UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 2003
|_| Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from ___________ to ___________.
Commission file number 000-24293
---------
LMI AEROSPACE, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Missouri 43-1309065
- ------------------------------------ --------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3600 Mueller Road, St. Charles, Missouri 63302-0900
- ---------------------------------------- --------------------------------
(Address of Principal Executive Officer) (ZIP Code)
(636) 946-6525
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act: None
------------
Securities to be registered pursuant to Section 12(g) of the Act:
Common stock, $0.02 par value
--------------------------------------------------
(Title of Class)
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Act).
YES NO X
--- ---
The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the average bid and asked price of such common equity
as of the last business day of the registrant's most recently completed second
fiscal quarter ended June 30, 2003, was $6,424,386. The aggregate market value
of the voting common equity held by non-affiliates as of April 8, 2004 was
$7,051,156.
There were 8,181,786 total shares of common stock outstanding as of April 8,
2004.
Documents Incorporated by Reference
Part III incorporates by reference portions of the Proxy Statement for the
Registrant's 2004 Annual Meeting.
TABLE OF CONTENTS
Item No. Page
PART I
1 Business 4
2 Properties 17
3 Legal Proceedings 19
4 Submission of Matters to a Vote of Security Holders 19
PART II
5 Market for Registrant's Common Equity and Related Stockholder 20
Matters
6 Selected Financial Data 22
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
7A Quantitative and Qualitative Disclosures About Market Risk 37
8 Financial Statements and Supplementary Data 37
9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 68
9A Controls and Procedures 68
PART III
10 Directors and Executive Officers 70
11 Executive Compensation 71
12 Security Ownership of Certain Beneficial Owners and Management 71
13 Certain Relationships and Related Transactions 71
14 Principal Accountant Fees and Services 71
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 72
Signatures 73
Exhibit Index 74
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The Company makes forward-looking
statements in this Annual Report on Form 10-K and in the public documents that
are incorporated herein by reference, which represent the Company's expectations
or beliefs about future events and financial performance. When used in this
report and the documents incorporated herein by reference, the words "expect,"
"believe," "anticipate," "goal," "plan," "intend," "estimate," "may," "will" or
similar words are intended to identify forward-looking statements. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions, including those referred to under "Risk Factors" in this Annual
Report on Form 10-K and otherwise described in the Company's periodic filings.
All predictions as to future results contain a measure of uncertainty, and
accordingly, actual results could differ materially. Among the factors that
could cause actual results to differ from those contemplated, projected or
implied by the forward-looking statements (the order of which does not
necessarily reflect their relative significance) are:
o our losses from operations in recent years, together with our
inability to meet certain covenants under our loan agreement in the
past, raise substantial doubt about our ability to continue as a going
concern. For further information, see Note 1 (Accounting Policies) to
the consolidated financial statements included in Item 8 of this
report.
o the financial well-being of the Boeing Company, Lockheed Martin,
Gulfstream and Cymer, orders from which comprise a majority of the
Company's consolidated revenues;
o the Company's success in restructuring it's outstanding debt;
o the effect of terrorism and other factors that adversely affect the
commercial travel industry;
o difficulties with the implementation of the Company's growth strategy,
such as acquisition integration problems and unanticipated costs
relating to the Company's manufacture of new parts for its current
customers and new customers;
o competitive pressures, such as pricing pressures relating to low-cost
foreign labor and industry participation commitments made by the
Company's customers to foreign governments;
o changes in the quality, costs and availability of the Company's raw
materials, principally aluminum;
o the Company's ability to stay current with technological changes, such
as advancements in semiconductor and laser component technology and
the development of alternative aerospace materials;
o difficulties in plant operations, and in particular, difficulties
relating to the Company's manufacturing facilities located in St.
Charles, Missouri;
o governmental funding for those military programs that utilize the
Company's products;
o asserted and unasserted claims, and in particular, the Company's
ability to successfully negotiate claims relating to cost over-runs of
work performed on certain customer contracts;
o changes in employee relations;
o environmental matters;
o changes in accounting principles or new accounting standards;
o compliance with laws and regulations;
o other unforeseen circumstances; and
o the risk factors described in Item 1 of this Annual Report on Form
10-K and in the Company's other periodic filings with the Securities
and Exchange Commission.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed may not occur. In addition, actual results could differ
materially from those suggested by the forward-looking statements. Accordingly,
investors are cautioned not to place undue reliance on the forward-looking
statements. Except as required by law, the Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Investors should, however, review
additional disclosures made by the Company from time to time in its periodic
filings with the Securities and Exchange Commission.
This Annual Report on Form 10-K and the documents incorporated herein by
reference should be read completely and with the understanding that the
Company's actual future results may be materially different from what the
Company expects. All forward-looking statements made by the Company in this
Annual Report on Form 10-K and in the Company's other filings with the
Securities and Exchange Commission are qualified by these cautionary statements.
PART I
Item 1. Business
General Overview
LMI Aerospace, Inc. (the "Company") is a leader in fabricating, machining,
finishing and integrating formed, close tolerance aluminum and specialty alloy
components and sheet metal products for use by the aerospace, technology and
commercial sheet metal industries. Aerospace components manufactured by the
Company include leading edge wing slats, flaps and lens assemblies; cockpit
window frame assemblies; fuselage skins and supports; and passenger and cargo
door frames and supports. The Company manufactures more than 20,000 aerospace
components for integration into a variety of civilian and military aircraft
platforms manufactured by leading original equipment manufacturers ("OEMs") and
prime subcontractors ("Primes"). In addition, the Company produces components
and assemblies for laser equipment used by semiconductor and medical equipment
manufacturers in the technology industry. The Company also produces sheet metal
products for various companies in the commercial sheet metal industry. In
addition to manufacturing quality components, the Company provides its customers
with value-added services related to the design, production and finishing of its
components.
For most of its history, the Company's primary focus had been the manufacture
and sale of components to the commercial aircraft market of the aerospace
industry. In recent years, the Company has expanded its operations through a
number of acquisitions. In April of 2001, the Company acquired the operating
assets of Tempco Engineering Inc. and its affiliate, Hyco Precision, Inc.
("Tempco"). This acquisition expanded the Company's aerospace product line and
added technology components used in the manufacture of semiconductors and
medical equipment as new product lines. In May of 2002, the Company acquired
Versaform Corporation and its Canadian affiliates ("Versaform"), producers of
large formed metal components for the regional jet, business jet and military
markets of the aerospace industry. The Company acquired the metal fabrication
assets of Stretch Forming Corporation in June of 2002, an aerospace sheet metal
manufacturer, which manufactures components for the military market of the
aerospace industry. Finally, in October of 2002, the Company acquired the
operations and certain assets of the aerospace division of Southern Stretch
Forming and Fabrication, Inc., a manufacturer of aerospace sheet metal for the
corporate and regional markets.
The Company was organized as a Missouri corporation in 1948. The Company's
headquarters are located at 3600 Mueller Road, St. Charles, Missouri 63302.
Recent Development
On March 30, 2004, the Company and Union Planters Bank N.A. ("Union Planters")
entered into a Thirteenth Amendment to Loan Agreement ("Thirteenth Amendment"),
amending the Loan Agreement dated as of August 15, 1996 (the "Loan Agreement")
between Leonard's Metal, Inc., the predecessor in interest to the Company, and
Magna Bank, National Association, the predecessor in interest to Union Planters.
The primary purposes of the Thirteenth Amendment were to (a) extend the maturity
of the Company's Revolving Line of Credit provided under the Loan Agreement
("Revolving Credit Loan") from March 31, 2004 to March 31, 2005, and (b) waive a
default arising under the Loan Agreement providing for the maintenance of a
minimum consolidated EBITDA amount (the "EBITDA Covenant") for the period ended
December 31, 2003.
In addition, under the terms of the Thirteenth Amendment to Loan Agreement:
o The maximum principal amount of the Revolving Credit Loan was
increased from $9,088,323 to $9,700,000 through September 30, 2004,
subject to a borrowing base calculation and further subject to a newly
established inventory reserve requirement and a more restrictive
requirement for eligible receivables, which, notwithstanding the
increased borrowing maximum amount provided by the Thirteenth
Amendment, could reduce the amount of borrowing availability under the
Revolving Credit Loan.
o The interest rate on the Revolving Credit Loan was changed from LIBOR
plus 2.50% to Union Planters' prime rate plus 1%. Moreover, if the
Company has not executed and delivered a letter of intent regarding
(i) the sale of the stock or of all or substantially all of the assets
of certain of its subsidiaries, and/or (ii) the procurement by the
Company of debt financing providing the Company with sufficient funds
to repay in full the Company's obligations to Union Planters ("Letter
of Intent") on or before June 30, 2004, the interest rate on the
Revolving Credit Loan will be increased to prime plus 1-1/2%, and
further increased to prime plus 2.00% if the Company has not paid all
of its obligations to Union Planters in full on or before September
30, 2004. The interest rate on Term Loan A provided under the Loan
Agreement, which, as of March 30, 2004, had a total outstanding
principal balance of $9,160,714, was changed from LIBOR plus 3%,
subject to a floor of 7% and a ceiling of 8.5%, to Union Planters'
prime rate plus 2%, subject to a floor of 7%. The interest rate on
Term Loan B provided under the Loan Agreement, which, as of March 30,
2004, had a total outstanding principal balance of $8,773,816, was
changed from LIBOR plus 3% to Union Planters' prime rate plus 2%.
Moreover, if the Company has not executed and delivered a Letter of
Intent on or before June 30, 2004, the interest rate on Term Loans A
and B will be increased to Union Planters' prime plus 2-1/2% and
further increased to Union Planters' prime plus 3% if the Company has
not paid all of its obligations to the Buyer in full on or before
September 30, 2004.
o If, by June 30, 2004, the Company does not enter into one or more
Letters of Intent, a fee of $125,000 will be payable on the earliest
of March 31, 2005, the date the Company repays all of its obligations
to Union Planters or the date on which Union Planters accelerates all
of the Company's obligations.
o If the Company fails to pay all of its obligations in full to Union
Planters by September 30, 2004, a fee of $350,000 will be payable to
Union Planters ($100,000 on October 1, 2004 and $250,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
o If the Company fails to pay all of its obligations in full to Union
Planters by December 30, 2004, a fee of $200,000 will be payable to
Union Planters ($100,000 on December 31, 2004 and $100,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
Thus, increased interest rates and additional fees will apply during the
remaining term of the Loan Agreement (through March 31, 2005) if the
indebtedness under the Loan Agreement is not repaid in full through alternative
financing and/or a sales of assets by certain prescribed dates. The Company has
engaged Lincoln Partners LLC, a Chicago, Illinois based investment banking firm,
to assist in these efforts.
Please see Note 8 of the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K for more detailed financial information relating
to the Company's debt.
Business Segments
As a result of its acquisition of Tempco, the Company's business is now divided
into two segments, the Sheet Metal segment and the Machining and Technology
segment. The Sheet Metal segment, which is the Company's dominant segment,
services the aerospace and commercial sheet metal industries and is comprised of
all of the Company's subsidiaries other than Tempco. The Sheet Metal segment
accounted for $62.0 million, or 81.7%, of the Company's net sales in 2003.
The business of the Machining and Technology segment, which utilizes a machining
process rather than a forming process to manufacture its product line, is
conducted entirely by Tempco and serves the aerospace and technology industries.
More than 50% of Tempco's revenue is derived from the medical and semiconductor
technology industries. The Company originally acquired Tempco to serve as a
supply arm to the Company. However, as the Tempco business evolved, it became an
autonomous unit with regard to virtually all aspects of its business, which led
the Company to categorize it as a distinct business segment. The Machining and
Technology segment accounted for $13.9 million, or 18.3%, of the Company's net
sales in 2003.
Please see Note 15 of the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K for specific financial information relating to
the Company's business segments.
Risk Factors
The Company's business, financial condition, results of operations and cash
flows can be impacted by a number of factors, including, but not limited to,
those factors set forth below and elsewhere in this Annual Report on Form 10-K,
any one of which could cause the Company's actual results to vary materially
from recent results or from the Company's anticipated future results.
Our recent operating losses raise substantial doubt about our ability to
continue as a going concern.
The Company has incurred operating losses in recent years due to difficulties
encountered on certain recent contracts, and the prevailing adverse economic
environment in the commercial aerospace and technology markets, which have
resulted in depressed markets for the Company's products.
The continuation of or further declines in demand for the Company's products
will place the Company at risk of further revenue erosion. The Company has begun
restructuring efforts to reduce its cost base in an effort to improve
performance. If the Company is unable to reduce costs or revenues continue to
decline, it may not achieve profitability.
Our independent certified public accountants have modified their opinion to our
audited financial statements for the year ended December 31, 2003 to include an
emphasis paragraph, stating that our continuing losses raise substantial doubt
about our ability to continue as a going concern. Our continuation as a going
concern will depend upon our ability to generate or obtain sufficient cash to
meet our obligations on a timely basis and ultimately to attain profitable
operations. Our management has developed a plan that includes restructuring or
possibly disposing of segments of our business, increasing sales and raising
alternative captital. If we are unsuccessful in accomplishing any of these three
tasks, our ability to continue to operate as a going concern could be in doubt.
Concern about our ability to continue as a going concern may make it more
difficult for us to obtain alternative funding to meet our obligations or
adversely affect the terms of any alternative funding we are able to obtain.
There can be no assurance that we can or will operate profitably in the future,
or that we will continue as a going concern.
If the Company is unable to effectively and efficiently implement our plan to
remediate a material weakness that has been identified in our internal controls
and procedures, there could be a material adverse effect on our financial
results.
In connection with its 2003 year-end audit, our independent certified public
accountants have identified a material weakness in our internal controls and
procedures relating to inventory costing and obsolescence analysis. The Company
has implemented and is continuing to implement various initiatives intended to
materially improve our internal controls and procedures to address this
weakness. These initiatives address our control environment, organization and
staffing, policies, procedures and documentation and information systems. The
implementation of these initiatives is one of our highest priorities. Our Board
of Directors, in coordination with our Audit Committee, will continually assess
the progress and sufficiency of these initiatives and make adjustments as
necessary. However, no assurance can be given that we will be able to
successfully implement our revised internal controls and procedures or that our
revised controls and procedures will be effective in remedying all of these
identified deficiencies in the Company's internal controls and procedures. In
addition, the Company may be required to hire additional employees, and may
experience higher than anticipated capital expenditures and operating expenses,
during the implementation of these changes and thereafter. If the Company is
unable to implement these changes effectively or efficiently, there could be a
material adverse effect on our financial results. Moreover, the Company could be
subject to additional regulatory oversight and our business and reputation could
be harmed.
Covenant restrictions in our credit facility and other debt instruments could
limit our ability to operate our business.
The Company currently maintains a credit facility with Union Planters under the
terms of the Loan Agreement. This facility is secured by all of the Company's
domestic property, including, but not limited to, accounts receivable,
inventories, buildings, and equipment, and includes certain restrictive
covenants relating to various financial measures. On March 30, 2004, the Company
and Union Planters entered into the Thirteenth Amendment to Loan Agreement. The
primary purposes of the Thirteenth Amendment were to (a) extend the maturity of
the Company's Revolving Credit Loan under the Loan Agreement from March 31, 2004
to March 31, 2005 and (b) waive a default arising under the Loan Agreement
providing for the maintenance of a minimum consolidated EBITDA amount for the
period ended December 31, 2003. The Loan Agreement, as amended, provides for
certain restrictive covenants, including the EBITDA Covenant.
In addition, the Company has executed a note in favor of a former owner of
Versaform Corporation, now a director of the Company, in connection with the
Company's purchase of Versaform. This note is secured by a pledge of 65% of the
Company's interest in its Canadian subsidiary, and as part of its obligations
under this note, the Company's Canadian subsidiary is subject to various
restrictive covenants relating to the its financial performance.
If the Company were to fail in the future to comply with the restrictive
covenants in the Loan Agreement or in the promissory note, the Company's
operations could be negatively impacted and its ability to take advantage of
potential business opportunities as they arise could be limited. Moreover, the
Company's failure to comply with these restrictive financial and other covenants
could result in an event of default that, if not cured or waived, could cause
the Company to be required to repay its borrowings before their due dates. If
the Company were unable to make this repayment or otherwise refinance these
borrowings, the Company's creditors could foreclose on the assets securing its
borrowings. Although in the Thirteenth Amendment Union Planters waived the
default arising from a failure of the Company to meet the EBITDA Covenant, such
waiver was limited to and valid only for the specific purposes given. Union
Planters is not obligated solely by reason of such waiver to agree to any
additional waivers.
Please see Item 1. Business - Recent Developments and Note 8 of the Consolidated
Financial Statements included as part of this Annual Report on Form 10-K for
more detailed financial information relating to the Company's debt.
The Company's outstanding indebtedness may adversely impact the Company's cash
flow and ability to raise necessary capital.
As of December 31, 2003, the Company had a total of $27,814,000 in outstanding
long-term debt, of which $21,583,000 matures in 2005. The Company is dependent
on borrowings under the Revolving Credit Loan to fund its working capital needs.
The existence of indebtedness at the current level will require that significant
portions of the Company's cash flow from its business operations be used to
service outstanding debt. If the Company is unable to obtain necessary financing
in the future and a substantial portion of the Company's cash flow is used to
service debt obligations, the Company may have limited ability to fund: (i)
working capital requirements; (ii) future acquisitions that would benefit the
Company's growth strategy; (iii) capital expenditures; (iv) debt service
requirements; and (v) other general business requirements.
The Thirteenth Amendment provides for an increased interest rate on borrowings
thereunder and imposes certain fees and additional interest rate increases if
the indebtedness under the Loan Agreement is not repaid in full through
alternative financing and/or sales of certain of its business operations by
certain prescribed dates. The Company has engaged Lincoln Partners LLC, a
Chicago, Illinois based investment banking firm, to assist in these efforts.
Please see Item 1. Business - Recent Developments and Note 8 of the Consolidated
Financial Statements included as part of this Annual Report on Form 10-K for
more detailed financial information relating to the Company's debt.
The Company will need to repay in full its outstanding bank debt through
refinancing or sale(s) of assets.
As discussed above, the Thirteenth Amendment contemplates the Company's
repayment in full of all indebtedness and other payment obligations under the
Loan Agreement by March 31, 2005 or sooner through the refinancing of its
indebtedness to Union Planters and/or the sale of certain of its business
operations.
No assurance can be given that the Company will be able to effect such
refinancing and/or sale(s) of assets to meet its obligations under the Loan
Agreement. The Company's failure to do so in a timely manner will result in
increased interest rates and fees during the term of the Loan Agreement, and if
the Company is unable to repay in full its indebtedness to Union Planters at the
maturity of the Loan Agreement, Union Planters will have the ability to
foreclose on its collateral, consisting of substantially all of the U.S. assets
of the Company and to pursue any or all of the other remedies available to it.
In such case, no assurance can be given that the Company will be able to
continue its operations.
Please see Item 1. Business - Recent Development and Note 8 of the Consolidated
Financial Statements included as part of this Annual Report on Form 10-K for
more detailed financial information relating to the Company's debt.
The Company's business is dependent on only a few customers.
In 2003, 55.0% of the Company's aggregate sales were dependent on relationships
with four major customers: Boeing Company, Lockheed Martin Corporation,
Gulfstream Aerospace Corporation and Cymer, Inc. Although a majority of the
Company's sales are made pursuant to multi-year contracts, such contracts are
generally terminable upon 30 days notice by the customer and typically do not
require the customer to purchase any specific quantity of products. Accordingly,
there can be no assurance that sales to customers that have in the past
accounted for significant sales individually or as a group will continue, or if
continued, will reach or exceed historical levels in any future periods. The
loss of any one of these customers, or a significant reduction in the amount of
orders received from any one of these customers, could cause a significant
decrease in the Company's net sales and profitability. The Company anticipates
that a small number of large customers will continue to dominate its sales for
the foreseeable future.
The Company's business is dependent on the aerospace industry and is therefore
susceptible to factors that affect that industry such as acts of terrorism and
general economic factors.
The Company derives approximately 89% of its sales and operating income from the
services and components sold to the aerospace industry. As a result of the
events of September 11, 2001, the commercial airline industry has suffered a
significant decline in operational efficiency and financial condition.
Consequently, the Company experienced a decrease in orders for new commercial
aircraft and replacement components. The Company is unable to predict when the
financial outlook of the airline industry might rebound, or when orders for new
aircraft and replacement components might increase. And, while in some instances
since September 11, 2001 the Company has seen an increase in orders from certain
customers, particularly producers of military and corporate and regional
aircraft, the overall effect of a prolonged downturn in the commercial airline
industry will be a potentially severe reduction in demand for the Company's
aerospace products. Additional acts of sabotage or terrorism or adverse results
to the U.S. in its military conflicts, such as the current conflict in Iraq,
would likely lead to even further reduced demand for the Company's products and
services.
In addition, the Company's business is directly affected by certain
characteristics and trends of the aerospace industry that affect its customers,
such as (i) fluctuations in the aerospace industry's business cycle, (ii)
varying fuel and labor costs, (iii) intense price competition and regulatory
scrutiny, (iv) certain trends, including a possible decrease in aviation
activity, a decrease in outsourcing by aircraft manufacturers or the failure of
projected market growth to materialize or continue, and (v) changes in military
budgeting and procurement for certain military aircraft. In the event that these
characteristics and trends adversely affect customers in the aerospace industry,
they would reduce the overall demand for the Company's products and services,
thereby decreasing the Company's sales and operating income.
The Company may experience cost over-runs related to orders for new products and
changes to existing products.
The Company generally sells its products under firm, fixed-priced contracts
providing for a fixed price for the products sold by the Company, regardless of
the production costs incurred by the Company. As a result, inaccurate pricing,
manufacturing inefficiencies, start-up costs and other factors may result in
cost over-runs and losses on contracts. The cost of production also may be
adversely affected by increases in the cost of labor, materials and overhead and
changing product standards. In many cases, the Company makes multi-year firm,
fixed-price commitments to its customers, without assurance that the Company's
anticipated production costs will be achieved. In some instances, the Company
has been successful in obtaining the agreement of a customer to reprice a
particular product and recoup previous losses, primarily when incomplete or
inaccurate engineering data or out-of-tolerance tooling has contributed to these
cost over-runs. However, with respect to future claims there can be no assurance
that the Company will be successful in obtaining the necessary re-pricing in
order to make a particular product profitable to the Company.
