ITEM 1. BUSINESS
Lexington Precision Corporation (the "Company") is a Delaware corporation which was incorporated in 1966. The Company manufactures, to customer specifications, rubber and metal component parts used primarily by manufacturers of automobiles, automotive replacement parts, computers, office equipment, medical devices, home appliances and industrial equipment. The Company's business is conducted primarily in the continental United States. Unless the context otherwise requires, all references herein to the Company are to Lexington Precision Corporation and its wholly-owned subsidiary, Lexington Components, Inc. ("LCI").
RUBBER GROUP
The Company's Rubber Group manufactures, to customer specifications, close tolerance silicone and organic rubber components. The Group conducts its business through four operating divisions of LCI.
PRECISION SEALS DIVISION. The Precision Seals Division manufactures molded rubber seals used in primary wire harnesses for automobiles and trucks. Primary wire harnesses distribute electrical power to interior and exterior lighting fixtures, electrically powered accessories and other electrical equipment. The seals are used to assure the integrity of the many connections which are required throughout the harnesses. The Division's largest customer is Delphi Packard Electric Systems, a division of General Motors Corporation ("Delphi Packard Electric").
ELECTRICAL INSULATOR DIVISION. The Electrical Insulator Division manufactures molded rubber insulators used in ignition wire harnesses for automobiles and trucks. Insulators are used to shield the electrical connections made by the ignition wire at the distributor and at the spark plug. Approximately 30% of the insulators manufactured by the Division are used in new vehicles, primarily those manufactured by Ford Motor Company and Chrysler Corporation, with the balance used in automotive replacement parts.
LEXINGTON MEDICAL DIVISION. The Lexington Medical Division manufactures molded rubber components which are used in a variety of medical devices, such as syringes, laparoscopic instruments, catheters and intravenous feeding systems.
EXTRUDED AND LATHE CUT PRODUCTS DIVISION. The Extruded and Lathe Cut Products Division manufactures extruded rubber components which are used primarily by manufacturers of industrial equipment, lighting products and home appliances.
METALS GROUP
The Company's Metals Group manufactures, to customer specifications, close tolerance metal components. The Group conducts its business through Falconer Die Casting Company ("Falconer") and Ness Precision Products ("Ness"), both of which are divisions of the Company.
FALCONER DIE CASTING COMPANY. Falconer manufactures aluminum, magnesium and zinc die castings used primarily by manufacturers of computers, office equipment, leisure time equipment, communications equipment, industrial equipment and automobiles. Many of the die castings which are
produced by Falconer are also machined by Falconer using computer-controlled machining centers and other secondary machining equipment.
NESS PRECISION PRODUCTS. Ness produces precision-machined aluminum, brass and stainless steel components used primarily by manufacturers of automobiles, home appliances, office equipment, communications equipment and industrial equipment. In 1994, approximately half of the revenues of Ness were generated by sales of components for automotive air bag systems.
PRINCIPAL END USES FOR THE COMPANY'S PRODUCTS
(For additional information concerning the Rubber Group and the Metals Group, see Note 11 to the Consolidated Financial Statements in Part II, Item 8.)
MARKETING AND SALES
The marketing and sales effort within the Rubber Group is carried out by management personnel and internal sales personnel. The marketing and sales effort within the Metals Group is carried out by management personnel, internal sales personnel and independent sales representatives.
RAW MATERIALS
Each of the principal raw materials used by the Company is available at competitive prices from several major manufacturers. All raw materials have been readily available and the Company does not foresee any significant shortages.
SEASONAL VARIATIONS
The Company's business generally is not subject to significant seasonal variations.
MAJOR CUSTOMERS
Net sales to two customers of the Rubber Group accounted for 26.7%, 27.4% and 27.2% of the Company's total net sales during 1994, 1993 and 1992, respectively. During such years, net sales to Delphi Packard Electric accounted for 20.6%, 22.3% and 20.4%, respectively, of the Company's total net sales. During 1994, 1993 and 1992, net sales to one customer of the Metals Group, TRW Vehicle Safety Systems, Inc. ("TRW VSSI"), accounted for 13.0%, 11.8% and 9.0%, respectively, of the Company's total net sales. Sales to TRW VSSI consisted primarily of sales of one component part. Loss of a significant amount of business from any of the Company's three largest customers would have a material adverse effect on the business of the affected Group and the Company as a whole if such business were not replaced by additional business from existing or new customers. (See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7.)
BACKLOG
COMPETITION
The Company competes for business primarily on the basis of quality, service, technical and engineering capabilities and price. The Rubber Group and the Metals Group encounter substantial competition from a large number of manufacturing companies. Competitors range from small and medium-sized specialized firms to large diversified companies, many of which have resources substantially greater than those of the Company. Additionally, some of the Company's customers have captive manufacturing operations which compete with the Company.
PRODUCT LIABILITY RISKS
The Company is subject to potential product liability risks which are inherent in the manufacture and sale of precision components, including components of medical devices. Although there have been no
claims made to date against the Company which the Company believes will have a material adverse effect upon its financial position, there can be no assurance that any existing claims or any claims made in the future will not have a material adverse effect upon the financial position of the Company. (For a description of a product liability claim against LCI, see "Legal Proceedings" in Part I, Item 3.)
ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to numerous federal, state and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. Although the Company continues to make expenditures for the protection of the environment, compliance with federal, state and local environmental regulations has not had a significant impact on the capital spending requirements, earnings or competitive position of the Company. There can be no assurance that changes in environmental laws and regulations, or the interpretation or enforcement thereof, will not require material expenditures by the Company in the future. (See also "Legal Proceedings" in Part I, Item 3.)
EMPLOYEES
Thirty hourly workers at one plant location within the Rubber Group are subject to a collective bargaining agreement. Although certain of the Company's facilities have experienced union organizing activity from time to time, the Company believes that its employee relations are generally good.
ITEM 2.

