SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30,
1998.
[ ] 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: 0-24293
LMI AEROSPACE, INC.
(Exact name of registrant as specified in its charter)
Missouri 43-1309065
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3600 Mueller Road
St. Charles, Missouri 63302
(Address of Principal Executive Offices) (ZIP Code)
(314) 946-6525
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of class Number of Shares outstanding
of Common Stock as of September 30, 1998
--------------- ----------------------------
Common Stock, par value $.02 per share 8,419,422
-----------
LMI AEROSPACE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDING SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
of December 31, 1997 and September 30, 1998
Condensed Consolidated Statements of Operations for the three months
and the nine months ending September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the nine months
ending September 30, 1998 and 1997
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE PAGE
LMI Aerospace, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31, September 30,
1997 1998
-----------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 244 15,643
Trade accounts receivable 8,058 10,073
Inventories 8,701 10,781
Prepaid expenses 147 265
Other current assets 109 133
Deferred income taxes 502 502
-----------------------------
Total current assets 17,761 37,397
Property, plant, and equipment, net 15,652 18,691
Other assets 216 1,844
-----------------------------
$ 33,629 $ 57,932
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,318 $ 3,332
Amounts due to broker -- 2,244
Accrued expenses 1,940 3,846
Income taxes payable 430 289
Demand note payable to stockholder 250 -
Current installments of long-term debt 567 157
-----------------------------
Total current liabilities 6,505 9,868
Long-term debt, less current installments 9,274 2,761
Deferred income taxes 1,099 1,099
-----------------------------
Total noncurrent liabilities 10,373 3,860
Stockholders' equity:
Common stock of $.02 par value; authorized
28,000,000 shares; issued 5,908,471 at
December 31, 1997 and 8,734,422 at
September 30, 1998, respectively 118 175
Additional paid-in capital 1,543 26,149
Treasury Stock, at cost, 315,000 shares in 1998 -- (2,244)
Retained earnings 15,090 20,124
------------------------------
Total stockholders' equity 16,751 44,204
------------------------------
==============================
$ 33,629 $ 57,932
==============================
See accompanying notes.
LMI Aerospace, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
1997 1998 1997 1998
------------------------------------------------------------------
Net sales $ 13,975 $ 15,165 $ 41,048 $ 47,158
Cost of sales 9,598 10,454 29,258 32,798
------------------------------------------------------------------
Gross profit 4,377 4,711 11,790 14,360
Selling, general, and administrative
expenses 1,567 2,267 4,728 6,000
------------------------------------------------------------------
Income from operations 2,810 2,444 7,062 8,360
Interest (expense)/income (245) 84 (776) (379)
------------------------------------------------------------------
Income before income taxes 2,565 2,528 6,286 7,981
Provision for income taxes 987 850 2,420 2,921
==================================================================
Net income $ 1,578 $ 1,678 $ 3,866 $ 5,060
==================================================================
Net income per common share $ .27 $ .19 $ .66 $ .74
==================================================================
Net income per common share - assuming
dilution $ .27 $ .19 $ .66 $ .72
==================================================================
Weighted average common shares
outstanding 5,822,839 8,675,074 5,822,839 6,870,833
==================================================================
Weighted average dilutive stock options
outstanding 86,164 167,209 68,474 147,205
==================================================================
See accompanying notes.
