##### Table of Contents



FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 forthe Year Ended December 31, 2004oro
    
    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. Employerincorporation or organization)
    
    Identification No.)40 East 52nd Street, New York, NY
    
    10022(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (212) 319-4657   Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 par value
(Title of Class) 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. þ o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of
the Act). o þ
 The aggregate market value of the registrants common stock, $0.25 par value per share, held
by non-affiliates of the registrant, as of March 18, 2005, was approximately $996,000. The number of shares of common stock outstanding as of March 18, 2005, was 4,931,767. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants proxy statement to be issued in connection with its 2005 Annual
Meeting of Stockholders (the Proxy Statement) are incorporated by reference into Part III. Only
those portions of the Proxy Statement which are specifically incorporated by reference are deemed
filed as part of this report on Form 10-K.




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LEXINGTON PRECISION CORPORATION Annual Report on Form 10-K Table of Contents PagePART IItem 1. Business
    
    
    1Item 2. Properties
    
    
    5Item 3. Legal Proceedings
    
    
    5Item 4. Submission of Matters to a Vote of Security Holders
    
    
    6PART IIItem 5. Market for Our Common Stock and Other Stockholder Matters
    
    
    7Item 6. Selected Financial Data
    
    
    8Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 8. Financial Statements and Supplementary Data
    
    
    31Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    63Item 9A. Controls and Procedures
    
    
    63Item 9B. Other Information
    
    
    63PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    64Item 11. Executive Compensation
    
    
    64Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    64Item 13. Certain Relationships and Related Transactions
    
    
    64Item 14. Principal Accountant Fees and Services
    
    
    64PART IVItem 15. Financial Statements, Financial Statement Schedules, Exhibits and Reports on Form 8-K
    
    
    65EX-10.7 Description of 2004 Compensation ArrangementEX-21.1 SubsidiariesEX-31.1 Certification 302 - ChairmanEX-31.2 Certification 302 - PresidentEX-31.3 Certification 302 - CFOEX-32.1 Certification 906 - ChairmanEX-32.2 Certification 906 - PresidentEX-32.3 Certification 906 - CFO




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PART I 
 Item 1. BUSINESS Our company was incorporated in Delaware in 1966. Substantially all of our business is
conducted in the continental United States. Through our two operating segments, the Rubber Group
and the Metals Group, we manufacture rubber and metal components that are sold to other
manufacturers. In 2004, net sales of the Rubber Group totaled $99,565,000, or 90.2% of our consolidated net
sales. The Rubber Group manufactures connector seals used in automotive wiring systems and
insulators used in automotive ignition wire sets. We believe that we are the leading manufacturer
of these types of components in North America. During 2004, sales to automotive customers
represented 89.2% of the total net sales of the Rubber Group. The Rubber Group also manufactures
molded rubber components used in a variety of medical devices, such as drug delivery systems and
syringes. In 2004, net sales from continuing operations of the Metals Group totaled $10,788,000, or 9.8%
of our consolidated net sales. The Metals Group manufactures machined components from aluminum,
brass, and steel bars. During 2004, sales to automotive customers represented 84.7% of the total
net sales of the Metals Group. During the third quarter of 2004, we committed to a plan to
discontinue the operations of the die casting division, which was one of two operating units within
our Metals Group segment. In this Form 10-K, the die casting division is reported as discontinued
operations wherever appropriate. For more information about the closing of the die casting
division, please refer to Managements Discussion and Analysis of Financial Condition and Results
of Operations in Part II, Item 7, and to Note 14, Discontinued Operations, to our consolidated
financial statements in Part II,
Item 8. Financial data and other information about our operating segments can be found in Note 9,
Segments, to our consolidated financial statements in Part II, Item 8. Principal End-Uses for Our Products The following table summarizes our net sales from continuing operations during 2004, 2003, and
2002, by the type of product in which our components were utilized (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Automobiles and trucks
    
    $
    97,902
    
    
    
    88.7
    %
    
    $
    97,146
    
    
    
    85.8
    %
    
    $
    96,458
    
    
    
    85.9
    %Medical devices
    
    
    10,568
    
    
    
    9.6
    
    
    
    12,334
    
    
    
    10.9
    
    
    
    11,705
    
    
    
    10.4Other
    
    
    1,883
    
    
    
    1.7
    
    
    
    3,751
    
    
    
    3.3
    
    
    
    4,200
    
    
    
    3.7$
    110,353
    
    
    
    100.0
    %
    
    $
    113,231
    
    
    
    100.0
    %
    
    $
    112,363
    
    
    
    100.0
    %
 - 1 -




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The following table summarizes net sales of the Rubber Group and net sales from continuing
operations of the Metals Group during 2004, 2003, and 2002, by the type of product in which each
segments components were utilized (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Rubber Group:Automobiles and trucks
    
    $
    88,764
    
    
    
    89.2
    %
    
    $
    89,642
    
    
    
    86.8
    %
    
    $
    86,345
    
    
    
    87.3
    %Medical devices
    
    
    10,568
    
    
    
    10.6
    
    
    
    12,334
    
    
    
    11.9
    
    
    
    11,705
    
    
    
    11.9Other
    
    
    233
    
    
    
    0.2
    
    
    
    1,267
    
    
    
    1.3
    
    
    
    830
    
    
    
    0.8$
    99,565
    
    
    
    100.0
    %
    
    $
    103,243
    
    
    
    100.0
    %
    
    $
    98,880
    
    
    
    100.0
    %Metals Group:Automobiles and trucks
    
    $
    9,138
    
    
    
    84.7
    %
    
    $
    7,504
    
    
    
    75.1
    %
    
    $
    10,113
    
    
    
    75.0
    %Industrial equipment
    
    
    313
    
    
    
    2.9
    
    
    
    428
    
    
    
    4.3
    
    
    
    954
    
    
    
    7.1Other
    
    
    1,337
    
    
    
    12.4
    
    
    
    2,056
    
    
    
    20.6
    
    
    
    2,416
    
    
    
    17.9$
    10,788
    
    
    
    100.0
    %
    
    $
    9,988
    
    
    
    100.0
    %
    
    $
    13,483
    
    
    
    100.0
    %
 Major Customers Our largest customer is Delphi Corporation. During 2004, 2003, and 2002, our net sales to
Delphi totaled $23,413,000, $24,591,000, and $25,181,000, which represented 21.2%, 21.7%, and
22.4%, respectively, of our net sales. Approximately 74.4% of the products we sold to Delphi during
2004 were covered by a supply contract that was restructured on November 16, 2004, and is now
scheduled to expire on December 31, 2009. For more information about the supply contract, please
refer to Managements Discussion and Analysis of Financial Condition and Results of Operations in
Part II, Item 7. During 2004 and 2003, net sales to General Cable Corporation totaled $11,636,000
and $11,801,000 or 10.5% and 10.4%, respectively, of our consolidated net sales, and 11.7% and
11.4%, respectively, of the Rubber Groups net sales. No other customer accounted for more than 10%
of our net sales during 2004, 2003, or 2002. Loss of a significant amount of business from Delphi,
General Cable, or any of our other large customers could have a material adverse effect on our
results of operations if that business were not replaced by additional business from existing or
new customers. In addition, our results of operations could be materially adversely affected if
Delphi, General Cable, or any of our other large customers experience financial difficulties that
cause them to delay or fail to make payments for goods sold to them. Marketing and Sales Our marketing and sales effort is carried out by management personnel and account managers. Raw Materials Our principal raw materials are silicone and organic rubber compounds and aluminum, steel, and
brass bars. Aluminum ingots are the principal raw material of our discontinued die casting
division. For a number of years, we have generally had access to adequate quantities of each of our
principal raw materials from several major suppliers, at stable or declining prices; however, over
the past year, we have
experienced tightening supplies and increasing prices for most of our principal raw materials. In - 2 -




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particular, we have experienced significant increases in the prices of organic rubber and steel,
and we anticipate that there may be further significant increases in the prices of these
commodities. We have been generally successful in passing through to our customers increases in the price
of steel, although price increases to our customers have generally lagged behind the price
increases from our suppliers. We have not generally passed through to our customers increases in
organic rubber prices; however, we are presently considering what actions we will take with respect
to these price increases. To date, we have not experienced any disruption in our production as a result of raw material
shortages; however, there can be no assurance that we will not experience such disruptions in the
future. Patents and Trademarks We do not currently hold any patents, trademarks, or licenses that we consider to be material
to the successful operation of our business. Seasonal Variations Our business generally is not subject to significant seasonal variation; however, we generally
experience decreased sales during the third calendar quarter of each year, due to shutdowns of our
customers plants in July as a result of vacations and model-year changeovers, and during the
fourth calendar quarter of each year, due to shutdowns of our customers plants for vacations and
holidays in December. Backlog Sales of our products are made pursuant to a variety of arrangements and practices. Our
customers regularly revise release schedules to correspond to their own production requirements. We
believe that the aggregate value of scheduled releases outstanding on our books at any time cannot
be considered firm backlog because those releases may be revised at any time. We also believe that
increases or decreases in the aggregate value of scheduled releases are not necessarily indicative
of any trend in our net sales. Competition The markets we compete in are characterized by intense price competition and increasing
customer requirements for quality and service. We compete for business primarily on the basis of
quality, service, engineering capability, and price. We encounter substantial competition from a
large number of domestic and foreign based manufacturing companies. Our competitors range from
small and medium-sized specialized firms to large diversified companies, many of which have
resources substantially greater than ours. Additionally, some of our customers have internal
manufacturing operations that compete with us. Research and Development During 2004, 2003, and 2002, we spent approximately $991,000, $1,168,000, and $924,000,
respectively, on our research and development activities, which are primarily related to improving
our manufacturing processes in order to reduce the cost and increase the quality of our products. - 3 -




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Product Liability Risks We are subject to potential product liability risks inherent in the manufacture and sale of
components. Although there currently are no product liability claims against us, we cannot assure
you that any future claims will not have a material adverse effect upon our business, financial
position, or results of operations. Although we maintain insurance coverage for product liability,
we cannot assure you that, in the event of a claim, the insurance coverage would apply or that, in
the event of an award arising out of a claim, the amount of any applicable insurance coverage would
be sufficient to satisfy the award. Environmental Compliance Our operations are subject to numerous laws and regulations controlling the discharge of
materials into the environment or otherwise relating to the protection of the environment. Although
we make expenditures relating to the protection of the environment, compliance with environmental
laws and regulations has not had a significant impact on our capital spending requirements, earnings, or
competitive position. We cannot assure you that changes in environmental laws and regulations, or
in the interpretation or enforcement of those laws and regulations, will not require material
expenditures in the future. Employees We believe that our employee relations are generally good. The following table shows the
number of employees at our continuing operations at December 31, 2004, 2003, and 2002. December 312004
    
    
    2003
    
    
    2002Rubber Group
    
    
    863
    
    
    
    904
    
    
    
    876Metals Group
    
    
    108
    
    
    
    98
    
    
    
    132Corporate Office
    
    
    7
    
    
    
    8
    
    
    
    7978
    
    
    
    1,010
    
    
    
    1,015
 At December 31, 2004, 2003 and 2002, employees at the Rubber Group included 340, 322, and 301
hourly workers at two plant locations that were subject to collective bargaining agreements, which
expire on October 21, 2007, and December 11, 2008, respectively. The number of employees at our
discontinued die casting division totaled 86, 91, and 128 at December 31, 2004, 2003, and 2002,
respectively. Filings with the Securities and Exchange Commission We do not currently maintain an internet website and therefore we do not make available
through a website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K, or any amendments to those reports. We will furnish free of charge, upon
written request to our President at 40 East 52nd Street, New York, NY 10022, a paper
copy of the reports that we file with the Securities and Exchange Commission (the Commission).
The reports have been filed electronically with the Commission and are accessible on the
Commissions website at www.sec.gov. - 4 -




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Item 2. PROPERTIES The following table shows the location and square footage of our manufacturing facilities of
continuing operations at December 31, 2004: SquareLocation
    
    FeetRubber Group:Jasper, Georgia
    
    
    100,000LaGrange, Georgia
    
    
    85,000North Canton, Ohio
    
    
    42,000Vienna, Ohio
    
    
    64,000Rock Hill, South Carolina
    
    
    61,000Total Rubber Group
    
    
    352,000Metals Group:Casa Grande, Arizona (closed)
    
    
    64,000Rochester, New York
    
    
    60,000Total Metals Group
    
    
    124,000Total Company
    
    
    476,000
 All of our facilities are encumbered by mortgages. All of our plants are general manufacturing
facilities suitable for our operations. We believe that our facilities are adequate to meet our
current operating needs. Our manufacturing facility in Casa Grande, Arizona, was closed in 2002 and is currently
under contract for sale at a price of $2,750,000; the carrying value of the facility was $1,587,000
at December 31, 2004. The closing of the sale is expected during the second quarter of 2005;
however, the buyer has the right to terminate the contract prior to closing, in which case we will
retain a $100,000 deposit. The manufacturing facility utilized by our discontinued die casting
division is located in Lakewood, New York and has 103,000 square feet of space. We occupy, in the aggregate, 5,000 square feet of office space for corporate executive and
administrative purposes. We lease an office in Cleveland, Ohio, and reimburse an affiliate for the
cost of leasing an office in New York City. 
 Item 3. LEGAL PROCEEDINGS We are subject to various claims and legal proceedings covering a wide range of matters that
arise in the ordinary course of our business activities. It is our policy to record accruals for
claims and legal proceedings when we consider a loss to be probable and we can reasonably estimate
the amount of that loss. The various actions to which we are or may in the future be a party are at
various stages of completion. Although we cannot assure you as to the outcome of existing or
potential litigation, we currently believe, based upon the information currently available to us,
that the outcome of those actions will not have a material adverse effect upon our financial
position. - 5 -




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of security holders during the fourth quarter of 2004. - 6 -




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PART II 
 Item 5. MARKET FOR OUR COMMON STOCK AND OTHER STOCKHOLDER MATTERS Our common stock is traded in the over-the-counter market. At March 22, 2005, there were
approximately 738 holders of record of our common stock. Trading in shares of our common stock is
limited. During 2004 and 2003, trading data for our stock was available on the OTC Bulletin Board
operated by the National Association of Securities Dealers, Inc. (NASD). The following table sets
forth prices at which transactions in our common stock were reported on the OTC Bulletin Board.
Additional trading data can be found at the NASD website, www.nasdaq.com. Years Ended December 312004
    
    
    2003High
    
    
    Low
    
    
    High
    
    
    LowFirst quarter
    
    $
    0.85
    
    
    $
    0.61
    
    
    $
    1.01
    
    
    $
    0.53Second quarter
    
    $
    0.74
    
    
    $
    0.61
    
    
    $
    1.01
    
    
    $
    0.55Third quarter
    
    $
    0.68
    
    
    $
    0.36
    
    
    $
    0.65
    
    
    $
    0.40Fourth quarter
    
    $
    0.70
    
    
    $
    0.36
    
    
    $
    0.90
    
    
    $
    0.50
 We are not able to determine whether retail markups, markdowns, or commissions were included
in the above prices. We believe that ten brokerage firms currently make a market in our common
stock, although both bid and asked quotations may be limited. We have not paid dividends on our common stock since 1979, and we have no current plans to
reinstate the payment of dividends. In addition, agreements defining the right of holders of our
debt currently restrict us from paying cash dividends on our common stock. We are currently in
arrears with respect to the redemption of 2,250 shares of our $8 Cumulative Convertible Preferred
Stock, Series B (the Series B Preferred Stock), for an aggregate redemption price of $450,000,
representing the scheduled redemptions for 2000 through 2004. - 7 -




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Item 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data, including the
reconciliation of income (loss) from continuing operations to
earnings from continuing operations before other income
(expense), interest, taxes, depreciation, and amortization (EBITDA),
for each of the years in the five-year period ended December 31, 2004 (dollar amounts in thousands,
except per share amounts). The financial data has been derived from our consolidated financial
statements, which have been audited by Ernst & Young LLP, independent certified public accountants.
This information is not necessarily indicative of the results of future operations and should be
read in conjunction with, and is qualified by, Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II, Item 7, and our consolidated financial statements
in Part II, Item 8. Years Ended December 31Summary of operations:
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net sales
    
    $
    110,353
    
    
    $
    113,231
    
    
    $
    112,363
    
    
    $
    113,377
    
    
    $
    126,066Cost of sales
    
    
    98,304
    
    
    
    99,773
    
    
    
    97,571
    
    
    
    96,880
    
    
    
    108,739Gross profit
    
    
    12,049
    
    
    
    13,458
    
    
    
    14,792
    
    
    
    16,497
    
    
    
    17,327Selling and administrative expenses
    
    
    7,383
    
    
    
    7,904
    
    
    
    7,981
    
    
    
    8,863
    
    
    
    9,786Impairment of goodwill
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,047
    
    
    
    Plant closure costs
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    
    
    
    
    Income from insurance company demutualization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,274
    )
    
    
    Income from operations
    
    
    4,666
    
    
    
    5,507
    
    
    
    6,202
    
    
    
    6,861
    
    
    
    7,541Other income (expense):Interest expense
    
    
    (8,662
    )
    
    
    (6,980
    )
    
    
    (7,158
    )
    
    
    (8,445
    )
    
    
    (9,797
    )Gain on sale of securities
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    Gain on repurchase of debt
    
    
    8,598
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing
operations
before income tax
    
    
    4,602
    
    
    
    (1,473
    )
    
    
    (708
    )
    
    
    (1,584
    )
    
    
    (2,256
    )Income tax provision (benefit)
    
    
    (196
    )
    
    
    76
    
    
    
    (538
    )
    
    
    80
    
    
    
    (161
    )Income (loss) from continuing
operations
    
    
    4,798
    
    
    
    (1,549
    )
    
    
    (170
    )
    
    
    (1,664
    )
    
    
    (2,095
    )Loss from discontinued operations
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )
    
    
    (487
    )
    
    
    (1,004
    )Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    (247
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    1,590
    
    
    $
    (6,449
    )
    
    $
    (1,567
    )
    
    $
    (2,151
    )
    
    $
    (3,099
    )Net income (loss) per diluted common share
    
    $
    0.32
    
    
    $
    (1.36
    )
    
    $
    (0.32
    )
    
    $
    (0.45
    )
    
    $
    (0.65
    )
 (continued on next page) - 8 -




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Years Ended December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Other data (continuing operations):Net cash provided by operating activities of
continuing operations
    
    $
    7,068
    
    
    $
    13,470
    
    
    $
    14,766
    
    
    $
    15,915
    
    
    $
    21,464Reconciliation of income (loss) from continuing
operations to EBITDA from continuing
operations:
    
    $
    4,798
    
    
    $
    (1,549
    )
    
    $
    (170
    )
    
    $
    (1,664
    )
    
    $
    (2,095
    )Adjustments:Depreciation and amortization included
in income from continuing operations
    
    
    8,444
    
    
    
    8,955
    
    
    
    10,247
    
    
    
    11,583
    
    
    
    11,602Gain on repurchase of debt
    
    
    (8,598
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    8,662
    
    
    
    6,980
    
    
    
    7,158
    
    
    
    8,445
    
    
    
    9,797Gain on sale of securities
    
    
    
    
    
    
    
    
    
    
    (248
    )
    
    
    
    
    
    
    Income tax expense (benefit)
    
    
    (196
    )
    
    
    76
    
    
    
    (538
    )
    
    
    80
    
    
    
    (161
    )EBITDA from continuing operations (1)
    
    $
    13,110
    
    
    $
    14,462
    
    
    $
    16,449
    
    
    $
    18,444
    
    
    $
    19,143Capital expenditures (2)
    