ITEM 2. PROPERTIES
At December 31, 1994, the Company conducted its operations at eight manufacturing plants located in the United States. In December 1994, the Company acquired an additional manufacturing facility in LaGrange, Georgia, at which production is expected to commence during the second quarter of 1995. The following table sets forth the manufacturing facilities of the Rubber Group and the Metals Group and the Company's corporate offices as of December 31, 1994:
All of the plants are well maintained, general manufacturing facilities which are suitable for the Company's operations. Although the Company believes that, to varying degrees, each of the Company's manufacturing facilities has the flexibility to meet increased demand for the Company's products, the Company currently plans to add approximately 62,000 square feet of manufacturing space within the Rubber Group and approximately 95,000 square feet of manufacturing space within the Metals Group during 1995.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
During the fourth quarter of 1994, the Company settled an action commenced on April 26, 1991 in New York Supreme Court, County of Chautauqua, and previously reported in the Company's Annual Reports on Form 10-K for the years ended December 31, 1991 through 1993, by the purchaser of certain assets of
the Company's discontinued office furniture division. As part of the settlement, the Company sold certain real estate to a designee of the purchaser for $200,000 in cash. In addition, the Company and the purchaser agreed to dismiss the action with prejudice and exchanged mutual releases. During the fourth quarter of 1994, the Company recorded a pre-tax gain of $200,000 relating to the sale and settlement.
On December 3, 1993, Kingston Oil Supply Corp. ("Kingston") commenced a third party action against, among others, LCI in New York Supreme Court, Ulster County, alleging that LCI had manufactured a defective gasket used in a furnace which leaked oil and caused damage to a party who has sued Kingston seeking $2,000,000 in compensatory damages plus punitive damages. Kingston has sought contribution or indemnification from LCI and other third party defendants with respect to any judgment awarded against Kingston. LCI has asserted a crossclaim in this action against the customer for whom LCI manufactured the gasket, seeking indemnification in the event LCI is held liable in the action. LCI intends to appeal a decision denying its motion for summary judgment dismissing the complaint against LCI. A trial of the action has been tentatively scheduled for April 1995. LCI intends to defend the allegations against it vigorously. Based upon the information presently available to the Company, the Company believes that the outcome of the action will not have a material adverse effect upon its financial position.
The Company has been one of approximately 150 potentially responsible parties under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), for aggregate costs of approximately $2,000,000 incurred by the Environmental Protection Agency ("EPA") in connection with, among other things, inventorying, sampling, analyzing, removing and disposing of containerized hazardous substances found at a site to which such substances had been transported from a hazardous substance treatment and disposal facility. The Company and other potentially responsible parties have entered into an Administrative Order on Consent with the EPA settling the matter. The Company has paid its pro rata share of the settlement in the amount of $6,000. The Order on Consent is currently pending approval by the Department of Justice. It is not anticipated that the EPA will take any further action with respect to the site.
The Company has been one of approximately 50 potentially responsible parties under CERCLA for costs of approximately $1,000,000 incurred by the EPA in connection with, among other things, inventorying, sampling, analyzing, removing and disposing of containerized hazardous substances found at a hazardous substance treatment and disposal facility. The Company and other potentially responsible parties have entered into an Administrative Order on Consent with the EPA settling the matter. The Company has paid its pro rata share of the settlement in the amount of $15,000. The Order on Consent was approved by the Department of Justice in November 1994.
The Company is a party to certain other legal actions arising in the ordinary course of its business, including actions naming the Company as a potentially responsible party or as a third-party defendant in cost recovery actions initiated by the EPA pursuant to applicable sections of CERCLA. Based upon the information presently available to the Company, the Company believes that the ultimate outcome of these actions will not have a material adverse effect upon its financial position.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, held by approximately 1,100 holders of record as of February 28, 1995, is traded in the over-the-counter market. The Company's common stock has not been listed on the National Association of Securities Dealers Automated Quotation System (NASDAQ) since May 24, 1991 because the Company has failed to meet applicable net worth requirements. Trading of shares of the Company's common stock is limited. No material trading data for the Company's common stock was publicly available for the period January 1, 1993 through April 7, 1994. Since April 8, 1994, trading information has been available from the OTC Bulletin Board provided by the National Association of Securities Dealers (NASD). The following table sets forth information regarding selling prices obtained from the OTC Bulletin Board:
The Company is not able to determine whether or not retail mark-ups, mark-downs or commissions were included in the above prices. The Company believes that four brokerage firms currently make a market in the Company's common stock, although both bid and asked quotations may at times be limited.
No dividends have been paid on the Company's common stock since 1979. The future payment of dividends is dependent upon, among other things, the earnings and capital requirements of the Company. The agreements pursuant to which certain of the Company's indebtedness is outstanding contain provisions limiting the Company's ability to make dividend payments on its common stock. The most restrictive of such provisions would have permitted the Company to pay $2,264,000 of dividends on its common stock as of December 31, 1994.
The Board of Directors intends, for the foreseeable future, to follow a policy of retaining the Company's earnings in order to reduce the indebtedness of the Company and finance the development and expansion of its business.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Through its two business segments, the Rubber Group and the Metals Group, the Company manufactures, to customer specifications, close tolerance rubber and metal components. The Rubber Group manufactures silicone and organic rubber components for sale primarily to manufacturers of automobiles, automotive replacement parts and medical devices. The Metals Group manufactures metal components for sale primarily to manufacturers of automobiles, automotive replacement parts, industrial equipment, home appliances and business machines.
LIQUIDITY AND CAPITAL RESOURCES
DEBT RESTRUCTURING
In January 1994, the Company completed a restructuring of substantially all of its outstanding debt. The restructuring included the completion of an exchange offer (the "Exchange Offer") for the Company's 12-3/4% Subordinated Notes, due February 1, 1997 (the "12-3/4% Subordinated Notes"), the restructuring of the Company's 14% Junior Subordinated Convertible Notes, due May 1, 2000 (the "14% Convertible Notes"), and the amendment of the Company's borrowing arrangement (the "Working Capital Facility") with its working capital lender (the "Working Capital Lender"). Upon the completion of the restructuring, all defaults which existed on the Company's debt at the time of the restructuring were eliminated.
Pursuant to the Exchange Offer, all of the 12-3/4% Subordinated Notes (principal of $25,275,000 and accrued interest of $10,079,000) were tendered in exchange for $31,720,000 principal amount of 12-3/4% Senior Subordinated Notes, due February 1, 2000 (the "12-3/4% Senior Subordinated Notes"), and $3,634,000 of cash. The restructuring of the 14% Convertible Notes included the satisfaction of past due interest through the payment of $99,000 in cash and the issuance of $347,000 principal amount of 14% Junior Subordinated Non-Convertible Notes, due May 1, 2000 (the "14% Non-Convertible Notes"). The funds used to make the cash payments required at the closing of the debt restructuring in January 1994 were obtained through increased borrowings under the Working Capital Facility.
The Company did not record any gain or loss for book purposes or for tax purposes from the restructuring of its indebtedness in January 1994.