LMI Aerospace, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
For the Nine Months Ended September 30
1997 1998
----------------------------------------
Operating activities
Net income $ 3,866 $ 5,060
Adjustments to reconcile net income to
Net cash provided by operating activities:
Net cash provided by operating activities:
Depreciation and amortization 1,505 1,915
Changes in operating assets and liabilities:
Trade accounts receivable (2,106) (1,635)
Inventories (912) (1,617)
Prepaid expenses 11 (114)
Other current assets 21 (68)
Other assets 35 84
Income taxes payable (48) (141)
Accounts payable 373 (23)
Accrued expenses 857 1,728
---------------------------------------
Net cash provided by operating activities 3,602 5,189
Investing activities
Additions to property, plant, and equipment, net (2,258) (3,991)
Acquisition of company, net of cash acquired - (2,791)
----------------------------------------
Net cash used in investing activities (2,258) (6,782)
Financing activities
Proceeds from issuance of long-term debt 391 2,073
Principal payments on long-term debt (1,987) (9,247)
Proceeds from exercise of stock options - 29
Proceeds from subscriptions receivable - 600
Proceeds from issuance of common stock, net 297 23,537
Proceeds from issuance of treasury stock 5 --
----------------------------------------
Net cash used in financing activities (1,294) 16,992
Net change in cash and cash equivalents 50 15,399
Cash and cash equivalents, beginning of period 205 244
----------------------------------------
Cash and cash equivalents, end of period $ 255 $ 15,643
========================================
Supplemental Disclosures of Non-Cash Flow Information
Common Stock contributed to profit sharing plan - $ 296
Stock bonus issued to officer of Company - 200
Treasury stock acquired and due to broker 2,244
See accompanying notes.
LMI Aerospace, Inc.
Notes to Condensed Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data))
(Unaudited)
September 30, 1998
1. Accounting Policies
Basis of Presentation
LMI Aerospace, Inc. (the Company) (formerly Leonard's Metal, Inc.) is a
fabricator, finisher, and integrator of formed, close tolerance aluminum and
specialty alloy components for use by the aerospace industry. 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; and Irving, Texas (see Note 3).
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair representation
have been included. Operating results for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. These financial statements should
be read in conjunction with the consolidated financial statements and
accompanying footnotes for the year ended December 31, 1997 included in the
Company's prospectus dated June 29, 1998 as filed with the SEC.
Earnings per Common Share
In 1997, the Company adopted SFAS No. 128, Earnings per Share, which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. All earnings per share amounts for all periods have
been presented or, where appropriate, restated to conform to SFAS No. 128.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
2. Initial Public Offering
On April 27, 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission relating to
an initial public offering of 2,300,000 shares of the Company's unissued common
stock (345,000 additional shares if the underwriters' over-allotment option was
exercised). In connection with the initial public offering, the Company effected
a 2.29-for-one stock dividend of the Company's common stock payable June 1, 1998
to shareholders of record on May 1, 1998. All references in the accompanying
financial statements to the number of shares of common stock and per common
share amounts have been retroactively adjusted to reflect the stock dividend. In
addition, the Company's capital structure was changed to reflect 28,000,000
shares of common stock and 2,000,000 shares of preferred stock authorized.
During 1998, the Company completed its Initial Public Offering ("IPO"), selling
2,645,000 shares (including the underwriters 15% over allotment) at $10.00 per
share ($23.5 million after fees and expenses of $2.9 million).
3. Acquisition
On August 11, 1998, the Company announced that it had reached an agreement in
principal to acquire the assets of Precise Machine Company ("Precise"), based in
Irving, Texas. Precise manufactures precision machined components used primarily
by the defense, aerospace and financial service industries and had sales of
approximately $3 million for the year ended 1997. The sale was completed on
August 25, 1998. The purchase price for the net assets acquired was
approximately $2,844 in cash.
This acquisition has been accounted for by the purchase method, and accordingly,
the results of operations were included in the Company's Condensed Consolidated
Statements of Operations from the date of acquisition. The purchase price has
been allocated to the assets acquired and liabilities assumed based on their
fair value at the date of the acquisition. The excess of the purchase price over
the fair value of net assets acquired, totaling $1,728, was allocated to
goodwill, and is being amortized over a 25-year period on a straight-line basis.
Amortization of Goodwill through September 30, 1998 was approximately $6.