    $
    6,057
    
    
    $
    5,686
    
    
    $
    4,013
    
    
    $
    5,420
    
    
    $
    12,564
 December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Financial position:Current assets
    
    $
    28,907
    
    
    $
    30,101
    
    
    $
    32,991
    
    
    $
    34,146
    
    
    $
    36,968Current liabilities
    
    
    35,777
    
    
    
    37,687
    
    
    
    101,061
    
    
    
    107,074
    
    
    
    117,147Net working capital deficit
    
    $
    (6,870
    )
    
    $
    (7,586
    )
    
    $
    (68,070
    )
    
    $
    (72,928
    )
    
    $
    (80,179
    )Total assets
    
    $
    78,377
    
    
    $
    83,687
    
    
    $
    92,145
    
    
    $
    99,877
    
    
    $
    110,289Long-term debt, excluding current portion
    
    $
    58,949
    
    
    $
    63,681
    
    
    $
    1,117
    
    
    $
    2,000
    
    
    $
    104Total stockholders deficit
    
    $
    (17,879
    )
    
    $
    (19,492
    )
    
    $
    (13,199
    )
    
    $
    (11,659
    )
    
    $
    (9,536
    )
   (1)
    
    EBITDA is not a measure of performance under U.S. generally accepted accounting
principles and should not be considered in isolation or used as a substitute for income
from operations, net income, net cash provided by operating activities, or other operating
or cash flow statement data prepared in accordance with U.S. generally accepted accounting
principles. We have presented EBITDA here and elsewhere in this Form 10-K because this
measure is used by investors, as well as our management, to evaluate the operating
performance of our business, including its ability to incur and to service debt, and
because it is used by our lenders in setting financial covenants. Our definition of EBITDA
may not be the same as the definition of EBITDA used by other companies.(2)
    
    Includes equipment purchased under capital leases and with seller-provided financing. - 9 -




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##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Some of our statements in this Form 10-K, including this item, are forward-looking
statements. Forward-looking statements usually can be identified by our use of words like
believes, expects, may, will, should, anticipates, estimates, projects, or the
negative thereof. They may be used when we discuss strategy, which typically involves risk and
uncertainty, and they generally are based upon projections and estimates rather than historical
facts and events. Forward-looking statements are subject to a number of risks and uncertainties that could cause
our actual results or performance to be materially different from the future results or performance
expressed in or implied by those statements. Some of those risks and uncertainties are:  
    increases and decreases in business awarded to us by our customers,
    unanticipated price reductions for our products as a result of competition,
    unanticipated operating results,
    changes in the cost of raw materials,
    increases or decreases in capital expenditures,
    changes in economic conditions,
    strength or weakness in the North American automotive market,
    financial difficulties encountered by our customers,
    the filing by one or more of our customers for protection under the
federal bankruptcy code;
    changes in the competitive environment,
    changes in interest rates and the credit and securities markets, and
    labor interruptions at our facilities or at our customers facilities. Because we have substantial borrowings for a company our size and because those borrowings
require us to make substantial interest and principal payments, any negative event may have a
greater adverse effect upon us than it would have upon a company of the same size that has less
debt. Our results of operations for any particular period are not necessarily indicative of the
results to be expected for any one or more succeeding periods. The use of forward-looking statements should
not be regarded as a representation that any of the projections or estimates expressed in or
implied by those forward-looking statements will be realized, and actual results may vary
materially. We cannot assure you that any of the forward-looking statements contained herein will
prove to be accurate. All forward-looking statements are expressly qualified by the discussion
above. - 10 -




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##### Table of Contents



Results of Operations  Comparison of 2004, 2003, and 2002 The following table sets forth our consolidated operating results from continuing operations
for 2004, 2003, and 2002 and the reconciliation of income from operations to earnings before other
income (expense), interest, taxes, depreciation, and amortization (EBITDA) from continuing
operations (dollar amounts in thousands). Unless otherwise indicated, the data set forth below in
this Item 7 relates solely to our continuing operations. Years Ended December 312004
    
    
    2003
    
    
    2002Continuing operations:Net sales
    
    $
    110,353
    
    
    
    100.0
    %
    
    $
    113,231
    
    
    
    100.0
    %
    
    $
    112,363
    
    
    

    100.0
    %Cost of sales
    
    
    98,304
    
    
    
    89.1
    
    
    
    99,773
    
    
    
    88.1
    
    
    
    97,571
    
    
    
    86.8Gross profit
    
    
    12,049
    
    
    
    10.9
    
    
    
    13,458
    
    
    
    11.9
    
    
    
    14,792
    
    
    
    13.2Selling and administrative expenses
    
    
    7,383
    
    
    
    6.7
    
    
    
    7,904
    
    
    
    7.0
    
    
    
    7,981
    
    
    
    7.1Impairment of goodwill (1)
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    Plant closure costs (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    0.6Income from operations
    
    
    4,666
    
    
    
    4.2
    
    
    
    5,507
    
    
    
    4.9
    
    
    
    6,202
    
    
    
    5.5Add back: depreciation and amortization (3)
    
    
    8,444
    
    
    
    7.7
    
    
    
    8,955
    
    
    
    7.9
    
    
    
    10,247
    
    
    
    9.1EBITDA from continuing operations (4)
    
    $
    13,110
    
    
    
    11.9
    %
    
    $
    14,462
    
    
    
    12.8
    %
    
    $
    16,449
    
    
    
    14.6
    %Net cash provided by operating activities of
continuing operations (5)
    
    $
    7,068
    
    
    
    6.3
    %
    
    $
    13,470
    
    
    
    11.9
    %
    
    $
    14,766
    
    
    
    13.1
    %
   (1)
    
    As of October 1, 2003, we performed our annual impairment test of goodwill, which
involved the preparation of a projection of cash flow, discounted to present value, and the
consideration of other factors, and determined that the unamortized goodwill of the Metals
Group was impaired. As a result, we recorded a non-cash, pre-tax impairment charge of
$208,000 to write off the unamortized goodwill of the Metals Group, of which $161,000 was
related to the discontinued operations.(2)
    
    During 2002, we closed our metal machining facility in Casa Grande, Arizona, and
incurred related costs of $609,000. For more information, refer to the discussion of the
results of operations of the Metals Group in this section.(3)
    
    Does not include amortization of deferred financing expenses, which totaled $1,098,000,
$610,000, and $440,000, in 2004, 2003, and 2002, respectively, and which is included in
interest expense in the consolidated financial statements.(4)
    
    EBITDA is not a measure of performance under U.S. generally accepted accounting
principles and should not be considered in isolation or used as a substitute for income
from operations, net income, net cash provided by operating activities, or other operating
or cash flow statement data prepared in accordance with U.S. generally accepted
accounting principles. We have presented EBITDA here and elsewhere in this Form 10-K
because this measure is used by investors, as well as our own management, to evaluate the
operating performance of our business, including its ability to service debt, and because
it is used by our lenders in setting financial covenants. Our definition of EBITDA may not
be the same as the definition of EBITDA used by other companies. - 11 -




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##### Table of Contents



(5)
    
    The calculation of net cash provided by operating activities is detailed in the
consolidated statement of cash flows that is part of our consolidated financial statements
in Part II, Item 8. Our net sales from continuing operations for 2004 were $110,353,000, compared to net
sales from continuing operations of $113,231,000 for 2003, a decrease of $2,878,000, or 2.5%. The
decrease in net sales was principally a result of decreased net sales of rubber components, offset,
in part, by increased net sales of metal components. EBITDA from continuing operations for 2004 was
$13,110,000, or 11.9% of net sales, compared to EBITDA of $14,462,000, or 12.8% of net sales, for
2003. The change in EBITDA reflected reductions in EBITDA of $353,000 at our Rubber Group and
$1,268,000 at our Metals Group. EBITDA from the discontinued operations for 2004 was negative
$2,301,000 compared to negative $3,260,000 for 2003; EBITDA from discontinued operations included
impairment charges of $1,595,000 and $2,588,000, respectively. Net cash provided by operating activities of continuing operations during 2004 totaled
$7,068,000, compared to $13,470,000 for 2003. For more information about net cash provided by our
operating activities, please refer to the consolidated statement of cash flows in Part II, Item 8,
and to our discussion of operating activities under the caption Liquidity and Capital Resources
in this Part II, Item 7. The discussion that follows sets forth our analysis of the operating results of the Rubber
Group, the Metals Group, and the Corporate Office for the years ended December 31, 2004, 2003, and
2002. Rubber Group The Rubber Group manufactures silicone and organic rubber components primarily for automotive
industry customers. During 2004, 2003, and 2002, sales to automotive industry customers represented
89.2%, 86.8%, and 87.3%, respectively, of the Rubber Groups net sales. Any significant reduction
in the level of activity in the automotive industry could have a material adverse effect on the
results of operations of the Rubber Group and on our company as a whole. The three largest customers of the Rubber Group accounted for 44.6%, 45.5%, and 45.6% of the
Rubber Groups net sales during 2004, 2003, and 2002, respectively. Loss of a significant amount of
business from any of the Rubber Groups large customers would have a material adverse effect upon
the Rubber Group and upon our company as a whole if that business were not substantially replaced
by additional business from existing or new customers. Delphi Corporation is the Rubber Groups largest customer. During 2004, 2003, and 2002, the
Rubber Groups net sales to Delphi totaled $23,413,000, $24,150,000, and $24,837,000, respectively,
which represented 23.5%, 23.4%, and 25.1%, respectively, of the Rubber Groups net sales. Net sales
to Delphi of connector seals for automotive wire harnesses totaled $19,802,000, $20,227,000, and
$21,147,000, during 2004, 2003, and 2002, respectively. Since July 2001, substantially all of the
connector seals we sold to Delphi were sold pursuant to a supply agreement that was scheduled to
expire on December 31, 2004. During 2004, Delphi advised us that it planned to insource during 2005, approximately 36
high-volume connector seals that were then being produced by our Lexington Connector Seals
division, and asked us to provide a proposal to continue to manufacture the remaining connector
seals then being supplied to Delphi by our connector seals division. On November 22, 2004, Delphi
and our connector seals division entered into an agreement, pursuant to which Delphi agreed to
purchase from the division 100% of its requirements through December 31, 2009, for all connector
seals not scheduled to be insourced and 100% of its requirements, through various dates in 2005,
for the connector seals scheduled - 12 -




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##### Table of Contents



to be insourced. We estimate that if the 36 connector seals had been in-sourced by Delphi on
January 1, 2004, our net sales and income from operations for 2004 would have been reduced by
approximately $8,624,000 and $840,000, respectively. Pursuant to the agreement, our connector
seals division has received price increases effective January 1, 2005, which are expected to offset
a significant portion of the profit lost due to the in-sourcing. We are currently restructuring the
operations of our connector seals division to reduce expenses and further mitigate the impact of
the reduced volume. The restructuring of our connector seals division will include, among other
things, the closing of one of its existing manufacturing facilities. The following table sets forth the operating results of the Rubber Group for 2004, 2003, and
2002 and the reconciliation of the Rubber Groups income from operations to its EBITDA (dollar
amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    99,565
    
    
    
    100.0
    %
    
    $
    103,243
    
    
    
    100.0
    %
    
    $
    98,880
    
    
    
    100.0
    %Cost of sales
    
    
    85,457
    
    
    
    85.8
    
    
    
    88,667
    
    
    
    85.9
    
    
    
    83,503
    
    
    
    84.4Gross profit
    
    
    14,108
    
    
    
    14.2
    
    
    
    14,576
    
    
    
    14.1
    
    
    
    15,377
    
    
    
    15.6Selling and administrative expenses
    
    
    4,243
    
    
    
    4.3
    
    
    
    4,550
    
    
    
    4.4
    
    
    
    4,612
    
    
    
    4.7Income from operations
    
    
    9,865
    
    
    
    9.9
    
    
    
    10,026
    
    
    
    9.7
    
    
    
    10,765
    
    
    
    10.9Add back: depreciation and
amortization
    
    
    6,929
    
    
    
    7.0
    
    
    
    7,121
    
    
    
    6.9
    
    
    
    7,786
    
    
    
    7.9EBITDA
    
    $
    16,794
    
    
    
    16.9
    %
    
    $
    17,147
    
    
    
    16.6
    %
    
    $
    18,551
    
    
    
    18.8
    %
 During 2004, net sales of the Rubber Group decreased by $3,678,000, or 3.6%, compared to 2003.
The decrease in net sales was primarily due to (1) decreased unit sales of insulators for
automotive ignition wire sets due to reduced demand from original equipment customers, (2) reduced
sales of medical components, and (3) price reductions on certain automotive components, partially
offset by increased net sales of connector seals for automotive wiring systems. Cost of sales as a percentage of net sales remained essentially unchanged at 85.8% of net
sales during 2004, compared to 85.9% of net sales during 2003. Selling and administrative expenses as a percentage of net sales decreased during 2004,
compared to 2003, primarily because of reduced salary expense. During 2004, income from operations totaled $9,865,000, a decrease of $161,000, or 1.6%,
compared to 2003. EBITDA for 2004 was $16,794,000, or 16.9% of net sales, compared to $17,147,000,
or 16.6% of net sales, for 2003. During 2003, net sales of the Rubber Group increased by $4,363,000, or 4.4%, compared to 2002.
The increase in net sales was primarily due to (1) increased unit sales of insulators for
automotive ignition wire sets, which resulted primarily from an increase in the level of activity
in the automotive industry, (2) an increase in our share of business at certain existing customers, and (3), to a lesser
extent, increased sales of components for medical devices, offset, in part, by price reductions on
certain automotive components. - 13 -




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Cost of sales as a percentage of net sales increased during 2003 to 85.9% of net sales from
84.4% of net sales during 2002, primarily due to operational inefficiencies and increased scrap at
our connector seals division, and, to a lesser extent, because of increased operating losses at our
captive tool-making operation, due primarily to reduced tooling orders from our customers. These
increased costs were offset, in part, by reduced depreciation and amortization expenses. Selling and administrative expenses as a percentage of net sales decreased during 2003
compared to 2002, primarily because these expenses are partially fixed in nature. During 2003, income from operations was $10,026,000, a decrease of $739,000, or 6.9%, compared
to 2002. EBITDA for 2003 was $17,147,000, or 16.6% of net sales, compared to $18,551,000, or 18.8%
of net sales, for 2002. Operating results for 2004 and 2003 were adversely affected by less than acceptable operating
results at our connector seals division. The main factors that affected the operating results of
our connector seals division for 2004 and 2003, included:  
    costs for scrap, sorting, and repair, relating to a particular type of connector seal;
    freight costs, which resulted from delivery issues related to those quality problems;
    losses resulting from production problems encountered in the manufacture of
seals from liquid silicone rubber;
    losses resulting from production problems encountered in the manufacture of
automotive door grommets; and
    costs incurred due to the general disruption to our operations as we attempted to
cope with the problems listed above. During the second half of 2003, we initiated a plan to reduce or eliminate operating issues at
the connector seals division. That plan included:  
    upgrading management and supervisory personnel;
    installing and utilizing improved process controllers and centralized
data collection capabilities on molding presses;
    implementing improved manufacturing procedures throughout the
operation;
    installing automated inspection equipment; and
    improving utilization of the divisions enterprise resource planning
software system. During the second and third quarters of 2004, the plan was expanded to include:  
    upgrading certain materials;
    modifying or replacing certain tooling; and
    initiating price increases on selected products. During the fourth quarter of 2004, the plan was further expanded to include:  
    the closing of the connector seals division facility in LaGrange, Georgia, during 2005,
and the relocation of the business remaining in the LaGrange facility to either our
connector seals divisions facility in Vienna, Ohio, or our insulator divisions
facility in Jasper, Georgia. These - 14 -




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##### Table of Contents



actions were taken primarily because of Delphis decision to in-source 36 high-volume
connector seals during 2005, as discussed above. During 2004, the operating profit of our connector seals division, expressed as a percentage
of net sales, improved to 2.6% from 1.7% during 2003. In addition to the price increases that will
become effective in 2005 pursuant to the terms of the restructured contract with Delphi, our
connector seals division has obtained additional price increases on specified components, which we
anticipate will total approximately $475,000 during 2005, net of price reductions scheduled to take
effect during 2005. We believe that the operations improvement plan has begun to positively affect
our profitability and will continue to yield improved profitability as key components of the plan
take effect. Metals Group The continuing operations of the Metals Group machines components from aluminum, brass, and
steel bars. During 2004, 2003, and 2002, net sales to automotive industry customers represented
84.7%, 75.1%, and 75.0%, respectively, of the Metals Groups net sales. Any significant reduction
in the level of activity in the automotive industry could have a material adverse effect on the
results of operations of the Metals Group and on our company as a whole. As discussed in more
detail below, during 2004, we committed to a plan to discontinue the operations of our die casting
division, which was one of two operating units within our Metals Group segment. Accordingly, the
results of operations, net assets, liabilities, and cash flows of the die casting division have
been classified as discontinued operations in this Form 10-K. The three largest customers of the continuing operations of the Metals Group accounted for
61.3%, 40.3%, and 54.7% of the Metals Groups net sales during 2004, 2003, and 2002, respectively.
Loss of a significant amount of business from any of the Metals Groups large customers would have
a material adverse effect upon the Metals Group and upon our company as a whole if that business
were not substantially replaced by additional business from existing or new customers. During 2004, we committed to a plan to discontinue the operations of the die casting division.
In the fourth quarter of 2004, we initiated a program to sell the assets or business of the die
casting division. If a sale of the entire operation does not occur during the first half of 2005,
we plan to close the operations of the die casting division during the second quarter of 2005.
Accordingly, the results of operations, net assets, liabilities, and cash flows of the division
have been classified as discontinued operations in this Form 10-K. - 15 -




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##### Table of Contents



The following table sets forth the operating results of the Metals Groups continuing
operations for 2004, 2003, and 2002 and the reconciliation of the Metals Groups loss from
operations to its EBITDA from continuing operations (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    10,788
    
    
    
    100.0
    %
    
    $
    9,988
    
    
    
    100.0
    %
    
    $
    13,483
    
    
    
    100.0
    %Cost of sales
    
    
    12,847
    
    
    
    119.1
    
    
    
    11,106
    
    
    
    111.2
    
    
    
    14,068
    
    
    
    104.3Gross profit (loss)
    
    
    (2,059
    )
    
    
    (19.1
    )
    
    
    (1,118
    )
    
    
    (11.2
    )
    
    
    (585
    )
    
    
    (4.3
    )Selling and administrative expenses
    
    
    729
    
    
    
    6.8
    
    
    
    675
    
    
    
    6.8
    
    
    
    905
    
    
    
    6.7Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    0.4
    
    
    
    
    
    
    
    Plant closure costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    4.5Loss from operations
    
    
    (2,788
    )
    
    
    (25.9
    )
    
    
    (1,840
    )
    
    
    (18.4
    )
    
    
    (2,099
    )
    
    
    (15.6
    )Add back: depreciation and amortization
    
    
    1,476
    
    
    
    13.7
    
    
    
    1,796
    
    
    
    18.0
    
    
    
    2,408
    
    
    
    17.9EBITDA from continuing operations
    
    $
    (1,312
    )
    
    
    (12.2
    )%
    
    $
    (44
    )
    
    
    (0.4
    )%
    
    $
    309
    
    
    