Risks associated with acquisitions could result in increased costs and
production inefficiencies.
A key element of the Company's growth strategy has been expansion through the
acquisition of complementary businesses involved in the aerospace industry and
strategic acquisitions that would provide the Company with access to new
industries. The Company's ability to expand by acquisition is dependent on, and
may be limited by, the availability of suitable acquisition candidates and the
Company's capital resources. Acquisition risks include difficulties in
assimilating the operations and personnel of acquired companies, difficulties
associated with new product lines and meeting new tolerance requirements, an
inability to accurately price new products, the potential loss of key employees
of the acquired companies, the incurrence of substantial, additional
indebtedness in funding such acquisitions, and goodwill impairment. Furthermore,
although the Company will investigate the business operations and assets of
entities that it acquires, there may be liabilities that the Company fails or is
unable to discover and for which the Company, as a successor owner or operator,
may be liable. The Company evaluates acquisition opportunities from time to
time, but there can be no assurance that the Company will be able to consummate
acquisitions on satisfactory terms, or at all, or that it will be successful in
integrating any such acquisitions into its operations. However, as indicated
above, the Company's limited capital resources will signficantly restrict its
ability to effect strategic acquisitions.
The Company's industries are characterized by intense competition.
The Company's competitors in the aerospace industry consist of a large
fragmented group of companies, including certain business units or affiliates of
the Company's customers. However, the Company is unaware of any single company
in the aerospace industry with which it competes in all of the Company's
processes. The Company believes that competition within the aerospace industry
will increase substantially as a result of industry consolidations and trends
toward favoring greater outsourcing of components and reducing the number of
preferred suppliers. The Company also believes that foreign aerospace
manufacturers will become an increasing source of competition, due largely to
foreign manufacturers' access to low-cost labor and the increased prevalence of
industry participation commitments, pursuant to which domestic OEMs and Primes
agree to award production work to manufacturers from a foreign country in order
to obtain orders from that country. In contrast to the aerospace industry, the
Machining and Technology segment has only a few competitors for the products it
produces. Certain of the Company's competitors in all of its industries, have
substantially greater financial, production and other resources than the
Company. These competitors may have (i) the ability to adapt more quickly to
changes in customer requirements and industry conditions or trends, (ii)
stronger relationships with customers and suppliers, and (iii) greater name
recognition than the Company. There can be no assurance that competitive
pressures will not materially and adversely affect the Company's business,
financial condition or results of operation.
Decreases in the availability, or increases in the cost, of the Company's raw
materials would increase the Company's operating costs.
Most of the Company's components are manufactured from aluminum products. From
time to time, the Company, and the aerospace components industry as a whole, has
experienced shortages in the availability of aerospace quality aluminum. In
addition, the Company's Machining and Technology segment utilizes materials
that, in some cases, may be provided by a limited number of suppliers. Raw
material shortages could inhibit the Company's ability to deliver products to
its customers on a timely basis. However, there can be no assurance that the
Company will be able to purchase sufficient quantities of aluminum products or
other materials to meet its production needs in the future or that necessary
materials will be available on satisfactory terms or at reasonable prices. Any
such material shortage or price escalation would increase the Company's
operating costs, which would likely reduce profits.
The Company's long-term success and growth strategy depend on its senior
management and the Company's ability to attract and retain qualified personnel.
The Company is currently renegotiating written employment agreements with its
senior management, which expired December 31, 2003. The Company also maintains
key man life insurance policies on the lives of certain of such personnel.
However, the loss of service of one or more of the Company's senior management
personnel could result in a loss of leadership and an inability to successfully
pursue the Company's long-term success and growth strategy.
The Company's success and future growth also depend on management's ability to
attract, hire, train, integrate and retain qualified personnel in all areas of
its business. Competition for such personnel is intense, and the Company's
inability to adequately staff its operations with such personnel could render
the Company less efficient, thereby slowing its rate of production. In addition,
rising costs associated with certain employee benefits, in particular the rising
costs associated with providing employee health coverage, could limit the
ability of the Company to provide certain employee benefits in the future. The
Company's inability to provide a competitive employee benefits package could
limit the ability of the Company to recruit and retain qualified personnel.
Compliance with and changes in environmental, health and safety laws and other
laws that regulate the operation of the Company's business could increase the
cost of production and expose the Company to regulatory claims.
The Company's operations are subject to extensive and frequently changing
federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency ("EPA"), the United
States Occupational Safety and Health Administration ("OSHA") and the Federal
Aviation Administration ("FAA"). Among other matters, these agencies impose
requirements that regulate the operation, handling, transportation and disposal
of hazardous materials generated or used by the Company during the normal course
of its operations, govern the health and safety of the Company's employees and
require the Company to meet certain standards and licensing requirements for
aerospace components. This extensive regulatory framework imposes significant
compliance burdens and risks on the Company and, as a result, may substantially
affect its operational costs. In addition, the Company may become liable for the
costs of removal or remediation of certain hazardous substances released on or
in its facilities without regard to whether or not the Company knew of, or
caused, the release of such substances. The Company believes that it is
currently in material compliance with applicable laws and regulations and is not
aware of any material environmental violations at any of its current or former
facilities. There can be no assurance, however, that its prior activities did
not create a material environmental situation for which the Company could be
responsible or that future uses or conditions (including, without limitation,
changes in applicable environmental laws and regulations, or an increase in the
amount of hazardous substances generated or used by the Company's operations)
will not result in any material environmental liability to the Company or result
in a material adverse effect to the Company's financial condition or results of
operations.
The operations of the end-users of the product platforms into which the
Company's components are integrated could expose the Company to product
liability claims.
Although the Company assists its customers in the design of a limited number of
parts, components and sub-assemblies, the Company's business may still be
exposed to possible claims of personal injury, death or property damage that may
result from the failure or malfunction of any component or subassembly
fabricated by the Company. The Company currently has in place aviation products
liability and premises insurance, which the Company believes provides coverage
in amounts and on terms that are generally consistent with industry practice.
The Company has not experienced any product liability claims related to its
products. However, the Company may be subject to a material loss, to the extent
that a claim is made against the Company that is not covered in whole or in part
by insurance, which could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that insurance coverages can be maintained in the future at a
cost acceptable to the Company.
The Company's facilities are located in regions that suffer from natural
disasters.
Several of the Company's facilities are located in regions that have an
increased risk of earthquake activity, and one of the Company's facilities has
experienced damage due to floods in the past. Although the Company maintains
earthquake and standard blanket flood loss insurance where necessary, an
earthquake, flood or other natural disaster could have a material adverse effect
on the Company's business or its operating results.
The market price of the Company's common stock may be volatile.
The market price of the Company's common stock could be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by security analysts, a failure of the Company to meet
such estimates and other events or factors. In addition, the stock market has
experienced volatility that has affected the market prices of the equity
securities of many companies. The resulting changes in such market prices are
often not directly related to the operating performance of such companies.
Accordingly, market volatility could adversely affect the market price of the
Company's common stock.
Certain provisions in the Company's charter documents may have the effect of
delaying, deterring, or preventing certain potential acquisitions or a change in
control of the Company.
The Company's Restated Articles of Incorporation and Amended and Restated Bylaws
contain certain provisions that reduce the probability of a change of control or
acquisition of the Company. These provisions include, but are not limited to,
(i) the ability of the Board of Directors to issue preferred stock in one or
more series with such rights, obligations and preferences as the Board of
Directors may determine, without any further vote or action by the shareholders,
(ii) advance notice procedures for shareholders to nominate candidates for
election as directors of the Company and for shareholders to submit proposals
for consideration at shareholders' meetings, (iii) the staggered election of
directors, and (iv) restrictions on the ability of shareholders to call special
meetings of shareholders. In addition, the Company is subject to Section 459 of
the General and Business Corporation Law of Missouri, which, under certain
circumstances, may prohibit a business combination between the Company and a
shareholder owning 20% or more of the outstanding voting power of the Company.
Customers and Products
Customers
The Company's principal customers serviced by the Sheet Metal segment are
Boeing, Lockheed Martin and Gulfstream, leading OEMs and Primes in the
commercial, corporate and regional and military aircraft markets of the
aerospace industry. During 2003, direct sales to these customers accounted for a
total of approximately 55% of the segment's sales.
Typically, the Company conducts its aerospace business under contracts that
provide for: (i) payment on a net 30 day basis; (ii) termination for convenience
upon 30 days notice; (iii) reasonable manufacturing lead time for delivery of
components; (iv) limitations on and specifications for the scope of work to be
performed; and (v) pricing of components by quotes. In addition, these contracts
are typically "requirements" contracts under which the purchaser commits to
purchase all of its requirements of a particular component from the Company.
Specific orders are placed with the Company on a periodic basis.
The Machining and Technology segment's principal customers are Cymer, a
manufacturer of semi-conductor equipment in the technology industry, and Alliant
Techsystems (ATK), a defense contractor. During 2003, Cymer and Alliant
Techsystems accounted for 68.5% of the Machining and Technology segment sales.
Products.
The Company fabricates, machines and integrates formed, close tolerance aluminum
and specialty alloy components for use by the aerospace, technology and
commercial sheet metal industries. All components are fabricated from designs
and specifications prepared and furnished by its customers. Because the Company
manufactures thousands of components, no one component accounts for a
significant portion of the Company's sales. The following table describes some
of the principal products manufactured by each of the Company's segments and the
models into which they are integrated:
Product Models
------- ------
Sheet Metal Segment
-------------------
Wing leading edge skins, flapskins, winglets 737 NG, G-400 and Citation X
Detail interior components Boeing 737 Classic, 737 NG,
727, 747, 757, 767, 777 and
C-130
Wing panels and floorbeams 747
Door assembly structural details 737 Classic, 737 NG, 747 and
757, Challenger 604, Regional
Jet, F-16, C-130 and Business
jet
Thrust reversers and engine G-400, CL415, 737 Classic,
nacelles/cowlings 777 and B-52
Cockpit window frames and landing light 737 NG, 747, 767, 777,
lens assembly Citation III, VII and Excel,
MD-80, KC-10 and F-16
Product Models
------- ------
Fuselage and wing skin Models 45 and 60, Dash-8, 717
737 Classic, 737 NG, 747, 757,
767, 777, C-130, F-16,
Sovereign, Citation, G-300,
G-400 and G-500
Structural sheet metal & extruded Boeing 737 Classic, 737 NG,
components 727, 747, 757, 767, 777 and
C-130, F-16, Gulfstream G400
and G500
Auxiliary power units Embraer, Regional Jet and V-22
Osprey
Machining and Technology Segment
--------------------------------
Fans, heat exchangers, and various assemblies ELS 7000, ELS 6010, and XLA
and components 100 components
Housings and assemblies for gun turret AH-64 Apache Helicopter
Various components and assemblies IntraLase FS Laser
Please see Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview for detailed information regarding the
revenues contributed by classes of products.
Manufacturing Process
The manufacturing facilities are organized by work centers focusing on a
particular manufacturing process. Depending on the component, the Company
utilizes either a forming process or a machining process. Each work center is
staffed by a team of operators who are supported by a supervisor, lead operators
and quality inspectors. Throughout each stage of the manufacturing and finishing
processes, the Company collects, maintains and evaluates data, including
customer design inputs, process scheduling, material inventory, labor,
inspection results and completion and delivery dates. The Company's information
systems employ this data to provide accurate pricing and scheduling information
to its customers as well as to establish production standards used to measure
internal performance.
In manufacturing some components for the Sheet Metal segment, the Company uses
several forming processes to shape or "form" a "work piece" (aluminum, stainless
steel or titanium sheet metal and extrusion) into components by applying
pressure through impact, stretching or pressing the raw material (sheet metal or
extrusion) to cause conformance to a die. The shapes may be simple with a single
angle, bend or curve, or may be complex with compound contours having multiple
bends and angles. Some processes incorporate heat to soften the metal prior to
or during forming. Forming processes include: drop hammer, fluid cell press,
sheet metal and extrusion stretch, skin stretch, stretch draw, hot joggle, brake
forming, roll forming and radial draw.
Additionally, certain products manufactured by the Sheet Metal segments and
virtually all of the Machining and Technology segment products are produced
using close tolerance machining methods. Various metals are machined, such as
stainless, aluminum, monel, kevlar, and numerous varieties of steel and castings
for small to medium sized parts, in heat treated and non-heat treated
conditions. Parts are processed through conventional and computer numerical
control machining methods, also known as CNC, from raw material or castings up
to and through assembly processes. In addition, complex machining of parts is
accomplished through experience in engineering set-ups to produce intricate and
close tolerances with very restricted finish requirements. Each machining
facility is also set up to complete turnkey, research and development projects
to better support engineering changes from customers.
Value-Added Services
In addition to the products the Company sells, each segment offers its customers
various value-added services that are intended to result in both cost and time
savings. These services may include the production of tooling, heat treating and
aging of components, computer inspection and engineering of components, chemical
milling, metal finishing, polishing and painting, assembly, prototyping and
warehousing, distribution and kitting.
Backlog
The Company's backlog for each of its business segments is displayed in the
following table:
As of December 31,
(in millions)
2001 2002 2003
Sheet Metal Segment ------ ------ ------
- -------------------
Total $ 46.8 $ 59.2 $ 42.7
Portion deliverable within 12 months $ 31.8 $ 44.7 $ 36.4
Machining and Technology Segment (1)
- --------------------------------
Total $ 11.9 $ 12.9 $ 11.2
Portion deliverable within 12 months $ 10.5 $ 12.5 $ 11.0
- ----------------------
(1) The Company acquired Tempco Engineering, which comprises the Machining
and Technology segment, in April of 2001.
The Company's customers often modify purchase orders to accelerate or delay
delivery dates. The level of unfilled orders at any given time during the year
will be materially affected by the timing of the Company's receipt of orders and
the speed with which those orders are filled. Moreover, sales during any period
may include sales which are not part of the backlog at the end of the prior
period.
Raw Materials and Procurement Practices
Most of the Company's aerospace components are manufactured from aerospace
quality aluminum sheet metal and extrusion. From time to time the Company, and
the aerospace components industry as a whole, has experienced shortages in the
availability of aerospace quality aluminum sheet metal and extrusion. Such
shortages could inhibit the Company's ability to deliver products to its
customers on a timely basis.
A strategy adopted by the commercial division of Boeing, requires that Boeing
subcontractors purchase aluminum sheet, aluminum extrusion and titanium sheet
from TMX Aerospace (a Boeing-designated raw material service provider). This
supply chain approach is intended to control raw material pricing and assure
adequate levels of inventory for both Boeing and its supply base. Additional
designated material source strategies are used by several of the Company's
customers. Like the Boeing arrangement, these customers provide the Company with
access to an assured supply of materials at competitive pricing.
The Company obtains its raw materials for the technology portion of its
Machining and Technology segment from a variety of vendors and distributors.
The Company believes its sources of raw materials and its relationships with its
suppliers are satisfactory. While the loss of any one supplier could have a
material adverse effect on the Company until alternative suppliers are located
and have commenced providing products, alternative suppliers exist for
substantially all of the products and services purchased by the Company.
Quality Assurance and Control
The Company continually seeks to maintain high quality standards in the
fabrication and processing of its products. Accordingly, the Company employs 65
full-time quality control and assurance personnel. Each work order introduced to
the Company's manufacturing facilities contains an inspection plan specifying
required inspection points. Quality inspectors are assigned to each work center
and are trained in the testing required in connection with products passing
through the assigned work center. Although a large percentage of the Company's
products are 100% inspected immediately prior to shipment by a customer employee
or a customer designated Company employee, Boeing has approved a sampling
inspection program for certain components using statistical process control data
maintained by the Company.
The Company's Quality Systems are continuously reviewed and updated to comply
with the requirements of ISO9001-2000, AS9100 Revision A and Nadcap quality
standards. Through this continuous improvement process we have maintained our
approval by Boeing to D6-82479 as well as other customer's quality standards.
This updating process has allowed certain facilities with third party
registrations for ISO9001-2000, AS9100 Rev. A and Nadcap to maintain those
certifications for 2004. During 2004 the Company will continue to review all
procedures to ensure they meet the latest revisions to the ISO and AS standards.
The Company will continue with its ongoing employee training program and use of
lean manufacturing techniques to assist employees in becoming familiar with any
changes in the Company's procedures. The Company has continued to develop a
robust internal auditing program for each of the facilities to ensure that the
training is effective and to ensure ongoing compliance to customer required
standards.
Sales and Marketing
The Company has realigned its sales and marketing organization into four market
sectors: Commercial Aerospace, Military Aircraft, Business/Regional Jets and
Non-Aerospace (which includes sales to the technology and commercial sheet metal
industries). Within these sectors, one Sales and Marketing Director, two Market
Sector Directors and five Program Managers support the Company and its customers
in the conduct of business. At each of the Company's facilities, customer
service representatives establish and maintain an associate business
relationship between customers and the Company's production and fabrication
business units with a focus on customer satisfaction. Additionally, two
independent sales representatives conduct business on behalf of the Company.
A majority of the Company's sales to existing customers are awarded after
receipt of a request for quotation ("RFQ"). On receipt, the RFQ is preliminarily
reviewed by a team consisting of members of the Company's senior management, a
program manager, an estimator and the plant manager. If the Company determines
the program is adequately compatible with the Company's capabilities and
objectives, a formal response is prepared by a member of the Company's estimator
group. Although a substantial percentage of programs are awarded on a
competitive bid basis, the Company has recognized a recent trend favoring
reverse auctions for simple aerospace components.
Competition
Components for customers in the aerospace industry are provided by a large
fragmented group of companies, including certain business units or affiliates of
the Company's customers. The Company believes participants in the aerospace
industry compete primarily with respect to delivery, price and quality. To the
contrary, the Company believes that there are only a few producers of components
similar to the principal technology components manufactured by the Company's
Machining and Technology segment. The Company believes that engineering
capability, responsiveness and price are key aspects of competition in the
technology industry. In all industries in which the Company competes, certain of
the Company's competitors, including business units affiliated with the
Company's customers, have substantially greater financial, production and other
resources than the Company. The Company has also recognized a trend by certain
of its customers to outsource production to foreign countries where labor costs
are significantly lower. This trend has been exacerbated by the expanded use of
industry participation arrangements, pursuant to which OEMs and Primes agree to
outsource certain manufacturing contract work to a foreign country in return for
orders for new aircraft.
Governmental Regulations; Environmental Compliance
The Company's operations are subject to extensive and frequently changing
federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency ("EPA"), the United
States Occupational Safety and Health Administration ("OSHA") and the Federal
Aviation Administration ("FAA"). Among other matters, these agencies impose
requirements that regulate the handling, transportation and disposal of
hazardous materials generated or used by the Company during the normal course of
its operations, govern the health and safety of the Company's employees and
require the Company to meet certain standards and licensing requirements for
aerospace components. This extensive regulatory framework imposes significant
compliance burdens and risks on the Company and, as a result, may substantially
affect its operational costs.
In addition, the Company may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its facilities
without regard to whether or not the Company knew of, or caused, the release of
such substances. The Company believes it currently is in material compliance
with applicable laws and regulations and is not aware of any material
environmental violations at any of its current or former facilities. There can
be no assurance, however, that its prior activities did not create a material
environmental situation for which the Company could be responsible or that
future uses or conditions (including, without limitation, changes in applicable
environmental laws and regulation, or an increase in the amount of hazardous
substances generated or used by the Company's operations) will not result in any
material environmental liability to the Company or result in a material adverse
effect to the Company's financial condition or results of operations.
Employees
As of December 31, 2003, the Company had 738 permanent employees, of whom 19
were engaged in executive positions, 100 were engaged in administrative
positions and 619 were engaged in manufacturing operations. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company has not experienced any material business interruption as a result of
labor disputes since it was formed. The Company believes it has an excellent
relationship with its employees.
The Company strives to continuously train and educate its employees, thereby
enhancing the skill and flexibility of its work force. Through the use of
internally developed programs, which include formal classroom and on-the-job,
hands-on training, independently developed programs, and certain Company funded
tuition reimbursement programs, the Company seeks to attract, develop and retain
the personnel necessary to achieve the Company's growth and profitability
objectives.
In order to increase its customer focus, the Company initiated several changes
in its organizational structure. The Company divided its manufacturing plants
into a West Coast Region and Central Region and named Regional Vice Presidents
to oversee these operations. Within the manufacturing plants, customer focused
operating units were developed which expanded our expertise in customer quality
requirements and manufacturing methods. At the corporate level, the Company
created four market sectors; Military, Commercial, Regional/Business Jet, and
Non-Aerospace. The Company also appointed a Market Sector Director for each
market sector to serve as industry experts to increase work volume while
continuing strategic diversification. The Company also began transitioning to a
matrix organizational structure with several dual reporting relationships
between corporate and plant positions in order to enhance company wide
communications, provide consistency in approach, and strengthen our operation as
one company.
The Company does not generally experience any seasonality in the demand for its
products.
Item 2. Properties.