4. Equity Transactions
During April 1998, the Company issued 32,900 new shares of common stock as
compensation to one of its officers, pursuant to an employment agreement, and
recorded approximately $200 of deferred compensation expense to be recognized
over the subsequent 24 months. In addition, the Company sold 98,700 shares of
common stock to one of its officers, pursuant to an employment agreement. The
Company had no compensation obligation related to this transaction.
On September 25, 1998, the Company announced that its Board of Directors
authorized the Company's repurchase of up to 600,000 shares of the Company's
common stock. On September 29, 1998, the Company purchased 315,000 shares in the
open market at a price of $7.125 per share and this transaction was recorded at
cost in stockholders' equity with the corresponding liability in Amounts due to
Broker.
5. Inventories
Inventories consist of the following:
December 31, September 30,
1997 1998
------------------------------------
Raw materials $2,990 $ 4,321
Work in process 3,875 3,610
Finished goods 1,836 2,850
====================================
$8,701 $ 10,781
====================================
6. Property, Plant, and Equipment
Property, plant, and equipment consist
of the following:
December 31, September 30,
1997 1998
------------------------------------
Land $ 638 $ 638
Buildings 7,405 8,677
Machinery and equipment 18,376 20,970
Software costs 523 607
Leasehold improvements 426 832
Construction in progress 298 790
------------------------------------
27,666 32,514
Less accumulated depreciation (12,014) (13,823)
====================================
$ 15,652 $ 18,691
====================================
7. Long-Term Debt
Long-term debt consists of the following:
December 31, September 30,
1997 1998
-----------------------------------------
Revolving line of credit, interest payable monthly, at a
variable rate $ 1,281 $ --
Industrial Development Revenue Bond, interest payable
monthly, at a variable rate 2,500 2,500
Term loan note payable, principal and interest payable
monthly, at a fixed rate of 9.0% 3,482 --
Real estate note payable, principal and interest payable
monthly, at a variable rate 428 --
Notes payable, principal and interest payable monthly, at
fixed rates, ranging from 8.78% to 9.56% 1,233 339
Subordinated debentures, interest payable monthly, at a fixed
rate of 11% 800 --
Capital lease obligations 117 79
-----------------------------------------
9,841 2,918
Less current installments 567 157
=========================================
$ 9,274 $ 2,761
=========================================
On March 31, 1998, the Company secured a $15,000 unsecured line of credit with
Magna Bank to fund various corporate needs. Interest is payable monthly based on
a quarterly cash flow leverage calculation and the LIBOR rate. This facility
matures on March 30, 2000 and requires compliance with certain non-financial and
financial covenants including minimum tangible net worth and EBITDA
requirements. The credit facility prohibits the payment of cash dividends on
common stock without Magna's prior written consent. The Company drew upon the
line in March 1998 to retire certain outstanding debt balances, including the
previous revolving line of credit ($1,281 at December 31, 1997), demand notes to
former shareholders ($250 at December 31, 1997), and the subordinated debentures
($800 at December 31, 1997). On July 6, 1998, the Company received the proceeds
($21,390) from the initial public offering and retired certain outstanding debt
balances, including the term loan note payable ($3,351 at June 30, 1998) and the
real estate note payable ($416 at June 30, 1998). In addition, the Company paid
down the revolving line of credit ($2,309 at June 30, 1998).
The Industrial Revenue Bond ("IRB") bears interest at a variable rate, which is
based on the existing market rates for comparable outstanding tax-exempt bonds
(4.1 percent and 4.2 percent at December 31, 1997 and September 30, 1998,
respectively), not to exceed 12 percent. The IRB is secured by a letter of
credit, and Magna Bank NA ("Magna"), which holds 100 percent participation in
the letter of credit, has a security interest in certain equipment. The bond
matures in November 2000.
The Company entered into various notes payable for the purchase of certain
equipment. The notes are payable in monthly installments including interest
(ranging from 8.78 percent to 9.56 percent through November 2002). The notes
payable are secured by equipment. During the quarter, certain notes payable were
paid off at the discretion of management.
8. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following report
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled Management's Discussion and
Analysis of Financial Conditions and Results of Operations.
Overview
LMI Aerospace, Inc. is a leading fabricator, finisher and integrator of formed
and machined, close tolerance aluminum and specialty alloy components for use by
the aerospace industry. The Company has been engaged in manufacturing components
for a wide variety of aerospace applications. 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 maintains multi-year contracts with
leading original equipment manufacturers and primary subcontractors of
commercial, corporate, regional and military aircraft. Such contracts, which
govern the majority of the Company's sales, designate the Company as the sole
supplier of the aerospace components sold under the contracts. Customers include
Boeing, Lockheed Martin, Northrop Grumman, Gulfstream, Learjet, Canadair,
DeHavilland and PPG. The Company manufactures approximately 14,000 parts for
integration into such models as Boeing's 737, 747, 757, 767 and 777 commercial
aircraft and F-15, F-18, C-17 military aircraft, Canadair's RJ regional
aircraft, Gulfstream's G-IV and G-V corporate aircraft, and Lockheed Martin's
F-16 and C-130 military aircraft.
The Company has executed new contracts this year with several of its key
customers. During the third quarter, the Company reached agreement with Boeing
Seattle to extend its current long-term contract for five years. The current
contract was to expire on December 31, 1998 and now expires on December 31,
2003. Earlier this year, the Company entered into a new 10-year contract with
the Wichita division of Boeing and reached an agreement to renew its contract
with Lockheed Martin, extending the agreement for an additional 4 years.
Additionally, the Company has begun to accept orders and ship components to
Boeing-St. Louis (formerly McDonnell Douglas, Inc.) on several military
platforms, including the F-15, F-18 and C-17. Although the orders under this
program are just commencing and had minimal effect on the first nine months of
1998, they are indicative of the Company's strategy to diversify its revenue
base.
In August, 1998, the Company purchased the assets of Texas based Precise Machine
Company ("Precise"), a company specializing in the manufacture of precision
machined components to the aerospace, financial services, and printing
industries. The Company believes that the addition of Precise will expand its
integration capabilities to better support its customer base as well as allow it
to gain access to non-aerospace customers. This acquisition is also consistent
with the Company's strategy of locating facilities in close proximity to its
customers. Precise provides the Company with a facility near Northrop Grumman
and Lockheed Martin, customers also served by Precise.
Results of Operations - Quarter Ended September 30, 1998 compared to September
30, 1997.
Net Sales. Net sales for the quarter ended September 30, 1998 rose 8.5% from
$14.0 million in 1997 to $15.2 million. This increase was primarily due to the
Company's participation on the 737 New Generation ("737 NG") model aircraft
which added $1.3 million in sales in the third quarter rising to $3.0 million
from $1.7 million.
Additionally, net sales on the 747 model aircraft contributed an additional $0.4
million, rising to $3.6 million from $3.2 million. Although the third quarter of
1998 continued to be positively impacted by the 747, Boeing has announced a 30%
reduction in output on this model and, therefore, reductions in volume will
likely occur in future periods. With production rates declining and scheduled to
end in 2000, sales of the 737 Classic components were down $1.2 million,
dropping from $2.2 million to $1 million.
Gross Profit. Gross profit increased 7.6% in the third quarter of 1998 to $4.7
million (31.1% of net sales) from $4.4 million (31.3% of net sales). This
improvement in gross profit was primarily due to the increase in sales volume.
Selling, General, and Administrative Expenses ("SG&A"). SG&A increased 44.6% in
the third quarter of 1998 to $2.3 million (14.9% of net sales) from $1.6 million
(11.2% of net sales) in 1997. Included in the third quarter SG&A is a $0.3
million charge from the settlement of a claim that was disclosed in the S-1
filed in June, 1998. Excluding this charge, SG&A would have been 13.1% of net
sales.