    2.3
    %
 During 2004, net sales of the continuing operations of the Metals Group increased by $800,000,
or 8.0%, compared to 2003. The increase in net sales resulted from the roll-out of new business
awarded to us during 2003. Cost of sales as a percentage of net sales increased to 119.1% of net sales during 2004 from
111.2% of net sales during 2003, primarily because of increased metal prices that had not yet been
passed on to customers, and higher than anticipated start-up costs on several components recently
awarded to us, offset, in part, by lower depreciation and amortization expenses. During 2004 and
2003, the loss from operations at the Metals Group included losses from operations of $334,000 and
$559,000, respectively, incurred at the Groups idle facility in Casa Grande, Arizona, primarily to
maintain, insure, protect, and depreciate the facility. During 2004, the loss from operations was $2,788,000 compared to a loss from operations of
$1,840,000 during 2003. EBITDA for 2004 was negative $1,312,000, or negative 12.2% of net sales, a
decrease of $1,268,000, compared to 2003. During 2003, net sales of the Metals Group decreased by $3,495,000, or 25.9%, compared to
2002. The decrease was primarily due to the end of the product life of certain components that were
not replaced with sales of new components, and the loss of a high-volume component because the
customer converted the part to a stamped metal component. Cost of sales as a percentage of net sales increased during 2003 to 111.2% of net sales from
104.3% of net sales during 2002, primarily due to the effect of fixed, or partially fixed,
manufacturing expenses during a period of low sales volume, offset, in part, by reduced
depreciation and amortization expenses. Selling and administrative expenses declined 25.4% during 2003 compared to 2002, but increased
as a percentage of net sales because of the reduced sales level. - 16 -




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During 2003, the loss from operations for the Metals Group was $1,840,000, compared to a loss
from operations of $2,099,000 during 2002. Excluding the $47,000 charge for impairment of goodwill
in 2003, and the $609,000 of plant closure costs in 2002, the loss from operations during 2003 was
$1,793,000, compared to a loss from operations of $1,490,000 during 2002, and EBITDA was a negative
$44,000, or negative 0.4% of net sales, compared to positive $309,000, or positive 2.3% of net
sales, for 2002. During the fourth quarter of 2003, we performed our annual impairment test of goodwill, which
involves the preparation of a projection of future cash flow, discounted to present value, and the
consideration of other factors and determined that the unamortized goodwill of the Metals Group was
impaired. As a result, we recorded a non-cash, pre-tax impairment charge of $208,000, to write off
the unamortized goodwill of the Metals Group. Of this amount, $161,000 related to the die casting
division and is included in discontinued operations. The write-down resulted from the deteriorating
operating results of the Metals Group in 2002 and 2003 and a consequent reduction in our
expectations for the future performance of this segment. The charge appears as a separate line item
in our consolidated statement of operations in Part II, Item 8. The following table sets forth certain operating data of the idled Arizona facility for 2004,
2003, and 2002 and the reconciliation of the Arizona facilitys income from operations to its
EBITDA (dollar amounts in thousands). The results of operations of the Arizona facility are
included in the continuing operations of the Metals Group. Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    
    
    
    $
    
    
    
    $
    332Operating loss before nonrecurring charges
    
    $
    (334
    )
    
    $
    (559
    )
    
    $
    (1,290
    )Nonrecurring charges:Plant closure costs:Severance and other employee
termination costs
    
    
    
    
    
    
    
    
    
    
    246Asset relocation costs
    
    
    
    
    
    
    
    
    
    
    209Other costs
    
    
    
    
    
    
    
    
    
    
    154Subtotal
    
    
    
    
    
    
    
    
    
    
    609Operating loss
    
    
    (334
    )
    
    
    (559
    )
    
    
    (1,899
    )Add back: depreciation and amortization
    
    
    127
    
    
    
    200
    
    
    
    527EBITDA
    
    $
    (207
    )
    
    $
    (359
    )
    
    $
    (1,372
    )
 We have entered into a contract to sell the Casa Grande facility, which had a carrying value
of $1,587,000 at December 31, 2004, for $2,750,000. The closing of the sale is scheduled for the
second quarter of 2005; however, the buyer has the right to terminate the contract prior to
closing, in which case we will retain a $100,000 deposit. Discontinued Operations During 2002 and 2003 our die casting division experienced negative gross profit margins. At
December 31, 2003, we reassessed the divisions business and reduced our overall expectations for
the divisions future financial performance. As a result, we reviewed the long-lived assets of the
die casting division for impairment as of December 31, 2003, under the provisions of Statement of
Financial Accounting Standards No.144, Accounting for Impairment or Disposal of Long-Lived Assets - 17 -




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##### Table of Contents



(FAS 144), and determined that the undiscounted, projected cash flow of the division was less
than the carrying value of its long-lived assets. Based upon this review, we concluded that the
divisions long-lived assets, which had a carrying value of $7,131,000, were impaired and we wrote
them down to their estimated fair value of $4,704,000, recording a non-cash, pre-tax impairment
charge of $2,427,000 at December 31, 2003. Fair value was based primarily on independent appraisals
of the long-lived assets. In September 2004, as a result of continued poor operating performance and reduced
expectations for the divisions future financial performance, we committed to a plan to discontinue
the operations of the die casting division. In the fourth quarter of 2004, we initiated a program
to sell the assets or business of the die casting division. If a sale of the entire business does
not occur during the first half of 2005, we plan to close the operations of the die casting
division during the second quarter of 2005, after fulfilling certain agreed-upon customer purchase
orders. Accordingly, pursuant to FAS 144, the carrying value of the assets of the die casting
division have been adjusted to managements estimate of the fair value of such assets, which
approximates the projected proceeds to be realized on the disposition of the assets, net of
estimated selling costs. As a result, we recognized a pretax impairment charge of $1,595,000 during
2004. In accordance with Financial Accounting Standards Board Emerging Issue Task force Abstract No.
87-24, Allocation of Interest to Discontinued Operations (EITF 87-24), we have allocated
interest to the discontinued operations based on the debt that would be required to be repaid using
managements estimate of the proceeds to be realized on the anticipated sale of the assets of the
die casting division. No allocation was made to the die casting division for any other interest
expense or for any corporate office expenses. Interest expense allocated to the die casting
division totaled $241,000, $69,000, and $62,000 for 2004, 2003, and 2002, respectively. The following table summarizes certain operating data of the die casting division for 2004,
2003, and 2002 (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    9,096
    
    
    $
    8,385
    
    
    $
    12,489Loss from operations before asset impairment charge
    
    $
    (1,372
    )
    
    $
    (1,996
    )
    
    $
    (1,335
    )Impairment of long-lived assets
    
    
    (1,595
    )
    
    
    (2,427
    )
    
    
    Impairment of goodwill
    
    
    
    
    
    
    (161
    )
    
    
    Loss from operations of discontinued operations
    
    
    (2,967
    )
    
    
    (4,584
    )
    
    
    (1,335
    )Allocated interest expense
    
    
    241
    
    
    
    69
    
    
    
    62Loss before income tax
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Add back: depreciation and amortization
    
    
    666
    
    
    
    1,324
    
    
    
    1,618interest expense
    
    
    241
    
    
    
    69
    
    
    
    62EBITDA from discontinued operations
    
    $
    (2,301
    )
    
    $
    (3,260
    )
    
    $
    283
 - 18 -




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The following table sets forth the assets and liabilities of the die casting division in our
consolidated balance sheets at December 31, 2004 and 2003 (dollar amounts in thousands): December 31,2004
    
    
    2003Assets:Current assets:Cash
    
    $
    
    
    
    $
    11Accounts receivable, net
    
    
    1,056
    
    
    
    1,394Inventories, net
    
    
    695
    
    
    
    894Prepaid expenses and other current assets
    
    
    240
    
    
    
    388Other assets, net
    
    
    31
    
    
    
    267Current assets
    
    
    2,022
    
    
    
    2,954Plant and equipment, net (1)
    
    
    2,754
    
    
    
    4,438Assets of discontinued operations
    
    $
    4,776
    
    
    $
    7,392Liabilities(2):Current liabilities:Accounts payable
    
    $
    615
    
    
    $
    516Accrued expenses
    
    
    179
    
    
    
    166Other liabilities
    
    
    
    
    
    
    93Liabilities of discontinued operations
    
    $
    794
    
    
    $
    775
   (1)
    
    Under the terms of our secured loan agreements, we are required to use proceeds
from the sale of property, plant and equipment to pay down the indebtedness
collateralized by such plant and equipment.(2)
    
    Liabilities do not include borrowings of the Company that are secured by assets
of the division. Corporate Office Corporate Office expenses, which are not included in the operating results of the Rubber Group
or the Metals Group, represent administrative expenses incurred primarily at our New York and
Cleveland offices. Corporate Office expenses are consolidated with the selling and administrative
expenses of the Rubber Group and the Metals Group in our consolidated financial statements. - 19 -




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The following table sets forth the operating results of the Corporate Office for 2004, 2003,
and 2002 and the reconciliation of the Corporate Offices loss from operations to its EBITDA (dollar
amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Loss from operations
    
    $
    (2,411
    )
    
    $
    (2,679
    )
    
    $
    (2,464
    )Add back: depreciation and amortization (1)
    
    
    39
    
    
    
    38
    
    
    
    53EBITDA
    
    $
    (2,372
    )
    
    $
    (2,641
    )
    
    $
    (2,411
    )
   (1)
    
    Excludes amortization of deferred financing expenses, which
totaled $1,098,000, $610,000, and $440,000, in 2004, 2003, and 2002,
respectively, and which is included in interest expense in the
consolidated financial statements. Corporate Office expenses decreased by $268,000 in 2004, primarily because of decreased
legal fees. Interest Expense During 2004, 2003, and 2002, interest expense totaled $8,662,000, $6,980,000, and $7,158,000,
respectively, and cash interest expense totaled $7,144,000, $2,122,000, and $2,644,000,
respectively. During 2004, 2003, and 2002, interest expense included amortization of deferred
financing expenses of $1,098,000, $610,000, and $440,000, respectively. In addition to the increase
related to the amortization of deferred financing expenses, interest expense increased in 2004
because the average amount of debt on which we accrued and paid interest increased to $82,500,000
during 2004 compared $71,600,000 during 2003, principally due to the exchange of our 12% Senior
Subordinated Notes for our 123/4% Senior Subordinated Notes, pursuant to which $15,029,000 of accrued
interest was converted into 12% Senior Subordinated Notes, and because of increased rates of
interest on our other indebtedness. Gain on the Repurchase of Debt During 2004, we recognized pre-tax gains of $8,598,000 on the repurchase of our debt. During the second quarter of 2004, we recognized a pre-tax gain of $3,252,000 on the
repurchase of our $7,500,000 senior, unsecured note and all accrued interest thereon. Although we
repurchased the senior, unsecured note on December 18, 2003, the gain on the repurchase of the
senior, unsecured note was deferred and recorded, at December 31, 2003, in current liabilities as
deferred gain on repurchase of debt because the agreement governing the repurchase of the note
provided that the claim could be reinstated if certain events occurred prior to April 20, 2004.
Because none of these events occurred prior to April 20, 2004, we recognized the pre-tax gain
during the three-month period ended June 30, 2004. On October 1, 2004, we repurchased a total of $8,264,000 principal amount of our 12% Senior
Subordinated Notes plus interest accrued thereon at an aggregate cost of $2,892,000. After the
write-off of deferred financing expenses of $192,000, we realized a pre-tax gain on the repurchase
of $5,346,000. The repurchased 12% Senior Subordinated Notes have been cancelled and retired. - 20 -




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##### Table of Contents



Gain on Sale of Securities During the fourth quarter of 2002, we sold the shares of common stock of an insurance company
that were received during the fourth quarter of 2001 and realized a pre-tax gain of $248,000 on the
sale. Income Tax Provision The income tax benefit recorded during 2004, consisted of a credit for the adjustment of
previously recorded income tax liabilities offset, in part, by a provision for state income tax. The 2003 income tax provision consisted of state income taxes. The income tax benefit recorded during 2002 resulted from a $643,000 refund of alternative
minimum taxes paid in earlier periods, offset, in part, by state income tax expense. For additional information concerning income taxes and related matters, see Note 8 to our
consolidated financial statements in Part II, Item 8. Liquidity and Capital Resources Operating Activities Operating activities of our continuing operations provided $7,068,000 of cash during 2004.
Accounts receivable decreased by $561,000, primarily due to decreased levels of business activity
in November and December of 2004 compared to November and December of 2003. Inventories increased
by $1,158,000 during 2004, due, in part, to the need for additional inventory to better service
just-in-time shipping requirements and to provide a safety stock to facilitate the transfer of
tooling from our facility in LaGrange, Georgia, which is to be closed, to our facility in Vienna,
Ohio; the tooling transfer commenced in January of 2005 and was substantially completed in March
2005. Prepaid expenses and other current assets decreased by $428,000, primarily because of a
reduction in the amount of unbilled tooling being manufactured or purchased by us for sale to our
customers. Accounts payable increased by $231,000, due primarily to a slowing in the timing of
payments to vendors, and during 2004, $1,689,000 of accounts payable were converted into unsecured,
amortizing term notes. At December 31, 2004, the unpaid balances on these notes totaled $669,000.
At December 31, 2004, and December 31, 2003, accounts payable included outstanding checks of
$524,000 and $1,488,000, respectively. During 2004, accrued expenses decreased by $1,154,000, due,
in part, to a reduction in accruals for workers compensation claims and medical benefits, which
resulted primarily from improved claims experience, and a reduction of previously recorded income
tax liabilities. Investing Activities During 2004, investing activities of our continuing operations used net cash of $6,085,000,
primarily for capital expenditures. Capital expenditures attributable to the Rubber Group, the
Metals Group, and the Corporate Office totaled $5,277,000, $773,000, and $7,000, respectively,
primarily for the purchase of equipment. Capital expenditures for the Rubber Group during 2004
include $198,000 of equipment financed by the vendor of the equipment and $144,000 of equipment
financed under a capitalized lease. Capital expenditures for the Rubber Group, and the Metals
Group, are currently projected to total $6,037,000, and $305,000, respectively, during 2005. Net
cash used by the investing activities of our discontinued operations totaled $440,000. At December 31, 2004, we had
outstanding commitments to purchase equipment of approximately $341,000. - 21 -




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Financing Activities During 2004, our financing activities used $580,000 of cash. On September 3, 2004, we issued a $7,000,000 note with an increasing interest rate. The
Increasing Rate Note is an unsecured obligation that is senior in right of payment to the 12%
Senior Subordinated Notes, the 123/4% Senior Subordinated Notes, and the 13% Junior Subordinated
Notes. The Increasing Rate Note matures on June 30, 2007. Interest is due monthly and is currently being
paid at the rate of 13.8% per annum, which we refer to as the Cash Rate. In lieu of paying the Cash
Rate, we have the option to pay interest at the rate of 12% in cash and an additional 3.6% in
additional Increasing Rate Notes, which we refer to as the PIK Rate. The cash rate will increase by
up to 0.6 percentage points on each of September 1, 2005 and 2006 and the PIK Rate will increase by
up to 1.2 percentage points on each of September 1, 2005 and 2006. The exact amount of each
increase will depend upon the principal amount of the Increasing Rate Note then outstanding. If any
payment is not made when due, the Increasing Rate Note will bear interest at a default rate equal
to the Cash Rate plus 5% per annum. On October 1, 2004, we repurchased $8,264,000 principal amount of our 12% Senior Subordinated
Notes plus interest accrued thereon at an aggregate cost of $2,892,000. After the write-off of
deferred financing expenses of $192,000, we realized a pre-tax gain on the repurchase of
$5,346,000. The repurchased 12% Senior Subordinated Notes have been cancelled and retired. During 2004, we entered into an equipment financing lease and vendor equipment financing
arrangements totaling $144,000 and $198,000, respectively, with monthly payments over two years,
and we converted $1,689,000 of trade accounts payable into unsecured, amortizing term notes with
terms ranging from six to nine months and interest payable at rates ranging from 6% to 8%. During 2004, we made scheduled monthly payments on our amortizing term notes totaling
$6,364,000, cash interest payments of $7,144,000, and paid financing expenses related to new debt
and modifications of existing debt of $745,000 that were capitalized. On January 27, 2005, we entered into amendments of the loan agreements governing our equipment
term loans, our real estate term loan, and our revolving line of credit. The amendments permitted
us to borrowing an additional $1,500,000 under our equipment loan agreements, which increased the
aggregate amount of equipment term loans to $11,400,000. The amendments also incorporated the
following modifications:  
    The monthly principal payments due on our equipment term loans on February 1, 2005,
were eliminated and the scheduled monthly principal payments were reduced from $300,000 to
$200,000;
    The option of a Eurodollar rate for our equipment term loans was eliminated;
    The interest rate on our equipment term loans was increased from the prime rate plus
13/4% to the prime rate plus 43/4%;
    Certain financial covenants were modified;
    $600,000 of reserves against the availability of funds under our revolving line of
credit were eliminated; and - 22 -




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##### Table of Contents




    The revolving line of credit was reduced from $23,500,000 to $20,000,000, subject to
availability under a borrowing base formula. Liquidity We operate with substantial financial leverage and limited liquidity. Our aggregate
indebtedness as of December 31, 2004, totaled $78,365,000. During the year ending December 31,
2005, cash interest payments and scheduled principal payments are projected to be approximately
$8,189,000 and $4,277,000, respectively. We finance our operations with cash from operating activities and a variety of financing
arrangements, including equipment term loans, a real estate term loan, and loans under a revolving
line of credit, which we refer to collectively as our secured loans. The equipment term loans bear
interest at the prime rate plus 43/4%. The real estate term loan bears interest at the prime rate
plus 5%, subject to a minimum rate of 91/4% and requires us to pay a fee of $216,000 on each
anniversary of the closing date. Loans under the revolving line of credit bear interest at the
prime rate plus 1% or LIBOR plus 31/4%, at our option. The revolving loans are limited to 88% of
eligible accounts receivable plus 65% of eligible inventories. Our revolving line of credit is
currently scheduled to expire on June 30, 2006. All of our secured loans contain cross-default
provisions. The revolving line of credit and the equipment term loans are secured by first priority liens
on substantially all of our assets other than real estate. The real estate term loan is secured by
first priority liens on all of our real estate and second priority liens on substantially all of
our other assets. At December 31, 2004, availability under the revolving line of credit was reduced
by reserves established by the lender, which totaled $1,350,000. During January 2005, $600,000 of
reserves were released. The release of the existing reserves is at the discretion of the lender and
we cannot predict at this time whether any of the remaining reserves will be released. At December 31, 2004, net availability under our revolving line of credit totaled $1,224,000.
At March 25, 2005, net availability under our revolving line of credit totaled $1,298,000. We have entered into a contract to sell our idle facility in Casa Grande, Arizona, for
$2,750,000. If the sale takes place, substantially all of the net proceeds thereof will be applied
to reduce our real estate term loan. At December 31, 2004, and December 31, 2003, the aggregate principal amount of loans
outstanding under the revolving line of credit was $14,509,000 and $12,088,000, respectively. These
loans are classified as short-term debt because the revolving line of credit requires that our cash
receipts be 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 our approval. The agreements governing our secured loans contain certain financial covenants that require us
to maintain specified financial ratios as of the end of specified periods, including the
maintenance of a minimum level of fixed charge coverage, minimum levels of net worth and EBITDA,
and a maximum ratio of debt to EBITDA. From time to time, our secured lenders have agreed to waive, amend, or eliminate certain of
the financial covenants contained in our various financing agreements in order to maintain or
otherwise ensure our current or future compliance. During 2004 and January 2005, the following
modifications were made: - 23 -