WORKING CAPITAL FINANCING
The Company's working capital financing is provided through the Working Capital Facility, originally entered into between the Company and the Working Capital Lender in 1990. The Working Capital Facility currently permits the Company to borrow up to $40,000,000, provided that the aggregate borrowings may not exceed an availability formula set by the Working Capital Lender. During 1994, the Working Capital Facility was amended to, among other things, increase the Company's maximum borrowing availability from $10,000,000 to $25,000,000, convert certain borrowings thereunder from revolving loans to term loans, reduce the rate of interest charged on loans outstanding under the Working Capital Facility from Prime plus 2% to Prime plus 1-1/2% and revise certain financial covenants.
In January 1995, the Working Capital Facility was further amended to, among other things, increase the Company's maximum borrowing availability from $25,000,000 to $40,000,000, subject to availability formulas set by the Working Capital Lender, convert $7,873,000 of term loans and $7,267,000 of revolving loans into new term loans in the aggregate amount of $15,140,000 payable in 84 monthly principal
installments of $181,000 each, reduce the rate of interest charged on loans outstanding under the Working Capital Facility from Prime plus 1-1/2% to either Prime plus 1% or the London Interbank Offered Rate plus 3-1/4% and revise a financial covenant. As amended, the Working Capital Facility includes a line (the "Equipment Line") of $11,300,000 which, subject to availability formulas set by the Working Capital Lender, can be used to finance a portion of the purchase price of new equipment. If utilized, borrowings under the Equipment Line will convert to term loans which will be payable in equal monthly principal installments through February 1, 2002. As of March 1, 1995, the Company had borrowings of $23,943,000 outstanding under the Working Capital Facility and had approximately $3,097,000 of unused availability, without giving effect to new borrowings which are expected to be available under the Equipment Line to finance purchases of new equipment.
Amounts outstanding under the Working Capital Facility are collateralized by substantially all of the accounts receivable, inventory, equipment and other personal property, and certain real property of the Company.
OPERATING ACTIVITIES OF THE COMPANY
During 1994, net cash provided by the operating activities of the Company totaled $5,957,000, a decrease of $3,644,000 when compared to 1993. The decrease was attributable, in large part, to the payment during January 1994, in connection with the restructuring of substantially all of the Company's indebtedness, of all past due interest of the Company. During 1993, cash provided by operating activities included an increase in accrued interest of $4,152,000 resulting from the Company's failure to pay, during 1993, interest due on the 12-3/4% Subordinated Notes and the 14% Convertible Notes.
During 1994, accounts receivable increased by $3,384,000. The increase was primarily the result of increased net sales during the fourth quarter of 1994 compared to the fourth quarter of 1993 and a slowdown in payments from one of the Company's largest customers. Inventories increased by $2,458,000 during 1994, primarily as a result of increased sales levels during the fourth quarter of 1994 and anticipated higher sales levels during the first quarter of 1995.
Accounts payable increased by $6,037,000 during 1994. The increase included an increase of $2,293,000 in payables relating to purchases of capital equipment, an increase of $1,218,000 in payables relating to purchases of tooling, and a general slowing of payments to suppliers during the fourth quarter of 1994 pending the completion of the amendments to the Working Capital Facility. Subsequent to the completion of the amendments to the Working Capital Facility in January 1995, the Company reduced its accounts payable to bring the amounts outstanding to its suppliers generally within terms which the Company believes are customary in the industries in which the Company operates. The funds used to reduce the Company's trade debt were obtained through increased borrowings under the Working Capital Facility.
Although 1994 net income exceeded 1993 net income by $1,481,000 and non-cash charges for depreciation and amortization expenses increased by $763,000 during 1994, net working capital declined by $4,659,000 primarily because, at December 31, 1994, the Company classified as short-term debt $5,052,000 of revolving loans outstanding under the Working Capital Facility. Although the revolving loans, as amended in January 1995, have a maturity date of January 2, 1998, the revolving loans have been classified as short-term debt because the Company's cash receipts are automatically used to reduce the revolving loans on a daily basis, by means of a lock-box sweep agreement, and the Working Capital Lender has the ability to modify certain terms of the revolving loan financing agreements without the prior approval of the Company.
During 1994, aggregate income from operations of the Rubber Group and the Metals Group totaled $9,920,000. After deducting corporate operating expenses of $1,818,000, income from operations totaled $8,102,000, or 9.2% of net sales. Included in income from operations for 1994 were non-cash expenses of $5,018,000 (principally depreciation expense of $4,239,000). Net income for 1994 included a gain, net of income taxes, of $336,000 from the sale of marketable equity securities and a gain, net of applicable income taxes, of $200,000 from a sale of real estate in connection with the settlement of certain litigation.
INVESTING ACTIVITIES OF THE COMPANY
During 1994, the investing activities of the Company used $14,966,000 of cash. During the year, the Company made $15,319,000 of capital expenditures, which included $1,500,000 for the purchase of a 77,000 square foot manufacturing facility in LaGrange, Georgia. During 1994, capital expenditures attributable to the Rubber Group and the Metals Group totaled $8,651,000 and $6,656,000, respectively. The Company estimates that approximately $3,000,000 of the 1994 capital expenditures were made to maintain or replace existing equipment or to effect cost reductions. The Company estimates that approximately $10,000,000 of the 1994 capital expenditures were for the purchase and installation of production equipment to meet orders which have been awarded to the Company. During 1994, the capital expenditure program included the purchase and rebuilding of die casting machines, the purchase of metal machining equipment, the purchase and rebuilding of rubber molding machines and ancillary equipment, the expansion of clean room facilities for the molding of rubber components for medical devices and the purchase of the LaGrange facility to provide space for ongoing expansion of production capacity within the Rubber Group. The Company presently projects that 1995 capital expenditures will total approximately $19,000,000. As of December 31, 1994, the Company had commitments outstanding to purchase equipment of approximately $4,727,000.
FINANCING ACTIVITIES OF THE COMPANY
During 1994, the financing activities of the Company provided $9,055,000 of cash, primarily from increased borrowings under the Working Capital Facility.
The Company operates with high financial leverage. As of December 31, 1994, the Company's aggregate indebtedness, excluding trade payables, was $57,278,000, compared to $48,077,000 as of December 31, 1993, an increase of $9,201,000. As a result of increased borrowings under the Working Capital Facility during the first two months of 1995, aggregate indebtedness, excluding trade payables, totaled $60,780,000 as of March 1, 1995 an increase of $3,502,000. The additional borrowings were used for the payment, on February 1, 1995, of the interest due on the 12-3/4% Senior Subordinated Notes and the 14% Convertible and Non-Convertible Notes and the reduction of trade payables. During 1994, cash interest and principal payments required and paid under the terms of the Company's various financing agreements (exclusive of cash interest payments of $3,733,000 made upon completion of the debt restructuring in January 1994) totaled $6,046,000 and $1,804,000, respectively. During 1995, the cash interest and principal payments required under the terms of the Company's loan agreements are currently projected to total $7,900,000 and $2,599,000, respectively.