Income Taxes. The effective tax rate in the third quarter of 1998 was 33.6%
compared to 38.5% in 1997. During the third quarter, the Company recognized the
benefit of state income tax credits relating to 1997 income taxes of $0.1
million. Excluding this benefit, the effective tax rate would have been 37.5%.
Net Income. As a result of the foregoing, the net income rose 6.4% in the third
quarter of 1998, rising to $1.7 million from $1.6 million.
Results of Operations - Nine Months Ended September 30, 1998 compared to
September 30, 1997
Net Sales. Net sales increased 14.9% in the nine months ended September 30,
1998, rising from $41.0 million in 1997 to $47.2 million. Net sales increased on
all Boeing 7-series models with the exception of the 737 Classic, which Boeing
is phasing out of production. The increase in net sales was primarily due to the
Company's participation on the 737 NG aircraft which resulted in a net sales
increase of $5.8 million in 1998, growing to $9.2 million from $3.4 million. The
first nine months of 1998 also were aided by increased shipments on the 747,
with sales growing to $12.1 million from $11.0 million. The Company's net sales
of components for the 737 Classic decreased approximately $2.8 million, from
$7.5 million in 1997 to $4.7 million in 1998.
Gross Profit. Gross profit increased 21.8% in the first nine months of 1998,
from $11.8 million (28.7% of net sales) to $14.4 million (30.5% of net sales).
The increase in margin was predominantly the result of better coverage of fixed
costs afforded by the increase in net sales.
Selling, General, and Administrative Expenses ("SG&A"). SG&A increased 26.9% in
1998, from $4.7 million (11.5% of net sales) in 1997 to $6.0 million (12.7% of
net sales). The Company's SG&A is driven in large part by the salaries, wages,
and related fringe benefits paid to its selling and administrative employees
which accounted for $0.3 million of the increase and the previously mentioned
lawsuit settlement of $0.3 million.
Income Taxes. The effective income tax rate for the first nine months of 1998
was 36.6%, down from 38.5% in 1997. This reduction in the effective rate is the
result of the Company's recognition of current and prior year state income tax
credits.
Net Income. The increase in net sales, improvements in gross profits and other
changes discussed above, drove net income up for the nine months 30.9% to $5.1
million in 1998 from $3.9 million.
Liquidity and Capital Resources.
During 1998, the Company completed its IPO, selling 2,645,000 shares (including
the underwriters 15% over allotment) at $10.00 per share ($23.5 million after
fees and expenses of $2.9 million). Immediately upon receipt of the cash from
the IPO, the Company retired term debt of $3.3 million with Magna Bank, N.A. and
$0.4 million with the Oklahoma Industrial Finance Authority. Both of these notes
were secured by real estate of the Company. Additionally, the Company used $2.4
million of the proceeds to temporarily pay down the revolving line of credit
with Magna Bank, N.A. The Company maintains its ability to borrow up to $15
million under this revolving line of credit. The balance of these proceeds from
the IPO will be used to fund acquisitions, working capital needs, or capital
investment needs.
Also during the third quarter, the Company received approval of its Board of
Directors to repurchase up to 600,000 shares of its common stock. The Company
purchased 315,000 shares near the end of the third quarter for $2.2 million.
This transaction was funded early in the fourth quarter and was reflected as a
liability at September 30, 1998.
In August, 1998, the Company completed the acquisition of Precise Machine
Company of Irving, Texas. The Company used $2.9 million of the IPO proceeds to
purchase the net assets of Precise.
The working capital needs of the Company are generally funded by cash flows from
operations. During the first nine months of 1998, operating activities generated
$5.2 million of cash compared to $3.6 million in the first nine months of 1997.
The growth of the Company has required a substantial investment in receivables
and inventories with each growing by $1.6 million.