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##### Table of Contents




    Effective March 31, 2004, our two secured lenders amended fixed charge coverage ratios
and annual limitations on unfinanced capital expenditures;
    Effective May 31, 2004, one of our secured lenders waived compliance with a minimum net
worth covenant;
    Effective June 30, 2004, our two secured lenders amended financial covenants, related
to minimum net worth, minimum fixed charge coverage, minimum EBITDA, and maximum debt to
EBITDA; and
    Effective January 27, 2005, our two secured lenders further amended financial
covenants, related to minimum consolidated EBITDA, minimum Rubber Group EBITDA , fixed
charge coverage ratios, and maximum secured debt to EBITDA. In the event that we are not in compliance with any of our covenants in the future and our
lenders do not agree to amend, waive, or eliminate those covenants, the lenders would have the
right to declare the borrowings under their financing agreements to be due and payable immediately. The financial covenants, which are set forth in detail in the financing documents, are
summarized below as of January 27, 2005, the date of the most recent amendments to the agreements
governing the revolving line of credit, the equipment term loans, and the real estate term loan:  
    Fixed Charge Coverage Ratio. The fixed charge coverage ratio is
calculated by dividing consolidated EBITDA less capital expenditures by specified fixed
charges and is required to be not less than 0.55 for the twelve-month period ended December
31, 2004, and not less than 0.60, 0.80, 0.90, 0.95, and 1.00 for the twelve month periods
ending March 31, June 30, September 30, and December 31, 2005, and March 31, 2006,
respectively;
    Net Worth. Stockholders deficit plus specified non-cash write-offs
must not be less than negative $17,500,000 at each month-end through March 31, 2005; not
less than negative $17,300,000 at April 30, 2005, and May 31, 2005, not less than negative
$17,000,000 at each month-end from June 30, 2005, through August 31, 2005, not less than
negative $16,500,000 at each month-end from September 30, 2005, through November 30, 2005,
not less than negative $16,000,000 at December 31, 2005, and not less than negative
$15,000,000 at January 31, 2006, and each month-end thereafter;
    Consolidated EBITDA. Must be not less than $11,500,000 for the
twelve-month period ended December 31, 2004, and each twelve-month period ending January
31, February 28, and March 31, 2005; minimum consolidated trailing twelve-month
EBITDA increases each month thereafter by $500,000 until it reaches $16,000,000 at December
31, 2005.
    Rubber Group EBITDA. Must not be less than $5,000,000 for the six-month
period ended December 31, 2004, $9,500,000 for the nine-month period ending March 31, 2005,
and $13,500,000 and $15,000,000 for the twelve-month periods ending
June 30 and September 30, 2005, respectively, and $16,000,000 for the twelve-month period ending on the last day
of each calendar quarter thereafter; and
    Leverage Ratio. The ratio of secured debt plus outstanding letters of
credit to consolidated EBITDA must not exceed 3.35 for each twelve-month period, through
March 31, 2005, 3.25 for the twelve-month periods ending April 30 and May 31, 2005, 3.10
for the twelve-month period - 24 -




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##### Table of Contents



ending June 30, 2005, 2.75 for the twelve-month period ending
July 31, 2005, and 2.50 for each trailing twelve-month period ending on the last day of
each calendar month thereafter. We also have covenants that limit our unfinanced capital expenditures to $6,250,000 per annum
and limit the amount of additional secured financing we can incur for the purchase of plant and
equipment to $2,500,000 per annum. Although there can be no assurance, we currently believe that
this provision will not limit our planned capital expenditures during 2005. We also have other
covenants that place restrictions on our business and operations, including covenants relating to
the sale of all or substantially all of our assets, the purchase of common stock, the redemption of
preferred stock, and the payment of cash dividends. Although our most recent financial projections indicate that we will not be in violation of
any of our financial covenants during 2005, our projections are subject to a number of risks and
uncertainties that could cause our actual results or performance to be materially different from
our projected results. As a result, we cannot give any assurance that we will remain in compliance
with our financial covenants throughout 2005 and beyond. We had a net working capital deficit of $6,870,000 at December 31, 2004, compared to a net
working capital deficit of $7,586,000 at December 31, 2003. The net working capital deficit exists
primarily because we are required, under U.S. generally accepted accounting principles, to classify
the loans outstanding under the revolving line of credit, which totaled $14,509,000 and
$12,088,000, at December 31, 2004, and December 31, 2003, respectively, as current liabilities. Although there can be no assurance, based on our most recent financial projections, we
estimate that we will not require any new borrowings (except for normal borrowings under our
revolving line of credit) during the year ending December 31, 2005, other than the new borrowings
provided to us pursuant to the January 27, 2005, amendments, to meet our foreseeable working
capital, debt service, and capital expenditure requirements. If our cash flow from operations or
availability under our existing financing arrangements falls below expectations, we may be forced
to seek additional financing, delay certain capital expenditures, reduce certain operating
expenses, extend certain trade accounts payable beyond terms that we believe are customary in the
industries in which we operate, or consider other alternatives designed to improve our liquidity.
Some of these actions could have a material adverse effect on our business. - 25 -




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##### Table of Contents



Contractual Obligations The following table summarizes our expected cash outflows from financial contracts and
commitments in effect as of December 31, 2004. We have not included information on recurring
purchases of raw materials for use in our manufacturing operations. Those amounts are normally
consistent from year to year and do not represent a long-term commitment. The dollar amounts set
forth in the table below are in thousands. Payments Due by Period2006 &
    
    
    2008 &
    
    
    More thanContractual Obligations(1) (2)
    
    Total
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    5 yearsEquipment term loans
    
    $
    10,200
    
    
    $
    2,300
    
    
    $
    7,900
    
    
    $
    
    
    
    $
    Real estate term loan
    
    
    10,350
    
    
    
    1,150
    
    
    
    9,200
    
    
    
    
    
    
    
    Subordinated debt
    
    
    34,524
    
    
    
    
    
    
    
    
    
    
    
    34,524
    
    
    
    Increasing Rate Note
    
    
    7,000
    
    
    
    
    
    
    
    7,000
    
    
    
    Other long-term debt
    
    
    1,350
    
    
    
    1,115
    
    
    
    210
    
    
    
    25
    
    
    
    Capital lease obligations
    
    
    274
    
    
    
    184
    
    
    
    90
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    473
    
    
    
    226
    
    
    
    160
    
    
    
    87
    
    
    
    Purchase obligations (3)
    
    
    341
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    64,512
    
    
    $
    5,316
    
    
    $
    24,560
    
    
    $
    34,636
    
    
    $
    
   (1)
    
    In addition, we currently project that we will make cash interest payments of
$8,189,000 during 2005, and believe that amounts due beyond 2005 are not readily
determinable.(2)
    
    Contractual commitments also include $2,093,000 of outstanding letters of
credit, which are not reflected in this chart.(3)
    
    Represents commitments for the purchase of equipment. Inflation We generally attempt to pass through to our customers fluctuations in raw material costs;
however, many of our customers will not accept price increases from us to compensate for increases
in labor and overhead expenses that result from inflation. To offset inflationary increases in
costs that we cannot pass through to our customers and to maintain or improve our operating
margins, we attempt to improve our production efficiencies and manufacturing processes. We believe
that, over time, prices are affected by many factors, but that the price we can charge our
customers will be governed by the competitive pricing set by the marketplace, rather than by the
increase or decrease in any particular component of our cost. Environmental Matters We have been named from time to time as one of numerous potentially responsible parties or
third-party defendants under applicable environmental laws for restoration costs at waste-disposal
sites, and as a defendant or potential defendant in various other environmental law matters. It is
our policy to record accruals for matters of these types when we deem a loss to be probable and we
can reasonably
estimate the amount of that loss. The various actions to which we are or may in the future be a
party are at various stages of completion. Although we can give no assurance as to the outcome of
existing or potential environmental litigation, based upon the information currently available to
us, we believe that the outcome thereof will not have a material adverse effect upon our results of
operations or cash flow. - 26 -




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##### Table of Contents



You will find information concerning certain other commitments and
contingencies affecting us in Note 11, Commitments and Contingencies, to our consolidated
financial statements in Part II, Item 8. Quarterly Financial Data For quarterly financial data please refer to Note 15, Quarterly Financial Data, to our
consolidated financial statements in Part II, Item 8. Critical Accounting Policies and Estimates Our accounting policies are more fully described in Note 1, Summary of Significant Accounting
Policies, to our consolidated financial statements in Part II, Item 8. As set forth in Note 1, the
preparation of our consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the
consolidated financial statements, and the reported amounts of revenues and expenses during each
reporting period. The accuracy of our estimates is subject to an inherent amount of risk. Future
events and their impact on our results of operations or financial position cannot be determined
with absolute certainty. Although we strive to use our best judgment in making estimates, actual
results could vary materially from our estimates. We believe that the most critical accounting policies inherent in the preparation of our
consolidated financial statements are the following: Revenue Recognition All of our revenues result from the sale of rubber and metal components. We recognize revenue
from the sale of components upon the passage of title and risk of loss to the customers according
to shipping schedules and terms of sale mutually agreed to by us and our customers. Valuation of Trade Receivables We record trade receivables due from our customers at the time a sale is recorded in
accordance with our revenue recognition policy. We operate primarily in the domestic automotive
market, which has been characterized by intense price competition and increasing customer
requirements for quality and service. These factors, among others, may have a sudden and adverse
effect on the operating results and financial condition of our customers, and, in turn, on the
collectibility of our accounts receivable from those customers. We attempt to mitigate this risk of
loss through ongoing evaluations of automotive market conditions, examinations of financial
statements of our customers, and discussions with management of our customers, as deemed necessary.
Provisions for credit losses are based upon historical experience and such ongoing evaluations of
the financial condition of our customers. We generally do not require collateral from our customers
to support the extension of trade credit. Inventory Valuation Inventories are valued at the lower of cost (first-in, first-out method) or market. Where
appropriate, standard cost systems are used to determine cost and the standards are adjusted as
necessary to ensure that standard cost approximates actual cost. We evaluate our inventory on a
quarterly and
annual basis to ensure that it is properly valued. We write down our inventory where
appropriate to provide for losses due to obsolescence, lower of cost or market valuations, excess
quantities on hand, and certain other factors. In doing so, we apply consistent practices, which
include the identification of potentially unmarketable inventory based on assumptions about future
demand and usage rates, specific - 27 -




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identification of components that are being replaced with new
generation components, actual margins generated from the sales of our components, and historical
unit sales volumes. Valuation of Long-Lived Assets We evaluate long-lived assets, such as plant and equipment and other long-term amortizable
assets, for impairment when events or changes in circumstances indicate that the carrying value of
the assets may not be fully recoverable. Changes in technology or in our intended use of these
assets, including changes in the primary markets in which we operate, may cause the original
estimated useful lives of these assets to change and result in the impairment of these assets. To perform our impairment evaluation, we compare the undiscounted projected cash flow before
interest and taxes of an asset or group of assets to the carrying value of that asset or asset
group. If the projected cash flow is less than the carrying value of the asset or asset group, we
recognize an impairment loss equal to the excess, if any, of the carrying value of the asset or
asset group over the appraised value of the asset or asset group, net of estimated disposal costs.
Although we believe that our estimates of future cash flows are reasonable, changes in assumptions
regarding future unit volumes, pricing, operating efficiencies, material, labor, and overhead
costs, and other factors could significantly affect our cash flow projections. Valuation of Goodwill Prior to 2002, we amortized purchased goodwill using the straight-line method principally over
40 years. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No.142,
Goodwill and Other Intangible Assets (FAS 142), which eliminated the amortization of goodwill,
but requires that goodwill be tested annually for impairment using a fair value approach. Goodwill
is tested annually during the fourth quarter of each year, unless there is a change in
circumstances or an adverse event that would indicate impairment at some other time. To assess the
value of goodwill, estimates of discounted future cash flow and other factors are considered in
order to determine fair value. Other Other critical accounting policies include estimates used to determine liabilities related to
environmental matters, litigation, income taxes, and other contingencies. The process of making estimates takes into account historical experience, specific facts and
circumstances, present and projected economic and business conditions, projected unit volumes,
projected operating efficiencies, and any other relevant factors and assumptions. We reevaluate our
estimates whenever factors relevant to the making of the estimates change. Recently Issued Accounting Standards Listed below are recently issued accounting standards and a discussion of how they have
affected our consolidated financial statements: Statement of Financial Accounting Standards No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) became
law on December 8, 2003. The Act provides for a prescription drug benefit under Medicare - 28 -




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Part D and
a federal subsidy, effective January 1, 2006, under current law, for plan sponsors who provide an
actuarially equivalent prescription drug benefit to retirees. Statement of Financial Accounting
Standards No.106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (FAS 106-2), provides accounting guidance and
disclosure for the subsidy, if applicable. Although we currently believe that this legislation may
eventually reduce the prescription drug portion of our retiree medical cost, we have not yet made
any such determination. The adoption of FAS 106-2 during 2004 did not have any effect on our
results of operations or financial position and it is not expected to have any significant effect
in 2005. Statement of Financial Accounting Standards No. 151, Inventory Costs  an Amendment of ARB
No. 43, Chapter 4 In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, Inventory costs, an Amendment of ARB No. 43, Chapter 4
(FAS 151), which is effective for our fiscal years beginning on January 1, 2006. Early adoption
of
FAS 151 is not anticipated. FAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and waste materials (spoilage) should be
recognized as current-period charges. FAS 151 also requires that that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. We have not determined the potential impact of adopting FAS 151 on January 1, 2006, if
any, on our results of operations or financial position. Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based Payment (FAS 123 Revised). FAS 123
Revised is a revision to Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25. Accounting
for Stock Issued to Employees, and effectively eliminates the intrinsic value method of accounting
for stock options that was available in FAS 123 as originally issued. FAS 123 Revised requires
entities to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. This statement is effective at the
beginning of the third quarter of 2005 and applies to all awards granted after the effective date.
We do not anticipate that the adoption of FAS 123 Revised will have a material impact on our
results of operations or financial position. Statement of Financial Position No. 109-1, Application of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 On December 21, 2004, the Financial Accounting Standards Board issued Statement of Financial
Position No. 109-1, Application of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 (SOP 109-1). The American Jobs Creation Act provides for
a specified tax credit on qualified production activities beginning in 2005. SOP 109-1 clarifies
that the specified tax credit should be accounted for as a special tax deduction in accordance with
Statement of Financial
Accounting Standard No.109, Accounting for Income Taxes. We currently believe that the
application of SOP 109-1 will not have any impact on our taxable income or loss or on our financial
position. - 29 -




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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not invest in or trade market risk sensitive instruments. We also do not have any
foreign operations or any significant amount of foreign sales and, therefore, we believe that our
exposure to foreign currency exchange rate risk is insignificant. At December 31, 2004, we had $35,509,000 of outstanding floating rate debt at interest rates
equal to either LIBOR plus 31/4%, LIBOR plus 4%, the prime rate plus 1%, the prime rate plus 43/4%, or
the prime rate plus 5%. On January 27, 2005, the option to pay interest at the rate of LIBOR plus
4% on our equipment term loans was eliminated. Currently, we do not purchase derivative financial
instruments to hedge or reduce our interest rate risk. As a result, changes in either LIBOR or the
prime rate affect the rates at which we borrow funds under these agreements. At December 31, 2004, we had outstanding $43,306,000 of fixed-rate, long-term debt with a
weighted-average interest rate of 12.1%, of which $158,000 had matured. We currently estimate that our monthly cash interest expense during 2005 will be approximately
$680,000 and that a one percentage point increase or decrease in short-term interest rates would
increase or decrease our monthly interest expense by approximately $28,000. For further information about our indebtedness, we recommend that you also read Note 5,
Debt, to our consolidated financial statements in Part II, Item 8 of this Form 10-K. - 30 -




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Table of Contents PageReport of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    32Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003, and 2002
    
    
    33Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    34Consolidated Statements of Stockholders Deficit for
the Years Ended December 31, 2004, 2003, and 2002
    
    
    36Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003, and 2002
    
    
    37Notes to Consolidated Financial Statements
    
    
    38
 - 31 -




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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders
Lexington Precision Corporation and Subsidiaries We have audited the accompanying consolidated balance sheets of Lexington Precision
Corporation and subsidiaries at December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholders deficit, and cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the financial
statement schedule contained in Part IV, Item
15 (a) 2, of the Companys report on Form 10-K. These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audit included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Lexington Precision Corporation and its
subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein. As discussed in Note 5 to the consolidated financial statements, effective July 1, 2003, the
Company changed its method of accounting for its $8 Cumulative Convertible Preferred Stock, Series
B, in accordance with the adoption of Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. /s/ Ernst & Young LLP
 Cleveland, Ohio
March 29, 2005 - 32 -




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LEXINGTON PRECISION CORPORATION 
 Consolidated Statements of Operations (thousands of dollars, except per share data)
 Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    110,353
    
    
    $
    113,231
    
    
    $
    112,363Cost of sales
    
    
    98,304
    
    
    
    99,773
    
    
    
    97,571Gross profit
    
    
    12,049
    
    
    
    13,458
    
    
    
    14,792Selling and administrative expenses
    
    
    7,383
    
    
    
    7,904
    
    
    
    7,981Impairment of goodwill
    
    
    
    
    
    
    47
    
    
    
    Plant closure costs
    
    
    
    
    
    
    
    
    
    
    609Income from operations
    
    
    4,666
    
    
    
    5,507
    
    
    
    6,202Other income (expense):Gain on repurchase of debt
    
    
    8,598
    
    
    
    
    
    
    
    Gain on sale of securities
    
    
    
    
    
    
    
    
    
    
    248Interest expense
    
    
    (8,662
    )
    
    
    (6,980
    )
    
    
    (7,158
    )Income (loss) from continuing operations before
income tax
    
    
    4,602
    
    
    
    (1,473
    )
    
    
    (708
    )Income tax provision (benefit)
    
    
    (196
    )
    
    
    76
    
    
    
    (538
    )Income (loss) from continuing operations
    
    
    4,798
    
    
    
    (1,549
    )
    
    
    (170
    )Loss from discontinued operations
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Income (loss) before cumulative effect of a
change in accounting principle
    
    
    1,590
    
    
    
    (6,202
    )
    
    
    (1,567
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (247
    )
    
    
    Net income (loss)
    
    $
    1,590
    
    
    $
    (6,449
    )
    
    $
    (1,567
    )Basic and diluted income (loss) per share of common stock:Continuing operations
    
    $
    0.97
    
    
    $
    (0.35
    )
    
    $
    (0.03
    )Discontinued operations
    
    
    (0.65
    )
    
    
    (0.96
    )
    
    
    (0.29
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (0.05
    )
    
    
    Net income (loss)
    
    $
    0.32
    
    
    $
    (1.36
    )
    
    $
    (0.32
    )
 See notes to consolidated financial statements - 33 -




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LEXINGTON PRECISION CORPORATION 
 Consolidated Balance Sheets (thousands of dollars)
 December 312004
    
    
    2003Assets:Current assets:Cash
    
    $
    17
    
    
    $
    178Accounts receivable, net of allowances of $537,000
and $545,000, respectively
    
    
    15,322
    
    
    
    15,883Inventories, net of allowances of $845,000
and $931,000, respectively
    
    
    8,791
    
    
    
    7,633Prepaid expenses and other current assets
    
    
    1,665
    
    
    
    2,093Deferred income taxes
    
    
    1,090
    
    
    
    1,360Assets of discontinued operations
    
    
    2,022
    
    
    
    2,954Total current assets
    
    
    28,907
    
    
    
    30,101Plant and equipment:Land
    
    
    2,074
    
    
    
    2,074Buildings
    
    
    19,450
    
    
    
    19,301Equipment
    
    
    107,961
    
    
    
    103,457129,485
    
    
    
    124,832Accumulated depreciation
    
    
    93,428
    
    
    
    86,638Plant and equipment, net
    
    
    36,057
    
    
    