Based upon the Company's present business plan, the achievement of which cannot be assured, the Company believes that for the foreseeable future anticipated borrowings under the Working Capital Facility and cash generated from operations should be adequate to meet its presently anticipated working capital, capital expenditure and debt service requirements. If cash flow from operations or availability under the Working Capital Facility fall below expectations, the Company's capital expenditure program will be reduced or delayed.
ACQUISITIONS OF BUSINESSES
The Company is seeking to acquire assets and businesses related to its current operations with the intention of expanding its existing operations. Depending on, among other things, the size and terms of such acquisitions, the Company may be required to obtain additional financing and, in some cases, the approval of the Working Capital Lender and the holders of other debt of the Company. The Company's ability to effect acquisitions may be dependent upon its ability to obtain such financing and, to the extent applicable, consents.
DEPENDENCE ON LARGE CUSTOMERS
The Company has limited ability to predict the volume and pricing of orders from its existing and potential customers. For example, since 1992, Delphi Packard Electric and other divisions of General Motors Corporation have followed a policy of soliciting bids from large groups of manufacturers for the majority of the component parts purchased by General Motors and its divisions, including those parts which have previously been awarded to the Company and its competitors. The Company is unable to predict the timing or the outcome of future rounds of competitive bidding or other programs designed to lower Delphi Packard Electric's cost of purchased parts. During 1994, 1993, and 1992, net sales to Delphi Packard Electric accounted for 20.6%, 22.3% and 20.4%, respectively, of the Company's total net sales. Loss of all or a major portion of the Delphi Packard Electric business would have a material adverse effect on the Company's operations.
During 1994, 1993 and 1992, net sales to TRW VSSI, the Company's second largest customer, accounted for 13.0%, 11.8% and 9.0%, respectively, of the Company's total net sales and consisted primarily of a single component part. The Company has limited ability to predict the customer's future requirements for this component part and the percentage of production, if any, which will be awarded to the Company. Currently, management of the Company believes that the part will remain in production for all of 1995 and at substantially reduced quantities during 1996 and 1997. During 1993 and 1994, the Company received several orders for new parts from TRW VSSI and anticipates receiving orders for additional new parts during 1995, although there can be no assurance such orders will be received. Loss of all or a major portion of the TRW VSSI business, if not replaced by equivalent volume of other parts, would have a material adverse effect on the Company's operations.
RESULTS OF OPERATIONS
1994 VERSUS 1993
NET SALES
A summary of the net sales of the Rubber Group and the Metals Group follows (dollar amounts in thousands):
Net sales of the Rubber Group increased by $6,480,000 in 1994. Net sales to automotive customers increased by $4,823,000, or 14.7%, primarily as a result of increased sales of wire harness seals to Delphi Packard Electric and increased sales of ignition wire insulators for new vehicles. Net sales of rubber components for medical devices increased to $5,536,000 in 1994 from $3,946,000 in 1993, primarily as a result of increased sales efforts.
Net sales of the Metals Group increased by $7,076,000 in 1994, primarily due to a 30.5% increase in net sales to TRW VSSI of component parts used in automotive airbag systems.
COST OF SALES
A summary of the cost of sales (in thousands of dollars and as a percentage of net sales) for the Rubber Group and the Metals Group follows:
Cost of sales of the Rubber Group as a percentage of net sales increased from 82.4% in 1993 to 83.9% in 1994, primarily as a result of increased factory overhead costs as a percentage of net sales. During 1994, increased factory overhead costs included higher indirect labor costs, increased depreciation and amortization expenses resulting from the installation and startup of new and refurbished equipment and new tooling and increased workers' compensation costs. Increased factory overhead costs as a percentage of net sales were offset in part by lower direct labor costs as a percentage of net sales resulting from the installation of new and refurbished equipment and the introduction of improved manufacturing processes.
Cost of sales of the Metals Group as a percentage of net sales decreased from 79.3% in 1993 to 77.6% in 1994. During 1994, material and direct labor costs as percentages of net sales were essentially unchanged,
while factory overhead costs as a percentage of net sales decreased, primarily because sales increased while certain components of factory overhead costs remained relatively unchanged.
SELLING AND ADMINISTRATIVE EXPENSES
In 1994, consolidated selling and administrative expenses totaled $8,796,000, or 9.9% of net sales, compared to $7,936,000, or 10.6% of net sales, in 1993. Selling and administrative expenses of the Rubber Group increased to $3,694,000, or 7.9% of net sales, during 1994, compared to $3,166,000, or 7.8% of net sales, during 1993, primarily as a result of the addition of sales and administrative personnel. Selling and administrative expenses of the Metals Group increased to $3,284,000, or 7.9% of net sales, during 1994, compared to $2,894,000, or 8.4% of net sales, during 1993. Increased sales of products subject to sales commissions and increased advertising costs were more than offset by efficiencies related to increased volume. Corporate office administrative expenses decreased by $58,000, or 3.1%, primarily as a result of reduced legal fees. During 1993, corporate office administrative expenses included $730,000 of expenses recorded in connection with the Company's restructuring of its 12-3/4% Subordinated Notes and 14% Convertible Notes which were partially offset by a credit of $215,000 resulting from the settlement of litigation. Effective for 1994, the Company determined that amortization of the excess of cost over net assets of businesses acquired (goodwill) should be classified as part of selling and administrative expenses. Previously, amortization of goodwill had been classified as other expense. Prior period presentations have been reclassified to conform to the current year's presentation. During each of the years presented, amortization of goodwill totaled $316,000.
INTEREST EXPENSE
Interest expense totaled $6,272,000 during 1994, an increase of $776,000 compared to 1993. This increase was caused primarily by an increase of approximately $7,690,000 in average borrowings outstanding under the Working Capital Facility and an increase in the weighted average rate of interest charged on the Working Capital Facility due to increases in the Prime rate which more than offset interest rate reductions negotiated by the Company.
OTHER INCOME
During 1994, other income consisted of a realized gain of $336,000 on the sale of marketable securities and a gain of $200,000 from the sale of real estate in connection with the settlement of litigation.