The Company continued to invest in property, plant and equipment spending $4.0
million in 1998. In Tulsa, the Company completed a 33,000 square foot addition
($1.1 million) nearly doubling its available space to 75,000 square feet. The
Auburn facility upgraded its punching capability with the addition of a new CNC
punching machine ($0.4 million) to replace an older, slower model and spent $0.4
million upgrading and customizing a newly leased 80,000 square foot facility
that will replace the current 45,000 square foot facility. The Company spent
$0.3 million as it began expansion efforts at one of its St. Charles locations
which will add approximately 20,000 square feet. The Company estimates it will
expend an additional $1.0 million over the balance of 1998, primarily on
facility expansions. Capital spending should be reduced in 1999 to approximately
$3.0 million.
Year 2000 Preparedness
The advent of the year 2000 (sometimes referred to as "Y2K") poses certain
technological challenges resulting from computer technologies that recognize and
process calendar years by the last two digits rather than all four digits of
such year (e.g., "98" for "1998"). Computer technologies programmed in this
manner may not properly recognize or process a year that begins with the digits
"20" instead of "19" (the "Year 2000 Problem"). If not corrected, such computer
technologies could produce, among other problems, inaccurate, erroneous or
unpredictable results or system failures.
To address the Year 2000 Problem, the Company, beginning in late 1997,
formulated a three-step plan under which the Company's information technology
("IT") and non-information technology, such as embedded chip machines
("Non-IT"), systems would be (i) assessed; (ii) updated, replaced and tested as
necessary, and (iii) monitored for compliance (the "Plan").
As of September 30, 1998, the Company had substantially completed the assessment
phase of the Plan. This phase involves, among other things, identification of
those IT and non-IT systems that were impacted in some way by the Year 2000
problem, and of such systems, identifying which are principal to the Company's
principal business operations. As part of this assessment, the Company reviewed
its principal IT system which was installed in late 1997 as part of a previously
formulated strategic growth plan and found it to have satisfied the Company's
Y2K concerns. The Company also identified the other IT systems which have
certain Y2K concerns and has plans to replace such programs. Finally, based on
internal reviews of the non-IT systems and inquiries made of the manufacturers
of the non-IT systems, the Company believes that such systems do not have any
material Y2K concerns.
What remains of this assessment phase is a review of the systems of Precise, the
Company's recent acquisition, and completion of an assessment of the Tulsa
facility. Based on its preliminary results, the Y2K concerns at the Tulsa
facility (which supplies services to the other divisions of the Company and
operates with a backlog of less than 30 days) should be limited and immaterial
to the Company.
Updating and replacing critical IT systems and components, other than its system
in Tulsa, was substantially completed by the end of 1997, as a result of an
upgrade to the Company's IT systems which had been planned and scheduled prior
to the Company's review of the Year 2000 Problem. Updating and replacing
noncritical IT systems is scheduled to be completed prior to June 30, 1999.
Monitoring of Y2K concerns generally, is on-going and the Company anticipates it
will continue throughout 1999.
During all phases of the Plan, the Company has actively monitored the Y2K
preparedness of its key suppliers, distributors, customers and service
providers. Based on the inquiries made, correspondence received and other
verification procedures conducted, the Company believes that its significant
business partners are resolving their respective Year 2000 Problems in a
reasonable fashion in line with industry practice.
However, the Company has not yet engaged in discussions with its utility
providers (e.g., electricity, gas, telecommunications) regarding Y2K concerns.
As part of the Plan, however, the Company will continue to monitor Y2K
disclosures by, and make certain inquiries of, key providers and agencies to the
businesses that rely on them and will generally strive for Y2K preparedness
against industry-wide and geographic Y2K systemic risks comparable to that
maintained by similarly situated organizations exercising appropriate due care.
Because the Company had recently upgraded its IT systems prior to directly
addressing any Y2K concerns, to date, the Company has incurred an immaterial
amount of costs that are directly attributable to addressing its Year 2000
Problem. Moreover, the Company expects additional Y2K expenditures to be
similarly immaterial. The Company has funded, and plans to fund, its Year 2000
related expenditures out of general operating income.