Facilities
The following table provides certain information with respect to the Company's
headquarters and manufacturing centers:
Sheet Metal Segment
Location Principal Use Square Footage Interest
-------- ------------- -------------- --------
3600 Mueller Road Executive and Administrative 62,585 Owned
St. Charles, Missouri Offices and Manufacturing Center
3030-3050 N. Hwy 94 Manufacturing Center and Storage 92,736 Owned
St. Charles, Missouri
3000-3010 N. Hwy 94 Assembly and Storage 30,074 Leased(1)
St. Charles, Missouri
101 Western Ave. So. Manufacturing Center 79,120 Leased(2)
Auburn, Washington
2629-2635 Esthner Ct. Manufacturing Center 31,000 Owned
Wichita, Kansas
2621 W. Esthner Ct. Administrative Offices and Storage 39,883 Leased(3)
Wichita, Kansas
2104 N. 170th St. E. Ave. Finishing and Manufacturing Facility 75,000 Owned
Tulsa, Oklahoma
1120 Main Parkway Distribution Center 40,000 Leased(4)
Catoosa, OK
2205 and 2215 River Hill Rd Machining Facility 8,400 Leased(5)
Irving, Texas
6221 202nd Street #6 Office and Manufacturing 10,835 Leased(6)
Langley, British Columbia
Canada
1377 Speciality Drive Office and Manufacturing 73,554 Leased (7)
Vista, California
1315 S. Cleveland Street Office and Manufacturing 19,000 Leased (8)
Oceanside, California
101 Coleman Blvd Distribution 38,400 Leased (9)
Pooler, Georgia
Machining and Technology Segment
Location Principal Use Square Footage Interest
-------- ------------- -------------- --------
8866 Laurel Canyon Blvd. Office and Manufacturing 26,200 Leased (10)
Sun Valley, California
11011-11021 Olinda Street Office, Manufacturing and Storage 20,320 Leased (11)
Sun Valley, California
- ----------------------------------------------
(1) Subject to a yearly rental amount of $120,266, expired on February 28,
2004 and is continuing on a monthly basis.
(2) Subject to graduated yearly payments of $353,640 to $418,800 during
the life of the lease. The lease expires in 2005, but the Company
retains the option to extend the lease through June 30, 2008 at the
monthly rate of $39,090.
(3) Subject to graduated yearly payments of $134,196 to $148,620 during
the life of the lease. The lease expires in 2009, but the Company
retains an option to extend the lease term for an additional 5 years.
(4) Subject to yearly payments of $109,596 expiring on August 31, 2004.
(5) Month to month lease of $3,750 subject to a six-month cancellation
notice.
(6) Subject to yearly payments of $92,168 (Canadian $), expiring September
30, 2004.
(7) Subject to graduated yearly payments of $334,340 to $572,304 during
the life of the lease. The lease expires on September 30, 2013,
subject to the Company's option to extend the lease for two additional
five year terms. The Company shall be entitled to occupy an additional
11,450 square feet of this property on October 1, 2004.
(8) Subject to yearly payment of $86,400, expiring on January 31, 2005.
This facility is leased from Edward D. Geary, the father of Brian
Geary, a director of the Company.
(9) Subject to yearly payments of $165,120, expiring on August 31, 2006.
(10) Subject to yearly payments of $172,920, expiring March 31, 2006 The
landlord for this property is Starwood Company, a company beneficially
owned in part by Ernest L. Star, the father of Ernest R. Star, an
officer of the Company.
(11) Subject to yearly payments of $155,347, expiring March 31, 2006. One
of the landlords for this property is a trust for the benefit of
Ernest L. Star, the father of Ernest R. Star, an officer of the
Company. Ernest R. Star is a co-trustee of this trust.
Item 3. Legal Proceedings.
On February 6, 2004, Versaform, a wholly-owned subsidiary of the Company
acquired on May 16, 2002 was served a subpoena by the federal government.
The Subpoena relates to the time period January 1, 1999 through February 6, 2004
and was issued in connection with an investigation by certain government
agencies including the Department of Defense, Office of Inspector General,
Defense Criminal Investigative Service, and the Federal Bureau of Investigation.
The subpoena refers to structural components Versaform manufactured for Nordam
Corporation for B-52 engine cowlings, components for auxiliary power units
Versaform manufactured for Hamilton Sundstrand a United Technologies Company,
and certain tools Versaform manufactured for Lockheed Martin Corporation.
The Company has not been served with any notice of any pending legal action
filed by any government agency. Accordingly, the Company has no knowledge of any
specific allegations of wrongdoing against Versaform by any regulatory
authority.
The Company intends to cooperate fully with the federal government in connection
with any investigation of this matter.
Other than noted above, the Company is not a party to any legal proceedings,
other than routine claims and lawsuits arising in the ordinary course of its
business. The Company does not believe such claims and lawsuits, individually or
in the aggregate, will have a material adverse effect on the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Market Information. The Company's common stock is traded on the NASDAQ National
Market under the symbol "LMIA." The following table sets forth the range of high
and low bid prices for the common stock for the periods indicated during the
Company's past two fiscal years:
Period High Low
------ ---- ---
Fiscal 2002
-----------
1st quarter 4.73 3.90
2nd quarter 6.18 4.24
3rd quarter 4.44 2.20
4th quarter 2.52 1.82
Fiscal 2003
-----------
1st quarter 3.50 1.91
2nd quarter 2.57 1.65
3rd quarter 2.45 1.72
4th quarter 2.33 1.61
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
Holders. As of April 2, 2004, the reported closing price for the Company's
common stock was $1.77. As of April 2, 2004, there were approximately 65 holders
of record of the Company's common stock.
Dividends. The Company has not declared or paid cash dividends on any class of
its common stock during the past two fiscal years, and does not anticipate
paying any cash dividends in the foreseeable future. The credit facility between
the Company and Union Planters prohibits the Company from declaring a dividend
with respect to its common stock without the financial institution's approval.
The Company currently intends to retain its earnings, if any, and reinvest them
in the development of its business.
Securities Authorized for Issuance Under Equity Compensation Plans. The
Company's only compensation plan under which the Company's common stock is
authorized for issuance to employees or directors in exchange for consideration
in the form of goods and services, the Amended and Restated LMI Aerospace, Inc.
1998 Stock Option Plan, was approved by the Company's shareholders.
The following table summarizes information about our equity compensation plan as
of December 31, 2003. All outstanding awards relate to the Company's common
stock.
Equity Compensation Plan Information
- ------------------------- ------------------------- ----------------------- --------------------------
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
- ------------------------- ------------------------- ----------------------- --------------------------
(a) (b) (c)
- ------------------------- ------------------------- ----------------------- --------------------------
Equity compensation
plans approved by 396,568 $3.28 503,432
security holders
- ------------------------- ------------------------- ----------------------- --------------------------
Equity compensation
plans not approved by 0 0 0
security holders
- ------------------------- ------------------------- ----------------------- --------------------------
Total 396,568 $3.28 503,432
- ------------------------- ------------------------- ----------------------- --------------------------
Item 6. Selected Financial Data.
(Dollar amounts in thousands, except per share data)
1999 2000 2001 (1) 2002 (2) 2003
------ ------ ---------- --------- ------
Statement of Operations Data:
Net sales $50,054 $55,658 $70,823 $81,349 $75,855
Cost of sales 41,586 48,255 54,809 69,185 67,485
Gross profit 8,468 7,403 16,014 12,164 8,370
Selling, general &
administrative expenses 8,517 9,135 10,194 12,931 13,423
Goodwill impairment charges - - - 5,104 -
----------- ---------- ------------ ------------- -------------
Income (loss) from operations (49) (1,732) 5,820 (5,871) (5,053)
Interest expense (195) (169) (843) (1,495) (1,645)
Other (expense) income, net 435 179 (247) (525) 306
----------- ---------- ------------ ------------- -------------
Income (loss) before income taxes 191 (1,722) 4,730 (7,891) (6,392)
Provision for (benefit of) income taxes (40) (603) 1,764 (691) (2,411)
----------- ---------- ------------ ------------- -------------
Income (loss) before cumulative change
in accounting principle 231 (1,119) 2,966 (7,200) (3,981)
Cumulative effect of change in
accounting principle, net of tax - (164) - (1,104) -
=========== ========== ============ ============= =============
Net income (loss) $ 231 $(1,283) $ 2,966 $(8,304) $(3,981)
=========== ========== ============ ============= =============
Amounts per common share:
Income (loss) before cumulative
effect of change in accounting
principle $0.03 $(0.14) $0.37 $(0.89) $ (.49)
Cumulative effect of change in
accounting principle, net of tax - (0.02) - (0.14) -
----------- ---------- ------------ ------------- -------------
Net income (loss) $0.03 $(0.16) $0.37 $(1.03) $ (.49)
=========== ========== ============ ============= =============
Net income (loss) - assuming dilution $0.03 $(0.16) $0.36 $(1.03) $ (.49)
=========== ========== ============ ============= =============
Weighted average shares
outstanding 8,201,805 8,190,525 8,059,682 8,077,293 8,181,786
Other Financial Data:
Capital expenditures $4,622 $2,776 $3,387 $2,293 $1,001
Cash flow from operating activities 112 1,905 6,985 (2,042) 1,011
Cash flows from investing activities (4,972) (3,249) (18,205) (13,991) (371)
Cash flows from financing activities (1,177) (2,888) 14,189 12,587 (1,412)
Gross profit margin 16.9% 13.3% 22.6% 15.0% 11.0%
Balance Sheet Data
Cash and equivalents $5,908 $ 1,676 $ 4,645 $ 1,182 $ 441
Working capital 21,417 20,752 27,751 28,054 25,919
Total assets 54,669 49,680 68,002 77,865 70,519
Total long-term debt,
excluding current portion 134 121 12,621 24,621 21,756
Stockholders' equity 44,486 42,678 45,649 37,736 33,792
- ---------------------------
Item 6. Selected Financial Data. (cont)
(1) Includes the operating results of Tempco Engineering subsequent to the
acquisition on April 1, 2001.
(2) Includes the operating results of Versaform subsequent to the
acquisition on May 16, 2002, the results of SFC subsequent to the
acquisition on June 12, 2002 and the results of SSFF subsequent to the
acquisition date, September 30, 2002.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company manufactures formed and machined components for use in the
aerospace, technology and commercial sheet metal industries. The Company
primarily sells its product to the commercial aircraft, military, corporate and
regional aircraft markets, and technology markets within the aerospace and
technology industries. Historically, the Company's business was primarily
dependent on the commercial aircraft market, with Boeing as the Company's
principal customer. In order to diversify its product and customer base, the
Company implemented an acquisition and marketing strategy in the late 1990's
that has broadened the number of industries to which the Company sells its
components, and, within the aerospace industry, has diversified its customer
base to reduce the Company's dependence on Boeing. The following table
illustrates the Company's sales percentages over the last three years to its
primary industries and markets.
Market 2001 2002 2003
--------------- ---------------- -------------
Commercial aircraft 51.5% 28.5% 28.7%
Corporate and regional aircraft 15.4 24.8 24.6
Military products 16.9 22.7 29.1
Technology products 7.1 14.2 10.9
Other (1) 9.1 9.8 6.7
--------------- ---------------- -------------
--------------- ---------------- -------------
Total 100% 100% 100%
- ---------------------------------------------
(1) Includes commercial sheet metal and various aerospace products.
Beginning in 2001, the Company began an aggressive acquisition campaign that
resulted in the consummation of four transactions through 2002. In April 2001,
the Company acquired Tempco Engineering Inc. ("Tempco") and its affiliates,
which expanded the Company's aerospace product line and introduced the Company
to the technology industry. In 2002, the Company acquired Versaform Corporation
("Versaform") and its affiliates, as well as Stretch Forming Corporation ("SFC")
and Southern Stretch Forming and Fabrication, Inc. ("SSFF"). The Versaform
acquisition significantly increased the Company's presence in the corporate and
regional aircraft market, while adding some military products to the Company's
product line. The SFC acquisition further supplemented the Company's military
product line. Finally, the Company's acquisition of SSFF increased the Company's
business in the corporate and regional market.
As a result of the development of Tempco's business, the Company determined that
Tempco should operate and be managed as an autonomous unit, and accordingly as a
business segment separate from the Company's other businesses. The Tempco
business, which sells machined components to both the aerospace and technology
industries, is referred to in this discussion as the Machining and Technology
segment and the Company's other businesses are referred to as the Sheet Metal
segment.
Year Ended December 31, 2003 compared to year ended December 31, 2002
The following table provides the comparative data for 2002 and 2003 for each of
the Company's segments.
2002 2003
---------------------------------- -------------------------------------
Sheet Machining & Total Sheet Machining & Total
Metal Technology Metal TechnologY
--------- -------------- --------- ----------- --------------- ---------
Net Sales $61.3 $20.0 $81.3 $ 62.0 $13.9 $75.9
Cost of Sales 54.3 14.9 69.2 56.0 11.5 67.5
--------- -------------- --------- ----------- --------------- ---------
Gross Profit 7.0 5.1 12.1 6.0 2.4 8.4
S, G & A 11.3 1.6 12.9 11.8 1.7 13.5
Goodwill Impairment 5.1 - 5.1 - - -
--------- -------------- --------- ----------- --------------- ---------
--------- -------------- --------- ----------- --------------- ---------
Income (loss) from operations $(9.4) $3.5 $(5.9) $ (5.8) $ .7 $(5.1)
========= ============== ========= =========== =============== =========
The Sheet Metal Segment
Net Sales. Net sales for the Sheet Metal segment were $62.0 million in 2003, up
0.8% from $61.3 million in 2002. Net sales were augmented in 2003 by inclusion
of a full year of revenue from the acquisitions of Versaform in May 2002, SFC in
June 2002, and SSFF in September 2002 which were partly offset by lower
Commercial, Corporate and Regional Aircraft Sales. The following table
summarizes the sales of the Sheet Metal segment by the market served:
Market 2002 2003 Difference
----------------------------------
Commercial Aircraft $23.0 $21.7 $(1.3)
Corporate & Regional Aircraft 20.0 18.7 (1.3)
Military 12.0 17.9 5.9
Other 6.3 3.7 (2.6)
---------- ---------- ------------
Total $61.3 $62.0 $ 0.7
========== ========== ============
Net sales for use on Boeing commercial aircraft were $21.7 million in 2003. The
decline in net sales of components for Boeing commercial aircraft of $1.3
million is principally due to reduced volume on the 757 and 767 models which
generated less than 5% of the segments net sales. Net sales for the 737 were
$11.2 million in 2003 and $11.8 million in 2002. The segment generated net sales
for the 747 model of $6.1 million in 2003, up from $5.0 million in 2002. Boeing
has announced plans to end production of the 757 model, which only contributed
$0.5 million of net sales to the segment in 2003, down from $1.3 million in
2002. The 767 model, currently produced at historically low rates, is threatened
with cancellation if the United States Air Force does not purchase a tanker
version of the 767. The segment generated net sales for the 767 of $1.4 million
in 2003, down from $2.7 million in 2002.
Net sales for the corporate and regional aircraft markets were $18.7 million in
2003, down $1.3 million from 2002. This reduction resulted from a decline in
volume for Gulfstream product as they accounted for $10.7 million in net sales
in 2003 compared to $14.2 million in 2002. In the third quarter of 2003,
Gulfstream ceased production of aircraft for 28 days and cut production
schedules, thereby reducing its demand for the segment's product. In September
2003, the segment opened a distribution facility in Savannah, Georgia, near
Gulfstream's production facility and began supplying kits comprised of product
both produced by the segment and purchased from other suppliers. The new
facility generated only $0.2 million in net sales during 2003 as deliveries
began in November. Net sales were negatively impacted by $0.3 million due to the
start up of the distribution facility as product previously sold to the customer
was provided to the distribution facility. Offsetting this decline was an
increase in net sales for the Bombardier family of aircraft to $4.8 million in
2003 from $3.7 million in 2002. The increase in Bombardier demand was primarily
driven by the Canadair Regional Jet.
Net sales of military product were $17.9 million in 2003, up $5.9 million. This
increase is primarily attributable to shipments of product for a B-52
refurbishment program of $3.9 million in 2003, up from $0.7 million in 2002; net
sales on Lockheed Martin aircraft, principally F-16 and C-130, of $10.6 million,
up from $9.3 million in 2002; and a new program with GKN Aerospace which
generated net sales of $0.8 million in 2003.
Gross Profit. The Sheet Metal segment had a gross profit of $6.0 million (9.7%
of sales) in 2003, compared to $7.0 million (11.4% of net sales) in 2002. The
decline in gross profit was due to a $1.2 million increase in the Company's
inventory obsolescence and slow moving reserve in the fourth quarter based on
management's evaluation of the current aerospace industry, customer requirements
and inventory quantities. This reserve offset a favorable gross profit impact.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") were $11.8 million in 2003, up from $11.3
million in 2002. The increase primarily reflects the inclusion of the Versaform
acquisition for a full year. Also included in SGA are restructuring costs of
$0.5 million in 2003. These costs were incurred as the segment executed a
downsizing of the St. Charles plant. The costs incurred included severance pay,
costs of moving and rearrangement and professional fees. See the financial
statements for further discussion.
Goodwill Impairment. In 2002, the segment recorded an impairment charge of $5.1
million to reflect the write off of goodwill as determined under SFAS No. 142.
See Note 6 of the Consolidated Financial Statements included as part of this
Annual Report on Form 10-K and "Critical Accounting Estimates" set forth later
in this discussion for more information on the testing process and assumptions
made by the Company. The impairment charge in 2002 removed all goodwill from the
segment.
Interest Expense. Interest expense for the segment was $0.5 million in 2003, up
from $0.4 million in 2002. Interest expense for the segment is predominantly due
to a term note issued in connection with the acquisition of Versaform in May
2002. This note was issued with a three year maturity and is amortized on a
seven year schedule. The balance due at the end of three years is due to be paid
or payment renegotiated. The note accrues interest at LIBOR plus 3.0% and the
effective rate was 4.2% at December 31, 2003. The increase in interest expense
is due to twelve months of interest in 2003 compared to eight months of interest
in 2002. Please see Liquidity and Capital Resources, below.
The Machining and Technology Segment
Net Sales. Net sales for the Machining and Technology Segment were $13.9 million
in 2003, down 30.5% from $20.0 million in 2002. Declines in components for
lasers and military programs contributed to the reduction in net sales.
Net sales of products used in laser equipment were $8.2 million in 2003, down
28.1% from $11.4 million in 2002. The segments largest customer supplies the
semiconductor industry and experienced a decline in demand which resulted in
lower demand for the Company's products. This decline was moderated by a slight
increase in sales of products for medical lasers used in lasik eye surgery.
Net sales of military components were $4.0 million in 2003, down 36.5% from $6.3
million in 2002. These components are primarily used on Boeing's Apache
helicopter and in guidance systems for various military applications. The sale
in 2002 of Boeing's Weapon and Armament Division to Alliant Tech Systems ("ATK")
disrupted normal sales volumes in 2003 as sales to the combined entities were
$3.1 million in 2003, down from $4.4 million in 2002. This decline was due to a
surge of orders in 2002 during the Afghanistan invasion, inventory adjustments
at Boeing and ATK, and the competitive loss of certain components after the
sale.
Gross Profit. The Machining and Technology segment generated a gross profit of
$2.4 million (17.2% of net sales) in 2003 compared to $5.1 million (25.5% of net
sales) in 2002. The rapid decline in net sales early in 2003 was managed by
manufacturing certain work previously performed at suppliers, resulting in a
decrease in purchased subcontract services to $1.3 million (9.3% of net sales)
in 2003 from $2.5 million (12.5% of net sales) in 2002. Additionally,
manufacturing salaries, wages and fringes reduced in total dollars but increased
as a percentage of net sales to $5.9 million (42.4% of net sales) in 2003 from
$6.7 million (33.5% of net sales) in 2002. The decline in labor and fringe
dollars is indicative of management's attempt to reduce hours and employment
levels during periods of lower sales. However, these reductions did not match
the rate of decline in net sales, resulting in lower productivity and gross
margins. The lower revenue base also provided less benefit to cover the fixed
costs related to the operations. In the fourth quarter of 2003, the Company
recorded an additional $0.3 million reserve for components determined to be
obsolete or slow moving.
Selling, General and Administrative Expenses. The segment's selling, general and
administrative expenses ("SGA") are comprised principally of administrative
salaries and wages, professional services and fees for corporate services. SGA
for 2003 were $1.7 million (12.2% of net sales), up slightly from $1.6 million
(8.0% of net sales) in 2002. This increase is primarily attributable to
increased payroll related to accounting support.
Interest Expense. Interest expense for the Machining and Technology segment is
related to the term note executed to fund the purchase of Tempco Engineering.
The interest rate was ninety day LIBOR plus 3.0%, subject to a floor of 7.0% and
a ceiling of 8.5%. The note had been reduced using a seven year amortization
schedule and was issued with a maturity date of three and one-half years
(September 30, 2004), at which time the balance would be repaid or
re-negotiated. Interest on this note was $0.8 million in 2003, down from $0.9
million in 2002 due entirely to principal reductions as the interest rate has
been at the floor rate of 7.0% for the two year period. This note was included
in and is now governed by the Thirteenth Amendment. Please see Liquidity and
Capital Resources, below.
Consolidated Operations
Non-Operating Expenses:
Other Expense. The Company generated non-operating income of $0.3 million from
the sale of certain available for sale securities in 2003 compared to a loss of
$0.6 million in 2002.
Interest Expense. Interest expense from the revolving line of credit is not
assigned to a segment as cash for the company is assigned to one account and was
$0.3 million in 2003, up from $0.2 million in 2002 due to higher borrowing in
the revolving line of credit.
Income Taxes. The income tax benefit in 2003 was $2.4 million compared to a
benefit of $0.7 million in 2002, both due to operating losses. During 2003, the
Company's effective tax rate was 37.7% compared to 8.7% in 2002. The effective
tax rate in 2002 was unusually low due to the nondeductible impairment of
goodwill recorded in that period. See note 11 to the Consolidated Financial
Statements included as part of this Annual Report Form 10-K for further
information on the Company's effective tax rate.
Year Ended December 31, 2002 compared to year ended December 31, 2001
The following table provides the comparative data for 2001 and 2002 for each of
the Company's segments.