PROVISION FOR INCOME TAXES
The provisions for income tax otherwise recognizable during 1994 and 1993 were reduced by the utilization of portions of the Company's tax loss and tax credit carryforwards. For information concerning income tax expense and the utilization of tax loss and tax credit carryforwards, see Note 10 to the Consolidated Financial Statements in Part II, Item 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Lexington Precision Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Lexington Precision Corporation and subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the table of contents in Part IV, Item 14(a). 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 subsidiary at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein.
As discussed in the notes to consolidated financial statements, effective January 1, 1993, the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions.
ERNST & YOUNG LLP
Cleveland, Ohio February 28, 1995
LEXINGTON PRECISION CORPORATION
CONSOLIDATED BALANCE SHEETS (CONT.) (THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
LEXINGTON PRECISION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) (THOUSANDS OF DOLLARS)
See notes to consolidated financial statements.
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 wholly-owned subsidiary (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
As of December 31, 1994 and 1993, trade accounts receivable outstanding from automotive customers totaled $7,904,000 and $5,364,000, respectively. The Company provides for credit losses based upon historical experience and ongoing credit evaluations of its customers' financial condition but does not generally require collateral from its customers to support the extension of trade credit. As of December 31, 1994 and 1993, the Company had reserves for credit losses of $174,000 and $159,000, respectively.
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 (in thousands of dollars):
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is calculated principally on the straight-line method over the estimated useful life of the various assets (15 to 32 years for buildings and 3 to 10 years for equipment). Maintenance and repair expenses were $2,484,000, $2,189,000 and $1,395,000 for 1994, 1993 and 1992, respectively. Maintenance and repair expenses are charged against income as incurred, while major improvements are capitalized. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are eliminated.
EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
Excess of cost over the net assets of businesses acquired (goodwill) is amortized on the straight-line method, principally over 40 years. As of December 31, 1994 and 1993, accumulated amortization of goodwill was $1,948,000 and $1,632,000, respectively. Effective for 1994, the Company determined that amortization of goodwill should be classified as part of selling and administrative expenses. Previously, amortization of goodwill had been classified as other expense. Prior period presentations have been reclassified to conform to the current year's presentation. During each of the periods presented, amortization
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of goodwill totaled $316,000. The carrying value of goodwill is reviewed quarterly using an analysis of historical and projected operating performance of the business to which the goodwill relates. Based upon such analysis, the Company believes that no impairment of goodwill existed as of December 31, 1994.
INCOME PER SHARE
Income per common and dilutive common equivalent share were computed based upon the weighted average number of common shares and dilutive common equivalent shares outstanding. For purposes of the income per share calculations, income for each period was reduced by preferred stock dividends and by the amount by which payments made to redeem shares of the Company's $8 Cumulative Convertible Redeemable Preferred Stock, Series B (the "Redeemable Preferred Stock"), exceeded the par value of such shares. Common equivalent shares were those shares issuable upon the assumed exercise of outstanding stock options and conversion of Redeemable Preferred Stock, calculated using the treasury stock method. Fully diluted income per share assumes conversion of the 14% Junior Subordinated Convertible Notes, due May 1, 2000 (the "14% Convertible Notes"), if dilutive.
REPORTING OF CASH FLOWS
The Company considers all highly liquid investments with maturities at the time of purchase of less than three months to be cash equivalents.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for 1993 and 1992 have been reclassified to conform to the statement presentation for 1994.
NOTE 2 -- OTHER CURRENT ASSETS
As of December 31, 1994 and 1993, other current assets included $1,242,000 and $237,000, respectively, of tooling acquired by the company for certain customers. Upon customer approval of the components produced from such tooling, which normally takes less than 90 days, the customer is required to purchase the tooling from the Company.
NOTE 3 -- OTHER NONCURRENT ASSETS
As of December 31, 1994 and 1993, other noncurrent assets included $797,000 and $438,000, respectively, which represented amounts paid by the Company for tooling owned by the Company's customers in excess of the amounts paid by the customers for such tooling. Such excess amounts are amortized over periods not exceeding three years. During 1994 and 1993, amortization expense related to tooling owned by customers but funded by the Company was $272,000 and $115,000, respectively.
NOTE 4 -- SHORT-TERM DEBT
As of December 31, 1994, short-term debt consisted of $5,052,000 of revolving loans outstanding under the Company's borrowing arrangement (the "Working Capital Facility") with its working capital lender (the "Working Capital Lender"). Although the revolving loans, as amended in January 1995, have a maturity date of January 2, 1998, the revolving loans have been classified as short-term debt as of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 because the Company's cash receipts are automatically used to reduce the revolving loans on a daily basis, by means of a lock-box sweep arrangement, and the Working Capital Lender has the ability to modify certain terms of the revolving loan financing agreements without the prior approval of the Company.
At December 31, 1994, 1993 and 1992, the interest rate on borrowings under the revolving line of credit was 10.0%, 7.5% and 8.5%, respectively. (Also see Note 6, Long-Term Debt.)
NOTE 5 -- ACCRUED EXPENSES
Accrued expenses are summarized below (in thousands of dollars):
- 31 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WORKING CAPITAL FACILITY
As of December 31, 1994 and 1993, the Working Capital Facility consisted of loans outstanding under a revolving line of credit and term loans. At December 31, 1994, the long-term portion of the Working Capital Facility consisted of $8,029,000 of term loans and $7,267,000 of revolving loans which were converted into new term loans in January 1995. In January 1995, the Working Capital Facility was further amended to, among other things, increase the company's maximum borrowing availability from $25,000,000 to $40,000,000, subject to availability formulas set by the Working Capital Lender, convert $7,873,000 of term loans and $7,267,000 of revolving loans into new term loans in the aggregate amount of $15,140,000 payable in 84 monthly principal installments of $181,000 each, reduce the rate of interest charged on loans outstanding under the Working Capital Facility from Prime plus 1-1/2% to either Prime plus 1% or the London Interbank Offered Rate plus 3-1/4% and revise a financial covenant. As amended, the Working Capital Facility includes a line (the "Equipment Line") of $11,300,000 which, subject to availability formulas set by the Working Capital Lender, can be used to finance a portion of the purchase price of new equipment. If utilized, borrowings under the equipment line will convert to term loans which will be payable in equal monthly principal installments through February 1, 2002. As of March 1, 1995, the Company had borrowings of $23,943,000 outstanding under the Working Capital Facility and had approximately $3,097,000 of unused availability, without giving effect to new borrowings which are expected to be available under the Equipment Line to finance purchases of new equipment.