The Company believes that it has substantially completed its Plan and that all
remaining actions are not significant. The Company also believes that such Plan
provides a reasonable course of action to prepare the Company for the year 2000
and significantly reduce the risks faced by the Company with respect to the Year
2000 Problem. However, the uncertainty surrounding the Year 2000 Problem could
lead to a failure of the Company's Plan which may result in an interruption in
or failure of certain normal business activities or operations. Such failures
could materially adversely affect the Company's results of operations, liquidity
and financial condition.
The Company could face some risk from the possible failure of one or more of its
suppliers, distributors and service providers to continue to provide
uninterrupted service through the changeover to the year 2000. While an
evaluation of the year 2000 preparedness of such parties has been part of the
Company's Plan, the Company's ability to evaluate is limited to some extent by
the willingness of such parties to supply information and the ability of such
parties to verify the year 2000 preparedness of their own systems or their
sub-providers. The Company does not currently anticipate that any of such
parties will fail to provide continuing service due to the Year 2000 Problem.
The Company, like similarly-situated enterprises, is subject to certain risks as
a result of possible industry-wide or area-wide failures triggered by the Year
2000 Problem. For example, the failure of certain utility providers (e.g.,
electricity, gas, telecommunications) to avoid disruption of service in
connection with the transition from 1999 to 2000 could materially adversely
affect the Company's results of operations, liquidity and financial condition.
In management's estimate, such a system-wide or area-wide failure presents the
most significant risk to the Company in connection with the Year 2000 Problem
because the resulting disruption may be entirely beyond the ability of the
Company to cure. The significance of any such disruption would depend on its
duration and systemic and geographic magnitude. Of course, any such disruption
would likely impact businesses other than the Company.
In order to reduce the risks enumerated above, the Company is developing and
evaluating contingency plans to deal with events affecting the Company or one of
its business partners arising from the Year 2000 Problem. These contingency
plans include identifying alternative suppliers, distribution networks and
service providers. Certain catastrophic events (such as the loss of utilities or
the failure of certain governmental bodies to function) are outside the scope of
the Company's contingency plans, although the Company anticipates that it would
respond to any such catastrophe in a manner designed to minimize disruptions in
customer service, and in full cooperation with its peer providers, community
leaders and service organizations.
The foregoing discussion of the Company's Year 2000 Preparedness contains a
substantial number of forward-looking statements, indicated by such words as
"expects," "believes," "estimates," "anticipates," "plans," "assessment,"
"should," "will," and similar words. These forward-looking statements are based
on the Company's and management's beliefs, assumptions, expectations, estimates
and projections any or all of which are subject to future change, depending on
unknown developments and facts. These forward-looking statements should be read
in conjunction with the Company's disclosures located at the beginning of
Management's Discussion and Analysis.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Stock
Use of Proceeds from the Public Offering
(c) During the quarter ended September 30, 1998, the Company used $2.8
million of the proceeds of the June 30, 1998 IPO to purchase the net
assets of Precise Machine Company of Irving, Texas. Additionally, the
Company used $2.2 million of the proceeds to purchase 315,000 shares of
its common stock during the third quarter.
The remainder of the proceeds are currently held in highly liquid
assets to be used to support the Company's growth strategies through,
among other things, the funding of acquisitions of complementary
businesses.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) See Exhibit Index
(B) No current reports on Form 8-K have been filed by the Company
during the nine month period ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LMI AEROSPACE, INC.
Date: November 16, 1998 By: /s/ Lawrence E. Dickinson
-----------------------------------------
Lawrence E. Dickinson
Chief Financial Officer and Secretary
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10.15 General Terms Agreement between Boeing Company
and Leonard's Metal, Inc. with Special Business
Provisions attached
27 Financial Data Schedule