2001 2002
--------------------------------- ----------------------------------
Sheet Machining & Total Sheet Machining & Total
Metal Technology Metal Technology
--------- -------------- -------- --------- --------------- --------
Net Sales $ 60.5 $ 10.3 $ 70.8 $ 61.3 $ 20.0 $ 81.3
Cost of Sales 46.6 8.2 54.8 54.3 14.9 69.2
--------- -------------- -------- --------- --------------- --------
Gross Profit 13.9 2.1 16.0 7.0 5.1 12.1
S, G & A 9.2 1.0 10.2 11.3 1.6 12.9
Goodwill Impairment - - - 5.1 - 5.1
--------- -------------- -------- --------- --------------- --------
Income (loss) from operations $ 4.7 $ 1.1 $ 5.8 $(9.4) $ 3.5 $(5.9)
========= ============== ======== ========= =============== ========
The Sheet Metal Segment
Net Sales. Net sales for the Sheet Metal segment were $61.3 million in 2002
compared to $60.5 million in 2001, an increase of 1.3%. The increase resulted
from the Company's three acquisitions in 2002, significantly offset by reduced
sales to the commercial aircraft market. The Company's acquisition of Versaform
contributed $9.4 million in net sales, primarily in the corporate and regional
aircraft market. Additionally, the acquisition of SSFF contributed $1.1 million
of net sales to the corporate and regional markets in 2002. The acquisition of
SFC added $0.7 million to net sales, primarily in the military market. Excluding
acquisitions, the Sheet Metal segment experienced a 17.2% decrease in net sales
to $50.1 million in 2002 from $60.5 million in 2001. The following table
summarizes the Company's Sheet Metal segment's net sales by market, with and
without 2002 acquisitions:
Market 2002 with 2002 without 2001
Acquisitions Acquisitions
------------- ------------- ----------
Commercial Aircraft $ 23.0 $ 22.9 $ 36.6
Corporate & Regional Aircraft 20.0 12.8 11.0
Military 12.0 10.0 8.5
Other 6.3 4.4 4.4
------------- ------------- ----------
Total $ 61.3 $ 50.1 $ 60.5
============= ============= ==========
Because substantially all of the segment's net sales are attributable to the
aerospace industry markets, the Sheet Metal segment is heavily influenced by
various factors that influence the demand patterns of the Company's aerospace
customers.
The events of September 11, 2001, influenced the commercial aircraft market
significantly and is primarily responsible for the segment's decline in sales.
Shortly after September 11, 2001, Boeing, the Company's dominant customer in the
commercial aircraft market, scaled back its production rates on all of its
models. As a result, sales of products used on Boeing aircraft dropped 37.4% to
$22.9 million, excluding acquisitions, in 2002 from $36.6 million in 2001. Net
sales on the 737 aircraft were $11.8 million in 2002, down 34.8% from $18.1
million in 2001 resulting from production rate declines and inventory management
by Boeing and its subcontractors. Additionally, net sales on the 747 aircraft
declined by 41.2% to $5.0 million in 2002 from $8.5 million in 2001 for similar
reasons. The Sheet Metal segment experienced similar percentage declines on
Boeing's 757, 767 and 777 aircraft. Versaform added $0.1 million in sales to the
commercial aircraft market.
The Company's net sales for corporate and regional aircraft, excluding
acquisitions, increased 16.4% to $12.8 million in 2002 from $11.0 million in
2001. This increase was primarily attributable to new orders from Gulfstream,
resulting from the closing of a Gulfstream in-house production facility.
Excluding acquisitions, net sales for products used on Gulfstream aircraft were
$10.3 million in 2002, an increase of 56.1% from $6.6 million in 2001. The
increase in Gulfstream sales was partially offset by a decline in net sales to
Learjet due to production rate cutbacks. Net sales to Learjet were $0.5 million
in 2002, down from $2.0 million in 2001. Versaform contributed net sales to the
corporate and regional aircraft market of $6.1 million. Net sales for products
used on Gulfstream aircraft were $4.4 million and $1.0 million from SSFF.
Additionally, Versaform's net sales to Cessna were $1.2 million.
Excluding acquisitions, net sales on military programs were up 14.1% to $9.7
million in 2002 from $8.5 million in 2001. This increase is attributable to
sales to Lockheed Martin for new work on the C-130 aircraft and a combination of
production rate increases and new work on the F-16. Versaform's net sales on
military programs were $1.3 million, predominantly derived from a program to
refurbish nacelles on B-52 bombers.
Gross Profit. The Sheet Metal segment experienced a gross profit of $7.0 million
(11.4% of net sales) in 2002 compared to $13.9 million (22.9% of net sales) in
2001. Versaform's gross profit was at $2.5 million (26.6% of Versaform net
sales) Excluding Versaform, the Sheet Metal segment generated a gross profit of
$4.5 million (8.7% of the net sales of the Sheet Metal segment excluding
Versaform).
The decline in gross profit was caused by cost over-runs on certain new programs
during 2002. The Company encountered significant difficulties with a new package
of components from a military customer. Additional production difficulties were
encountered on military components obtained in the Company's acquisition of SFC
in June 2002. The utilization of furnished tooling on both programs created high
levels of scrap and large amounts of inefficient labor, which, along with
inadequate pricing, resulted in accrued losses in the production of these
components of $1.1 million on components not yet completed at year end. The
Company has presented this customer with a claim for certain of these costs
incurred and has requested re-pricing of several of the components to provide an
adequate return on future deliveries. However, because management believes that
the collection of this claim is not yet probable, no benefit of this claim has
been recorded in 2002 (or 2003). If the Company cannot come to an agreement with
this customer that is reasonably acceptable to the Company, the Company will
take other measures to avoid future losses including the return of the work
statement to its customer.
Additionally, the Sheet Metal segment experienced production difficulties with a
new corporate and regional aircraft program it received in 2002. The
difficulties resulted primarily from excessive amounts of scrap and problems
with a subcontractor critical to the production of these components. These
difficulties resulted in losses on completed product and expected losses of $0.2
million of accrued losses on components in process at year end. Subsequent to
year end the Company notified the customer of its intention to no longer
manufacture these components. The Company may agree to provide certain forming
services for these components at prices acceptable to the Company.
Selling, General and Administrative Expenses. The Sheet Metal segment incurred
selling, general, and administrative expenses ("SGA") of $11.3 million in 2002,
an increase from $9.2 million in 2001. The acquisition of Versaform and SSFF
added $2.0 million in SGA, primarily related to salaries, wages and professional
fees to support the integration of the acquired business. Excluding the
acquisitions, increased professional fees of $0.4 million in 2002 offset the
benefit of not amortizing goodwill under SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142").
Goodwill Impairment. The segment recorded an impairment charge of $5.1 million
to reflect the write off of goodwill as determined under SFAS No. 142. See Note
6 of the Consolidated Financial Statements included as part of this Annual
Report on Form 10-K and "Critical Accounting Estimates" set forth later in this
discussion for more information on the testing process and assumptions made by
the Company.
Interest Expense. The Sheet Metal segment incurred interest expenses of $0.6
million in 2002, up from $0.1 million in 2001, due to the $12.6 million in debt
incurred to finance the acquisition of Versaform and additional borrowing under
the Company's revolving line of credit made in order to fund working capital
needs.
The Machining and Technology Segment
Net Sales. The Machining and Technology segment had net sales of $20.0 million
in 2002, up from $10.3 million in 2001. A portion of this increase was
attributable to the fact that 2001 sales only included nine months of activity
after the acquisition of Tempco in April 2001. The rest of the segment's growth
resulted from an increase in sales to both the technology and aerospace
industries.
Net sales to the technology industry for product used in excimer laser
applications was $11.4 million (57.0% of net sales) in 2002 compared to $5.0
million (48.5% of net sales) in 2001. This increase was attributable to
increased production demand and new product development orders from its
technology customers.
Net sales to the aerospace industry were $ 7.3 million. Products used in the
military market increased to $6.3 million (31.5% of net sales) for 2002 from
$3.5 million (34.0% of net sales). These sales primarily related to components
used on the Apache helicopter for Boeing and its prime subcontractors, and
guidance systems for various military applications for Northrop. Net sales for
these programs were stronger in the first half of 2002 as the United States
military was involved in the conflict in Afghanistan, but moderated in the
second half of the year.
Gross Profit. Gross profit for the Machining and Technology segment was $5.1
million (25.5% of net sales) in 2002, an increase from $2.1 million (20.4% of
net sales) in 2001. The additional volume and mix of work afforded favorable
coverage of fixed costs for the segment.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses increased to $1.6 million (8.0% of net sales) in 2002
from $1.0 million (9.7% of net sales) in 2001. This increase was primarily
attributable to the inclusion of only nine months of expenses in 2001 and
additional payroll of approximately $0.2 million for new management positions
created in 2002. As required by SFAS 142 "Goodwill and Other Intangible Assets,"
the Company conducted an annual impairment test of goodwill and ceased
amortizing goodwill, a benefit of $0.3 million in 2002. See note 6 to the
Consolidated Financial Statements included as part of this Annual Report on Form
10-K.
Interest Expense. In order to finance the purchase of Tempco, the Company
secured term debt in the amount of $14.3 million bearing a variable rate of
interest with a floor of 7.0% and a cap of 8.5%. Interest expense resulting from
this indebtedness was $0.9 million in 2002 compared to $0.8 million in 2001.
Only nine months of interest expense was recorded in 2001. Interest expense from
2001 to 2002 also reduced slightly as interest rates declined on this variable
rate debt.
Consolidated Operations
Non-Operating Expenses:
Other Expense. Included in other, net is a charge of $0.5 million to write down
the value of available for sale securities. These securities have exposure to
the aerospace industry. The value of these securities declined as the overall
market declined after the events of September 11, 2001 and did not improve as
difficult conditions continued to plague the commercial aerospace industry.
Therefore, the Company determined the decline in value to be other than
temporary and recorded an adjustment to write off the carrying value of these
securities.
Income Taxes. The income tax benefit in 2002 was $0.7 million compared to an
expense of $1.8 million in 2001 due to operating losses. During 2002, the
Company's effective tax rate was 8.7% compared to 37.3% in 2001. The decrease
effective tax rate is predominantly attributable to the impairment of
non-deductible goodwill recorded in 2002 . See note 11 to the Consolidated
Financial Statements included as part of this Annual Report on Form 10-K for
further information on the Company's effective tax rate.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
the Company adopted SFAS No. 142, under which goodwill will no longer be
amortized but instead be tested for impairment. The Company completed the
required transitional impairment test and recorded a $1,767 charge ($1,104 net
of tax) for the impairment of the Sheet Metal segments goodwill as of January 1,
2002. See note 6 to the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K for further information.
Liquidity and Capital Resources.
During the twelve-month period ended December 31, 2003, we incurred a net loss
of $4.0 million. Primarily as a result of our continuing losses and lack of
liquidity our independent certified public accountants modified their opinion on
our December 31, 2003 Consolidated Financial Statement to contain a paragraph
wherein they expresed a substantial doubt about our ability to continue as a
going concern. We have taken steps to improve our current liquidity and provide
the capital necessary to fund our plan for future growth. Our efforts to raise
alternative capital are discussed below.
The Company's balance of cash and equivalents was $441,000 as of December 31,
2003 compared to a balance of $1,182,000 at December 31, 2002. Cash flow from
operating activities for 2003 was at $1,011,000 and reflected $4.8 million
non-cash depreciation and amortization, and a reduced accounts receivable
balance, which were partly offset by the Company's $3.9 million net loss and
lower accounts payable. Cash flow from operations was a use of $2.0 million in
2002 due to the net loss of $8.3 million, higher accounts receivable balance,
and a lower income tax accrual; favorably offsetting were non-cash depreciation
and amortization of $4.4 million, and $6.9 million of non-cash goodwill
impairment charges. Cash used for investing activities was $371,000 in 2003 and
included $1.0 million of capital expenditures offset by proceeds from the sale
of equipment and sale of a stock investment. Cash used in investing activity in
2002 of $14.0 million reflected capital additions of $2.3 million and $11.7
million of investment for the acquisitions of Versaform, Stretch Forming
Corporation, Southern Stretch Forming and Fabrication, and a charge for the
prior year Tempco acquisition. See related note 2 to the Consolidating Financial
Statements. The Company's financing activity in 2003 was a use of $1.4 million
as scheduled principal pay downs on long term and notes payable were partly
offset by additional borrowings on the Company's revolving credit line.
Financing activities provided $12.6 million in 2002 and reflected the proceeds
from the issuance of long-term debt to finance the acquisitions noted above.
The Company's ratio of total debt to capitalization (debt plus stockholders
equity) was 45.2% as of December 21, 2003 and 44.3% as of December 31, 2002. The
ratio of debt to total equity increased due to the net loss in 2003. The
Company's revolving credit line at December 31, 2003 was at $7.7 million, with
an additional line capacity of $1.4 million.
In 2003, the Company's failure to meet certain financial covenants with its
primary lender resulted in a renegotiation of its Lending Agreement on January
5, 2004 and again on March 30, 2004.
On March 30, 2004, the Company and Union Planters entered into a Thirteenth
Amendment to Loan Agreement, amending the Loan Agreement. The primary purposes
of the Thirteenth Amendment were to (a) extend the maturity of the Company's
Revolving Credit Loan provided under the Loan Agreement from March 31, 2004 to
March 31, 2005, and (b) waive a default arising under the Loan Agreement of the
EBITDA Covenant for the period ended December 31, 2003.
In addition, under the terms of the Thirteenth Amendment to Loan Agreement:
o The maximum principal amount of the Revolving Credit Loan was
increased from $9,088,323 to $9,700,000 through September 30, 2004,
subject to a borrowing base calculation and further subject to a newly
established inventory reserve requirement and a more restrictive
requirement for eligible receivables, which could reduce the amount of
borrowing availability under the Revolving Credit Loan.
o The interest rate on the Revolving Credit Loan was changed from LIBOR
plus 2.50% to Union Planters' prime rate plus 1%. Moreover, if the
Company has not executed and delivered a letter of intent regarding
(i) the sale of the stock or of all or substantially all of the assets
of certain of its subsidiaries, and/or (ii) the procurement by the
Company of debt financing providing the Company with sufficient funds
to repay in full the Company's obligations to Union Planters ("Letter
of Intent") on or before June 30, 2004, the interest rate on the
Revolving Credit Loan will be increased to prime plus 1-1/2%, and
further increased to prime plus 2.00% if the Company has not paid all
of its obligations to Union Planters in full on or before September
30, 2004. The interest rate on Term Loan A provided under the Loan
Agreement, which, as of March 30, 2004, had a total outstanding
principal balance of $9,160,714, was changed from LIBOR plus 3%,
subject to a floor of 7% and a ceiling of 8.5%, to Union Planters'
prime rate plus 2%, subject to a floor of 7%. The interest rate on
Term Loan B provided under the Loan Agreement, which, as of March 30,
2004, had a total outstanding principal balance of $8,773,816, was
changed from LIBOR plus 3% to Union Planters' prime rate plus 2%.
Moreover, if the Company has not executed and delivered a Letter of
Intent on or before June 30, 2004, the interest rate on Term Loans A
and B will be increased to Union Planters' prime plus 2-1/2% and
further increased to Union Planters' prime plus 3% if the Company has
not paid all of its obligations to the Buyer in full on or before
September 30, 2004.
o If, by June 30, 2004, the Company does not enter into one or more
Letters of Intent, a fee of $125,000 will be payable on the earliest
of March 31, 2005, the date the Company repays all of its obligations
to Union Planters or the date on which Union Planters accelerates all
of the Company's obligations.
o If the Company fails to pay all of its obligations in full to Union
Planters by September 30, 2004, a fee of $350,000 will be payable to
Union Planters ($100,000 on October 1, 2004 and $250,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
o If the Company fails to pay all of its obligations in full to Union
Planters by December 30, 2004, a fee of $200,000 will be payable to
Union Planters ($100,000 on December 31, 2004 and $100,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
In addition, the Company has executed a $1,300,000 note in favor of a former
owner of Versaform Corporation, now a director of the Company, in connection
with the Company's purchase of Versaform. This note is secured by a pledge of
65% of the Company's interest in its Canadian subsidiary, and as part of its
obligations under this note, the Company's Canadian subsidiary is subject to
various restrictive covenants relating to the its financial performance. This
note is payable monthly over three years and bears interest at 7.0%
The Company has entered into various notes payable for the purchase of certain
equipment. The notes are payable in monthly installments including interest
ranging from 6.99% - 10.0% through November 2006. The notes payable are secured
by equipment. The Company also has entered into capital lease agreements for the
purchase of certain equipment. The leases are payable in monthly installments
including interest ranging from 4.98% - 9.15% through August 2005.
As a result of the above described debt, the Company is required to utilize a
significant portion of its cash generated from operations to meet its debt
service obligations. Furthermore, if the Company were to fail in the future to
comply with the restrictive covenants in the Loan Agreement or in the promissory
note, Company's operations could be negatively impacted and the Company's
ability to take advantage of potential business opportunities as they arise
could be limited. Moreover, the Company's failure to comply with these
restrictive financial and other covenants could result a default that, if not
cured or waived, could cause the Company to be required to repay its borrowings
before their due dates. If the Company were unable to make this repayment or
otherwise refinance these borrowings, the Company's creditors could foreclose on
the assets securing its borrowings. Although in the Thirteenth Amendment Union
Planters wavied the default arising from a failure of the Company to meet the
EBITDA Covenant, such waiver was limited to and valid only for the specific
purposes given. Union Planters is not obligated soley by reason of such waiver
to agree to any additional waivers.
Please see Note 8 of the Consolidated Financial Statements included as part of
this Annual Report on Form 10-K and Exhibit 10.32 for more detailed financial
information relating to the Company's debt.
In addition to the cash requirements for debt service, the Company anticipates
that it will incur significant additional costs to meet the increased
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, regarding
internal controls and procedures. Please see Item 9A - Controls and Procedures.
Based upon forecasted operating results and cash flows, management believes the
current lending agreement is sufficient to meet its cash needs in 2004. Our
management has developed a plan that includes restructuring or possibly
disposing of segments of our business, increasing sales and raising alternative
capital. However, the Company's losses from operations in recent years, together
with its inability to meet the EBITDA Covenant and certain other covenants under
the Loan Agreement, have raised substantial doubt about the Company's ability to
continue as a going concern. If the Company fails to meet its covenants, fails
to comply with the refinancing or sale of assets contemplated in the Loan
Agreement, or is unable to fund its operations within the limits of the Loan
Agreement, no assurance can be given that additional and/or replacement
financing can be obtained on reasonable or acceptable terms or that the Company
will be able to continue as a going concern.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements consist of the operating leases and
capital commitments noted below.
Contractual Obligations and Commitments
The Company had the following contractual obligations and commitments for debt,
capital leases and non-cancelable operating lease payments, ($ in thousands):
Total 2004 2005 2006 2007 2008 2009 Thereafter
-------- -------- -------- -------- -------- -------- -------- -------------
Long Term Debt $27,814 $6,058 $21,583 $173 $ - $ - $ - $ -
Capital Leases 11 11 - - - - - -
Operating Leases 9,474 2,231 1,859 1,288 799 650 572 2,075
-------- -------- -------- --------- ------- -------- -------- -------------
Total $37,299 $8,300 $23,442 $1,461 $799 $650 $572 $2,075
======== ======== ======== ========= ======= ======== ======== =============
- ----------------------------
(1) The Company has not committed to any signficant current or long-term
purchase orders for its operations.
Critical Accounting Estimates
Certain accounting issues require management estimates and judgments for the
preparation of financial statements. The Company believes that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on the Company's financial statements.
Therefore, the Company considers these to be its critical accounting estimates.
The Company's management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Company's Board of
Directors and the Audit Committee has reviewed the Company's disclosure relating
to these estimates in the "Management Discussion and Analysis." The Company's
most significant estimates and judgments are listed below.
Accounts Receivable Reserves. The Company evaluates the collectibility of its
accounts receivable based on a combination of factors, including historical
trends and industry and general economic conditions. In circumstances where the
Company is aware of a specific customer's inability to meet its financial
obligations (e.g., bankruptcy filings, substantial downgrading of credit
scores), a specific reserve for bad debts is recorded against amounts due to
reduce the net recognized receivable to the amount the Company reasonably
believes will be collected. The Company's evaluation also includes reserves for
billing adjustments, pricing changes, warranty claims and disputes. If
circumstances change (i.e., an unexpected material adverse change in a major
customer's ability to meet its financial obligations to the Company), estimates
of the recoverability of amounts due the Company could be reduced by a material
amount. The Company applies this policy to its acquired businesses and makes
adjustments to existing bad debt reserves based upon its evaluation.
As discussed in Note 1 to the consolidated financial statements, the Company
generates a significant portion of its revenues and corresponding accounts
receivable from sales to a limited number of customers in the aerospace and
technology industries. If these customers experience significant adverse
conditions in their industries or operations, including the continued impact of
the current downturn in demand for aerospace and technology products, these
customers may not be able to meet their ongoing financial obligations to the
Company for prior sales or purchase additional products under the terms of
existing contracts.
Inventory. The Company values its inventories at the lower of cost or market
using actual cost for raw materials and average cost for finished goods and work
in process. In assessing the ultimate realization of inventories, the Company
makes judgments as to future demand requirements based upon customer orders in
backlog, historical customer orders, customer and industry analyst estimates of
aircraft production rates, and other market data available to the Company.
Additionally, in the aviation industry, these future demand requirements depend
on estimates of aircraft lives and the need for spare parts over the course of
the aircraft life. The Company has recorded charges in recent periods due to
discontinuances of product lines, losses of customer contracts, lack of order
activity, or changes in expectations of future requirements. In the fourth
quarter of 2003, the Company recorded a charge of $1.4 million based upon
management's evaluation of the current aerospace industry, customer
requirements, and inventory quantities.
The Company sells much of its product under fixed price arrangements.
Occasionally, costs of production may exceed the market values of certain
products and product families which require the Company to adjust its inventory
value. In these circumstances, management is required to make estimates of costs
not yet incurred to determine the ultimate cost of these products which are in
work in process. Changes in the assumptions and estimates of such factors as
expected scrap, costs of material, labor and outside services and the amount
of labor required to complete the products may result in actual results that
vary from management's estimates.