    38,194Goodwill, net
    
    
    7,623
    
    
    
    7,623Assets of discontinued operations
    
    
    2,754
    
    
    
    4,438Other assets, net
    
    
    3,036
    
    
    
    3,331$
    78,377
    
    
    $
    83,687
 See notes to consolidated financial statements
    
    (continued on next page)
 - 34 -




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LEXINGTON PRECISION CORPORATION Consolidated Balance Sheets (continued)
(thousands of dollars) December 312004
    
    
    2003Liabilities and stockholders deficit:Current liabilities:Accounts payable
    
    $
    9,753
    
    
    $
    9,522Accrued expenses, excluding interest
    
    
    4,839
    
    
    
    5,993Accrued interest expense
    
    
    975
    
    
    
    314Deferred gain on repurchase of debt
    
    
    
    
    
    
    3,252Short-term debt
    
    
    14,667
    
    
    
    12,246Current portion of long-term debt
    
    
    4,749
    
    
    
    5,585Liabilities of discontinued operations
    
    
    794
    
    
    
    775Total current liabilities
    
    
    35,777
    
    
    
    37,687Long-term debt, excluding current portion
    
    
    58,949
    
    
    
    63,681Deferred income taxes
    
    
    1,090
    
    
    
    1,360Other long-term liabilities
    
    
    436
    
    
    
    451Stockholders deficit:Common stock, $0.25 par value, 10,000,000 shares
authorized, 4,931,767 shares issued at December 31, 2004,
and December 31, 2003
    
    
    1,233
    
    
    
    1,233Additional paid-in-capital
    
    
    13,169
    
    
    
    13,169Accumulated deficit
    
    
    (32,277
    )
    
    
    (33,894
    )Total stockholders deficit
    
    
    (17,875
    )
    
    
    (19,492
    )$
    78,377
    
    
    $
    83,687
 See notes to consolidated financial statements - 35 -




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LEXINGTON PRECISION CORPORATION 
 Consolidated Statements of Stockholders Deficit (thousands of dollars)
 Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Paid-in-
    
    
    Accumulated
    
    
    StockholdersStock
    
    
    Capital
    
    
    Deficit
    
    
    DeficitBalance at January 1, 2001
    
    $
    1,207
    
    
    $
    12,960
    
    
    $
    (23,703
    )
    
    $
    (9,536
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (2,151
    )
    
    
    (2,151
    )Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Balance at December 31, 2001
    
    
    1,207
    
    
    
    12,960
    
    
    
    (25,826
    )
    
    
    (11,659
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (1,567
    )
    
    
    (1,567
    )Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Balance at December 31, 2002
    
    
    1,207
    
    
    
    12,960
    
    
    
    (27,366
    )
    
    $
    (13,199
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (6,449
    )
    
    
    (6,449
    )Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Conversion of interest payable on
junior subordinated notes into 103,731
shares of common stock
    
    
    26
    
    
    
    209
    
    
    
    
    
    
    
    235Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    (106
    )Balance at December 31, 2003
    
    
    1,233
    
    
    
    13,169
    
    
    
    (33,894
    )
    
    
    (19,492
    )Net income
    
    
    
    
    
    
    
    
    
    
    1,590
    
    
    
    1,590Amortization of restricted stock grants
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    27Balance at December 31, 2004
    
    $
    1,233
    
    
    $
    13,169
    
    
    $
    (32,277
    )
    
    $
    (17,875
    )
 See notes to consolidated financial statements - 36 -




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LEXINGTON PRECISION CORPORATION 
 Consolidated Statements of Cash Flows (thousands of dollars)
 Years Ended December 312004
    
    
    2003
    
    
    2002Operating activities:Income (loss) from continuing operations
    
    $
    4,798
    
    
    $
    (1,549
    )
    
    $
    (170
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation
    
    
    8,140
    
    
    
    8,573
    
    
    
    9,649Amortization included in operating expense
    
    
    304
    
    
    
    382
    
    
    
    598Amortization included in interest
    
    
    1,098
    
    
    
    610
    
    
    
    440Impairment of goodwill
    
    
    
    
    
    
    47
    
    
    
    Gain on repurchase of debt
    
    
    (8,598
    )
    
    
    
    
    
    
    Gain on sales of marketable securities
    
    
    
    
    
    
    
    
    
    
    (248
    )Current year interest expense converted to debt
    
    
    
    
    
    
    3,953
    
    
    
    Changes in operating assets and liabilities that
provided (used) cash:Accounts receivable, net
    
    
    561
    
    
    
    (376
    )
    
    
    1,112Inventories, net
    
    
    (1,158
    )
    
    
    301
    
    
    
    (136
    )Prepaid expenses and other assets
    
    
    310
    
    
    
    850
    
    
    
    (360
    )Accounts payable
    
    
    1,920
    
    
    
    413
    
    
    
    (1,050
    )Accrued expenses, excluding interest
    
    
    (1,154
    )
    
    
    67
    
    
    
    620Accrued interest expense
    
    
    827
    
    
    
    164
    
    
    
    4,137Other long term liabilities
    
    
    104
    
    
    
    (33
    )
    
    
    158Other
    
    
    (84
    )
    
    
    68
    
    
    
    16Net cash provided by continuing operations
    
    
    7,068
    
    
    
    13,470
    
    
    
    14,766Net cash provided (used) by discontinued operations
    
    
    (135
    )
    
    
    (2,351
    )
    
    
    1,465Net cash provided by operating activities
    
    
    6,933
    
    
    
    11,119
    
    
    
    16,231Investing activities:Purchases of plant and equipment
    
    
    (5,715
    )
    
    
    (4,966
    )
    
    
    (3,401
    )Proceeds from sales of marketable securities
    
    
    
    
    
    
    
    
    
    
    1,522Decrease (increase) in equipment deposits
    
    
    27
    
    
    
    (61
    )
    
    
    345Proceeds from sales of equipment
    
    
    271
    
    
    
    23
    
    
    
    21Expenditures for tooling owned by customers
    
    
    (650
    )
    
    
    (148
    )
    
    
    (368
    )Other
    
    
    (18
    )
    
    
    374
    
    
    
    328Net cash used by continuing operations
    
    
    (6,085
    )
    
    
    (4,778
    )
    
    
    (1,553
    )Net cash used by discontinued operations
    
    
    (440
    )
    
    
    (75
    )
    
    
    (1,551
    )Net cash used by Investing activities
    
    
    (6,525
    )
    
    
    (4,853
    )
    
    
    (3,104
    )Financing activities:Net increase (decrease), in borrowings under revolving
line of credit
    
    
    2,421
    
    
    
    (3,347
    )
    
    
    (750
    )Proceeds from issuance of debt
    
    
    7,000
    
    
    
    25,000
    
    
    
    Repayment of long-term debt
    
    
    (6,364
    )
    
    
    (21,548
    )
    
    
    (10,194
    )Repurchase of debt
    
    
    (2,892
    )
    
    
    (5,550
    )
    
    
    Payment of deferred financing expenses
    
    
    (745
    )
    
    
    (2,279
    )
    
    
    Other
    
    
    
    
    
    
    (106
    )
    
    
    (619
    )Net cash used by financing activities
    
    
    (580
    )
    
    
    (7,830
    )
    
    
    (11,563
    )Net increase (decrease) in cash
    
    
    (172
    )
    
    
    (1,564
    )
    
    
    1,564Cash at beginning of year
    
    
    189
    
    
    
    1,753
    
    
    
    189Cash at end of year
    
    $
    17
    
    
    $
    189
    
    
    $
    1,753
 See notes to consolidated financial statements - 37 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1  Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Lexington Precision Corporation
and its subsidiaries (the Company). All significant intercompany accounts and transactions have
been eliminated. During 2004, the Company committed to a plan to sell the assets and business, or to close its
die casting division. The results of operations and assets and liabilities of the die casting
division are classified as discontinued operations in the Companys consolidated financial
statements. Unless otherwise indicated all disclosures and amounts relate solely to continuing
operations. Certain reclassifications have been made to the financial statements for prior years in order
to conform to the current years presentation. Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of
contingent liabilities in the consolidated financial statements. Actual results could differ from
those estimates. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. Inventory
levels by principal classification are set forth below (dollar amounts in thousands): December 312004
    
    
    2003Finished goods
    
    $
    4,142
    
    
    $
    3,475Work in process
    
    
    2,372
    
    
    
    1,570Raw materials
    
    
    2,277
    
    
    
    2,588$
    8,791
    
    
    $
    7,633
 Plant and Equipment Plant and equipment are carried at cost less accumulated depreciation. Depreciation is
calculated principally on the straight-line method over the estimated useful lives of the various
assets (15 to 32 years for buildings and 3 to 8 years for equipment). When an asset is retired or
otherwise disposed of, the related cost and accumulated depreciation are eliminated. Maintenance
and repair expenses are charged as incurred, while major improvements that increase the useful life
of plant and equipment are capitalized. Maintenance and repair expenses were $5,552,000,
$5,733,000, and $5,961,000 for 2004, 2003, and 2002, respectively. - 38 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Valuation of Long-Lived Assets The Company evaluates long-lived assets, such as plant and equipment and other long-term
amortizable assets, for impairment when events or changes in circumstances indicate that the
carrying value of the assets may not be fully recoverable. When performing this evaluation, the
Company compares the undiscounted, projected cash flow of an asset or group of assets to the
carrying value of such asset or asset group. If such cash flow is less than the carrying value of
the asset or asset group, an impairment loss is recognized equal to the excess, if any, of the
carrying value of the asset or asset group over the appraised value of the asset or asset group,
net of estimated disposal costs. Although the Company believes that its projections of future cash
flows are reasonable, changes in assumptions regarding future unit volumes, pricing, operating
efficiencies, material, labor, and overhead costs, and other factors could significantly affect the
Companys cash flow projections. During the fourth quarter of 2003, the Company tested the
long-lived assets of its die casting division for impairment and, as a result thereof, recorded an
impairment charge of $2,427,000 to reduce the carrying value of the long-lived assets of the
division to their estimated fair value at that time. During 2004, the Company committed to a plan
to discontinue the operations of the die casting division and recognized pre-tax impairment charges
of $1,595,000 to reduce the value of the divisions assets to estimated fair value, which
approximates the projected proceeds to be realized on the disposition of the assets, net of selling
costs. For additional information, see Note 14, Discontinued Operations. Goodwill Goodwill represents the excess of the purchase price of acquired businesses over the fair
value of the identifiable assets acquired, net of the fair value of liabilities assumed. Tests for
impairment of goodwill are performed, using a fair value approach, during the fourth quarter of
each year, and at other times when there is a change in circumstances or an adverse event that
would indicate impairment. To assess the value of goodwill, an estimate of future cash flows and
other factors are considered in order to determine fair value. During 2003, the Company performed
its annual impairment test and determined that the goodwill associated with the Metals Group was
impaired; as a result, the Company recorded a provision of $208,000 to write off all of the
unamortized goodwill of the Metals Group, of which $161,000 has been classified as discontinued
operations. At December 31, 2004 and 2003, there was $7,623,000 of unamortized goodwill recorded as
an asset in the Companys consolidated balance sheet, all of which related to the Rubber Group. Deferred Financing Expenses Deferred financing expenses are amortized over the lives of the related debt instruments. Research and Development Expenses Research and development expenses are expensed as incurred. These costs totaled $991,000,
$1,168,000, and $924,000 during 2004, 2003, and 2002, respectively. Net Income or Loss per Common Share Basic net income or loss per common share is computed using the weighted-average number of
common shares outstanding. Diluted net income or loss per share is calculated after giving effect
to all potential common shares that were dilutive, using the treasury stock method. Potential
common shares are - 39 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS securities (convertible preferred stock and warrants to purchase common stock) that do not have a
current right to participate in earnings but could in the future by virtue of their terms. Revenue Recognition All of the Companys revenues result from the sale of rubber and metal components. The Company
recognizes revenue from the sale of components when title and risk of loss pass to the customer
according to shipping schedules and terms of sale mutually agreed to by the Company and its
customers. Shipping and handling costs are typically paid by the customer. If paid by the Company,
shipping and handling costs are included in cost of sales. Recently Issued Accounting Standards Listed below are recently issued accounting standards and a discussion of how they have
affected the Companys consolidated financial statements: Statement of Financial Accounting Standards No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) became
law on December 8, 2003. The Act provides for prescription drug benefits under Medicare Part D and
contains a subsidy, effective January 1, 2006, under current law, for plan sponsors who provide
actuarially equivalent prescription drug benefits to retirees on and after January 1, 2006.
Statement of Financial Accounting Standards No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FAS
106-2), provides accounting guidance and disclosure for the subsidy, if applicable. Although the
Company currently believes that this legislation may eventually reduce the prescription drug
portion of its retiree medical cost, it has not yet made any such determination. The adoption of
FAS 106-2 during 2004 did not have any effect on the Companys results of operations or financial
position and it is not expected to have any significant effect in 2005. Statement
of Financial Accounting Standards No. 151, Inventory Costs  an Amendment of ARB
No. 43, Chapter 4 In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, Inventory costs, an Amendment of ARB No. 43, Chapter 4
(FAS 151), which is effective for fiscal years beginning on January 1, 2006. Early adoption of
FAS 151 is not anticipated. FAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts
of idle facility expense, freight, handling costs, and waste materials (spoilage) should be
recognized as current-period charges. FAS 151 also requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the production facilities.
The Company has not yet determined the potential impact of adopting FAS 151 on January 1, 2006, if
any, on its results of operations or financial position. - 40 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share Based Payment (FAS 123 Revised). FAS 123
Revised is a revision to Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25. Accounting
for Stock Issued to Employees, and effectively eliminates the intrinsic value method of accounting
for stock options that was available in FAS 123 as originally issued. FAS 123 Revised requires
entities to recognize the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. This statement is effective at the
beginning of the third quarter of 2005 and applies to all awards granted after the effective date.
The Company does not anticipate that the adoption of FAS 123 Revised will have any a material
impact on its results of operations or financial position. Statement of Financial Position No. 109-1, Application of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004 On December 21, 2004, the Financial Accounting Standards Board issued Statement of Financial
Position No. 109-1, Application of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 (SOP 109-1). The American Jobs Creation Act provides for
a specified tax credit on qualified production activities beginning in 2005. SOP 109-1 clarifies
that the specified tax credit should be accounted for as a special tax deduction in accordance with
Statement of Financial Accounting Standard No.109, Accounting for Income Taxes. The Company
currently believes that SOP 109-1 will not have any impact on its results of operations or financial position. Note 2  Prepaid Expenses and Other Current Assets At December 31, 2004 and 2003, other current assets included $306,000 and $715,000,
respectively, of tooling manufactured or purchased by the Company pursuant to purchase orders
issued by its customers. Upon customer approval of the components produced by such tooling, which
normally takes less than 90 days, the customer is obligated to pay for the tooling in accordance
with previously agreed-upon terms. Note 3  Other Noncurrent Assets The Company has paid a portion of the cost of certain tooling that was purchased by customers
and is being used by the Company to produce components under long-term supply arrangements. The
payments have been recorded as a noncurrent asset and are being amortized on a straight-line basis
over three years or, if shorter, the period during which the tooling is expected to produce
components. At December 31, 2004 and 2003, other noncurrent assets included $746,000 and $728,000,
respectively, representing the unamortized portion of such capitalized payments. During 2004, 2003,
and 2002, the Company amortized $274,000, $354,000, and $570,000, respectively, of such capitalized
payments. - 41 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4  Accrued Expenses, excluding Interest Expense Accrued expenses, excluding interest expense, at December 31, 2004 and 2003, are summarized
below (dollar amounts in thousands): December 312004
    
    
    2003Employee fringe benefits
    
    $
    2,762
    
    
    $
    3,768Salaries and wages
    
    
    1,065
    
    
    
    931Taxes
    
    
    195
    
    
    
    445Other
    
    
    817
    
    
    
    849$
    4,839
    
    
    $
    5,993
 Note 5  Debt Debt at December 31, 2004 and 2003, is set forth below (dollar amounts in thousands): December 312004
    
    
    2003Short-term debt:Revolving line of credit
    
    $
    14,509
    
    
    $
    12,08812 3/4% Senior Subordinated Notes
    
    
    158
    
    
    
    158Subtotal
    
    
    14,667
    
    
    
    12,246Current portion of long-term debt
    
    
    4,749
    
    
    
    5,585Total short-term debt
    
    
    19,416
    
    
    
    17,831Long-term debt:Equipment term loans
    
    
    10,200
    
    
    
    13,500Real estate term loan
    
    
    10,350
    
    
    
    11,50012% Senior Subordinated Notes
    
    
    34,177
    
    
    
    42,44113% Junior Subordinated Note
    
    
    347
    
    
    
    347Increasing Rate Note
    
    
    7,000
    
    
    
    Unsecured, amortizing term
notes
    
    
    669
    
    
    
    104Capital lease obligations
    
    
    275
    
    
    
    573Series B Preferred Stock
    
    
    623
    
    
    
    594Other
    
    
    57
    
    
    
    207Subtotal
    
    
    63,698
    
    
    
    69,266Less current portion
    
    
    (4,749
    )
    
    
    (5,585
    )Total long-term debt
    
    
    58,949
    
    
    