Under the terms of the Working Capital Facility the Company is required, among other things, to maintain at all times working capital, exclusive of amounts borrowed under the Working Capital Facility which are classified as current liabilities, of not less than $1,000,000 and net worth of not less than negative $9,500,000.
Amounts outstanding under the Working Capital Facility are collateralized by substantially all of the accounts receivable, inventory, equipment and other personal property and certain real property of the Company.
12% TERM NOTE
The 12% Term Note, due April 30, 2000 (the "12% term note"), is payable by the Company's wholly-owned subsidiary, Lexington Components, Inc. ("LCI"), is secured by a mortgage on the premises of LCI's Rock Hill, South Carolina, facility and is guaranteed by the Company. Level payments of principal and interest in the amount of $66,000 are due monthly until the 12% Term Note is paid in full.
12-3/4% SENIOR SUBORDINATED NOTES AND 12-3/4% SUBORDINATED NOTES
The 12-3/4% Senior Subordinated Notes, due 2000 (the "12-3/4% Senior Subordinated Notes"), are unsecured obligations of the Company, redeemable at the option of the Company, in whole or in part, at a declining premium over the principal amount thereof. Interest on the 12-3/4% Senior Subordinated Notes is due semi-annually on February 1 and August 1. In January 1994, in connection with the restructuring of substantially all of the Company's indebtedness, the Company issued $31,720,000 principal amount of the 12-3/4 % Senior Subordinated Notes to the holders of the Company's 12-3/4% Subordinated Notes, due February 1, 1997 (the "12-3/4 Subordinated Notes"), in exchange for $25,275,000 principal amount of the 12-3/4% Subordinated Notes and accrued but unpaid interest on the 12-3/4% Subordinated Notes in the amount of $6,445,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14% NOTES
The 14% Junior Subordinated Convertible and Non-Convertible Notes, due May 1, 2000 (collectively the "14% Notes"), are unsecured obligations of the Company and are redeemable at the option of the Company, in whole or in part, at a declining premium over the principal amount thereof. Interest on the 14% Notes is due quarterly on February 1, May 1, August 1 and November 1. the 14% Convertible Notes are convertible into 440,000 shares of the Company's common stock.
The holders of the 14% Notes are the Chairman of the Board and the President of the Company, each of whom has a controlling equity interest in the Company. As of December 31, 1994, the Chairman and the President held 14% Notes in the amounts of $680,000 and $667,000, respectively.
RESTRUCTURING OF INDEBTEDNESS
In January 1994, the Company completed the restructuring of the 12-3/4% Subordinated Notes, the 14% Convertible Notes, the Working Capital Facility and a certain industrial revenue bond. The restructuring eliminated all defaults that existed at December 31, 1993. Accordingly, obligations previously classified as current liabilities due to the defaults were reclassified as long-term liabilities as of December 31, 1993.
RESTRICTIVE COVENANTS
Certain of the Company's loan agreements contain covenants restricting the Company's business and operations, including restrictions on the issuance or assumption of additional debt, the sale of all or substantially all of the Company's assets, the purchase of common stock, the redemption of preferred stock and the payment of cash dividends and prohibitions against any material adverse change in the Company's business, assets or financial condition.
SCHEDULED MATURITIES OF LONG-TERM DEBT
Maturities of long-term debt for the five-year period ending December 31, 1999 and for the years thereafter are listed below (in thousands of dollars):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- PREFERRED STOCK
REDEEMABLE PREFERRED STOCK
Each share of $8 Cumulative Convertible Redeemable Preferred Stock, Series B, is (1) entitled to one vote, (2) redeemable for $200 plus accumulated 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. On November 30, 1994, 450 shares of Redeemable Preferred Stock were redeemed for $90,000. Further redemptions of $90,000 are scheduled on November 30 of each year in order to annually retire 450 shares of Redeemable Preferred Stock. Scheduled redemptions for the years 1995 through 1999 total $450,000. For accounting purposes, when such stock is redeemed, the redeemable preferred stock account is reduced by the $100 par value of each share redeemed and paid-in-capital is charged for the $100 excess of redemption value over par value of each share redeemed. Under the terms of the Redeemable Preferred Stock, the Company may not declare any cash dividends on its common stock if there exists a dividend arrearage on the Redeemable Preferred Stock. During 1994, the Company paid the holders of the Redeemable Preferred Stock regular dividends aggregating $8.00 per share and past due dividends aggregating $24.00 per share which had been accrued by the Company as of December 31, 1993.
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, $100 par value ("Series A Preferred Stock"). As of December 31, 1994 and 1993, no shares of the Series A Preferred Stock were issued or outstanding.
The Company's Restated Certificate of Incorporation also provides that the Company is authorized to issue 2,500,000 shares of Preferred Stock having a par value of $1 per share. As of December 31, 1994 and 1993, no shares of the preferred stock, $1 par value, were issued or outstanding.
NOTE 8 -- COMMON STOCK
COMMON STOCK, $.25 PAR VALUE
As of December 31, 1994 and 1993, there were 4,203,036 and 4,048,036 shares, respectively, of the Company's common stock outstanding and 410,000 and 475,000 shares, respectively, reserved for issuance under the Company's Incentive Stock Option and Restricted Stock Award Plans.
RESTRICTED STOCK AWARD PLAN
The Company has a Restricted Stock Award Plan pursuant to which the Company may award restricted shares of common stock to officers and key employees. Plan participants are entitled to receive cash dividends (if any) and to vote their respective shares. The restricted shares vest at a rate set by the Compensation Committee of the Company's Board of Directors which has generally set the rate at 25% per year on each of the four anniversary dates subsequent to the award date. Unless otherwise amended, the Restricted Stock Award Plan expires on December 31, 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1994, 1993 and 1992, no shares of restricted common stock were awarded. As of December 31, 1994 and 1993, 350,000 shares of common stock were available for grant under the terms of the Restricted Stock Award Plan.
INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan that provides for grants to officers and key employees of options to purchase shares of the Company's common stock. The exercise prices of the options granted thereunder are established at the date of grant at prices not less than the market price of the Company's common stock on the date of grant. As of December 31, 1994, options for 60,000 shares were outstanding and no options were available for future grant.