At times, the Company accepts new orders for products from its customers in
which actual production costs may differ from the Company's expectations when it
quoted the product. Additionally, customers may request engineering changes or
quality acceptance changes in products that may alter the cost of products
produced by the Company. In these circumstances, the Company notifies the
customer of these issues and seeks reimbursement for costs incurred over and
above the selling price of the products and re-pricing of the product on future
deliveries. The Company's inventory valuation considers the estimated recovery
of these costs. Actual negotiation of the claim amounts may result in outcomes
different from those estimated by the Company and may have material impacts upon
the operating results of the Company. During the fourth quarter of 2002,
significant cost over-runs were incurred on certain products for which the
Company submitted a claim to its customer. At year-end, the Company could not
estimate the probable recovery of any amounts covered by this claim. Therefore,
excess inventory costs were written off and margins in 2002 were negatively
impacted. Subsequent recovery of this claim could have a material impact upon
future operating results of the Company.
Goodwill. In June 2001, the Financial Accounting Standards Board issued SFAS No.
142 which addresses financial accounting and reporting for acquired goodwill and
other intangible assets and was adopted by the Company effective January 1,
2002. The statement requires that goodwill not be amortized but instead be
tested at least annually for impairment and expensed to the extent the fair
value of a reporting unit, including goodwill, is less than its carrying amount.
The Company established the value of these segments with the assistance of an
outside expert that used Company provided forecasts of operations by reporting
unit, independent review of the assumptions in these forecasts, evaluations of
the carrying value of certain assets and liabilities, and independent appraisals
of the Company's fixed assets. These forecasts required the Company to estimate
future sales prices and volumes of its reporting units. The Company used its
internal budgets, customer order backlog, historical customer ordering patterns,
customer and industry projections of demand and other market information as well
as current cost of production to estimate future cash flows. Actual results may
vary significantly from the Company's projections and may result in material
adjustments to the goodwill balance on the Company's financial statements.
Income Taxes. The Company accounts for income taxes under the provisions of SFAS
No. 109, "Accounting for Income Taxes." The objectives of accounting for income
taxes are to recognize the amount of taxes payable or refundable for the current
year and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the company's financial statements or tax
returns. SFAS No. 109 also requires that deferred tax assets be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
Self Insured Reserves. The Company provides health insurance for many of its
employees through an insurance arrangement that requires the Company to fund all
claims incurred up to certain limits. The Company purchases an insurance policy
to limit the amount of claims that it will be responsible to fund on any
specific claim as well as a policy that limits the total claims that the Company
would be responsible to fund in a specific plan year. Since time delays occur
between delivery of medical services and ultimate payment of these services, the
Company is required to estimate the incurred claims that have not yet been
settled by the administrator that adjusts these claims. The administrator of the
claims provides the Company information such as historical claim values, trends
in medical costs, and time lags between service dates and ultimate payment
dates. The Company uses this information to estimate the amount of claims that
may have been incurred but are not yet reported in order to establish a
liability on its financial statements.
Additionally, the Company provides workers' compensation insurance for certain
of its employees that requires the Company to pay for actual losses plus an
administrative fee for all claims and expenses incurred. The Company has
negotiated minimum and maximum amounts that it may be required to fund with its
insurance carrier. The Company is provided such information as claim losses,
estimated amounts that the insurance company feels will be required to settle
the claim, and estimates of time delay between injuries and notification of
injuries. The Company uses this information to estimate its liability under this
arrangement.
Actual claim experience under these insurance plans may vary from estimates made
by the Company and could have material impacts upon its financial statements.
Related Party Transactions
In May of 2002, the Company acquired the outstanding capital stock of Versaform
Corporation, a California corporation, and the capital stock of its subsidiary,
541775 B.C., Ltd., a corporation incorporated in the Province of British
Columbia, Canada. At the time, 541775 B.C., Ltd. owned all of the outstanding
capital stock of Versaform Canada Corporation, a corporation incorporated in the
Province of British Columbia, Canada. The Company has since consolidated 541775
B.C., Ltd. and Versaform Canada Corporation with its own wholly-owned Canadian
subsidiary, LMIV Holding Ltd., a corporation incorporated in the Province of
British Columbia, Canada. All of the capital stock of Versaform was owned
directly by Brian Geary, an individual residing in the State of California. In
June of 2002, Mr. Geary was appointed as a director of the Company. As part of
the transaction pursuant to which it acquired Versaform Canada, the Company
executed a non-negotiable, subordinated promissory note in favor of Mr. Geary,
in the principal amount of $1.3 million. This promissory note is payable in
thirty-six monthly installments beginning on July 1, 2002, and bears interest at
a rate of seven percent per annum. The note is secured by a pledge of 65% of the
Company's interest in its Canadian subsidiary, and pursuant to such pledge, the
Company's Canadian subsidiary is required to meet certain financial and other
restrictive covenants. Also as part of the transaction, the Company is required
to pay Mr. Geary additional consideration of up to 5% of the annual net sales
received under agreements between Versaform and Hamilton Sundstrand, a customer
of Versaform in excess of $3 million.
In September 2002, the Company acquired from Mr. Geary the operations and
certain of the assets of the aerospace division of SSFF, an aerospace sheet
metal manufacturer based in Denton, Texas. The Company paid Mr. Geary
consideration consisting of 90,000 shares of the Company's common stock for
machinery and equipment, issued pursuant to a private placement conforming with
the safe harbor provisions of Rule 506 of Regulations D promulgated under the
Securities Act of 1933, as amended, $115,000 cash for all inventories, and the
transfer of certain equipment valued at $60,000. Also, as part of the SSFF
transaction, the Company is required to pay Mr. Geary 5% of the gross sales of
specific parts to a specific customer during the period beginning on January 1,
2003 and ending on December 31, 2007, not to exceed $500,000. Payments to Mr.
Geary under this agreement for the year ended December 31, 2003 was $55,000.
The Company negotiated each of the above transactions on an arms-length basis.
Although Mr. Geary was not a director at the time of the Company's acquisition
of Versaform, the Company received an opinion from an independent investment
banking firm stating that the Company's acquisition of Versaform was fair from a
financial point of view to the holder's of the Company's common stock. Because
the Company's acquisition of SSFF occurred following Mr. Geary's appointment to
the Company's Board of Directors, and because of the potential conflict of
interest created by the Company's acquisition of assets from Mr. Geary, the
Company's audit committee reviewed the following specific factors relating to
the Company's acquisition of SSFF:
o whether or not the potential conflict of interest arising from the
Company's proposed transaction with SSFF and indirectly with Mr. Geary
had been fully disclosed and revealed to the Audit Committee;
o whether or not the proposed transaction had been negotiated at arm's
length;
o whether or not Mr. Geary had participated in the negotiation of the
proposed transaction on behalf of the Company; and
o whether or not the terms of the proposed transaction were fair to the
Company and its shareholders.
After full discussion and deliberation of these factors, the members of the
Company's Audit Committee unanimously determined that all relevant facts
regarding a potential conflict of interest had been fully disclosed to the Audit
Committee, that the terms of the proposed transaction were fair and in the best
interests of the Company and its shareholders, and that the transaction had been
negotiated at arm's length, without participation by or influence of Mr. Geary
with respect to the Company's interest.
The Company leases its facility located at 11011-11021 Olinda Street in Sun
Valley, California from multiple landlords, one of whom is a trust for the
benefit of Ernest L. Star, the father of Ernest R. Star, the General Manager of
Tempco. Ernest R. Star is a co-trustee of this trust. Pursuant to the terms of
the applicable lease agreement, the Company pays the owners of this property
aggregate annual rent payments of $155,347 for the lease of a facility with
square footage of 20,320. In addition, the Company leases property located at
8866 Laurel Canyon Blvd. in Sun Valley, California from Starwood Company, a
company beneficially owned in part by Ernest L. Star. Pursuant to the terms of
the applicable lease agreement, the Company pays Starwood Company aggregate
annual rent of $172,920 for the lease of a facility having a square footage of
26,200. The leases governing the Company's occupancy of the above described
properties were entered into at the time of the Company's acquisition of Tempco
Engineering. Both leases were negotiated on an arms-length basis, prior to the
time that Ernest R. Star became an officer of the Company.
The Company leases property located at 1315 S. Cleveland Street in Oceanside,
California from Edward D. Geary, the father of Brian Geary, a member of the
Company's Board of Directors. Pursuant to the applicable lease arrangement, the
Company pays Edward D. Geary annual aggregate rent payments of $86,400 for the
lease of a facility with a square footage of 19,000. This lease was assumed by
the Company as part of its acquisition of Versaform Corporation. This lease
expires in January 2005 and it is the Company's intention to vacate the building
during 2004.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46").
In general, a variable interest entity is a corporation, partnership, trust or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The Company adopted the provisions of FIN 46 effective
February 1, 2003 and such adoption did not have a material impact on its
consolidated financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect to variable
interest entities created before January 2003, which among other things, revised
the implementation date to the first fiscal year or interim period ending after
March 15, 2004, with the exception of special purose entities ("SPE"). The
consolidation requirements apply to all SPEs in the first fiscal year or interim
period ending after December 15, 2003. The Company adopted the provisions of FIN
46R effective December 29, 2003 and such adoption did not have a material impact
on its consolidated financial statements since it currently has no SPEs.
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative instruments and Hedging Activities
("SFAS No.149"). SFAS No.149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No.149 is
effective for contracts and hedging relationships entered into or modified after
June 30, 2003. The Company adopted the provisions of SFAS No.149 effective June
30, 2003 and such adoption did not have a material impact on its consolidated
financial statements since the Company has not entered into any derivative or
hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity ("SFAS No.150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
o a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;
o a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuer's equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and
o a financial instrument that embodies and unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuer's equity shares, or
(3) variations inversely related to changes in the fair value of the
issuer's equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3 ("SFAS 150-3") which
deferred the effective dates for applying certain provisions of SFAS No.150
related to mandatorily redeemable financial instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for public
and non-public companies. For public entities SFAS No.150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
non-controlling interest that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS No. 150, but would be
classified as liabilities by the parent, the classification and measurement
provisions of SFAS No.150 are deferred indefinitely. The measurement provisions
of SFAS No.150 are also deferred indefinitely for other mandatorily redeemable
non-controlling interests that were issued before November 4, 2003. For those
instruments, the measurement guidance for redeemable shares and non-controlling
interests in other literature shall apply during the deferral period.
On December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin
No.104 (SAB No. 104), Revenue Recognition, which supersedes SAB No.101, "Revenue
Recognition in Financial Statements". SAB No.104's primary purpose is to rescind
accounting guidance contained in SAB No.101 related to multiple element revenue
arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." Additionally, SAB No. 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB No.101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB No.104. While the wording of SAB No.104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
No.101 remain largely unchanged by the issuance of SAB No. 104. The adoption of
SAB No.104 did not materially affect the Company's revenue recognition policies,
nor the results of operations, financial position or cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk primarily due to fluctuation in interest
rates. The Company does not utilize any particular strategy or instruments to
manage its interest rate risk.
The Company's outstanding credit facility carries a floating interest rate that
now varies based on changes to the prime rate of interest of Union Planters.
Accordingly, the Company is subject to potential fluctuations in its debt
service. Based on the amount of the Company's outstanding debt as of the end of
the 2003 fiscal year, a hypothetical 1% change in the interest rate of the
Company's outstanding credit facility would result in a change in the Company's
annual interest expense of approximately $0.3 million during the next fiscal
year.
The Company's potential exposure to interest rate market risk increased during
the 2002 fiscal year due to the Company's increased borrowings under its
outstanding credit facility. On May 16, 2002, the Company incurred an additional
$11 million of debt as part of a term loan borrowed under its current credit
facility. These funds were used by the Company to acquire Versaform Corporation,
and its affiliated entities.
Item 8. Financial Statements and Supplementary Data.
The following financial statements are included in Item 8 of this report:
Financial Statement Page
Report of Independent Certified Public Accountants 38
Report of Independent Auditor 39
Consolidated Balance Sheets as of December 31, 2002 and 2003 40
Consolidated Statements of Operations for the Years Ended 41
December 31, 2001, 2002 and 2003
Consolidated Statements of Stockholders' Equity for the Years 42
Ended December 31, 2001, 2002 and 2003
Consolidated Statements of Cash Flows for the Years Ended 43
December 31, 2001, 2002 and 2003
Notes to Consolidated Financial Statements 44
Schedule II - Valuation and Qualifying Accounts 67
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
LMI Aerospace, Inc.
Saint Charles, Missouri
We have audited the accompanying consolidated balance sheet of LMI Aerospace,
Inc. and subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 2003. We have also audited the accompanying Schedule
II, "Valuation and Qualifying Accounts." These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule 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 and schedule presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LMI Aerospace,
Inc. and subsidiaries at December 31, 2003, and the consolidated results of its
operations and its cash flows for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, the Company has incurred substantial losses
from operations in recent years. In addition, the Company is dependent on its
Loan Agreement, described in Note 8, to fund its working capital needs. The Loan
Agreement contains certain financial covenants with which the Company must
comply, and compliance cannot be assured. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Chicago, Illinois
March 31, 2004
Report of Independent Auditor
The Board of Directors and Stockholders
LMI Aerospace, Inc.
We have audited the accompanying consolidated balance sheet of LMI Aerospace,
Inc. (the "Company") as of December 31, 2002, and the related consolidated
statements of operations, stockholder equity, and cash flows for each of the two
years in the period ended December 31, 2002. Our audit also included the
financial statement schedule listed in the Index as Item 15(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. 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 amangement, 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LMI Aerospace,
Inc. at December 31, 2002 and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 2002, in
conformity with accounting principles generaly ccepted in the United States.
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 described in Note 1 to the financial statements in 2002 the Company changed
its method of accounting for goodwill.
/s/ Ernst & Young, LLP
St. Louis, Missouri
April 15, 2003
LMI Aerospace, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31
------------------------
2002 2003
------------------------
Assets
Current assets:
Cash and cash equivalents $1,182 $441
Trade accounts receivable, net of allowance
of $334 in 2002 and $245 in 2003 11,392 9,158
Inventories 25,181 24,159
Prepaid expenses 978 787
Deferred income taxes 1,389 2,206
Income taxes receivable 1,501 1,933
------------------------
Total current assets 41,623 38,684
Property, plant, and equipment, net 25,986 22,248
Goodwill 5,653 5,653
Customer intangible assets, net 4,267 3,792
Other assets 336 142
------------------------
Total assets $77,865 $70,519
========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $6,107 $4,570
Accrued expenses 2,846 2,126
Current installments of long-term debt
and capital lease obligations 4,616 6,069
-------------------------
Total current liabilities 13,569 12,765
Long-term debt and capital lease obligations,
less current installments 24,621 21,756
Deferred income taxes 1,939 2,206
-------------------------
Total long-term liabilities 26,560 23,962
Stockholders' equity:
Common stock of $.02 par value;
authorized 28,000,000 shares;
8,736,427 shares issued in 2002 and 2003 175 175
Preferred stock; authorized 2,000,000 shares;
none issued - -
Additional paid-in capital 26,171 26,171
-------------------------
Treasury stock, at cost, 554,641 shares
in 2002 and 2003 (2,632) (2,632)
Accumulated other comprehensive (loss) income (17) 20
Retained earnings 14,039 10,058
-------------------------
Total stockholders' equity 37,736 33,792
-------------------------
Total liabilities and stockholders equity $77,865 $70,519
=========================
See accompanying notes to the consolidated financial statement.
LMI Aerospace, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Year Ended December 31
-------------------------------------
2001 2002 2003
-------------------------------------
Net sales $70,823 $81,349 $75,855
Cost of sales 54,809 69,185 67,485
-------------------------------------
Gross profit 16,014 12,164 8,370
Selling, general and administrative expenses
10,194 12,931 13,423
Goodwill impairment charges - 5,104 -
-------------------------------------
Income (loss) from operations 5,820 (5,871) (5,053)
Other income (expense):
Interest expense (843) (1,495) (1,645)
Other, net (247) (525) 306
-------------------------------------
(1,090) (2,020) (1,339)
-------------------------------------
Income (loss) before income taxes 4,730 (7,891) (6,392)
Provision for (benefit of) income taxes 1,764 (691) (2,411)
-------------------------------------
Income (loss) before cumulative effect of
change in accounting principle 2,966 (7,200) (3,981)
Cumulative effect of change in accounting
principle, net of income tax benefit of
$663 for 2002. - (1,104) -
-------------------------------------
Net income (loss) $ 2,966 $ (8,304) $ (3,981)
=====================================
Amounts per common share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.37 $(0.89) $ (0.49)
Cumulative effect of change in accounting
principle - (0.14) -
-------------------------------------
Net income (loss) per common share $ 0.37 $(1.03) $ (0.49)
=====================================
Net income (loss) per common share -
assuming dilution $ 0.36 $ (1.03) $ (0.49)
=====================================
Weighted average common shares
outstanding 8,059,682 8,077,293 8,181,786
=====================================
Weighted average dilutive stock options
outstanding 98,444 - -
=====================================
See accompanying notes to the consolidated financial statement.
LMI Aerospace, Inc.
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share and per share data)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock income (loss) Equity
--------- ------------ ---------- ----------- ---------------- --------------
Balance at December 31, 2000 $ 175 $ 26,164 $ 19,785 $ (3,174) $ (272) $ 42,678
--------- ------------ ---------- ----------- ---------------- --------------
Comprehensive income (loss):
Net income - - 2,966 - - 2,966
Unrealized gain on available-
for-sale securities, net of
income tax of $40 - - - - 67 67
Reclassification adjustment for
losses realized in net income,
net of income tax benefit of $106 - - - - 205 205
--------------
Comprehensive income (loss) 3,238
Exercise of options to purchase stock - 7 - - - 7
Purchase of 119,000 shares of
outstanding stock for treasury - - - (379) (379)
Issuance of 30,928 shares of treasury
stock to profit sharing/401(k) plan - - (46) 151 - 105
--------- ------------ ---------- ----------- ---------------- --------------
Balance at December 31, 2001 $ 175 $ 26,171 $ 22,705 $(3,402) $ - $ 45,649
--------- ------------ ---------- ----------- ---------------- --------------
Comprehensive income (loss):
Net income $ - $ - $ (8,304) $ - $ - (8,304)
Exchange rate (loss) - - - - (17) (17)
--------------
Comprehensive income (loss) (8,321)
- - (218) 427 - 209
Issuance of stock - 90,000 shares of
common stock in connection with the
acquisition of SSFF
Purchase of 1,900 shares of - - - (8) - (8)
outstanding stock for treasury
Exercise of options to purchase stock - - (101) 196 - 95
Issuance of 32,690 shares of treasury - - (43) 155 - 112
stock to profit sharing/401(k) plan
--------- ------------ ---------- ----------- ---------------- --------------
Balance at December 31, 2002
$ 175 $ 26,171 $ 14,039 $ (2,632) $ (17) $ 37,736
--------- ------------ ---------- ----------- ---------------- --------------
Comprehensive income (loss):
Net income $ - $ - $ (3,981) $ - $ - $ (3,981)
Exchange rate gain - - - - 37 37
--------------
Comprehensive Income (Loss) (3,944)
--------- ------------ ---------- ----------- ---------------- --------------
Balance at December 31, 2003
$ 175 $ 26,171 $ 10,058 $ (2,632) $ 20 $ 33,792
--------- ------------ ---------- ----------- ---------------- --------------
See accompanying notes to the consolidated financial statement.
LMI Aerospace, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year Ended December 31
------------------------------------
2001 2002 2003
------------------------------------
Operating activities
Net income (loss) $2,966 $ (8,304) $ (3,981)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 4,208 4,433 4,793
Charges for bad debt expense 49 110 132
Charges for inventory obsolescence and
valuation 739 2,599 2,549
Goodwill impairment charges - 6,871 -
Non cash investment loss 311 643 -
Non cash loss on sale of equipment - - 54
Changes in operating assets and liabilities:
Trade accounts receivable 2,761 (2,746) 2,102
Inventories (3,567) (3,446) (1,527)
Prepaid expenses and other assets (432) (176) 128
Income taxes 349 (2,026) (1,043)
Accounts payable (612) 274 (1,537)
Accrued expenses 213 (274) (659)
------------------------------------
Net cash provided from (used by) operating activities 6,985 (2,042) 1,011
Investing activities
Additions to property, plant, and equipment (3,387) (2,293) (1,001)
Proceeds from sale of equipment 90 - 325
Proceeds from sale of stock investments - - 305
Acquisition of Versaform, net of cash acquired - (10,458) -
Acquisition of Stretch Forming Corporation - (825) -
Acquisition of Southern Stretch Forming and Fabrication - (115) -
Acquisition of Tempco, net of cash acquired (14,908) (300) -
------------------------------------
Net cash used by investing activities (18,205) (13,991) (371)
Financing activities
Proceeds from issuance of long-term debt 14,250 11,000 -
Principal payments on long-term debt (715) (2,918) (3,812)
Proceeds from equipment notes payable 1,027 -
Payment on notes payable - - (867)
Net advances on revolver - 4,417 3,267
Treasury stock transactions, net (380) (7) -
Proceeds from exercise of stock options 7 95 -
------------------------------------
Net cash provided from (used by) financing activities 14,189 12,587 (1,412)
Effect of exchange rate changes on cash - (17) 31
------------------------------------
Net increase (decrease) in cash and cash equivalents 2,969 (3,463) (741)
Cash and cash equivalents, beginning of year 1,676 4,645 1,182
------------------------------------
Cash and cash equivalents, end of year $ 4,645 $ 1,182 $ 441
====================================
Supplemental Disclosures of Cash Flow Information
Interest paid $ 798 $ 1,469 $1,659
Income taxes paid (refunded), net $ 1,294 $ 649 $(1,331)
See accompanying notes to the consolidated financial statement.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
1. Accounting Policies
Description of Business
LMI Aerospace, Inc. (the "Company") fabricates, machines, and integrates formed,
close tolerance aluminum and specialty alloy components for use by the
aerospace, semiconductor and medical products industries. The Company is a
Missouri corporation with headquarters in St. Charles, Missouri. The Company
maintains facilities in St. Charles, Missouri; Seattle, Washington; Tulsa,
Oklahoma; Wichita, Kansas; Irving, Texas; Sun Valley, California; Oceanside, CA;
Savannah, GA; and Langley, BC.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations in recent years. This factor raises
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is ultimately dependent on
its ability to improve operating performance such that it can operate
profitably, sustain positive operating cash flows and support its required
financial covenants with its primary lender. Management is currently seeking
alternative financing arrangements and pursuing the sale of certain assets to
replace its current lender and secure additional funds. However, there is no
assurance that the Company will be successful in improving its operating
results, obtaining alternative financing, or consummating the sale of assets.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Principles of Consolidation
The accompanying financial statements include the consolidated financial
position, results of operations, and cash flows of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Customer and Supplier Concentration
Direct sales to the Company's largest customer accounted for 40.0%, 25.4%, and
18.6% of the Company's total revenues in 2001, 2002 and 2003, respectively.