    63,681Total Debt
    
    $
    78,365
    
    
    $
    81,512
 Revolving Line of Credit At December 31, 2004, the Company had outstanding loans of $14,509,000, outstanding letters of
credit of $2,093,000, and net unused availability of $1,224,000 under the revolving line of credit.
The - 42 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS revolving line of credit expires on June 30, 2006. Loans under the revolving line of credit
bear interest at either the prime rate plus 1% or the London Interbank Offered Rate (LIBOR) plus
3 1/4%, at the Companys option. The loans outstanding under the revolving line of credit are
classified as short-term debt because the revolving line of credit provides that 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 Companys approval. Loans under the revolving line of credit are limited to 88% of
eligible accounts receivable plus 65% of eligible inventories, less outstanding letters of credit
and any reserves established by the lender. All loans and reimbursement obligations with respect to
letters of credit under the revolving line of credit are secured by first priority liens on
substantially all of the Companys assets other than real estate. At December 31, 2004, the Companys availability under the revolving line of credit was
reduced by $1,350,000 of reserves established by the lender. In connection with amendments to
certain of the Companys loan agreements on January 27, 2005, $600,000 of these reserves were
released. The release of the balance of the reserves is at the discretion of the lender, and the
Company cannot predict at this time whether any of the remaining reserves will be released. At December 31, 2004, 2003, and 2002, the weighted-average interest rates on borrowings under
the revolving line of credit were 6 1/4%, 5%, and 5 1/4%, respectively. Equipment Term Loans The equipment term loans were originally payable in monthly installments of $300,000 each,
with interest at either the prime rate plus 1 1/2% or LIBOR plus 3 3/4%, at the Companys option. On
January 27, 2005, the Company and the lender amended the terms of the agreement governing the
equipment term loans. The amendment permitted the Company to borrowing an additional $1,500,000
under its equipment loan agreement, which increased the equipment term loans to $11,400,000,
eliminated the principal payment due February 1, 2005, reduced the scheduled monthly principal
payments to $200,000 commencing March 1, 2005, eliminated the option of a Eurodollar rate for the
equipment term loans, and increased the interest rate to the prime
rate plus 4 3/4%. At December 31,
2004, the interest rate on the equipment term loans was 6 3/4%. The unpaid balance of the equipment
term loans is payable on June 30, 2006, if the revolving line of credit is not extended. The
equipment term loans are secured by first priority liens on substantially all of the Companys
assets other than real estate. Real Estate Term Loan The real estate term loan is payable in monthly installments of $96,000 each from January 1,
2004, through June 1, 2006, with the unpaid balance due on June 30, 2006. The Company has the
option to extend the loans to June 30, 2007, on the same terms, provided that the revolving line of
credit is also extended from June 30, 2006, to June 30, 2007. The real estate term loan bears
interest at the prime rate plus 5%, subject to a minimum of 9 1/4%, and requires the Company to pay a
fee of $216,000 on each anniversary of the closing date. The real estate term loan is secured by
first mortgages on substantially all of the Companys real estate and by second priority liens on
substantially all of the Companys other assets. The real estate term loan contains a provision
that permits the lender to accelerate the loan if there is a material adverse change in the
Companys financial condition, business, or operating performance. At December 31, 2004, the
interest rate on the real estate term loan was 10 1/4%. - 43 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Increasing Rate Note On September 3, 2004, the Company issued a $7,000,000 note with an increasing rate of
interest. The Increasing Rate Note is an unsecured obligation of the Company that is senior in
right of payment to the 12% Senior Subordinated Notes, the 12 3/4% Senior Subordinated Notes, and the
13% Junior Subordinated Notes. The Increasing Rate Note matures on June 30, 2007. Interest is due
monthly and is currently being paid at the rate of 13.8% per annum (the Cash Rate). In lieu of
paying the Cash Rate, the Company has the option to pay interest at the rate of 12% in cash and an
additional 3.6% in additional Increasing Rate Notes (the PIK Rate). The Cash Rate will increase
by up to 0.6 percentage points on each of September 1, 2005 and 2006, and the PIK Rate will
increase by up to 1.2 percentage points on each of September 1, 2005 and 2006. The exact amount of
each increase will depend upon the principal amount of the Increasing Rate Note then outstanding. 12
3/4% Senior Subordinated Notes The
12 3/4% Senior Subordinated Notes matured on February 1, 2000, and are unsecured obligations
of the Company that are subordinated to all of the Companys existing and future senior debt. In
December 2003, 99.3% of the 12 3/4% Senior Subordinated Notes then outstanding were exchanged for
units consisting of 12% Senior Subordinated Notes and warrants to purchase common stock. The
remaining $158,000 of 12 3/4% Senior Subordinated Notes that did not participate in the exchange
remained outstanding at December 31, 2004. 12% Senior Subordinated Notes The
12% Senior Subordinated Notes mature on August 1, 2009, and are unsecured obligations of the Company that are subordinated in right of payment to all of the Companys existing and
future senior debt. Interest on the 12% Senior Subordinated Notes is payable quarterly on February
1, May 1, August 1, and November 1. On October 1, 2004, the Company purchased $8,264,000 principal
amount of its 12% Senior Subordinated Notes plus interest accrued thereon for $2,892,000. See Note
13, Gain on the Repurchase of Debt. 13% Junior Subordinated Note The 13% Junior Subordinated Note matures on November 1, 2009, and is an unsecured obligation
of the Company that is subordinated in right of payment to all existing and future secured and
senior, unsecured debt of the Company, the 12 3/4% Senior Subordinated Notes, and the 12% Senior
Subordinated Notes. Unsecured, Amortizing Term Notes The unsecured, amortizing term notes mature in 2005, and bear interest at rates varying from
6% to 8%. At December 31, 2004, the weighted average interest rate on the notes was 7.8%. Capital Lease Obligations Capital lease obligations relate to the purchase of equipment used in the Companys
manufacturing operations. During 2004, the Company entered into capital leases totaling $144,000.
At December 31, 2004, the Companys consolidated balance sheet included equipment held under
capital - 44 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS leases with a cost of $1,146,000 and related accumulated depreciation of $252,000. The
future minimum lease payments under the terms of the various capital leases are set forth below
under the heading
Scheduled Maturities of Long-Term Debt. Amortization of assets recorded as capital leases is
included in depreciation expense. Series B Preferred Stock At December 31, 2004, there were outstanding 3,300 shares of the Companys $8 Cumulative
Convertible Preferred Stock, Series B (the Series B
Preferred Stock), par value $100 per share, with a carrying value of $623,000. Each share of Series B Preferred Stock is (1) entitled to one
vote, (2) redeemable for $200 plus accumulated and unpaid dividends, (3) convertible into 14.8148
shares of common stock (subject to adjustment), and (4) entitled, upon voluntary or involuntary
liquidation and after payment of the debts and other liabilities of the Company, to a liquidation
preference of $200 plus accumulated and unpaid dividends. Redemptions of $90,000 are scheduled on
November 30 of each year in order to retire 450 shares of Series B Preferred Stock annually. The
Company failed to make scheduled redemptions in the aggregate amount of $450,000 on November 30,
2000, 2001, 2002, 2003, and 2004. During 2003, the Company adopted Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (FAS 150), which established standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer that have characteristics of both
liabilities and equity. As a result of the adoption of FAS 150, the Company began to classify the
Series B Preferred Stock as debt in the consolidated financial statements and recognized a pre-tax
charge of $247,000 to increase the carrying value of the Series B Preferred Stock to its fair
value. Subsequent to adoption, increases in the fair value of the Series B Preferred Stock and
payments of quarterly dividends have been recorded by monthly charges to interest expense. Non-Cash Investing and Financing Activities The Company purchased equipment under capitalized lease obligations in the amount of $144,000,
$720,000, and $365,000, during 2004, 2003, and 2002, respectively, and obtained seller financing
for the purchase of equipment in the aggregate amount of $198,000 in 2004 and $247,000 in 2002. Restrictive Covenants The agreements governing the revolving line of credit, the equipment term loans, and the real
estate term loan contain certain financial covenants that require the Company to maintain specified
financial ratios as of the end of specified periods, including the maintenance of a minimum level
of fixed charge coverage, minimum levels of net worth and EBITDA, and a maximum ratio of debt to
EBITDA. The Company also has covenants that limit its unfinanced capital expenditures to $6,250,000
per annum and limit the amount of additional secured financing that it can incur for the purchase
of plant and equipment to $2,500,000 per annum. Although there can be no assurance, the Company
currently believes that this provision will not limit its planned capital expenditures during 2005.
The Company also has other covenants that place restrictions on its business and operations,
including covenants relating to the sale of all or substantially all of its assets, the purchase of
common stock, the redemption of preferred stock, and the payment of cash dividends. - 45 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS From time to time, the Companys secured lenders have agreed to waive, amend, or eliminate
certain of the financial covenants contained in its various financing agreements in order to
maintain or otherwise ensure the Companys current or future compliance.  
    Effective March 31, 2004, the Companys two secured lenders amended fixed charge
coverage ratios and annual limitations on unfinanced capital expenditures;
    Effective May 31, 2004, one of the Companys secured lenders waived compliance with a
minimum net worth covenant;
    Effective June 30, 2004, the Companys two secured lenders amended financial covenants,
related to minimum net worth, minimum fixed charge coverage, minimum EBITDA, and maximum
debt to EBITDA; and
    Effective January 27, 2005, the Companys two secured lenders further amended financial
covenants, related to minimum consolidated EBITDA, minimum Rubber Group EBITDA, fixed
charge coverage ratios, and maximum secured debt to EBITDA. In the event that the Company is not in compliance with any of its covenants in the future and
its lenders do not agree to amend, waive, or eliminate those covenants, the lenders would have the
right to declare the borrowings under their financing agreements to be due and payable immediately. Fair Value of Financial Instruments The Company believes that, at December 31, 2004, the fair values of the loans outstanding
under the revolving line of credit, the equipment term loans, and the real estate term loan
approximated the principal amounts of such loans. On October 1, 2004, the Company repurchased a total of $8,264,000 principal amount of its 12%
Senior Subordinated Notes plus interest accrued thereon at an aggregate cost of $2,892,000. The
Company is unaware of any other trading activity in the 12% Senior
Subordinated Notes or the 12 3/4%
Senior Subordinated Notes since January 1, 2001. The Company believes that it has no basis to
express an opinion as to the fair market value of 12% Senior
Subordinated Notes, 12 3/4% Senior
Subordinated Notes, the 13% Junior Subordinated Note, the Increasing Rate Note, or the Series B
Preferred Stock. Financial Leverage and Liquidity The Company operates with substantial financial leverage and limited liquidity. Aggregate
indebtedness as of December 31, 2004, totaled $78,365,000. During 2005, interest and scheduled
principal payments are projected to be approximately $8,189,000 and $4,277,000, respectively. Cash Interest Paid Cash interest paid during 2004, 2003, and 2002 totaled $7,144,000, $2,122,000, and $2,644,000,
respectively. - 46 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Scheduled Maturities of Long-Term Debt Scheduled maturities of long-term debt and capital lease obligations for the years ending
December 31 are listed below (dollar amounts in thousands): CapitalLong-Term
    
    
    LeaseDebt
    
    
    Obligations
    
    
    Total2005
    
    $
    4,565
    
    
    $
    184
    
    
    $
    4,7492006
    
    
    17,236
    
    
    
    86
    
    
    
    17,3222007
    
    
    7,074
    
    
    
    4
    
    
    
    7,0782008
    
    
    25
    
    
    
    
    
    
    
    252009
    
    
    34,524
    
    
    
    
    
    
    
    34,524$
    63,424
    
    
    $
    274
    
    
    $
    63,698
 Note 6  Common Stock, Warrants, and Other Equity Securities Common Stock, $.25 Par Value At December 31, 2004, 2003, and 2002, there were 4,931,767, 4,931,767 and 4,828,036 shares of
the Companys common stock outstanding, respectively, and 48,889 shares were reserved for issuance
on the conversion of the Series B Preferred Stock. In connection with the completion of the
Companys debt refinancing on December 18, 2003, the Company exchanged 103,731 shares of its common
stock for the $235,000 of interest that was accrued and unpaid on its then outstanding junior
subordinated notes. Warrants At December 31, 2004 and 2003, there were outstanding 345,237 and 427,877 warrants,
respectively, each of which entitles the holder to purchase one share of the Companys common stock
at $3.50 per share from August 1, 2005, through August 1, 2009. The Company issued 424,410 of the
warrants in connection with the exchange of its 12 3/4% Senior Subordinated Notes due February 1,
2000, for units consisting of warrants and 12% Senior Subordinated Notes due August 1, 2009, and
3,467 of the warrants in connection with the exchange of its 14% Junior Subordinated Notes for
units consisting of warrants and new 13% Junior Subordinated Notes due November 1, 2009. On October
1, 2004, the Company repurchased units comprising $8,264,000 principal amount of its 12% Senior
Subordinated Notes and 82,640 warrants, which were subsequently retired. The warrants will trade
only as part of a unit with the 12% Senior Subordinated Notes or the 13% Junior Subordinated Notes,
as the case may be, until August 1, 2005, at which time the warrants can be separated from the
notes. Because the exercise price of the warrants substantially exceeded the market price of the
Companys common stock at the date of issuance, the Company concluded that the warrants had
negligible value. Other Authorized Preferred Stock The Companys restated certificate of incorporation provides that the Company is authorized to
issue 2,500 shares of 6% Cumulative Convertible Preferred Stock, Series A, par value $100 per
share. No shares of this preferred stock have been issued. - 47 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Companys restated certificate of incorporation also provides that the Company is
authorized to issue 2,500,000 shares of other preferred stock having a par value of $1 per share.
No shares of this preferred stock have been issued. Note 7  Employee Benefit Plans Retirement and Savings Plan The Company maintains a retirement and savings plan pursuant to Section 401 of the Internal
Revenue Code (a 401(k) plan). All employees of the Company are entitled to participate in the
401(k) plan after meeting the eligibility requirements. Effective January 1, 2003, employees may
generally contribute up to 60% of their annual compensation but not more than prescribed dollar
amounts established by the United States Secretary of the Treasury. Employee contributions, up to a
maximum of 6% of an employees compensation, are matched 50% by the Company. During 2004, 2003, and
2002, matching contributions made by the Company totaled $507,000, $504,000, and $520,000,
respectively. Company contributions to the 401(k) plan vest at a rate of 20% per year commencing
after the participants second year of service until the participant becomes fully vested after six
years of service. Incentive Compensation Plan The Company has an incentive compensation plan that provides for the payment of annual cash
bonus awards to certain officers and key employees of the Company if specified targets are met. The
Compensation Committee of the Companys Board of Directors, which consists of two directors who are
not employees of the Company, oversees the administration of the incentive compensation plan and
approves the cash bonus awards. Bonus awards for eligible divisional employees are typically based
upon the attainment of predetermined targets for earnings before interest, taxes, depreciation, and
amortization (EBITDA) at each division. Bonus awards for corporate officers are typically based
upon the attainment of predetermined consolidated EBITDA targets. The consolidated financial
statements include provisions for bonuses totaling $641,000, $569,000, and $623,000 for 2004, 2003,
and 2002, respectively. Postretirement Benefits other than Pensions The Company maintains programs to fund certain costs related to a prescription drug card
program for a closed group of retirees of one of its former divisions and to fund limited medical
costs for certain retirees of one of its divisions. At December 31, 2004, the Companys accumulated
postretirement benefit obligation totaled $322,000. Prior to January 1, 2004, the Company amortized
its transition obligation over the remaining life expectancy of the participants, which equated to
an annual rate of $23,000. Effective January 1, 2004, the Company revised the life expectancy of
the participants in the prescription drug program and, as a result, the Company began to amortize
its unamortized transition obligation at the rate of $20,000 per year during 2004. The Company
measures its post-retirement benefit obligation on January 1 of each year. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) became
law on December 8, 2003. The Act provides for a prescription drug benefit under Medicare
Part D and contains a federal subsidy, effective January 1, 2006, to plan sponsors who provide
actuarially equivalent prescription drug benefit to retirees. The Company has not yet determined if
the prescription drug benefit it provides to a closed group of retirees is actuarially equivalent
to the benefits provided for in the Act. As a result, the possible effects of the Act are not
reflected in the obligations or net annual - 48 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS postretirement benefit cost set forth below. During 2004
and 2003, the Company paid $14,000 and $15,000, respectively, for retiree prescription drug
benefits. A reconciliation of the changes in the Companys post-retirement obligations at December 31,
2004 and 2003, is set forth below (dollar amounts in thousands): December 312004
    
    
    2003Accumulated postretirement benefit obligation at
beginning of year
    
    $
    332
    
    
    $
    411Interest cost
    
    
    19
    
    
    
    26Benefits paid
    
    
    (36
    )
    
    
    (43
    )Actuarial loss (gain)
    
    
    7
    
    
    
    (62
    )Accumulated postretirement benefit obligation at
end of year
    
    
    322
    
    
    
    332Plan assets at fair market value
    
    
    
    
    
    
    Unfunded accumulated postretirement benefit
obligation
at end of year
    
    
    322
    
    
    
    332Unrecognized transition obligation
    
    
    (79
    )
    
    
    (99
    )Unrecognized net gain
    
    
    52
    
    
    
    64Accrued benefit cost
    
    $
    295
    
    
    $
    297
 Net annual postretirement benefit costs for 2004, 2003, and 2002, are summarized below (dollar
amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Interest cost
    
    $
    19
    
    
    $
    26
    
    
    $
    28Net amortization and deferral
    
    
    15
    
    
    
    22
    
    
    
    54Net annual postretirement benefit cost
    
    $
    34
    
    
    $
    48
    
    
    $
    82
 The weighted-average annual rate of increase in the per capita cost of covered benefits for
the prescription drug card program is assumed to be 10% in 2005 and is projected to decrease
gradually thereafter until it reaches 5% in 2012. Changing the assumed rate of increase in the
prescription drug cost by one percentage point in each year would not have a significant effect on
the accumulated postretirement benefit obligation. The Companys program to fund certain insurance
premiums for retirees of one of its divisions has a defined dollar benefit and is therefore
unaffected by increases in health care costs. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation at December 31, 2004 and 2003, was 6%
and 6 1/4%, respectively. Note 8  Income Taxes Income taxes are accounted for in accordance with Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Company - 49 -




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS files a consolidated federal income tax return with its wholly-owned subsidiary. Deferred tax
assets are reduced by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. The components of the provisions for income taxes related to continuing operations in 2004,
2003, and 2002, are set forth below (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    (328
    )
    
    $
    
    
    
    $
    (643
    )State
    
    
    132
    
    
    
    76
    
    
    
    105(196
    )
    
    
    76
    
    
    
    (538
    )Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    Income tax provision (benefit)
    
    $
    (196
    )
    
    $
    76
    
    
    $
    (538
    )
 The federal income tax benefit recorded during 2004, consisted of an adjustment of previously
recorded federal income tax liabilities. The federal income tax benefit recorded during 2002 resulted from a refund of alternative
minimum taxes totaling $643,000 that were paid in earlier periods. Excluding the receipt of refunds of prior years income taxes, income taxes paid during 2004,
2003, and 2002 totaled $84,000, $103,000, and $80,000, respectively. The difference between the Companys income tax provision (benefit) for income (loss) from
operations in 2004, 2003, and 2002 and the income taxes that would have been payable at the federal
statutory rate for income (loss) from operations is reconciled as follows (dollar amounts in
thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Federal statutory income tax provision
    
    $
    1,564
    
    
    $
    (501
    )
    
    $
    (241
    )Change in valuation allowance
    
    
    (1,542
    )
    
    
    718
    
    
    
    (409
    )Adjustment of tax liabilities
    
    
    (328
    )Nondeductible goodwill
    
    
    
    
    
    
    16
    
    
    
    State income taxes, net of federal benefit
    
    
    87
    
    
    
    50
    
    
    
    78Other
    
    
    23
    
    
    
    (207
    )
    
    
    34Income tax provision (benefit)
    
    $
    (196
    )
    
    $
    76
    
    
    $
    (538
    )
 - 50 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the Companys deferred tax assets and deferred tax liabilities
at December 31, 2004 and 2003 (dollar amounts in thousands): December 312004
    
    
    2003Deferred tax assets:Net operating losses and tax credit carryforwards:Federal net operating losses
    
    $
    5,566
    
    
    $
    6,714State net operating losses
    
    
    1,852
    
    
    
    1,942Federal alternative minimum taxes
    
    
    864
    
    
    
    864Investment tax credit
    
    
    100
    
    
    
    100Other tax credit
    
    
    81
    
    
    
    81Total tax carryforwards
    
    
    8,463
    
    
    
    9,701Deductible temporary differences:Impairment of long-lived assets
    
    
    693
    
    
    
    693Accounts receivable and inventory reserves
    
    
    470
    
    
    
    520Tax inventory over book
    
    
    193
    
    
    
    159Compensation accruals
    
    
    542
    
    
    
    318Other accruals
    
    
    398
    
    
    
    381Other
    
    
    129
    
    
    
    118Total deferred tax assets
    
    
    10,888
    
    
    
    11,890Valuation allowance
    
    
    (8,121
    )
    
    
    (8,925
    )Net deferred tax assets
    
    
    2,767
    
    
    
    2,965Deferred tax liabilities:Tax over book depreciation
    
    
    2,767
    
    
    
    2,965Net deferred taxes
    
    $
    
    
    
    $
    
 During 2004, the Companys valuation allowance decreased by $804,000, primarily due to the net
income reported by the Company for calendar 2004. At December 31, 2004, the Company had net operating loss carryforwards for federal income tax
purposes of $16,370,000, which expire in the years 2005 through 2022, alternative minimum tax net
operating loss carryforwards of $7,838,000, which can be used to reduce future taxable income for
purposes of calculating alternative minimum taxable income, if any, without any time limitation,
and alternative minimum tax credit carryforwards of $864,000, which can be used to offset future
payments of regular federal income taxes, if any, without any time limitation. - 51 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The expiration of the Companys federal net operating loss carryforwards by year of expiration
is set forth in the table below (dollar amounts in thousands): 2005
    
