999 with the following installments on the same day of each month thereafter until payment in full of this Note. The monthly installments shall be level payments of principal each in the amount of $7,500.00. Debtor shall pay interest together with 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 then 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 or 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 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 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 IN 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 as 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 in 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-10.2 3 EXHIBIT 10.2 1 NEW EQUIPMENT TERM NOTE ----------------------- $845,000 July 30, 1999 FOR VALUE RECEIVED, LEXINGTON RUBBER GROUP, INC., formerly known as Lexington Components, Inc., a Delaware corporation (the "Debtor"), hereby unconditionally promises to pay to the order of CONGRESS FINANCIAL CORPORATION, a Delaware corporation, as successor by merger to Congress Financial Corporation, a California corporation (the "Payee"), at the offices of Payee at 1133 Avenue of the Americas, New York, New York 10036, or at such other place as the Payee or any holder hereof may from time to time designate, the principal sum of EIGHT HUNDRED FORTY-FIVE THOUSAND DOLLARS ($845,000) in lawful money of the United States of America and in immediately available funds, in eighty-four (84) consecutive monthly installments (or earlier as hereinafter referred to) on the first day of each month commencing September 1, 1999, of which the first eighty-three (83) installments shall each be in the amount of TEN THOUSAND ONE HUNDRED DOLLARS ($10,100), and the last (i.e. eighty-fourth (84th)) installment shall be in the amount of the entire unpaid balance of this Note. Debtor hereby further promises to pay interest to the order of Payee on the unpaid principal balance hereof at the Interest Rate. Such interest shall be paid in like money at said office or place from the date hereof, commencing on the first day of the month next following the date hereof, and on the first day of each month thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and during the continuance of an Event of Default or following the effective date of termination or non-renewal of the Financing Agreements shall be payable upon demand. For purposes hereof, (a) the term "Interest Rate" shall mean, as to Prime Rate Loans, a rate of one-quarter of one (1/4%) percent per annum in excess of the Prime Rate, and as to Eurodollar Rate Loans, a rate of two and three-quarters (2 3/4%) percent per annum in excess of the Adjusted Eurodollar Rate; PROVIDED, THAT, at Payee's option, the Interest Rate shall mean a rate of two and one-quarter (2 1/4%) percent per annum in excess of the Prime Rate as to Prime Rate Loans and a rate of four and three-quarters (4 3/4%) percent per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, upon and during the continuance of an Event of Default or following the effective date of termination or non-renewal of the Financing Agreements, and (b) the term "Prime Rate" shall mean the rate from time to time publicly announced by First Union National Bank, or its successors, as its prime rate, whether or not such announced rate is the best rate available at such bank. Unless otherwise defined herein, all 2 capitalized terms used herein shall have the meanings assigned thereto in the Accounts Agreement (as hereinafter defined) and the other Financing Agreements. The Interest Rate payable hereunder as to Prime Rate Loans shall increase or decrease by an amount equal to each increase or decrease, respectively, in such Prime Rate, effective on the first day of the month after any change in such Prime Rate, based on the Prime Rate in effect on the last day of the month in which any such change occurs. Interest shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. In no event shall the interest charged hereunder exceed the maximum permitted under the laws of the State of New York or other applicable law. This Note is issued pursuant to the terms and provisions of the letter agreement re: Amendment to Financing Agreements, dated as of March 11, 1997 between Debtor and Payee, as amended by the letter agreement re: Amendment to Financing Agreements, dated October 20, 1998, between Debtor and Payee (collectively, the "Amendment") to evidence a "New Equipment Term Loan" (as defined in the New Equipment Term Loan Agreement as referred to in and as modified by the Amendment) made by Payee to Debtor. This Note is secured by the "Collateral" described in the Accounts Financing Agreement [Security Agreement], dated January 11, 1990, by and between Payee and Debtor, as amended (the "Accounts Agreement") and any agreement, document or instrument now or at any time hereafter executed and/or delivered in connection therewith or related thereto (the foregoing, as the same now exist or may hereafter be