Activity in the Company's Incentive Stock Option Plan for 1994 and 1993 is summarized below:
As of December 31, 1994 and 1993, options for 51,250 and 98,750 shares, respectively, were exercisable.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
RETIREMENT AND SAVINGS PLAN
The Company maintains a retirement and savings plan (the "Plan") pursuant to section 401 of the Internal Revenue Code (i.e., a 401(k) plan). All employees of the Company are entitled to participate in the Plan after meeting the eligibility requirements. Generally, employees may contribute up to 15% of their annual compensation but not more than prescribed amounts as 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 1994, 1993 and 1992, provisions for company matching contributions totaled approximately $339,000, $296,000 and $248,000, respectively. In addition, the Company has the option of making a profit sharing contribution to the Plan. The size of the profit sharing contribution is set annually at the end of each Plan year by the Company's Board of Directors. Provisions
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded for profit sharing contributions authorized by the Company's Board of Directors totaled $370,000, $334,000 and $153,000 during 1994, 1993 and 1992, respectively. The Company's matching and profit sharing contributions vest over a seven-year period, with 20% vesting after three years of service and an additional 20% vesting for each year of service thereafter until fully vested.
INCENTIVE COMPENSATION PLAN
The Company has incentive compensation plans which provide for the payment of cash bonus awards to certain officers and key employees of the Company. The Compensation Committee (the "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 plans. Cash bonus awards, which are subject to the approval of the Committee, are based upon prescribed formulae relating to the attainment of predetermined consolidated and divisional operating profit and sales targets and the achievement of other objectives. The amounts charged against operations for bonus expense totaled $214,000, $386,000 and $103,000 during 1994, 1993 and 1992, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company maintains programs to fund certain costs related to a prescription drug card program for retirees of one of its former divisions and to fund certain insurance premiums for retirees of one of its divisions.
Effective January 1, 1993, the Company adopted "Financial Accounting Standard No. 106, Employers' Accounting For Postretirement Benefits Other Than Pensions" ("FAS 106"). As a result, during 1994 and 1993, the Company recognized the estimated future cost of providing retiree health and welfare benefits as an expense while employees render service. in 1993, the adoption of FAS 106 reduced earnings before income taxes by approximately $61,000.
As of January 1, 1993, the Company's accumulated postretirement benefit obligation (the "transition obligation") totaled $692,000. The Company is amortizing the transition obligation over the remaining life expectancy of the participants (i.e., an annual rate of $57,000). During 1992, the Company's cost of providing postretirement health care benefits (accounted for on a cash basis) totaled $65,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the plan's funded status (in thousands of dollars):
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits for the prescription drug card program is 10.7% for 1995 and is assumed to decrease gradually to 6.45% in 2005. 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 the health care cost trend rates. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.25% and 7.25% as of December 31, 1994 and 1993, respectively. The change in the discount rate at December 31, 1994, reflects the higher prevailing interest rates.
NOTE 10 -- INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method as required by "Financial Accounting Standard No. 109, Accounting For Income Taxes" ("FAS 109"). The Company recorded a valuation allowance equal to 100% of its net deferred tax asset at January 1, 1993. As a result, the adoption of FAS 109 did not affect the Company's results for 1993. As permitted by FAS 109, prior year financial statements were not restated.
In accordance with the provisions of FAS 109, at December 31, 1994 and 1993, the Company has recorded deferred tax assets and deferred tax liabilities. Deferred tax assets and liabilities recorded by the Company reflect the tax effects of loss carryforwards, tax credit carryforwards and temporary differences between the values of assets and liabilities for financial reporting purposes and income tax purposes. The tax effects of loss carryforwards, tax credit carryforwards and temporary differences existing at
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1993 that gave rise to the deferred tax assets and deferred tax liabilities are presented below (in thousands of dollars):
Management of the Company believes, after reviewing the positive and negative evidence available with respect to the realization of its net deferred tax assets, that a valuation allowance equal to 100% of its net deferred tax asset is appropriate. In 1994 and 1993, the change in the valuation allowance was $1,156,000 and $835,000, respectively.
At December 31, 1994, the Company had net operating loss carryforwards for federal income tax purposes of $8,319,000 that expire in the years 2004 through 2007. Capital loss carryforwards for federal income tax purposes totaled $6,802,000 at December 31, 1994 and expire in 1995 and 1996. For purposes of the Federal Alternative Minimum Tax, the Company essentially utilized all of its Alternative Minimum Tax operating loss carryforward during 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of income taxes at the United States federal statutory rate to the effective income tax rate are summarized below (liability method of accounting in 1994 and 1993 and deferred method of accounting in 1992):
NOTE 11 -- INDUSTRY SEGMENTS
Through its two business segments, the Rubber Group and the Metals Group, the Company manufactures, to customer specifications, close tolerance rubber and metal components. The Rubber Group manufactures silicone and organic rubber components for sale primarily to manufacturers of automobiles, automotive replacement parts and medical devices. The Metals Group manufactures metal components for sale primarily to manufacturers of automobiles, automotive replacement parts, industrial equipment, home appliances and business machines.
During 1994, 1993 and 1992, net sales to automotive industry customers totaled $53,005,000, $45,213,000 and $34,596,000, respectively, which represented 59.9%, 60.3% and 53.1%, respectively, of the Company's total net sales. The Company's three largest customers accounted for 39.7% 39.2% and 36.2% of net sales during the same respective periods. One customer of the Company's Rubber Group accounted for 20.6%, 22.3% and 20.4% of the Company's total net sales during the same respective periods. In addition, one customer of the Metals Group accounted for 13.0%, 11.8% and 9.0% of the Company's total net sales during such respective periods. Loss of a significant amount of business from any of the Company's three largest customers could have a material adverse effect on the Company's business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information relating to the Company's industry segments is summarized below (in thousands of dollars):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- INCOME PER SHARE
PRIMARY INCOME PER SHARE
Primary income per share is based upon the weighted average number of common shares outstanding and, if dilutive, the common share equivalents outstanding during each period. The weighted average number of common and dilutive common equivalent shares used in the calculation of primary income per share totaled 4,209,000 in 1994 and 4,048,000 in each of 1993 and 1992. For purposes of the primary income per share calculations, net income for 1994 was reduced by (1) $47,000 of dividends on Redeemable Preferred Stock and (2) $45,000, the amount by which the payment made to effect the scheduled redemption of 450 shares of Redeemable Preferred Stock exceeded the par value of such shares. Net income for 1993 was reduced by (1) $176,000 of dividends on Redeemable Preferred Stock and (2) $135,000, the amount by which the payment made to effect the redemption of 1,350 shares of redeemable preferred stock exceeded the par value of such shares. Net income for 1992 was not reduced by preferred stock dividends or the redemption of preferred shares because the Company did not pay any such dividends and did not redeem any of such shares.