    $
    3192006
    
    
    3,4732007
    
    
    1,2462008
    
    
    2009
    
    
    Thereafter
    
    
    11,332Total federal net operating loss
carryforwards
    
    $
    16,3707
 Note 9  Segments Description of Segments and Products The Company has two operating segments, the Rubber Group and the Metals Group. The Rubber
Group produces seals used in automotive wiring systems, insulators for automotive ignition wire
sets, and components for medical devices. The Metals Group machines components from aluminum,
brass, and steel bars for sale primarily to automotive suppliers. During 2004, the Company
committed to a plan to discontinue the operations of its die casting division, which is one of two
operating units that comprise the Metals Group segment. In the following table, information related
to the die casting division has been excluded. The Rubber Group and the Metals Group conduct
substantially all of their business in the continental United States. At December 31, 2004,
approximately 34.9% of the Companys employees were subject to collective bargaining agreements
that expire in 2007 and 2008. Measurement of Segment Profit or Loss The Company evaluates its performance based upon several measures, including income from
operations, EBITDA, and asset utilization. The accounting policies of the Companys operating segments are the same as those described in
Note 1, Summary of Significant Accounting Policies, except that debt, deferred financing
expenses, interest expense, and income tax expense are recorded at the Corporate Office. Also,
Corporate Office expenses that are not considered direct expenses of the Rubber Group or the Metals
Group are not allocated to those segments. Factors Management Used to Identify Reportable Segments Although all of the Companys production facilities are similar manufacturing operations,
selling to similar customers, the Company presents financial data for the Rubber Group and the
Metals Group because of the significant difference in financial performance between those
businesses. Industry Concentration; Reliance on Large Customers and Credit Risk During 2004, 2003, and 2002, net sales from continuing operations to customers in the
automotive industry totaled $97,902,000, $97,146,000, and $96,458,000, respectively, which
represented 88.7%, 85.8%, and 85.9%, respectively, of the Companys net sales. At December 31, 2004
and 2003, - 52 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS accounts receivable from automotive industry customers totaled $15,248,000 and
$15,166,000, respectively. The Company operates primarily in the domestic automotive market, which
has been characterized by intense price competition and increasing customer requirements for
quality and service. These factors, among others, may have a sudden and an adverse affect on the
operating results and financial condition of the Companys customers, and, in turn, the
collectibility of the Companys accounts receivable from those customers. The Company attempts to
mitigate this risk of loss through ongoing evaluations of automotive market conditions,
examinations of customer financial statements, and discussions with customer management as deemed
necessary. Provisions for credit losses are based upon historical experience and such ongoing
evaluations of the financial condition of the Companys customers. The Company generally does not
require collateral from its customers to support the extension of trade credit. At December 31,
2004 and 2003, the Company had reserves for credit losses of $537,000 and $545,000, respectively.
At December 31, 2004 and 2003, accounts receivable from automotive industry customers of
discontinued operations totaled $1,227,000 and $1,552,000, respectively. During 2004, 2003, and 2002, the Companys net sales to Delphi Corporation, totaled
$23,413,000, $24,591,000, and $25,181,000. Substantially all of the Companys net sales to Delphi
during the three years ended December 31, 2004, were made by the Rubber Group. Sales to Delphi in
2004, 2003, and 2002, represented 21.2%, 21.7%, and 22.4%, respectively, of the Companys net sales
and 23.5%, 23.4%, and 25.1%, respectively, of the Rubber Groups net sales. At December 31, 2004,
2003, and 2002, accounts receivable due from Delphi represented 23.8%, 23.3%, and 26.8% of the
Companys total trade receivable balances. During 2004 and 2003, net sales to General Cable
Corporation totaled $11,636,000 and $11,802,000 or 10.5% and 10.4%, respectively, of the Companys
net sales, and 11.7% and 11.4%, respectively, of the Rubber Groups net sales. No other customer
accounted for more than 10% of the Companys net sales during 2004, 2003, or 2002. In 2004, the
three largest customers of the Rubber Group, including Delphi, accounted for 44.6% of the Rubber
Groups net sales and, at December 31, 2004, 43.2% of the Companys total trade receivable
balances. In 2004, the three largest customers of the continuing operations of the Metals Group
accounted for 61.3% of the Metals Groups net sales and, at December 31, 2004, 9.3% of the
Companys total trade receivable balances. Loss of a significant amount of business from Delphi,
General Cable, or any of the Companys other large customers would have a material adverse effect
on the Company if such business were not substantially replaced by additional business from
existing or new customers. In addition, the Companys results of operations could be materially
adversely affected if Delphi, General Cable, or any of the Companys other large customers
experience financial difficulties that cause them to delay or fail to make payments for goods sold
to them. Net sales to Delphi of connector seals for automotive wiring harnesses totaled $19,802,000,
$20,227,000, and $21,147,000 during 2004, 2003, and 2002, respectively. Since July 2001,
substantially all of the connector seals that the Company has sold to Delphi were sold pursuant to
a supply agreement that was scheduled to expire on December 31, 2004. During 2004, Delphi advised the Company that it planned to insource during 2005, approximately
36 high-volume connector seals that were then being produced by the Companys Lexington Connector
Seals division, and asked the Company to provide a proposal to continue to manufacture the
remaining connector seals then being supplied to Delphi by the connector seals division. On
November 22, 2004, Delphi and the connector seals division entered into an agreement pursuant to
which Delphi agreed to purchase from the division 100% of its requirements through December 31,
2009, for all connector seals not scheduled to be insourced and 100% of its requirements through
various dates in 2005 for the connector seals scheduled to be insourced. The Company estimates that
if the 36 connector seals had been - 53 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in-sourced by Delphi on January 1, 2004, its net sales and
income from operations for 2004 would have been reduced by approximately $8,624,000 and $840,000,
respectively. Pursuant to the agreement, the connector seals division will receive price increases
effective January 1, 2005 on the remaining parts supplied to Delphi, which are expected to offset a
significant portion of the profit lost due to the in-sourcing. The Company is currently
restructuring the operations of the connector seals division to reduce expenses and further
mitigate the impact of the reduced volume. The restructuring of the connector seals division will
include, among other things, the closing of one of its existing manufacturing facilities. Corporate Office The net loss from operations at the Corporate Office consists primarily of general
administrative expenses that are not a result of any activity carried on by either the Rubber Group
or the Metals Group. Corporate Office expenses include the compensation and benefits of the
Companys executive officers
and corporate staff, rent on the office space occupied by these individuals, general corporate
legal fees, including fees related to financings, and certain insurance expenses. Assets of the
Corporate Office are primarily cash, certain prepaid expenses and other miscellaneous current
assets, deferred tax assets, and deferred financing expenses. - 54 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Segment Financial Data Information relating to the Companys operating segments and the Corporate Office for 2004,
2003, and 2002 is summarized below (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Net sales:Rubber Group
    
    $
    99,565
    
    
    $
    103,243
    
    
    $
    98,880Metals Group
    
    
    10,788
    
    
    
    9,988
    
    
    
    13,483Total net sales
    
    $
    110,353
    
    
    $
    113,231
    
    
    $
    112,363Income (loss) from operations(1):Rubber Group
    
    $
    9,865
    
    
    $
    10,026
    
    
    $
    10,765Metals Group
    
    
    (2,788
    )
    
    
    (1,840
    )
    
    
    (2,099
    )Subtotal
    
    
    7,077
    
    
    
    8,166
    
    
    
    8,666Corporate Office
    
    
    (2,411
    )
    
    
    (2,679
    )
    
    
    (2,464
    )Total income from operations
    
    $
    4,666
    
    
    $
    5,507
    
    
    $
    6,202Depreciation and amortization(2):Rubber Group
    
    $
    6,929
    
    
    $
    7,121
    
    
    $
    7,786Metals Group
    
    
    1,476
    
    
    
    1,796
    
    
    
    2,408Subtotal
    
    
    8,405
    
    
    
    8,919
    
    
    
    10,194Corporate Office
    
    
    39
    
    
    
    38
    
    
    
    53Total depreciation and amortization
    
    $
    8,444
    
    
    $
    8,955
    
    
    $
    10,247Capital expenditures(3):Rubber Group
    
    $
    5,277
    
    
    $
    4,873
    
    
    $
    3,690Metals Group
    
    
    773
    
    
    
    799
    
    
    
    319Subtotal
    
    
    6,050
    
    
    
    5,672
    
    
    
    4,009Corporate Office
    
    
    7
    
    
    
    14
    
    
    
    4Total capital expenditures
    
    $
    6,057
    
    
    $
    5,686
    
    
    $
    4,013Assets:Rubber Group
    
    $
    60,377
    
    
    $
    61,953
    
    
    $
    64,439Metals Group
    
    
    9,872
    
    
    
    10,231
    
    
    
    11,702Subtotal
    
    
    70,249
    
    
    
    72,184
    
    
    
    76,141Corporate Office
    
    
    3,352
    
    
    
    4,111
    
    
    
    5,252Discontinued operations
    
    
    4,776
    
    
    
    7,392
    
    
    
    10,752Total assets
    
    $
    78,377
    
    
    $
    83,687
    
    
    $
    92,145
   (1)
    
    During 2003, the loss from operations at the Metals Group includes a
provision of $47,000 to write off goodwill. During 2002, the loss from operations at
the Metals Group includes costs of $609,000 incurred to close the Metals Groups
metal machining facility in Arizona, and $1,290,000 of other losses related to the
Arizona facility.(2)
    
    Excludes amortization of deferred financing expenses, which totaled
$1,098,000, $610,000, and $440,000, during 2004, 2003, and 2002, respectively, and
which is included in interest expense in the consolidated financial statements.(3)
    
    Capital expenditures for 2004, included $144,000 of equipment purchased under
capitalized lease obligations and $198,000 of equipment acquired with seller-provided
financing. Capital expenditures for 2003 included $720,000 of equipment purchased under
capital lease obligations. Capital expenditures for 2002 included $365,000 of equipment
purchased under capitalized lease obligations and $247,000 of equipment acquired with
seller-provided financing. - 55 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10  Net Income (Loss) per Common Share The calculations of basic and diluted net income (loss) per common share for 2004, 2003, and
2002, are set forth below (in thousands, except per share amounts). The assumed conversion of the
Series B Preferred Stock and the assumed exercise of outstanding warrants to purchase the Companys
common stock, which were issued on December 18, 2003, were not dilutive. As a result, the weighted
average number of outstanding common shares used in the calculation of net income (loss) per common
share set forth below does not reflect the assumed conversion of the Series B Preferred Stock or
the assumed exercise of the warrants. During 2003, the Companys loss per share calculation reflected dividends on the Series B
Preferred Stock totaling $106,000. If the Company had paid dividends on the Series B Preferred
Stock during 2002, the Companys net loss per share would have been increased by one cent per
share. Dividends and redemptions accruing on the Series B preferred stock subsequent to the adoption of
FAS 150 by the Company on July 1, 2003, are classified as interest expense in the Companys
consolidated statements of operations. Years Ended December 312004
    
    
    2003
    
    
    2002Numerator for basic and diluted earnings per share:Income (loss) from continuing operations before deducting
preferred stock dividends
    
    $
    4,798
    
    
    $
    (1,549
    )
    
    $
    (170
    )Less: preferred stock dividends
    
    
    
    
    
    
    106
    
    
    
    Income (loss) from continuing operations after deducting
preferred stock dividends
    
    
    4,798
    
    
    
    (1,655
    )
    
    
    (170
    )Loss from discontinued operations
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (247
    )
    
    
    Net income (loss) applicable to common stockholders
    
    $
    1,590
    
    
    $
    (6,555
    )
    
    $
    (1,567
    )Denominator  weighted average shares outstanding
    
    
    4,932
    
    
    
    4,832
    
    
    
    4,828Basic and diluted income (loss) per share of common stock:Continuing operations
    
    $
    0.97
    
    
    $
    (0.35
    )
    
    $
    (0.03
    )Discontinued operations
    
    
    (0.65
    )
    
    
    (0.96
    )
    
    
    (0.29
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (0.05
    )
    
    
    Net income (loss)
    
    $
    0.32
    
    
    $
    (1.36
    )
    
    $
    (0.32
    )
 - 56 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11  Commitments and Contingencies Purchase Commitments At December 31, 2004, the Company had outstanding commitments to purchase equipment of
$341,000. Leases The Company is lessee under various operating leases relating to storage and office space,
temporary office units, and equipment. Total rent expense under operating leases from continuing
operations aggregated $440,000, $395,000, and $419,000 for 2004, 2003, and 2002, respectively. At
December 31, 2004, future minimum lease commitments under noncancelable operating leases from
continuing operations totaled $226,000, $109,000, and $54,000 for 2005, 2006, and 2007,
respectively. Commitments subsequent to 2007 are not significant. Legal Actions 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 or may in the future be a party
are at various stages of completion. Although there can be no assurance as to the outcome of
existing or potential litigation, the Company believes, based upon the information currently
available to it, that the outcome of such actions will not have a material adverse effect upon its
financial position. Other The Company maintains insurance coverage for certain aspects of its business and operations.
Based on the Companys evaluation of the various risks to which it may be exposed, the Company has
elected to retain a portion of the potential losses that it could experience in the future through
the use of various deductibles, limits, and retentions. These forms of self-insurance subject the
Company to possible future liability for which it is partially or completely uninsured. Although
there can be no assurance that it will be successful in its efforts, the Company attempts to limit
future liability through, among other things, the ongoing training and education of its employees,
the implementation of safety programs, the ongoing testing and evaluation of the safety and
suitability of its workplace environments, the development of sound business practices, and the
exercise of care and judgment in the negotiation of contracts. Note 12  Related Parties The Chairman of the Board and the President of the Company, Michael A. Lubin and Warren
Delano, are the Companys two largest stockholders, with beneficial ownership of 32.7% and 28.3%,
respectively, of the Companys common stock. They are also the holders of the 13% Junior
Subordinated Note, and, together with affiliates and associates, the holders of $2,831,000
principal amount of 12% Senior Subordinated Notes. In December 2003, Messrs. Delano and Lubin
converted accrued interest of $235,000 on the Companys junior subordinated notes into 103,731
shares of common stock. - 57 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In 2004, Messrs. Delano and Lubin, through an investment banking firm of which they are the
only partners, were paid $700,000 to provide management and investment banking services.
Additionally, Messrs. Delano and Lubin may receive incentive compensation tied to the Companys
operating performance and other compensation for specific transactions completed by the Company
with the assistance of Messrs. Lubin and Delano. The Company also has agreed to reimburse their
firm for certain out-of-pocket expenses. During each of 2003 and 2002, the Company paid the Messrs.
Lubin and Delano fees of $500,000. During 2004, 2003, and 2002, the Company reimbursed their firm
for expenses of $163,000, $200,000, and $196,000, respectively. For more information on the compensation of Messrs. Delano and Lubin, refer to the Companys
proxy statement to be issued in connection with its Annual Meeting of Stockholders and to be filed
during April, 2005. Note 13 Gain on the Repurchase of Debt During 2004, the Company recognized $8,598,000 of aggregate gains on the repurchase of its
debt. Repurchase of 10 1/2% Senior, Unsecured Note During the second quarter of 2004, the Company recognized a pre-tax gain of $3,252,000 on the
repurchase of its $7,500,000 10 1/2% senior, unsecured note and all accrued interest thereon. Although
the Company repurchased the senior, unsecured note on December 18, 2003, the gain on the repurchase
of the senior, unsecured note was deferred and recorded, at December 31, 2003, in current
liabilities as deferred gain on repurchase of debt because the agreement governing the repurchase
of the note provided that the claim could be reinstated if certain events occurred prior to April
20, 2004. Because none of these events occurred prior to April 20, 2004, the Company recognized the
pre-tax gain during the three-month period ended June 30, 2004. Repurchase of 12% Senior Subordinated Notes On October 1, 2004, the Company repurchased a total of $8,264,000 principal amount of its
12% Senior Subordinated Notes plus interest accrued thereon at an aggregate cost of $2,892,000.
After the write-off of deferred financing expenses of $192,000, the Company realized a pre-tax gain
on the repurchase of $5,346,000. The purchased 12% Senior Subordinated Notes have been cancelled
and retired. - 58 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14  Discontinued Operations During 2002 and 2003, the Companys die casting division, which was one of two operating units
that comprised the Companys Metals Group segment, experienced negative gross profit margins. At
December 31, 2003, the Company reassessed the divisions business and reduced its overall
expectations for the divisions future financial performance. As a result, the Company reviewed the
long-lived assets of the die casting division for impairment as of December 31, 2003, under the
provisions of Statement of Financial Accounting Standards No.144, Accounting for Impairment or
Disposal of Long-Lived Assets (FAS 144). The Company determined that the undiscounted, projected
cash flow of the division was less than the carrying value of the long-lived assets being tested.
As a result, the Company concluded that the long-lived assets of this division, which had a
carrying value of $7,131,000, were impaired and the Company wrote them down to their estimated fair
value of $4,704,000, recording a non-cash, pre-tax impairment charge of $2,427,000 at December 31,
2003. Fair value was based primarily on independent appraisals of the long-lived assets. In September 2004, as a result of continued poor operating performance and reduced
expectations for the divisions future financial performance, the Company committed to a plan to
discontinue the operations of the die casting division. In the fourth quarter of 2004, the Company
initiated a program to sell the assets or business of the die casting division. If a sale of the
entire business does not occur during the first half of 2005, the Company plans to close the
operations of the die casting division during the second quarter of 2005, after fulfilling certain
agreed-upon customer purchase orders. Accordingly, pursuant to FAS 144, the carrying value of the
assets of the die casting division have been adjusted to the Companys estimate of the fair value
of such assets, which approximates the projected proceeds to be realized on the disposition of the
assets, net of estimated selling costs. As a result, the Company recognized a pretax impairment
charge of $1,595,000 during 2004. In accordance with Financial Accounting Standards Board Emerging Issue Task force Abstract No.
87-24, Allocation of Interest to Discontinued Operations (EITF 87-24), the Company has
allocated interest to the discontinued operations based on the debt that would be required to be
repaid using managements estimate of the proceeds to be realized on the anticipated sale of the
die casting assets. No allocation was made to the die casting division for any other interest or
for any corporate office expenses. Interest expense allocated to the die casting division totaled
$241,000, $69,000, and $62,000 for 2004, 2003, and 2002, respectively. - 59 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes certain operating data of the die casting division for 2004,
2003, and 2002 (dollar amounts in thousands): Years Ended December 312004
    
    
    2003
    
    
    2002Net sales
    
    $
    9,096
    
    
    $
    8,385
    
    
    $
    12,489Loss from operations before asset impairment charge
    
    $
    (1,372
    )
    
    $
    (1,996
    )
    
    $
    (1,335
    )Impairment of long-lived assets
    
    
    (1,595
    )
    
    
    (2,427
    )
    
    
    Impairment of goodwill
    
    
    
    
    
    
    (161
    )
    
    
    Loss from operations of discontinued operations
    
    
    (2,967
    )
    
    
    (4,584
    )
    
    
    (1,335
    )Allocated interest expense
    
    
    241
    
    
    
    69
    
    
    
    62Loss before income tax
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Income tax
    
    
    
    
    
    
    
    
    
    
    Loss from discontinued operations
    
    
    (3,208
    )
    
    
    (4,653
    )
    
    
    (1,397
    )Add back: depreciation and amortization
    
    
    666
    
    
    
    1,324
    
    
    
    1,618interest expense
    
    
    241
    
    
    
    69
    
    
    
    62EBITDA from discontinued operations
    
    $
    (2,301
    )
    