Accounts receivable balances related to direct sales to this customer were 7.8%
at December 31, 2002 and 8.0% at December 31, 2003. Indirect sales to the
Company's largest customer accounted for 11.0%, 8.7% and 10.0% of the Company's
total sales in 2001, 2002, and 2003, respectively.
Direct sales to the Company's second largest customer accounted for 4.6%, 17.5%
and 14.1% of the Company'S total revenues in 2001, 2002 and 2003, and
represented 21.1% and 8.6% of the accounts receivable balance at December 31,
2002 and 2003, respectively.
Direct sales to the Company's third largest customer accounted for 8.6%, 10.6%
and 12.9% of the Company's total revenue in 2001, 2002 and 2003 and represented
11.2% and 7.3% of accounts receivable balance at December 31, 2002 and 2003,
respectively.
The Company purchased approximately 34% and 37% of the materials used in
production from three suppliers in 2002 and 2003, respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and all
highly liquid investment instruments with an initial maturity of three months or
less.
Inventories
The Company's inventories are stated at the lower of cost or market and utilize
actual costs for raw materials and an average cost for work in process and
finished goods. The Company evaluates the inventory carrying value and reduces
the carrying costs based on customer activity, estimated future demand, price
deterioration, and other relevant information. The Company's customer demand is
highly unpredictable and may fluctuate by factors beyond the Company's control.
The Company therefore, maintains an inventory allowance for potential obsolete
and slow moving inventories, and for gross inventory items carried at costs
higher than their potential market values.
Revenue Recognition
The Company recognizes revenue when products are shipped and services are
rendered, the price is fixed or determinable, and collection is reasonably
assured.
Allowance for Doubtful Accounts
The allowance for doubtful accounts receivable reflects the Company's best
estimate of probable losses inherent in our accounts receivable. The basis used
to determine this value is derived from historical experience, specific
allowances for known troubled customers, and other currently available evidence.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost. Equipment under capital leases
is stated at the present value of the minimum lease payments. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets. Equipment held under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or estimated useful life of the asset. Estimated useful lives for buildings and
machinery and equipment are 20 years and 4 to 10 years, respectively.
Long lived assets
In accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the impairment or Disposal of Long Lived Assets, long lived
assets held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. As of December 31, 2003, there has been no impairment of long lived
assets, other than as disclosed in Note 6.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Pre-Production Costs
The Company accounts for pre-production costs in accordance with (EITF) 99-5,
Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements.
All design and development costs for products to be sold under long-term supply
arrangements are expensed unless there is a contractual guarantee that provides
for specific required payments for design and development costs.
Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, ("SFAS No. 142") under which goodwill is no longer being
amortized but instead is tested upon adoption of the Statement and then at least
annually for impairment and expensed to the extent the implied fair value of
reporting units, including goodwill, is less than carrying value (see Note 6).
Acquired intangible assets with finite lives are amortized over the useful life
on a straight line basis.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." The objectives of accounting for income taxes are
to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the company's financial statements or tax returns.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), requires that
certain items such as foreign currency translation adjustments, unrealized gains
and losses on certain investments in debt and equity securities and minimum
pension liability adjustments be presented as separate components of
shareholders' equity. SFAS No. 130 defines these as items of other comprehensive
income and as such must be reported in a financial statement that is displayed
with the same prominence as other financial statements. Accumulated other
comprehensive income, as reflected in the Consolidated Statements of
Shareholders Equity, was comprised of a foreign currency translation adjustment
of $20,000 and ($17,000) at December 31, 2003 and December 31, 2002,
respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Stock-Based Compensation
The Company accounts for its stock based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25 and related interpretations and
provides the pro forma disclosure provisions of SFAS No. 123. The Company
applied APB Opinion No. 25 in accounting for its stock option plans, and
accordingly, no compensation cost has been recognized for stock options granted
at fair market value. Had the Company determined compensation cost based on the
fair value at the grant date under SFAS No. 123, net income and earnings per
share amounts would have been as follows:
2001 2002 2003
---------- ----------- -----------
Net income (loss) as reported $ 2,966 $(8,304) $(3,981)
Less: Total stock based employee
compensation expense determined under
fair value based method, net of tax effect (225) (208) (129)
---------- ----------- -----------
Pro forma net income (loss) $ 2,741 $(8,512) $(4,110)
Net income per common share
As reported $.37 $(1.03) $( .49)
Pro forma net income (loss) $.34 $(1.05) $( .50)
Net income per common share
Assuming dilution:
As reported $.36 $(1.03) $( .49)
Pro forma $.34 $(1.05) $( .50)
Financial Instruments
Fair values of the Company's long-term obligations approximate their carrying
values.
Available-for-sale securities are stated at fair value based on quoted market
prices, with the unrealized gains and losses, net of tax, reported in other
comprehensive income/loss. Realized gains and losses and declines in value
determined to be other-than-temporary on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
average cost method. Interest and dividends on securities classified as
available-for-sale are included in other income.
The Company's other financial instruments have fair values which approximate
their respective carrying values due to their short maturities or variable rate
characteristics.
Earnings per Common Share
The Company follows SFAS No. 128, Earnings per Share, in calculating basic and
fully diluted earnings per share. Earnings per share are computed by dividing
net income by the weighted average number of common shares outstanding during
the applicable periods.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46").
In general, a variable interest entity is a corporation, partnership, trust or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The Company adopted the provisions of FIN 46 effective
February 1, 2003 and such adoption did not have a material impact on its
consolidated financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect to variable
interest entities created before January 2003, which among other things, revised
the implementation date to the first fiscal year or interim period ending after
March 15, 2004, with the exception of special purpose entities ("SPE"). The
consolidation requirements apply to all SPEs in the first fiscal year or interim
period ending after December 15, 2003. The Company adopted the provisions of FIN
46R effective December 29, 2003 and such adoption did not have a material impact
on its consolidated financial statements since it currently has no SPEs.
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149,
Amendment of Statement 133 on Derivative instruments and Hedging Activities
("SFAS No.149"). SFAS No.149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No.149 is
effective for contracts and hedging relationships entered into or modified after
June 30, 2003. The Company adopted the provisions of SFAS No.149 effective June
30, 2003 and such adoption did not have a material impact on its consolidated
financial statements since the Company has not entered into any derivative or
hedging transactions.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:
o a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;
o a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuer's equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and
o a financial instrument that embodies and unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuer's equity shares, or
(3) variations inversely related to changes in the fair value of the
issuer's equity shares.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
In November 2003, FASB issued FASB Staff Position No. 150-3 ("SFAS 150-3") which
deferred the effective dates for applying certain provisions of SFAS No.150
related to mandatorily redeemable financial instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for public
and non-public companies. For public entities SFAS No.150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
non-controlling interest that would not have to be classified as liabilities by
a subsidiary under the exception in paragraph 9 of SFAS No. 150, but would be
classified as liabilities by the parent, the classification and measurement
provisions of SFAS No.150 are deferred indefinitely. The measurement provisions
of SFAS No.150 are also deferred indefinitely for other mandatorily redeemable
non-controlling interests that were issued before November 4, 2003. For those
instruments, the measurement guidance for redeemable shares and non-controlling
interests in other literature shall apply during the deferral period.
On December 17, 2003, the Staff of the SEC issued Staff Accounting Bulletin
No.104 (SAB No. 104), Revenue Recognition, which supersedes SAB No.101, "Revenue
Recognition in Financial Statements". SAB No.104's primary purpose is to rescind
accounting guidance contained in SAB No.101 related to multiple element revenue
arrangements, superseded as a result of the issuance of EITF 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables." Additionally, SAB No. 104
rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers (the FAQ) issued with SAB No.101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB No.104. While the wording of SAB No.104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
No.101 remain largely unchanged by the issuance of SAB No. 104. The adoption of
SAB No.104 did not materially affect the Company's revenue recognition policies,
nor the results of operations, financial position or cash flows.
2. Acquisitions
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Tempco Engineering
On April 2, 2001, the Company acquired certain assets of Tempco Engineering,
Inc. and Hyco Precision, Inc. (collectively, "Tempco"), two privately held
related metal machining companies based in Southern California, for cash. The
acquisition has been accounted for as a business combination, and accordingly,
the results of operations were included in the Company's financial statements
from the date of acquisition. Tempco produces components for photolithography
equipment used in the manufacture of semiconductors, as well as components for
the defense and commercial aerospace industries. The purchase price for the net
assets acquired, net of acquired cash, was approximately $15,200, which was
funded through the "Tempco Term Loan" (see Note 8). The purchase also included
contingent consideration of up to $1,250 if Tempco's EBITDA, as defined, exceeds
certain limits for the two years ended March 31, 2003. Tempco did not meet the
financial thresholds that would have obligated the Company to pay additional
consideration at the end of the contingency period, March 31, 2003. The excess
of the purchase price over the fair value of net assets acquired, $5,943, was
allocated to goodwill.
Versaform
On May 16, 2002, the Company acquired all of the outstanding stock of Versaform
Corporation and BC 541775, Ltd., a holding company that owned 100% of the common
stock of Versaform Canada Corporation (collectively, "Versaform") for
approximately $11,787 consisting of cash of approximately $10,487, provided by
the "Versaform Term Loan" (see Note 8) and a note of $1,300 payable to the
selling shareholder. Versaform forms large sheet metal and extrusion components
predominantly for the corporate, regional, and military aerospace markets from
two facilities in Oceanside, California and one facility in Langley, British
Columbia, Canada.
The acquisition was accounted for as a purchase business combination, and
accordingly, the results of operations were included in the Company's financial
statements after May 16, 2002. The cost to acquire Versaform has been allocated
to the assets acquired and liabilities assumed according to their estimated fair
values at the time of the acquisition as follows:
Working capital $ 400
Property, plant, and equipment 3,179
Assumed long-term liabilities (871)
Customer-related intangible 3,975
Goodwill (nondeductible) 5,104
--------------
$ 11,787
==============
The intangible asset relates to acquired customer relationships and is being
amortized over 15 years on a straight line basis. Based on the terms of the
purchase agreement, the Company is obligated to pay additional consideration if
sales to a specific customer exceed certain annual thresholds over the three
years following the acquisition. As of December 31, 2002 and 2003, sales to the
specific customer did not meet these thresholds and is not expected to meet the
thresholds for the remainder of the three year contingency period. The purchase
agreement allows for certain adjustments to the purchase price for claims in
excess of $100. The Company has filed a claim for reimbursement of certain
liabilities existing at the closing date. This claim was settled for $265 during
the third quarter of 2003 and paid to the Company in October 2003. Versaform's
sales were approximately $12,000 in 2001.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Southern Stretch Forming and Fabrication, Inc.
On September 30, 2002, the Company acquired certain assets of Southern Stretch
Forming and Fabrication, Inc. ("SSFF"). The former owner of Versaform, currently
a director of the Company, held a 50% interest in SSFF. Following the Company's
acquisition of Versaform, the director purchased the remaining 50% interest in
SSFF and sold SSFF to the Company. (See related party transactions at Note 12)
The assets consisted primarily of inventory, machinery and equipment. The
acquisition was accounted for as a purchase business combination, and
accordingly, the related results of operations have been included in the
consolidated statement of operations after September 30, 2002. The purchase
price of $444, which includes the assumption of debt and direct costs of the
transaction, consisted of $235 in cash and 90,000 shares of LMI common stock,
with a market value of $209.
The cost to acquire these assets has been allocated to the assets according to
their fair values and consisted of inventory of $115 and equipment and machinery
of $718 and assumed liabilities of $389. Net sales for SSFF for 2001 were
approximately $3,820, of which approximately $1,739 were to the Company.
Stretch Forming Corporation
On June 12, 2002, the Company acquired certain assets of Stretch Forming
Corporation ("SFC"), based in Southern California. The purchase price of $861
was allocated to the assets acquired based on their fair value and consisted of
working capital of $465, equipment of $66 and an intangible asset of $329
related to production backlog, to be amortized over 3 years on a straight line
basis.
3. Treasury Stock Transactions
The Board of Directors authorized the Company to repurchase shares of its common
stock and place these shares in a Treasury Stock account for use at management's
discretion. The Company purchased 1,900 shares in 2002 in the open market at
prices ranging from $4.48 to $2.00 per share. In addition, the Company issued
32,690 shares in 2002 in conjunction with the exercise of certain employees'
options, as well as contributions to and purchases by the Company's benefit
plans. These transactions were recorded at cost in stockholders' equity. A
portion of the consideration for SSFF consisted of 90,000 shares of treasury
stock recorded at fair value. There was no treasury stock activity in 2003 as
the Company did not purchase or issue any treasury shares.
4. Inventories
Inventories consist of the following: 2002 2003
-----------------------------------
Raw materials $ 4,469 $ 3,989
Work in process 5,576 5,479
Finished goods 15,136 14,691
-----------------------------------
Total Inventories $ 25,181 $ 24,159
===================================
Includes reserves for obsolete and slow moving inventory of $407 and $2,173; and
a reserve for lower of cost or market of $1,958 and $and $2,173 and $647 for
2002 and 2003, respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
5. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
2002 2003
-------------------------
Land $ 705 $ 705
Buildings 12,689 12,795
Machinery and equipment 36,493 36,652
Leasehold improvements 918 927
Software and other 1,608 2,038
Construction in progress 552 301
-------------------------
Total Gross Property, Plant & Equipment 52,965 53,418
Less accumulated depreciation 26,979 31,170
-------------------------
Total Net Property, Plant & Equipment $25,986 $22,248
=========================
Depreciation expense (including amortization expense on software) recorded by
the Company totaled $3,730, $4,284 and $ 4,366 for 2001, 2002 and 2003,
respectively.
6. Goodwill and Intangibles
As required by SFAS No. 142, the Company performed the initial phase of its
transitional impairment test as of January 1, 2002 during the first six months
following adoption and determined that its reporting segments constitute
reporting units. Additionally, the Company determined that the carrying value of
its Sheet Metal segment exceeded its fair value.
The initial phase of the transitional test indicated potential impairment of the
Sheet Metal segment's goodwill with a carrying value of $1,767 reflecting the
current industry conditions and estimates of aerospace industry spending in the
foreseeable future. The Company engaged valuation experts to assist in
performing a review of the fair value of the Sheet Metal segment's tangible and
intangible assets, including goodwill, as of January 1, 2002. Based upon the
valuation completed in the fourth quarter of 2002, relying primarily on a
discounted cash flow valuation technique, the Company recorded a $1,767 charge
($1,104 net of tax) for the impairment of the Sheet Metal segment's goodwill.
The charge is reflected as the cumulative effect of adopting the new accounting
standard as of January 1, 2002.
In the fourth quarter 2002, the Company performed the required annual impairment
test under SFAS No. 142. The initial phase of the required annual test indicated
potential impairment of the Sheet Metal segment's goodwill with a carrying value
of $5,104, all of which related to the May 2002 acquisition of Versaform. These
impairment indicators arose from poor operating performance at the other
operations in the Sheet Metal segment reflecting further deterioration in the
industry conditions and estimates of aerospace industry spending in the
foreseeable future. The Company engaged valuation experts to assist in
performing a review of the fair value of the Sheet Metal segment's tangible and
intangible assets, including goodwill, as of October 1, 2002. Based upon the
valuation, relying primarily on a discounted cash flow valuation technique, the
Company recorded a $5,104 charge as a component of operating income in the
fourth quarter of 2002.
In the fourth quarter of 2003, the Company performed the required annual
impairment test under SFAS No. 142, and concluded that the remaining Goodwill
balance, which relates to the Machining and Technology Segment only, was not
further impaired.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
The changes in the carrying amount of goodwill for the fiscal years ended 2001,
2002, and 2003 were as follows:
2001 2002 2003
-------- --------- ----------
Beginning of the year $1,888 $7,420 $5,653
Additions 5,943 5,104 -
Amortization (411) - -
Impairment:
Cumulative effect of accounting change - (1,767) -
Annual impairment assessment - (5,104) -
-------- --------- ----------
End of the year $7,420 $5,653 $5,653
======== ========= ==========
Goodwill remaining at December 31, 2003 relates to the Machining and Technology
segment.
Prior to the adoption of SFAS No. 142, amortization expense was recorded for
goodwill. The following table sets forth a reconciliation of net income and
earnings per share information for fiscal years 2001, 2002 and 2003 adjusted for
non-amortization provisions of SFAS No. 142.
Year ended December 31
2001 2002 2003
---------- ---------- ---------
Reported net income (loss) $ 2,966 $ (8,304) $ (3,981)
Goodwill amortization 411 - -
---------- ---------- ---------
Adjusted net income (loss) $ 3,377 $ (8,304) $ (3,981)
========== ========== =========
Earnings /(loss) per share - basic $ .37 $ (1.03) $ (.49)
Goodwill amortization expense, net of tax .05 - -
---------- ---------- ---------
Adjusted earnings per share - basic $ .42 $ (1.03) $ (.49)
========== ========== =========
Reported earnings/(loss) per share - diluted $ .36 $ (1.03) $ (.49)
Goodwill amortization expense, net of tax .05 - -
---------- ---------- ---------
Adjusted earnings per share-diluted $ .41 $ (1.03) $ (.49)
========== ========== =========
Customer Related Intangibles
The carrying amount of customer related intangibles for the years ended December
31, 2002 and 2003 were as follows (there were no customer related intangibles
prior to 2002):
Gross Accumulated Useful
Amount Amortization Life
--------- -------------- -------------
Versaform $3,975 $66 15 years
Stretch Forming Corp. 419 61 3.5 years
--------- -------------- -------------
December 31, 2002 $4,394 $127
========= ==============
Versaform $3,975 $332
Stretch Forming Corp. 329 180
--------- --------------
December 31, 2003 $4,304 $512
========= ==============
Customer related intangibles amortization expense for the calendar years 2001,
2002 and 2003 were $0, $127 and $385, respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
7. Accrued Liabilities Accrued liabilities include the following:
December 31
------------------
2002 2003
---- ----
Accrued Payroll $ 358 $ 187
Accrued Vacation & Holiday 1,118 902
Accrued Employee Benefits 542 444
Accrued Property Taxes 152 221
Accrued Legal & Accounting 110 195
Accrued Commissions 128 38
Accrued Interest 59 30
Other 379 109
-------- --------
Total $ 2,846 $ 2,126
======== ========
8. Long-Term Debt and Revolving Line of Credit
Long-term debt consists of the following:
December 31
2002 2003
-----------------------------
Term Loans:
Tempco $ 11,705 $ 9,670
Versaform 10,738 9,167
Revolving Line of Credit 4,417 7,684
Note payable to Director, principal and
interest payable monthly at 7% 1,003 614
Notes payable, principal and interested
payable monthly, at fixed rates, ranging from
a 6.99% to 10.0% 1,212 679
Capital lease obligations 162 11
-----------------------------
$ 29,237 $ 27,825
Less current installments 4,616 6,069
=============================
Total $ 24,621 $ 21,756
=============================
The Company has a loan agreement ("Loan Agreement") with Union Planters Bank,
NA. The Loan Agreement consists of a revolving line of credit ("Revolver"), a
term loan to finance the purchase of Tempco ("Tempco Term Loan"), and a term
loan to finance the purchase of Versaform ("Versaform Term Loan"). The Company's
Loan Agreement is secured by all the domestic assets of the Company and requires
compliance with certain non-financial and financial covenants including minimum
levels of EBITDA and tangible net worth.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
On January 5, 2004 the Company's extended its Loan Agreement to March 31, 2004,
received a waiver for certain non financial covenants, and agreed to a fee of
$75. Subsequently, on March 30, 2004, the Company and Union Planters Bank N.A.
("Union Planters") entered into a Thirteenth Amendment to Loan Agreement
("Thirteenth Amendment"), amending the Loan Agreement dated as of August 15,
1996 (the "Loan Agreement") between Leonard's Metal, Inc. the precedecessor in
interest to the Company, and Magna Bank, National Association, the predecessor
in interest to Union Planters. The primary purposes f the Thirteenth Amendment
were to (a) extend the maturity of the Company's Revolving Line of Credit
provided under the Loan Agreement ("Revolving Credit Loan") from March 31, 2004
to March 31, 2005, and (b) waive a default arising under the Loan Agreement
providing for the maintenance of a minimum of consolidated EBITDA amount for the
period ended December 31, 2003.
