FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

Commission File Number: 0-3252

LEXINGTON PRECISION CORPORATION

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.

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).

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.

LEXINGTON PRECISION CORPORATION

Annual Report on Form 10-K

Table of Contents

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):

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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):

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

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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.

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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.

     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 52^nd 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.

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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:

     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.

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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.

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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.

     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.

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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.

(continued on next page)

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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.

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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.

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     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

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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):

     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.

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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

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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.

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          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):

          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.

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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.

          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”

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(“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):

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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):

          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.

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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):

          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.

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          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.

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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

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•

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:

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	•	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

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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.

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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.

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.

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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

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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

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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.

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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.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

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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.”

Cleveland, Ohio
March 29, 2005

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LEXINGTON PRECISION CORPORATION

Consolidated Statements of Operations

See notes to consolidated financial statements

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LEXINGTON PRECISION CORPORATION

Consolidated Balance Sheets