    $
    (3,260
    )
    
    $
    283
 The following table sets forth the assets and liabilities of the die casting division in our
consolidated balance sheets at December 31, 2004 and 2003 (dollar amounts in thousands): December 312004
    
    
    2003Assets:Current assets:Cash
    
    $
    
    
    
    $
    11Accounts receivable, net
    
    
    1,056
    
    
    
    1,394Inventories, net
    
    
    695
    
    
    
    894Prepaid expenses and other current assets
    
    
    240
    
    
    
    388Other assets, net
    
    
    31
    
    
    
    267Current assets
    
    
    2,022
    
    
    
    2,954Plant and equipment, net (1)
    
    
    2,754
    
    
    
    4,438Assets of discontinued operations
    
    $
    4,776
    
    
    $
    7,392Liabilities(2):Current liabilities:Accounts payable
    
    $
    615
    
    
    $
    516Accrued expenses
    
    
    179
    
    
    
    166Other liabilities
    
    
    
    
    
    
    93Liabilities of discontinued operations
    
    $
    794
    
    
    $
    775
 - 60 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (1)
    
    Under the terms of our secured loan agreements, we are required to use proceeds from
the sale of property, plant and equipment to pay down the indebtedness collateralized by
such property, plant, and equipment.(2)
    
    Liabilities do not include debt for money borrowed by us that is secured by assets
of the division. Note 15  Quarterly Financial Data (Unaudited) Quarterly unaudited financial data for the eight fiscal quarters ended December 31, 2004, is
set forth below (dollar amounts in thousands, except per share amounts). Quarters Ended 2004Mar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31Net sales
    
    $
    30,607
    
    
    $
    29,474
    
    
    $
    25,880
    
    
    $
    24,392Gross profit
    
    $
    4,146
    
    
    $
    3,093
    
    
    $
    2,817
    
    
    $
    1,993Income (loss) from continuing operations
    
    $
    496
    
    
    $
    2,139
    
    
    $
    (1,194
    )
    
    $
    3,357Loss from discontinued operations
    
    
    (259
    )
    
    
    (857
    )
    
    
    (1,525
    )
    
    
    (567
    )Net income (loss)
    
    $
    237
    
    
    $
    1,282
    
    
    $
    (2,719
    )
    
    $
    2,790Basic and diluted income (loss) per share of
common stock:Continuing operations
    
    $
    0.10
    
    
    $
    0.42
    
    
    $
    (0.25
    )
    
    $
    0.66Discontinued operations
    
    
    (0.04
    )
    
    
    (0.16
    )
    
    
    (0.30
    )
    
    
    (0.10
    )Net income (loss)
    
    $
    0.06
    
    
    $
    0.26
    
    
    $
    (0.55
    )
    
    $
    0.56
 Quarters Ended 2003Mar. 31
    
    
    June 30
    
    
    Sept. 30
    
    
    Dec. 31Net sales
    
    $
    29,949
    
    
    $
    28,925
    
    
    $
    26,551
    
    
    $
    27,806Gross profit
    
    $
    3,853
    
    
    $
    3,700
    
    
    $
    2,334
    
    
    $
    3,571Income (loss) from continuing operations
    
    $
    158
    
    
    $
    (65
    )
    
    $
    (1,262
    )
    
    $
    (380
    )Loss from discontinued operations
    
    
    (327
    )
    
    
    (609
    )
    
    
    (454
    )
    
    
    (3,263
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (247
    )
    
    
    Net income (loss)
    
    $
    (169
    )
    
    $
    (674
    )
    
    $
    (1,963
    )
    
    $
    (3,643
    )Basic and diluted income (loss) per share of
common stockContinuing operations
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.26
    )
    
    $
    (0.10
    )Discontinued operations
    
    
    (0.06
    )
    
    
    (0.12
    )
    
    
    (0.10
    )
    
    
    (0.67
    )Cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (0.05
    )
    
    
    Net income (loss)
    
    $
    (0.04
    )
    
    $
    (0.14
    )
    
    $
    (0.41
    )
    
    $
    (0.77
    )
 Results of the discontinued operations for the third and fourth quarters of 2004,
included non-cash, pre-tax impairment charges of $928,000 and $667,000, respectively, to reduce the
carrying value of the assets of the discontinued die casting division to managements estimate of
the current fair value of such assets, which approximates the projected proceeds to be realized on
the disposition of the assets, net of selling costs. - 61 -




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Results of the discontinued operations for the fourth quarter of 2003, included a non-cash,
pre-tax impairment charge of $161,000 to write off its unamortized goodwill and a non-cash, pre-tax
charge of $2,427,000 to write down to fair value the long-lived assets of the discontinued die
casting division. - 62 -




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##### Table of Contents



Item 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 Item 9A. CONTROLS AND PROCEDURES Under the supervision of, and with the participation of, our management, including our
co-principal executive officers and our chief financial officer, we evaluated, as of December 31,
2004, the effectiveness of the design and operation of our disclosure controls and procedures.
Based on that evaluation, our co-principal executive officers and our chief financial officer
concluded that our disclosure controls and procedures provide management with timely notice of
material information that is required to be disclosed in periodic reports filed with the U.S.
Securities and Exchange Commission. We also reviewed our internal controls and concluded that there
have been no significant changes in our internal controls, or in other factors that could
significantly affect our internal controls, subsequent to the date of our previous evaluation. 
 Item 9B. OTHER INFORMATION None. - 63 -




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##### Table of Contents



PART III 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by Item 10 is incorporated by reference to the sections entitled
Election of Directors and Executive Officers in the Companys proxy statement to be issued in
connection with its 2005 Annual Meeting of Stockholders and to be filed with the Securities and
Exchange Commission (the Commission) not later than 120 days after December 31, 2004. 
 Item 11. EXECUTIVE COMPENSATION Information required by Item 11 is incorporated by reference to the section entitled
Executive Compensation in the Companys proxy statement to be issued in connection with its 2005
Annual Meeting of Stockholders and to be filed with the Commission not later than 120 days after
December 31, 2004. 
  Item 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item 12 is incorporated by reference to the sections entitled
Security Ownership and Equity Compensation Plan Information in the Companys proxy statement to
be issued in connection with its 2005 Annual Meeting of Stockholders and to be filed with the
Commission not later than 120 days after December 31, 2004. 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is incorporated by reference to the section entitled Certain
Relationships and Transactions in the Companys proxy statement to be issued in connection with
its 2005 Annual Meeting of Stockholders and to be filed with the Commission not later than 120 days
after December 31, 2004. 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by Item 14 is incorporated by reference to the section entitled
Ratification of Appointment of Independent Auditors in the Companys proxy statement to be issued
in connection with its 2005 Annual Meeting of Stockholders and to be filed with the Commission not
later than 120 days after December 31, 2004. - 64 -




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##### Table of Contents



PART IV 
  Item 15.
    FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K  (a)
    1.
    Financial StatementsThe consolidated financial statements of Lexington Precision Corporation and its
wholly owned subsidiaries, Lexington Rubber Group, Inc. and Lexington Precision
GmbH, are included in Part II, Item 8.2.
    Financial Statement ScheduleSchedule II, Valuation and Qualifying Accounts and Reserves, is included in this
Part IV, Item 15, on page 71. All other schedules are omitted because the required
information is not applicable, not material, or included in the consolidated
financial statements or the notes thereto.3.
    Exhibits 3-1
    
    Articles of Incorporation and Restatement thereof3-2
    
    By-laws, as amended3-3
    
    Certificate of Correction dated September 21, 19763-4
    
    Certificate of Ownership and Merger dated May 24, 19773-5
    
    Certificate of Ownership and Merger dated May 31, 19773-6
    
    Certificate of Reduction of Capital dated December 30, 19773-7
    
    Certificate of Retirement of Preferred Shares dated December 30, 19773-8
    
    Certificate of Reduction of Capital dated December 28, 19783-9
    
    Certificate of Retirement of Preferred Shares dated December 28, 19783-10
    
    Certificate of Reduction of Capital dated January 9, 19793-11
    
    Certificate of Reduction of Capital dated December 20, 19793-12
    
    Certificate of Retirement of Preferred Shares dated December 20, 19793-13
    
    Certificate of Reduction of Capital dated December 16, 19823-14
    
    Certificate of Reduction of Capital dated December 17, 19823-15
    
    Certificate of Amendment of Restated Certificate of Incorporation
dated September 26, 1984
 - 65 -




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##### Table of Contents



3-16
    
    Certificate of Retirement of Stock dated September 24, 19863-17
    
    Certificate of Amendment of Restated Certificate of Incorporation
dated November 21, 19863-18
    
    Certificate of Retirement of Stock dated January 15, 19873-19
    
    Certificate of Retirement of Stock dated February 22, 19883-20
    
    Certificate of Amendment of Restated Certificate of Incorporation
dated January 6, 19893-21
    
    Certificate of Retirement of Stock dated August 17, 19893-22
    
    Certificate of Retirement of Stock dated January 9, 19903-23
    
    Certificate of the Designations, Preferences and Relative
Participating, Optional and Other Special Rights of 12% Cumulative
Convertible Exchangeable Preferred Stock, Series C, and the
Qualifications, Limitations and Restrictions thereof dated January
10, 19903-24
    
    Certificate of Ownership and Merger dated April 25, 19903-25
    
    Certificate of Elimination of 12% Cumulative Convertible
Exchangeable Preferred Stock, Series C, dated June 4, 19903-26
    
    Certificate of Retirement of Stock dated March 6, 19913-27
    
    Certificate of Retirement of Stock dated April 29, 19943-28
    
    Certificate of Retirement of Stock dated January 6, 19953-29
    
    Certificate of Retirement of Stock dated January 5, 19963-30
    
    Certificate of Retirement of Stock dated January 6, 19973-31
    
    Certificate of Retirement of Stock dated January 9, 19983-32
    
    Certificate of Retirement of Stock dated January 13, 19993-33
    
    Certificate of Retirement of Stock dated January 26, 20004-1
    
    Certificate of Designations, Preferences, Rights and Number of
Shares of Redeemable Preferred Stock, Series B4-2
    
    Purchase Agreement dated as of February 7, 1985, between Lexington
Precision Corporation (LPC) and L&D Precision Limited Partnership
(L&D Precision) and exhibits thereto
 - 66 -




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##### Table of Contents



4-3
    
    Amendment Agreement dated as of April 27, 1990, between LPC and L&D
Precision with respect to Purchase Agreement dated as of February 7,
19854-4
    
    Recapitalization Agreement dated as of April 27, 1990, between LPC
and L&D Woolens Limited Partnership (L&D Woolens) and exhibits
thereto4-5
    
    Indenture dated as of August 1, 1993, between LPC and IBJ Schroder
Bank & Trust Company, as Trustee4-6
    
    Specimen of 12 3/4% Senior Subordinated Note, due February 1, 20004-7
    
    Indenture, dated as of December 18, 2003, between the Company and
Wilmington Trust Company, as Trustee4-8
    
    Registration Rights Agreement, dated as of December 18, 2003,
between the Company and Purchasers listed therein4-9
    
    Form of Unit4-10
    
    Form of Warrant4-11
    
    Form of 12% Senior Subordinated Note due August 1, 20094-12
    
    Form of 13% Junior Subordinated Note due November 1, 200910-1
    
    Purchase Agreement dated as of February 7, 1985, between LPC and L&D
Precision and exhibits thereto10-2
    
    Amendment Agreement dated as of April 27, 1990, between LPC and L&D
Precision with respect to Purchase Agreement dated as of February 7,
198510-3
    
    Lexington Precision Corporation Flexible Compensation Plan, as amended10-4
    
    1986 Restricted Stock Award Plan, as amended10-5
    
    Lexington Precision Corporation Retirement and Savings Plan, as
amended10-6
    
    Description of 2002 Compensation Arrangements with Lubin, Delano, &
Company10-7
    
    Description of 2004 Compensation Arrangements with Lubin, Delano, &
Company10-8
    
    Corporate Office 2002 Management Cash Bonus Plan10-9
    
    Recapitalization Agreement dated as of April 27, 1990, between LPC
and L&D Woolens and exhibits thereto
 - 67 -




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##### Table of Contents



10-10
    
    Exchange Agreement, dated as of December 18, 2003, between the
Company and each of Michael A. Lubin and Warren Delano10-11
    
    Warrant Agent Agreement, Dated as of December 18, 2003, between the
Company and Wilmington Trust Company, as Warrant Agent10-12
    
    Amended and Restated Loan and Security Agreement, dated as of
December 18, 2003, by and among the Company and Lexington Rubber
Group, Inc., as borrowers, and Congress Financial Corporation, as
Agent, The CIT Group/Commercial Financing, Inc., as Co-Agent, and
the lenders from time to time party thereto10-13
    
    Pledge and Security Agreement, dated as of December 18, 2003, made
by the Company in favor of Congress, as agent10-14
    
    Amended and Restated Term Promissory Note, dated December 18, 2003,
made by the Company in favor of Congress Financial Corporation, as
agent, in the original principal amount of $4,000,00010-15
    
    Amended and Restated Term Promissory Note, dated as of December 18,
2003, made by Lexington Rubber Group, Inc. in favor of Congress
Financial Corporation, as agent, in the original principal amount of
$9,500,00010-16
    
    Loan and Security Agreement, dated December 18, 2003, by and among
the Company and Lexington Rubber Group, Inc., as Borrowers, Ableco
Finance LLC, as Agent, and the lenders from time to time party
thereto10-17
    
    Pledge and Security Agreement, dated December 18, 2003, made by the
Company in favor of Ableco Finance LLC, as agent10-18
    
    Payoff Agreement, dated as of December 18, 2003, by and between
Nomura Special Situations Investment Trust and the Company10-19
    
    Amendment No. 1 to Loan and Security Agreement dated as of March 31,
2004, by and among the Company, Lexington Rubber Group, Inc., and
Ableco Finance LLC10-20
    
    Amendment No. 1 to Amended and Restated Loan and Security Agreement
dated as of March 19, 2004, by and among the Company, Lexington
Rubber Group, Inc. and Congress Financial Corporation10-21
    
    Amendment No. 2 to Amended and Restated Loan and Security Agreement
dated as of August 16, 2004, by and among the Company, Lexington
Rubber Group, Inc. and Congress Financial Corporation10-22
    
    Amendment No. 3 to Loan and Security Agreement dated as of August
16, 2004 by and among the Company, Lexington Rubber Group, Inc. and
Ableco Finance LLC
 - 68 -




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##### Table of Contents



10-23
    
    Loan Agreement, dated as of September 3, 2004, by and among the
Company, Lexington Rubber Group, Inc., and Cohanzick High Yield
Partners, L.P.10-24
    
    Term Note, dated as of September 7, 2004, made by the Company and
Lexington Rubber Group, Inc., in favor of Cohanzick High Yield
Partners, L.P., in the original principal amount of $7,000,00010-25
    
    Waiver and consent, dated as of September 3, 2004 by Ableco Finance
LLC in favor of the Company and Lexington Rubber Group, Inc.10-26
    
    Amendment No. 3 to Amended and Restated Loan and Security Agreement
dated as of September 3, 2004, by and among the Company, Lexington
Rubber Group, Inc. and Congress Financial Corporation10-27*
    
    Delphi Corporation Lifetime Contract, dated as of November 22, 2004,
by and between Delphi Automotive Systems LLC and Lexington Connector
Seals10-28
    
    Amendment No. 4 to Amended and Restated Loan and Security Agreement,
dated as of January 27, 2005, by and among the Company, Lexington
Rubber Group, Inc. and Wachovia Bank, National Association10-29
    
    Second Amended and Restated Term Promissory Note, dated January 27,
2005, made by the Company in favor of Wachovia Bank, National
Association in the principal amount of $2,944,00010-30
    
    Second Amended and Restated Term Promissory Note, dated January 27,
2005, made by Lexington Rubber Group, Inc. in favor of Wachovia
Bank, National Association in the principal amount of $8,456,00010-31
    
    Amendment No. 4 to Loan and Security Agreement, dated as of
January 27, 2005 by and among the Company, Lexington Rubber Group,
Inc. and Ableco Finance LLC10-32
    
    Amendment No. 1 to Intercreditor Agreement, dated as of January 27,
2005, by and between Wachovia Bank, National Association and Ableco
Finance LLC21-1
    
    Significant Subsidiary of Registrant31-1
    
    Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Michael A.
Lubin, Chairman of the Board and Co-Principal Executive Officer of
the registrant31-2
    
    Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Warren Delano,
President and Co-Principal Executive Officer of the registrant31-3
    
    Rule 13(a) - 14(a) / 15(d) - 14(a) Certification of Dennis J.
Welhouse, Chief Financial Officer and Principal Financial Officer of
the registrant
 - 69 -




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##### Table of Contents



32-1
    
    Certification of Michael A. Lubin, Chairman of the Board and
Co-Principal Executive Officer of the registrant, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232-2
    
    Certification of Warren Delano, President and Co-Principal Executive
Officer of the registrant, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232-3
    
    Certification of Dennis J. Welhouse, Chief Financial Officer and
Principal Financial Officer of the registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
  (b)
    Reports on Form 8-K On October 4, 2004, we filed a report on Form 8-K announcing a plan to discontinue the
operations of our die casting division. On October 4, 2004, we filed a report on Form 8-K announcing our repurchase of $8,264,000
principal amount of our 12% Senior Subordinated Notes. On November 16, 2004, we filed a report on Form 8-K that included a press release dated
November 15, 2004, announcing our financial results for the quarter ended September 30, 2004. On November 29, 2004, we filed a report on Form 8-K stating that on November 22, 2004, our
connector seals division entered into a material supply agreement with Delphi Corporation. On January 31, 2005, we filed a report on Form 8-K stating that on January 27, 2005, we had
amended our two secured financing agreements. - 70 -




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##### Table of Contents



LEXINGTON PRECISION CORPORATION Schedule II  Valuation and Qualifying Accounts and Reserves of
Continuing Operations
(thousands of dollars) Balance at
    
    
    Charged to
    
    
    Deductions
    
    
    BalanceBeginning
    
    
    Costs and
    
    
    From
    
    
    at Endof Period
    
    
    Expenses
    
    
    Reserves
    
    
    of periodAllowance for Doubtful AccountsYear ended December 31, 2004
    
    $
    545
    
    
    $
    380
    
    
    $
    388
    
    
    $
    537Year ended December 31, 2003
    
    
    542
    
    
    
    148
    
    
    
    145
    
    
    
    545Year ended December 31, 2002
    
    
    454
    
    
    
    211
    
    
    
    123
    
    
    
    542Inventory ReserveYear ended December 31, 2004
    
    $
    931
    
    
    $
    110
    
    
    $
    196
    
    
    $
    845Year ended December 31, 2003
    
    
    1,002
    
    
    
    732
    
    
    
    803
    
    
    
    931Year ended December 31, 2002
    
    
    1,317
    
    
    
    484
    
    
    
    799
    
    
    
    1,002
 - 71 -




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 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)By:
    /s/Warren DelanoWarren Delano, President March 30, 2005 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on March 30, 2005: Principal Executive Officers and Directors: /s/Michael A. LubinMichael A. Lubin, Chairman of the Board/s/Warren DelanoWarren Delano, President and DirectorPrincipal Financial and Accounting Officer:/s/Dennis J. WelhouseDennis J. Welhouse, Senior Vice President,Chief Financial Officer, and SecretaryDirectors:/s/William B. ConnerWilliam B. Conner, Director/s/Kenneth I. GreensteinKenneth I. Greenstein, Director/s/Joseph A. PardoJoseph A. Pardo, Director/s/Elizabeth H. RumlElizabeth H. Ruml, Director
 - 72 -