In addition, under the terms of the Thirteenth Amendment to Loan Agreement:
o The maximum principal amount of the Revolving Credit Loan was
increased from approxiately $9,088 to $9,700 through September 30,
2004, subject to a borrowing base calculation and further subject to a
newly established inventory reserve requirement and a more restrictive
reuirement for eligible receivables, which, notwithstanding the
increased borrowing maximum amount provided by the Thirteenth
Amendment, could reduce the amount of borrowing availability under the
Revolving Credit Loan.
o The interest rate on the Revolving Credit Loan was changed from LIBOR
plus 2.50% to Union Planters' prime rate plus 1%. Moreover, if the
Company has not executed and delivered a letter of intent regarding
(i) the sale of the stock or of all or substantially all of the assets
of certain of its subsidiaries, and/or (ii) the procurement by the
Company of debt financing providing the Company with sufficient funds
to repay in full the Company's obligations to Union Planters ("Letter
of Intent") on or before June 30, 2004, the interest rate on the
Revolving Credit Loan will be increased to prime plus 1-1/2%, and
further increased to prime plus 2.00% if the Company has not paid all
of its obligations to Union Planters in full on or before September
30, 2004. The interest rate on Term Loan A provided under the Loan
Agreement, which, as of March 30, 2004, had a total outstanding
principal balance of approximately $9,161, was changed from LIBOR plus
3%, subject to a floor of 7% and a ceiling of 8.5%, to Union Planters'
prime rate plus 2%, subject to a floor of 7%. The interest rate on
Term Loan B provided under the Loan Agreement, which, as of March 30,
2004, had a total outstanding principal balance of $8,773,816, was
changed from LIBOR plus 3% to Union Planters' prime rate plus 2%.
Moreover, if the Company has not executed and delivered a Letter of
Intent on or before June 30, 2004, the interest rate on Term Loans A
and B will be increased to Union Planters' prime plus 2-1/2% and
further increased to Union Planters' prime plus 3% if the Company has
not paid all of its obligations to the Buyer in full on or before
September 30, 2004.
o If, by June 30, 2004, the Company does not enter into one or more
Letters of Intent, a fee of $125,000 will be payable on the earliest
of March 31, 2005, the date the Company repays all of its obligations
to Union Planters or the date on which Union Planters accelerates all
of the Company's obligations.
o If the Company fails to pay all of its obligations in full to Union
Planters by September 30, 2004, a fee of $350,000 will be payable to
Union Planters ($100,000 on October 1, 2004 and $250,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
o If the Company fails to pay all of its obligations in full to Union
Planters by December 30, 2004, a fee of $200,000 will be payable to
Union Planters ($100,000 on December 31, 2004 and $100,000 on the
earliest of March 31, 2005, the date the Company repays all of its
obligations to Union Planters or the date on which Union Planters
accelerates all of the Company's obligations).
Thus, increased interest rates and additional fees will apply during the
remaining term of the Loan Agreement (through March 31, 2005) if the
indebtedness under the Loan Agreement is not repaid in full through alternative
financing and/or a sales of assets by certain prescribed dates. The Company has
engaged Lincoln Partners LLC, a Chicago, Illinois based investment banking firm,
to assist in these efforts.
At December 31, 2003, the Company's Revolver allowed for a $9,088 line of
credit, subject to a borrowing base calculation, to fund various corporate
needs. Interest was payable monthly based on a ninety day LIBOR plus 2.25% and
was 3.67% at December 31, 2003. The Company had $7,684 outstanding on this line
at December 31, 2003. This facility was amended in January 2004 to extend
maturities to March 31, 2004 and included an increase in interest to LIBOR plus
2.5%. On March 30, 2004, the Company further amended the Loan Agreement to
extend the Revolver maturity to March 31, 2005 and establish the Revolver line
at $9,700 until September 30, 2004, and $9,000 thereafter, each subject to a
borrowing base. The Revolver interest was amended to prime plus 1% with possible
adjustments as described above. The credit facility prohibits the payment of
cash dividends on common stock without the prior written consent of Union
Planters Bank.
The Company borrowed $14,250 (Tempco Term Loan) on April 2, 2001 to finance the
Tempco acquisition. The Tempco Term Loan required monthly principal and interest
payments over three years using a seven year amortization and bearing interest
at ninety day LIBOR plus 3%, subject to a cap of 8.5% and a floor of 7.0%. The
interest rate was 7.0% at December 31, 2003. On March 30, 2004 the Company
amended this note establishing a maturity of March 31, 2005 and interest at
prime plus 2% with possible adjustments as described above.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
The Versaform Term Loan was issued for $11,000 on May 15, 2002. The Versaform
Term Loan required monthly principal and interest payments over three years
using a seven year amortization and bears interest at the ninety day LIBOR plus
3%. The interest rate was 4.2% at December 31, 2003. On March 30, 2004 the
Company amended this note increasing interest to prime plus 2% with possible
adjustments as described above.
The Company entered into a note payable for $1,300 with the prior owner of
Versaform in connection with the acquisition. The prior owner has since become a
member of the board of directors of the Company. This note is payable monthly
over three years and bears interest at 7.0%. This note is secured by 65% of the
stock of the Company's Canadian subsidiary.
The Company entered into various notes payable for the purchase of certain
equipment. The notes are payable in monthly installments including interest
ranging from 6.99% - 10.0% through November 2006. The notes payable are secured
by equipment.
The Company entered into capital lease agreements for the purchase of certain
equipment. The leases are payable in monthly installments including interest
ranging from 4.98% - 9.15% through August 2005.
The aggregate maturities of long-term debt as of December 31, 2003 are as
follows:
Year ending December 31:
2004 $ 6,069
2005 21,583
2006 173
Thereafter -
------------
Total $ 27,825
============
9. Leases
The Company leases certain facilities and equipment under various non-cancelable
operating lease agreements which expire at various dates through 2013. At
December 31, 2003, the future minimum lease payments under operating leases with
initial non-cancelable terms in excess of one year are as follows:
Year ending December 31:
2004 $ 2,231
2005 1,859
2006 1,288
2007 799
2008 650
Thereafter 2,647
------------
Total $ 9,474
============
Rent expense totaled $1,354, $2,107 and $2,701 in 2001, 2002 and 2003,
respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
10. Defined Contribution Plans
The Company has a noncontributory profit sharing plan and a contributory 401(k)
plan which covers substantially all full-time employees. Employees are eligible
to participate in both plans after reaching 1,000 hours of accredited service.
Contributions to the profit sharing plan are at the discretion of management and
become fully vested after seven years. Contributions by the Company to the
profit sharing plan totaled $121, $0 and $0 for 2001, 2002 and 2003
respectively. Contributions by the Company to the 401(k) plan, which are fully
vested to the employees immediately upon contribution, are based upon a
percentage of employee contributions, up to a maximum of $675 dollars per
employee (dollars not in thousands). The Company's contributions to the 401(k)
plan totaled $86, $229 and $191, for 2001, 2002 and 2003 respectively. In
addition, at December 31, 2003, the Company had 600,000 common shares of its
stock reserved for contributions to the 401(k) plan.
11. Stock Options
The Company's 1998 Employee Stock Option Plan provides options for up to 900,000
shares to be granted to key employees at exercise prices greater than or equal
to the fair market value per share on the date the option is granted. Options
issued under the Plan are at the discretion of management and may be in the form
of Incentive Stock Options or Non-Qualified Stock Options. Vesting periods range
from 0 to 4 years.
At December 31, 2003, a total of 1,157,822 shares of authorized and unissued
common stock were reserved for issuance of stock awards and options granted or
authorized to be granted.
2001 2002 2003
---------------------- --------------------- ---------------------
Number Weighted Number Weighted Number Weighted
of Shares Average of Shares Average of Shares Average
Exercise Exercise Exercise
Price Price Price
Options outstanding at
beginning of year 404,235 3.62 470,295 3.09 500,475 3.41
Granted 146,700 2.38 89,500 4.76 28,500 2.10
Exercised (2,005) 2.75 (40,645) 2.31 - -
Canceled/expired (78,635) 4.38 (18,675) 4.23 (132,407) 3.52
---------- ---------- -----------
Options outstanding at
end of year 470,295 3.09 500,475 3.41 396,568 3.28
- --------------------------- ========== ========== ===========
- ---------------------------------------------------------------------------------------------- ------------------
Range of Number of Weighted Weighted Number Weighted
Exercise Outstanding Average Average Exercisable Average
Prices Options Remaining Exercise Price Exercise Price
Contractual Life
- -------------------------------------------------------------------------------------------------
$2.00 - $3.00 272,443 6.84 2.54 255,368 2.57
$3.01 - $5.00 60,300 6.58 4.34 58,650 4.34
$5.01 - $6.06 63,825 6.67 5.46 62,950 5.46
- -------------------------------------------------------------------------------------------------
Total 396,568 6.78 3.28 376,968 3.33
=================================================================================================
The number of vested options exercisable and the related range of exercise
prices at December 31, 2001, 2002, and 2003 were 276,170 shares, with a range of
exercise prices from $2.00 to $5.93; 404,200 shares, with a range of exercise
prices from $2.00 to $6.06; and 376,968 shares, with a range of exercise prices
from $2.00 to $6.06 respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
The fair value for options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2001, 2002 and 2003, respectively: risk-free interest rates of
4.78%, 3.36% and 3.86%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's common stock of 104%, 83% and 73%;
and a weighted average expected life of the option of six years for 2001, 2002
and 2003. The weighted average fair value of options granted during 2001, 2002
and 2003 was $1.96, $3.40 and $2.10, respectively. The weighted average
remaining life of outstanding options as of December 31, 2003 was 6.78 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
12. Income Taxes
The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to the deferred tax assets and
liabilities are as follows:
2002 2003
-------------------------
Deferred tax assets:
Accrued vacation $ 295 $ 264
Inventory 828 1,122
State tax credits 129 129
Goodwill 466 314
Net operating loss carry forward - 288
--------------------------
Other 138 89
--------------------------
Total deferred tax assets 1,856 2,206
Deferred tax liabilities:
Depreciation (2,406) (2,206)
Other (7) -
---------------------------
Total deferred tax liabilities (2,406) (2,206)
---------------------------
Net deferred tax liability $ (550) $
---------
===========================
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
The Company's income tax provision (benefit) attributable to income before
income taxes and cumulative effect of change in accounting principle consisted
of the following for the year ended December 31:
2001 2002 2003
----------------------------------
Federal:
Current $ 1,820 $ (171) $ (1,988)
Deferred (188) (468) (250)
----------------------------------
1,632 (639) (2,238)
Canadian:
Current - 22 39
Deferred - - 32
----------------------------------
- 22 71
State:
Current 150 (50) (201)
Deferred (18) (24) (43)
----------------------------------
132 (74) (244)
----------------------------------
Provision (benefit) for income taxes $ 1,764 $ (691) $ (2,411)
==================================
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense attributable to income before cumulative effect of
change in accounting principle is as follows:
2001 2002 2003
-------------------------------
Federal taxes (benefit) $ 1,608 $ (2,683) $ (2,173)
State and local taxes, net of federal benefit 140 (74) (224)
Benefit
Non deductible goodwill - 1,758 124
Valuation allowance for capital loss on - 241 (114)
available for sale securities
Other 16 67 (24)
-------------------------------
Provision (benefit) for income taxes $ 1,764 $ (691) $ (2,411)
===============================
Remaining net operating loss carry-forward is immaterial.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
13. Related Party Transactions
In May 2002, the Company entered into certain acquisition transactions with
Brian Geary, a director of the Company, related to the Versaform and SSFF
acquisitions (See Note 2 for further description of these acquisitions). As a
part of the acquisition of Versaform, the consideration included a note payable
of $1,300 to Mr. Geary (the then sole shareholder of Versaform) which bears
interest at 7% and is payable in monthly installments through May 2005. In
addition, a relative of Mr. Geary retained ownership of a building and property
where Versaform operates and leases the facility to the Company for
approximately $86 per year. This lease expires in January 2005 and it is the
intention of the Company to vacate during 2004.
Prior to his appointment as a director of the Company, Mr. Geary owned 50% of
SSFF. Subsequently, Mr. Geary purchased the remaining 50% of SSFF and sold the
entity to the Company. Prior to approving the purchase of SSFF, the Company's
Audit Committee, at the request of the Board of Directors, considered the
potential conflict of interest regarding the acquisition of SSFF. The Audit
Committee concluded that the above transaction was negotiated on an arms length
basis, consummated on terms generally similar to those prevailing with unrelated
third parties, and were fair and in the best interest of the Company and its
shareholders.
The Company leases the two Tempco operating facilities from entities in which a
relative of Ernest Star, a member of the Company's Board of Directors, is a
principal beneficiary. The leases governing the Company's occupancy of these
facilities were entered into at the time of the Tempco acquisition, prior to Mr.
Star's appointment as a Director, and were negotiated on an arms length basis at
terms generally similar to those prevailing with unrelated third parties.
14. Commitments and Contingencies
On February 6, 2004, Versaform, a wholly-owned subsidiary of the Company
acquired on May 16, 2002, was served a subpoena by the federal government.
The Subpoena relates to the time period January 1, 1999 through February 6, 2004
and was issued in connection with an investigation by certain government
agencies including the Department of Defense, Office of Inspector General,
Defense Criminal Investigative Service, and the Federal Bureau of Investigation.
The subpoena refers to structural components Versaform manufactured for Nordam
Corporation for B-52 engine cowlings, components for auxiliary power units
Versaform manufactured for Hamilton Sundstrand a United Technologies Company,
and certain tools Versaform manufactured for Lockheed Martin Corporation.
The Company has not been served with any notice of any pending legal action
filed by any government agency. Accordingly, the Company has no knowledge of any
specific allegations of wrongdoing against Versaform by any regulatory
authority.
The Company intends to cooperate fully with the federal government in connection
with any investigation of this matter.
Other than noted above, the Company is not a party to any legal proceedings,
other than routine claims and lawsuits arising in the ordinary course of its
business. The Company does not believe such claims and lawsuits, individually or
in the aggregate, will have a material adverse effect on the Company's business.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
15. Business Segment Information
As set forth in the criteria of statement of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, the Company is organized into
two reportable segments: Sheet Metal and Machining and Technology. The Sheet
Metal segment fabricates, finishes, and integrates close tolerance aluminum and
specialty alloy components primarily for the aerospace industry. The Machining
and Technology segment machines close tolerance aluminum and specialty alloy
components for the aerospace, semiconductor, and medical products industries.
During 2002, the Company determined that its Machining and Technology met the
definition of a reportable segment in accordance with SFAS No. 131 given its
management reporting structure and differences in products and customers. Prior
period reporting has been restated to conform to the new segment reporting.
The accounting policies of the segments are the same as those described in Note
1. Sales between segments are insignificant. Corporate assets, liabilities, and
expenses related to the Company's corporate offices are allocated to the
segments, except for income taxes. The table below presents information about
reported segments for years ended December 31, on the basis used internally to
evaluate segment performance (Machining and Technology results are presented
beginning April, 2001, the date of acquisition):
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
15. Business Segment Information (continued)
December 31
---------------------------------
2001 2002 2003
=================================
Net sales:
Sheet Metal $60,552 $61,397 $61,969
Machining and Technology 10,271 19,952 13,886
---------------------------------
$70,823 $81,349 $75,855
=================================
Income (loss) before income taxes:
Sheet Metal $4,353 $(10,465) $(6,354)
Machining and Technology 377 2,574 (38)
---------------------------------
$4,730 $(7,891) $(6,392)
=================================
Interest Expense:
Sheet Metal $64 $591 $885
Machining and Technology 779 904 760
---------------------------------
$843 $1,495 $1,645
=================================
Capital expenditures:
Sheet Metal $2,615 $1,496 $771
Machining and Technology 123 277 83
Corporate 649 520 147
---------------------------------
$3,387 $2,293 $1,001
=================================
Depreciation and amortization:
Sheet Metal $3,665 $4,062 $4,399
Machining and Technology 543 371 394
---------------------------------
$4,208 $4,433 $4,793
=================================
As of December 31
---------------------------------
Goodwill: 2001 2002 2003
=================================
Sheet Metal $1,767 $ - $ -
Machining and Technology 5,653 5,653 5,653
---------------------------------
$7,420 $5,653 $5,653
=================================
Total Assets:
Sheet Metal $44,770 $56,690 $49,896
Machining and Technology 15,942 16,319 15,016
Corporate 7,290 4,856 5,607
---------------------------------
$68,002 $77,865 $70,519
=================================
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
16. Restructuring Charges
The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit and
Disposal Activities, in 2003. SFAS No. 146 requires companies to recognize costs
associated with exit and disposal activities when they are incurred rather than
at the date of commitment to an exit or disposal plan. Costs covered include
lease termination, costs to consolidate facilities and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity,
On July 23, 2003, the Company announced the details of a restructuring plan to
reduce operating expenses and increase efficiencies at its St. Charles, Missouri
location which included a reduction of work force of approximately 60 people,
the exit of two leased facilities, and relocation of a significant amount of its
manufacturing equipment. In December 2003, the Company announced an additional
restructuring program at the Wichita, Kansas plant, including a staged reduction
in workforce of approximately 60 employees, and the sale of an LMI-owned
building and excess equipment. The Wichita restructuring program is scheduled to
occur over a five month period during which the Company plans to transfer from
its Wichita facility all extrusion stretch work to its Auburn, Washington and
Vista, California locations and its milling work packages to its Tulsa, Oklahoma
and Auburn, Washington facilities and plans to transfer its high pressure
forming work currently produced in Auburn to the Wichita, Kansas plant. Employee
severance costs for the Wichita plant restructuring will be paid upon completion
of service term in 2004 and, therefore were not accrued in 2003 per SFAS No.
146. The costs of these restructuring plans as of December 31, 2003 were $527
incurred as follows: $348 for moving and relocation, $118 for consulting
services, and $61 for severance costs. The Company expects to incur
restructuring costs for both of these programs of $434 in the first quarter of
2004 and $910 for the total year ended December 31, 2004. Total cumulative costs
for both programs over both years are estimated at $1,538. All restructuring
costs are attributable to the Sheet Metal Segment and are classified as Selling,
General and Administrative expenses.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
17. Quarterly Financial Data (Un-audited)
2002 First (1) Second Third Fourth
---------------------------------------------
Net sales $ 17,908 $ 20,355 $ 21,258 $ 21,828
Gross profit 3,806 4,097 3,532 729
Income (loss) before cumulative
effect of change in accounting
principle 464 462 (420) (7,706)
Cumulative effect of change in
accounting principle, net of tax (1,104) - - -
Net income (loss) after
accounting changes $ (640) $ 462 $ (420) $ (7,706)
=============================================
Amounts per common share:
Net income (loss) $ (0.08) $ 0.06 $ (0.05) $ (0.94)
=============================================
Net income (loss) - assuming
dilution
$ (0.08) $ 0.06 $ (0.05) $ (0.94)
=============================================
(1) First quarter 2002 results have been restated to reflect the cumulative
effect of change in accounting principle related to the adoption of SFAS no.
142.
2003 First Second Third Fourth (2)
---------------------------------------------
Net sales $ 20,842 $ 18,865 $ 17,566 $ 18,582
Gross Profit 2,220 2,429 2,743 978
Net income (loss) $ (957) $ (740) $ (644) $ (1,640)
=============================================
Amounts per common share:
Net income (loss) $ (.11) $ (.09) $ (.08) $ (.20)
=============================================
Net income (loss) - assuming
dilution $ (.11) $ (.09) $ (.08) $ (.20)
=============================================
(2) In the fourth quarter of 2003, Management increased the Company's reserves
for obsolescence and slow moving inventory by $1.4 million based on an
evaluation of the current market place and customer buying patterns.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
18. Fourth Quarter Adjustments
The fourth quarters of 2002 and 2003 include significant adjustments to increase
inventory reserves totaling $1,958 and $1,421, respectively. In the fourth
quarter of 2002, management established a reserve for lower of cost or market
("LOCOM") to reduce the inventory carrying value by $1,958 due to production
inefficiencies. This reserve has a current balance of $647 at December 31, 2003.
The Company also performed an in-depth analysis of inventory obsolescence and
slow moving products at the end of the fourth quarter of 2003. This analysis was
based on the current markets for the Company's products and the change in the
buying patterns of the Company's major customers. The result of this analysis
was the recording in the fourth quarter 2003 of an additional obsolescence
reserve of $1,421. The Company's reserve for obsolescence and slow moving
products totaled $2,173 at December 31, 2003.
The total for both the reserve for obsolescence and slow moving products and the
reserve for LOCOM was $2,364 and $2,820, for December 31, 2002 and December 31,
2003, respectively.
LMI Aerospace, Inc.
Schedule II - Valuation and Qualifying Accounts
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Additions Deductions
----------------------------------- -------------
Other
Beginning Charge to Acquisitions Charge to Write-offs Ending
Balance Cost/ (a) Cost/ net of Balance
Expense (c) Expense (b) Recoveries
Reserve for Accounts
Receivable
Year ended December 31, 2001 $ 50 $ 49 $ - $ - $ 35 $ 64
Year ended December 31, 2002 64 110 220 - 60 334
Year ended December 31, 2003 334 132 - - 221 245
Reserve for Inventory
Year ended December 31, 2001 $ - $739 $313 $ - $739 $ 313
Year ended December 31, 2002 313 641 - 1,958 548 2,364
Year ended December 31, 2003 2,364 2,549 - (1,311) 782 2,820
(a) Includes effects of business acquisitions, Tempco - April 2001, Versaform -
May 2002, Stretch Forming Corporation - June 2002, and Southern Stretch
Forming - September 2002.
(b) During year ended December 2002, due to production inefficiencies, the
Company established a reserve for lower of cost or market (LOCOM) of
$1,958. In the year ended December 2003, improved efficiencies and price
increases on selected products resulted in a reduced requirement of $1,311
of this reserve.
(c) In the fourth quarter of 2003, Management increased the Company's reserves
for obsolescence and slow moving inventory by $1,421 based on an evaluation
of the current market place and customer buying patterns.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 22, 2003, Ernst & Young, LLP informed the Company that Ernst &
Young was resigning as the Company's independent accountants, effective upon the
completion of the quarterly review of the Company's fiscal quarter ended
September 30, 2003. Ernst & Young's resignation became effective on November
14, 2003.
The reports of Ernst & Young on the financial statements of the Company for the
past two fiscal years contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with its audit for each of the two most recent fiscal years and
through November 14, 2003, the date of Ernst & Young's resignation, there had
been no disagreements with Ernst & Young on any matter of accounting principles
or practices, financial statement disclosures or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Ernst & Young, would
have caused Ernst & Young to make reference thereto in their report in the
financial statements for such years.