amended, modified, supplemented, renewed, extended, restated or replaced, are hereinafter collectively referred to as the "Financing Agreements") and is entitled to all of the benefits and rights thereof and of the Financing Agreements. At the time any payment is due hereunder, at its option, Payee may charge the amount thereof to any account of Debtor maintained by Payee. If any principal or interest payment is not made when due hereunder, and such failure shall continue for three (3) days, or if any other Event of Default (as defined in the Accounts Agreement) shall occur for any reason, or if the Financing Agreements shall be terminated or not renewed for any reason whatsoever, then and in any such event, in addition to all rights and remedies of Payee under the Financing Agreements, applicable law or otherwise, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively and concurrently, Payee may, at its option, declare any or all of Debtor's obligations, liabilities and indebtedness owing to Payee under the Financing Agreements (the "Obligations"), including, without limitation, all amounts owing under this Note, to be due and payable, whereupon the then unpaid balance hereof together with all interest accrued thereon, shall forthwith become due and payable, together with interest accruing thereafter at the then applicable rate stated above until the indebtedness evidenced by this Note is paid in full, plus the costs and expenses of collection hereof, including, but not limited to, reasonable attorneys' fees. Debtor (i) waives diligence, demand, presentment, protest and notice of any kind, (ii) agrees that it will not be necessary for any holder hereof to first institute suit in order to enforce -2- 3 payment of this Note and (iii) consents to any one or more extensions or postponements of time of payment, release, surrender or substitution of collateral security, or forbearance or other indulgence, without notice or consent. Upon the occurrence of any Event of Default and during the continuance thereof, Payee shall have the right, but not the obligation to setoff against this Note all money owed by Payee to Debtor. Payee shall not be required to resort to any Collateral for payment, but may proceed against Debtor and any guarantors or endorsers hereof in such order and manner as Payee may choose. None of the rights of Payee shall be waived or diminished by any failure or delay in the exercise thereof. Debtor hereby waives the right to a trial by jury and all rights of setoff and rights to interpose counterclaims and cross-claims in any litigation or proceeding arising in connection with this Note, the Accounts Agreement, the other Financing Agreements, the Obligations or the Collateral, other than compulsory counterclaims, the non-assertion of which would result in a permanent waiver. Debtor hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of the State of New York and of the United States District Court for the Southern District of New York for all purposes in connection with any action or proceeding arising out of or relating to this Note, the Accounts Agreement, the other Financing Agreements, the Obligations or the Collateral and further consents that any process or notice of motion or other application to said Courts or any judge thereof, or any notice in connection with any proceeding hereunder may be served (i) inside or outside the State of New York by registered or certified mail, return receipt requested, and service or notice so served shall be deemed complete five (5) days after the same shall have been posted or (ii) in such other manner as may be permissible under the rules of said Courts. Within thirty (30) days after such mailing, Debtor shall appear in answer to such process or notice of motion or other application to said Courts, failing which Debtor shall be deemed in default and judgment may be entered by Payee against Debtor for the amount of the claim and other relief requested therein. The execution and delivery of this Note has been authorized by the Board of Directors of Debtor. This Note, the other Obligations and the Collateral shall be governed by and construed in accordance with the laws of the State of New York and shall be binding upon the successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the Payee or the holder hereof. -3- 4 Whenever used herein, the terms "Debtor" and "Payee" shall be deemed to include their respective successors and assigns. LEXINGTON RUBBER GROUP, INC. ATTEST: By: Michael A. Lubin ------------------------------ Carly Strelzik - ----------------------- Assistant Secretary Title: Chairman --------------------------- [Corporate Seal] -4- EX-27 4 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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 309 0 20,953 0 9,906 35,309 116,380 54,576 110,297 82,855 32,647 375 0 1,087 (8,904) 110,297 70,538 70,538 59,095 59,095 0 0 4,750 370 92 278 0 1,371 0 1,649 .38 .38
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