FULLY DILUTED INCOME PER SHARE
Fully diluted income per share is based upon the total of the weighted average number of common shares outstanding, the exercise or conversion of common share equivalents, if dilutive, as of the beginning of each period or, if later, their date of issuance and the conversion, as of the beginning of each period, of $1,000,000 principal amount of 14% Convertible Notes, if dilutive, into 440,000 shares of the Company's common stock. The weighted average number of common and dilutive common equivalent shares used in the calculation of fully diluted income per share totaled 4,666,000 in 1994 and 4,048,000 in each of 1993 and 1992. For purposes of the fully diluted income per share calculations, net income for 1994 and 1993 was reduced to reflect dividends on the Redeemable Preferred Stock and the amount by which payments made to effect the redemption of Redeemable Preferred Stock exceeded the par value of such shares. In addition, net income for 1994 was increased by $140,000, net of applicable income taxes, to reflect the pro forma elimination of interest expense on the 14% Convertible Notes. For 1993 and 1992, exercise or conversion of common stock equivalents and the conversion of the 14% Convertible Notes was not assumed because such exercise or conversion would have been antidilutive.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Company is lessee under various leases relating to buildings and equipment. Total rent expense under operating leases aggregated $177,000, $89,000 and $85,000 for 1994, 1993 and 1992, respectively. As of December 31, 1994, future minimum lease commitments under non-cancelable operating leases were not significant for any year or in the aggregate.
LEGAL ACTIONS
The Company is subject to various claims and legal proceedings covering a wide range of matters that arose in the ordinary course of its business activities. In addition, the Company has been named a potentially responsible party or a third-party defendant, along with other companies, for certain waste disposal sites.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be decided unfavorably to the Company. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial position of the Company.
NOTE 14 -- RELATED PARTIES
The Chairman of the Board and the President of the Company are the two largest holders of the Company's common stock and are the holders of the 14% Notes.
The Chairman and the President of the Company are partners of an investment banking firm which was retained by the Company to provide management and investment banking services through December 31, 1994, for an annual fee of $400,000 and additional compensation related to the Company's operating performance and for specific transactions completed by the Company with the assistance of the firm. The Company also has agreed to reimburse the firm for certain expenses. During 1994, the Company paid the firm aggregate fees in the amount of $678,000 (including $328,000 which the company had accrued at December 31, 1993 relating to the restructuring of the Company's debt in January 1994) and reimbursed it for direct and indirect expenses incurred by the Chairman of the Board and the President in an amount totaling $135,000. During each of 1993 and 1992, the Company paid the firm aggregate fees of $300,000 and reimbursed it for indirect expenses of $50,000.
The Secretary of the Company, who is also a member of the Company's Board of Directors, is a stockholder of a professional corporation which is a partner in a law firm which serves as general counsel to the Company. During 1994, 1993 and 1992, the Company made payments to the law firm for legal services in the amounts of $364,000, $383,000 and $342,000, respectively. As of December 31, 1994 and 1993, outstanding accounts payable for legal services to the law firm totaled $36,000 and $67,000, respectively.
A member of the Board of Directors of the Company is a member of the board of directors of an insurance brokerage firm which specializes in brokering commercial, life and accident insurance coverage and providing third party administration of health claims. After a competitive bidding process, the Company has from time to time secured large portions of its insurance coverage through this firm and purchased third party administrative services from this firm. During 1994, 1993 and 1992, the Company made cash payments to the brokerage firm for (1) insurance premiums, including commissions thereon, of $1,319,000, $1,518,000 and $1,794,000, respectively, and (2) administrative fees for services performed in connection with the administration of the Company's hospital and medical plans of $70,000, $76,000 and $85,000, respectively. As of December 31, 1994, and 1993, the Company did not have a balance due to or from the brokerage firm. As of December 31, 1992, the Company had a net refund due from the brokerage firm of approximately $65,000.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 is incorporated by reference from the Company's proxy statement to be issued in connection with its 1995 Annual Meeting of Stockholders and to be filed with the Securities and Exchange Commission (the "Commission") not later than 120 days after December 31, 1994.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated by reference from the Company's proxy statement to be issued in connection with its 1995 Annual Meeting of Stockholders and to be filed with the Commission not later than 120 days after December 31, 1994.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated by reference from the Company's proxy statement to be issued in connection with its 1995 Annual Meeting of Stockholders and to be filed with the Commission not later than 120 days after December 31, 1994.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated by reference from the Company's proxy statement to be issued in connection with its 1995 Annual Meeting of Stockholders and to be filed with the Commission not later than 120 days after December 31, 1994.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements of Lexington Precision Corporation are included in Part II, Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II, Valuation and Qualifying Accounts and Reserves, is included in this Part IV, item 14, on page 49. All other schedules are omitted because the required information is not applicable, not material or included in the consolidated financial statements or notes thereto.
3. EXHIBITS
* Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to item 14(a)(3).
** Not deemed filed for purposes of section 11 of the Securities Act of 1933, Section 18 of the Securities Exchange Act of 1934 and Section 323 of the Trust Indenture Act of 1939, or otherwise subject to the liabilities of such sections and not deemed part of any regulation statement to which such exhibit relates.
Note: Pursuant to section (b)(4)(iii) of item 601 of Regulation S-K, the Company agrees to furnish to the Securities and Exchange Commission upon request documents defining the rights of other holders of long-term debt.
(b) Reports on Form 8-K:
On February 2, 1995, the Company filed with the Securities and Exchange Commission a Current Report on Form 8-K dated January 31, 1995 which stated, among other things, that the Company had amended its Working Capital Facility with its Working Capital Lender.
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 Delano ----------------------------------- Warren Delano, President
March 29, 1995
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 29, 1995:
PRINCIPAL EXECUTIVE OFFICERS:
/s/ Michael A. Lubin ------------------------------------------------------- Michael A. Lubin, Chairman of the Board
/s/ Warren Delano -------------------------------------------------------- Warren Delano, President and Director
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ Dennis J. Welhouse ------------------------------------------------------ Dennis J. Welhouse, Senior Vice President and Chief Financial Officer
DIRECTORS:
/s/ William B. Conner ------------------------------------------------------ William B. Conner, Director
/s/ Kenneth I. Greenstein ----------------------------------------------------- Kenneth I. Greenstein, Secretary and Director
/s/ Arnold W. MacAlonan -------------------------------------------------- Arnold W. MacAlonan, Director
/s/ Phillips E. Patton ---------------------------------------------------------- Phillips E. Patton, Director
EXHIBIT INDEX
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