During the 2001 and 2002 fiscal years, and through November 14, 2003, the dates
of Ernst & Young's resignation, there have been no reportable events as defined
in Registration S-K, Item 304(a)(1)(v).
Effective as of December 29, 2003, BDO Seidman, LLP accepted engagement to serve
as the Company's Independent Certified Public Accountants. The Company's Audit
Committee selected, and its Board of Directors ratified the appointment of, BDO
Seidman, LLP to serve as the Company's Independent Certified Public Accountants.
During the Company's two most recent fiscal years ended December 31, 2001 and
2002, and through December 29, 2003, the Company did not consult with BDO
Seidman, LLP with respect to the application of accounting principles to a
specified transaction, either contemplated or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or any
matter that was either the subject of a disagreement or a reportable event.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Item 9A. Controls and Procedures.
As of end of the fiscal quarter ended December 31, 2003, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation with the
participation of other members of the Company's management as they deemed
appropriate, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based upon and on the
date of the end of the Company's last fiscal quarter, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective in all material respects in ensuring that
material information required to be disclosed in periodic reports the Company
files with the Securities and Exchange Commission is recorded, processed,
summarized and reported in a timely manner.
This portion of our Annual report is our disclosure of the conclusions of our
management, including our Chief Executive Officer and Chief Financial Officer,
regarding the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report, based on management's evaluation of
those disclosure controls and procedures. You should read this disclosure in
conjunction with the certifications attached as Exhibit 31.1 and 31.2 to this
annual report for a more complete understanding of the topics presented.
In connection with its 2003 year-end audit, our independent certificate public
accountant has identified a material weakness relating to our internal controls
and procedures. While we are in the process of implementing a more effective
system of controls and procedures, we have instituted controls, procedures and
other changes to ensure that information required to be disclosed in this annual
report on Form 10-K has been recorded, processed, summarized and reported
accurately.
The incremental steps that we have taken as a result of the aforementioned
control deficiencies to ensure that all material information about our company
is accurately disclosed in this report included the application of additional
methods and techniques to evaluate the accuracy of inventory costing and
adequacy of inventory reserves.
Based in part on the steps listed above, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported accurately within the time periods
specified in Securities and Exchange Commission rules and forms.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
(Dollar amounts in thousands, except share and per share data)
December 31, 2003
Item 9A. Controls and Procedures. (cont)
In addition, in order to address further the deficiencies described above and to
improve our internal disclosure and control procedures for future periods, we
will:
1. Review, select and implement available improvements to information
systems for inventory accounting;
2. Perform a review of internal controls and procedures in connection
with Section 404 of Sarbanes Oxley legislative requirements;
3. Perform more detailed quarterly reconciliations and analysis of the
company's inventory accounts related to its distributors;
4. Continue to enhance staffing to provide sufficient resources to
accomplish the foregoing objectives.
These steps will constitute significant changes in internal controls. We will
continue to evaluate the effectiveness of our disclosure controls and internal
controls and procedures on an ongoing basis, and will take further action as
appropriate.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls during the fourth
quarter.
PART III
Item 10. Directors and Executive Officers.
The information contained under the caption "Information About the Nominees and
Current Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the Company's 2004 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference.
The following is a list of the current executive officers of the Company, their
ages, their positions with the Company, and their principal occupations for at
least the past five years.
Name Age Position
Ronald S. Saks 60 Chief Executive Officer, President and Director
Robert Grah 49 Vice President - Central Region
Brian Olsen 44 Vice President - West Region
Lawrence E. Dickinson 44 Chief Financial Officer and Secretary
Set forth below are biographies of each executive officer of the Company.
Ronald S. Saks has served as Chief Executive Officer and President and as a
director of the Company since 1984. Prior to his employment with the Company,
Mr. Saks was an Executive Vice President with Associated Transports, Inc. for
eight years and was a Tax Manager with Peat Marwick Mitchell & Co., now known as
KPMG Peat Marwick LLP, for the eight years prior thereto. Mr. Saks obtained his
Bachelor's degree in Business Administration from Washington University in 1966.
He also studied engineering at the Massachusetts Institute of Technology, and
completed an executive education program at Stanford University. Mr. Saks is a
Certified Public Accountant.
Robert T. Grah joined the Company in 1984 as Production Control Manager. Mr.
Grah has held various management positions with the Company, including
Purchasing and Contracts Manager, Maintenance Manager, Facilities Manager,
General Manager of LMI Finishing, Inc., and was promoted to his current position
as Vice President - Central Region in December 2002. Prior to joining the
Company, Mr. Grah was a supervisor for Associated Transports, Inc. and a manager
for Beneficial Finance. Mr. Grah's education has included Florissant Valley
Community College, and numerous continuing education courses in management,
total preventative maintenance, and various environmental and technical
subjects.
Lawrence E. Dickinson has been the Chief Financial Officer of the Company since
1993. He served as a Financial Analyst and Controller for LaBarge, Inc. from
1984 to 1993 and as a Cost Accountant with Monsanto from 1981 to 1984. Mr.
Dickinson received his Bachelor's degree in Accounting from the University of
Alabama and received his Master's degree in Business Administration from
Washington University in 1994.
Brian Olsen graduated from the University of Washington with a BA in Business
Administration in 1982. He concentrated in marketing and finance. From 1982
through 1997, Mr. Olsen worked for Tramco/BF Goodrich, a transport category
aircraft repair and maintenance facility. Mr. Olsen began as their Director of
Marketing and became Chief Operating Officer in 1987. In 1988, Tramco was
purchased by BF Goodrich. Mr. Olsen was appointed General Manager of the
division and served in that capacity from 1992 to 1997. Mr. Olsen served as
president of a small marine manufacturing and service company from 1997 to 2000.
Mr. Olsen then managed two divisions of Milgard Manufacturing, a window
manufacturing company owned by Masco Corporation from 2000 to 2002. Mr. Olsen
joined LMI as a Market Sector Director in 2002 and then became the Vice
President - West Coast Region in October of 2003.
Item 11. Executive Compensation.
The information contained under the captions "Directors Compensation,"
"Executive Compensation," "Option/SAR Grants in Last Fiscal Year," "Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option SAR Values,"
"Employment Arrangements with Named Officers", and "Compensation Committee
Report" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the Company's 2004 Annual Meeting of Shareholders, which
involves the election of directors, is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A for the
Company's 2004 Annual Meeting of Shareholders, which involves the election of
directors, is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Certain Transactions" in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A for
the Company's 2004 Annual Meeting of Shareholders, which involves the election
of directors, is incorporated herein by this reference.
Item 14. Principal Accountant Fees and Services.
The information contained under the caption "Fees Billed by Independent Public
Accountants" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the Company's 2004 Annual Meeting of Shareholders, which
involves the election of directors, is incorporated herein by this reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. For a list of the Consolidated Financial Statements of the Company
included as part of this report, see the index at Item 8.
2. Other than Schedule II - Valuation and Qualifying Accounts, all
schedules have been omitted as the required information is not present
in sufficient amounts or the required information is included
elsewhere in the Consolidated Financial Statement or notes thereto.
3. Exhibits:
See Exhibit Index (each management contract or
compensatory plan or arrangement listed therein is
identified).
(b) Reports on Form 8-K:
(i) On November 17, 2003, the Company filed a Report on Form 8-K,
announcing third quarter results.
(ii) On November 18, 2003, the Company filed a Report on Form 8-K,
announcing the effectiveness of the resignation of Ernst & Young, LLP
as the Company's independent accountants.
(iii)On December 4, 2003, the Company filed a Report on Form 8-K,
announcing the Company's entry into a long-term contract with
Bombardier, and the appointment of two independent directors of the
Company's Board of Directors.
(iv) On December 11, 2003, the Company filed a Report on Form 8-K,
announcing the restructuring plans of its facilities located in
Wichita, Kansas.
(v) On December 28, 2003, the Company filed a report on Form 8-K,
announcing the appointment of BDO Seidman, LLP to serve as the
Company's independent accountants.
(c) Exhibits:
See Exhibit Index
(d) All schedules have been omitted as the required information is not present
in sufficient amounts or the required information is included elsewhere in
the Consolidated Financial Statement or notes thereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the County of St.
Charles and State of Missouri on the 14th day of April, 2004.
LMI AEROSPACE, INC.
By: /s/ Ronald S. Saks
--------------------------------------
Ronald S. Saks
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Ronald S. Saks
- ------------------------- Chief Executive Officer, April 14, 2004
Ronald S. Saks President, and Director
/s/ Joseph Burstein
- ------------------------- Chairman of the Board, and April 14, 2004
Joseph Burstein Director
/s/ Lawrence E. Dickinson
- ------------------------- Chief Financial Officer and April 14, 2004
Lawrence E. Dickinson Secretary
/s/ Duane Hahn
- ------------------------- Vice President, Regional April 14, 2004
Duane Hahn Manager and Director
/s/ Sanford S. Neuman
- ------------------------- Assistant Secretary and April 14, 2004
Sanford S. Neuman Director
/s/ Thomas Unger
- ------------------------- Director April 14, 2004
Thomas Unger
/s/ Brian D. Geary
- ------------------------- Director April 14, 2004
Brian D. Geary
/s/ Paul L. Miller, Jr.
- ------------------------- Director April 14, 2004
Paul L. Miller, Jr.
/s/ John M. Roeder
- ------------------------- Director April 14, 2004
John M. Roeder
EXHIBIT INDEX
Exhibit
Number Description
2.1 Asset Purchase Agreement by and among Tempco Engineering, Inc. and Hyco
Precision, Inc., the shareholders of Tempco Engineering, Inc. and Hyco
Precision, Inc. and Metal Corporation, dated as of March 28, 2001,
filed as Exhibit 2.1 to the Registrant's Form 8K filed April 17, 2001
and incorporated herein by reference.
2.2 Stock Purchase Agreement between LMI Aerospace, Inc. and Brian Geary
dated as of May 15, 2002, filed as Exhibit 2.1 to the Registrant's Form
8-K filed May 16, 2002 and incorporated herein by reference.
3.1 Restated Articles of the Registrant previously filed as Exhibit 3.1 to
the Registrant's Form S-1 (File No. 333-51357) dated as of June 29,
1998 (the "Form S-1") and incorporated herein by reference.
3.2 Amended and Restated By-Laws of the Registrant previously filed as
Exhibit 3.2 to the Form S-1 and incorporated herein by reference.
3.3 Amendment to Restated Articles of Incorporation dated as of July 9,
2001 filed as Exhibit 3.3 to the Registrant's Form 10-K filed April 1,
2002, and incorporated herein by reference.
4.1 Form of the Registrant's Common Stock Certificate previously filed as
Exhibit 4.1 to the Form S-1 and incorporated herein by reference.
10.1+ Employment Agreement, dated January 1, 1997, between the Registrant and
Ronald S. Saks, as previously filed as Exhibit 10.2 to the Form S-1 and
incorporated herein by reference.
10.2 Lease Agreement, dated November 25, 1991, between the Registrant and
Roy R. Thoele and Madonna J. Thoele, including all amendments (Leased
premises at 3000 Highway 94 North), previously filed as Exhibit 10.8 to
the Form S-1 and incorporated herein by reference.
10.3 Lease Agreement, dated June 28, 1988, between the Registrant and J & R
Sales, including all amendments (Leased premises at 204 H Street),
previously filed as Exhibit 10.9 to the Form S-1 and incorporated
herein by reference.
10.4 Lease Agreement, dated May 6, 1997, between the Registrant and Victor
Enterprises, LLC, including all amendments (Leased premises at 101
Western Avenue S), previously filed as Exhibit 10.10 to the Form S-1
and incorporated herein by reference.
10.5 Lease Agreement, dated February 1, 1995, between the Registrant and RFS
Investments (Leased premises at 2621 West Esthner Court) previously
filed as Exhibit 10.11 to the Form S-1 and incorporated herein by
reference.
10.6+ Profit Sharing and Savings Plan and Trust, including amendments nos. 1
through 6, previously filed as Exhibit 10.12 to the Form S-1 and
incorporated herein by reference.
10.7 Loan Agreement between the Registrant and Magna Bank, N.A. dated August
15, 1996, including amendments nos. 1 through 3, previously filed as
Exhibit 10.13 to the Form S-1 and incorporated herein by reference.
10.8 Indenture of Trust and Loan Agreement, both with the Industrial
Development Authority of St. Charles County, Missouri and dated as of
September 1, 1990 previously filed as Exhibit 10.14 to the Form S-1 and
incorporated herein by reference.
10.9 General Terms Agreement, Special Terms Agreement and Warranty
Agreements, between the Registrant and Boeing Seattle previously filed
as Exhibit 10.15 to the Form S-1 and incorporated herein by reference.
10.10 Form of Master Order Agreement covering Boeing 777 and 747 Programs and
Master Order Agreement covering Boeing 737 Leading Edge Program, both
between the Registrant and Boeing North American, previously filed as
Exhibit 10.16 to the Form S-1 and incorporated herein by reference.
10.11 Form of Contract between the Registrant and Boeing Wichita previously
filed as Exhibit 10.17 to the Form S-1 and incorporated herein by
reference.
10.12 General Conditions (Fixed Price - Non-Governmental) for the G-14/F100
Program, General Conditions for the Wing Stub/Lower 45 Program Boeing
Model 767 Commercial Aircraft and Form of Master Agreement, all with
Vought previously filed as Exhibit 10.18 to the Form S-1 and
incorporated herein by reference.
10.13+ Amended and Restated 1998 Stock Option Plan, previously filed as
Exhibit 10.37 to the Registrant's Form S-8 (File No. 333-38090) dated
as of May 24, 2000 and incorporated herein by reference.
10.14 General Terms Agreement between Boeing Company and Leonard's Metal,
Inc. with Special Business Provision attached, previously filed as
Exhibit 10.15 to the Registrant's Form 10-Q dated as of November 16,
1998 and incorporated herein by reference.
10.15 Lease Agreement between Mother Goose Corporation and Precise Machine
Partners L.L.P. (Leased premises at 2205 and 2215 River Hill Road,
Irving, Texas) dated August 25, 1998, previously filed as Exhibit 10.24
to the Registrant's Form 10-K for the fiscal year ended December 31,
1999, and incorporated herein by reference.
10.16+ Employment Agreement effective as of January 1, 2000, between LMI
Aerospace, Inc. and Lawrence E. Dickinson, previously filed as Exhibit
10.32 to the Form 10-K for the fiscal year ended December 31, 2000, and
incorporated herein by reference.
10.17 Fourth Amendment to Loan Agreement dated as of October 30, 2000,
previously filed as Exhibit 10.37 to the Registrant's Form 8-K dated
December 26, 2000 and incorporated herein by reference.
10.19 Fifth Amendment to and Restatement of Loan Agreement dated as of April
2, 2001, previously filed as Exhibit 10.1 to the Registrant's Form 10-Q
dated August 9, 2001, and incorporated herein by reference.
10.20 Sixth Amendment to Loan Agreement dated as of October 30, 2001, filed
as Exhibit 10.2 to the Registrant's Form 10-Q dated November 14, 2001,
and incorporated herein by reference.
10.21 Business Reformation Agreement between Leonard's Metal, Inc. and
Lockheed Martin Aeronautics Company dated September 21, 2001, filed as
Exhibit 10.1 to the Registrant's Form 10-Q dated November 14, 2001, and
incorporated by reference.
10.22 Lease dated April 2, 2001 by and between Peter Holz and Anna L. Holz
Trustees of the Peter and Anna L. Holz Trust dated 2/8/89, as to an
undivided one-half interest, and Ernest R .Star and Linda Ann Zoettl,
Trustees under the Ernest L. Star and Elizabeth H. Star 1978 Trust
dated August 25, 2978, as to an undivided one-half interest and Metal
Corporation, filed as Exhibit 10.27 to the Registrant's Form 10-K for
the fiscal year ended December 31, 2001, and incorporated herein by
reference.
10.23 Lease dated April 2, 2001, between Tempco Engineering, Inc. and Metal
Corporation, filed as Exhibit 10.28 to the Registrant's Form 10-K for
the fiscal year ended December 31, 2001, and incorporated herein by
reference.
10.24+ Employment Agreement Effective as of January 1, 2002 between LMI
Aerospace, Inc. and Robert T. Grah, filed as Exhibit 10.29 to the
Registrant's Form 10-K for the fiscal year ended December 31, 2001, and
incorporated herein by reference.
10.25+ Employment Agreement Effective as of January 1, 2002 between LMI
Aerospace, Inc. and Duane Hahn , filed as Exhibit 10.30 to the
Registrant's Form 10-K for the fiscal year ended December 31, 2001, and
incorporated herein by reference.
10.26 Seventh Amendment to and Restatement of Loan Agreement dated November
30, 2001, filed as Exhibit 10.1 to the Registrant's Form 10-Q filed May
15, 2002 and incorporated herein by reference.
10.27 Eighth Amendment to and Restatement of Loan Agreement dated May 15,
2002, filed as Exhibit 10.1 to the Registrant's Form 8-K filed May 16,
2002 and incorporated herein by reference.
10.28 Ninth Amendment to Loan Agreement dated June 30, 2002, filed as Exhibit
10.1 to the Registrant's Form 10-Q filed August 14, 2002 and
incorporated herein by reference.
10.29 Tenth Amendment to Loan Agreement dated November 13, 2002, filed as
Exhibit 10 to the Registrant's Form 10-Q filed August 14, 2002 and
incorporated herein by reference.
10.30 Eleventh Amendment to Loan Agreement dated April 15, 2003, filed as
Exhibit 10.1 to the Registrant's Form 8-K filed April 23, 2003 and
incorporated herein by reference.
10.31 Twelfth Amendment to Loan Agreement dated January 5, 2004, filed as
Exhibit 10 to the Registrant's Form 8-K filed January 6, 2004 and
incorporated herein by reference.
10.32 Thirteenth Amendment to Loan Agreement dated March 30, 2004, filed as
Exhibit 10.1 to the Registrant's Form 8-K filed March 31, 2004 and
incorporated herein by reference.
10.33 Multi-year contract between Leonard's Metal, Inc. and Gulfstream
Aerospace dated September 3, 2003, filed as Exhibit 10.1 to the
Registrant's Form 8-K filed September 12, 2003 and incorporated herein
by reference.
10.34 Special Business Provisions Agreement between Leonard's Metal, Inc. and
Boeing Company dated March 20, 2003, filed as Exhibit 10.2 to the
Registrant's Form 8-K filed September 12, 2003 and incorporated herein
by reference.
10.35 General Terms Agreement between Leonard's Metal, Inc. and the Boeing
Company, filed as Exhibit 10.3 to the Registrant's Form 8-K filed
September 12, 2003 and incorporated herein by reference.
10.36 Net Industrial lease between Nonar Enterprises and Versaform
Corporation, dated as of September 12, 2003, filed as Exhibit 10.1 to
the Registrant's Form 10-Q filed November 14, 2003 and incorporated
herein by reference.
21.1 List of Subsidiaries of the Registrant (filed herewith).
23.1 Consent of BDO Seidman, LLP (filed herewith).
23.2 Consent of Ernst & Young, LLP (filed herewith).
31.1 Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief
Executive Officer (filed herewith).
31.2 Rule 13a-14(a) Certification of Lawrence E. Dickinson, Chief Financial
Officer (filed herewith).
32 Section 1350 Certification (filed herewith).
99.P Code of Business Conduct and Ethics (filed herewith).
- -----------------------------------------
+ Management contract or compensatory plan or arrangement required to be filed
as exhibit to this report.
Exhibit 21.1
Subsidiaries of Registrant
Subsidiary Jurisdiction
---------- ------------
LMI Finishing, Inc. Missouri
Leonard's Metal, Inc. Missouri
Precise Machine Partners, L.L.P. Texas
Precise Machine Company Texas
Tempco Engineering, Inc. Missouri
Versaform Corporation California
LMIV Holding Ltd. British Columbia, Canada
Exhibit 23.1
Consent of Independent Certified Public Accountants
We hereby consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-70259 and No. 333-38090) pertaining to the LMI
Aerospace, Inc. Profit Sharing and Savings Plan and Trust, the Amended and
Restated LMI Aerospace, Inc. 1998 Stock Option Plan, and the 1989 Employee
Incentive Stock Option Plan of our report dated March 31, 2004, relating to the
consolidated financial statements and financial statement schedule of LMI
Aerospace, Inc., which appears in this Form 10-K for the year ended December 31,
2003. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
/s/ BDO Seidman, LLP
Chicago, Illinois
April 14, 2004
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-70259 and No. 333-38090) pertaining to the LMI Aerospace, Inc.
Profit Sharing and Savings Plan and Trust, the Amended and Restated LMI
Aerospace, Inc. 1998 Stock Option Plan, and the 1989 Employee Incentive Stock
Option Plan of our report dated April 15, 2003, with respect to the consolidated
financial statements, as amended, of LMI Aerospace, Inc. included in the Annual
Report (Form 10-K) for the year ended December 31, 2003.
/s/ Ernst & Young LLP
St. Louis, Missouri
April 14, 2004
Exhibit 31.1
CERTIFICATIONS
I, Ronald S. Saks, certify that:
1. I have reviewed this annual report on Form 10-K of LMI Aerospace, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's independent certified public accountants and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2004 /s/ Ronald S. Saks
-------------------------------------
Ronald S. Saks
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATIONS
I, Lawrence E. Dickinson, certify that:
1. I have reviewed this annual report on Form 10-K of LMI Aerospace, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's independent certified public accountants and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2004 /s/ Lawrence E. Dickinson
-------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
EXHIBIT 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the
undersigned officers of LMI Aerospace, Inc., a Missouri corporation (the
"Company"), does hereby certify that, to the best of their knowledge:
The Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the
"Form 10-K") of the Company fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained
in the Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: April 14, 2004 /s/ Ronald S. Saks
-------------------------------------
Ronald S. Saks
President and Chief Executive Officer
Date: April 14, 2004 /s/ Lawrence E. Dickinson
-------------------------------------
Lawrence E. Dickinson
Secretary and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to LMI Aerospace, Inc. and will be retained by LMI Aerospace, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.