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, 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 (IRS Employer
Incorporation or Organization) Identification No.)
3600 Mueller Road, St. Charles, Missouri 63302-0900
(Address of Principal Executive Officer) (ZIP Code)
(314) 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, $.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, 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (computed by reference to the closing price of such voting stock on
the NASDAQ National Market on February 12, 1999 of $5.875) was approximately
$17,010,581.
There were 8,281,322 total shares of common stock outstanding as of February 12,
1999.
Documents Incorporated by Reference
1) The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 1999 Annual
Meeting of Shareholders, which involves the election of directors), are
incorporated by reference into Items 10, 11, 12 and 13 to the extent
stated in such items.
Forward-Looking Statements
Any forward-looking statements set forth in this report are necessarily subject
to uncertainties and risks. When used in this report, the words "believes,"
"anticipates," "intends," "plans," "projects," "estimate," "expects" and similar
expressions are intended to identify forward-looking statements. Actual results
could be materially different from those reflected in such forward-looking
statements as a result of various factors. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
Item 1. Business 4
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 4(a). Executive Officers of the Registrant 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 31
PART I
Item 1. Business.
General Overview
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LMI Aerospace, Inc. (the "Company") is a leader in fabricating, machining,
finishing and integrating formed, close tolerance aluminum and specialty alloy
components for use by the aerospace industry. For over 50 years, 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 ("OEMs") and primary subcontractors ("Primes") 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 more than 15,000 parts for integration into
such models as Boeing's 737, 747, 757, 767 and 777 commercial aircraft,
Gulfstream's G-IV and G-V corporate aircraft, Canadair's RJ regional aircraft,
and Lockheed Martin's F-16 and C-130 and Boeing F-15, F-18 and C-17 military
aircraft.
In addition to supplying quality components the Company provides its customers
with value-added services, including engineered tool design, production and
repair; heat treating; chemical milling; assembly; and metal finishing
processes, such as polishing and painting. The Company believes that such
value-added services provide significant benefits to its customers including:
(i) reduced administrative costs resulting from the Company's ability to serve
as a single point of purchase for a wide array of required products and
services, (ii) faster, more efficient production rates, and (iii) greater
consistency in meeting scheduled delivery dates. As a result, the Company
believes that its value-added services are an increasingly important factor in
the selection of the Company to provide aerospace components.
LMI Aerospace, Inc. is a Missouri corporation with headquarters at 3600 Mueller
Road, St. Charles, Missouri. The Company maintains facilities in St. Charles,
Missouri; Auburn, Washington; Tulsa, Oklahoma; Wichita, Kansas and Irving, Texas
Customer Concentration
- ----------------------
The Company manufacturers and supplies over 15,000 parts to leading OEMs and
Primes of commercial, corporate, regional and military aircraft, primarily under
multi-year contracts. Such contracts designate the Company as the sole supplier
of the aerospace components sold under the contracts. Customers include the
following leading OEMs and Primes:
Commercial Platforms
- ---------- ---------
Boeing 737 Classic, 737 Next Generation ("737NG"),
707, 727, 747, 757, 767 and 777
Northrop Grumman 747, 757 and 767
PPG 737NG, 747, 767, 777 and MD-80
National Machine 737NG
Canadair 767
Corporate and Regional Platforms
- ---------------------- ---------
Gulfstream G-IV and G-V
Canadair Regional Jet and Challenger 604
Learjet Models 31, 45 and 60
DeHavilland CL415 and Dash-8
Boeing 737 Business Jet
Nordam Citation V, VII, VIII, Ultra, Bravo and Excel,
Lear 60, and Beech 400A
PPG Citation III, VII, X and Excel
Northrop Grumman G-IV and G-V
Military Platforms
- -------- ---------
Lockheed Martin F-16 and C-130
Boeing AWACS, F-15, F-18 and C-17
The Company has a long-standing relationship with Boeing, which has steadily
grown to include several Boeing business units, including Boeing Commercial
Aircraft Group, Boeing North American, Boeing Military and Boeing Helicopter.
During 1996, 1997 and 1998, direct sales to Boeing business units accounted for
a total of approximately 46%, 59% and 62% of the Company's sales, respectively.
According to industry sources, Boeing holds more than a 50% share of the
worldwide commercial aircraft market. Each of Boeing's business units operate to
a significant degree as autonomous manufacturers, and as such, the Company has
entered into one or more multi-year contractual relationships with many of the
Boeing business units with which it does business. In general, these agreements
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 covering
delivery dates as far in the future as the year 2000. The Company believes that
its relationship with Boeing extends beyond the expressed language of the
multi-year contracts. Such belief is based on, among other things, discussions
with Boeing personnel, the longevity and growth of the relationship, and the
Company's experience with Boeing during occasional periods without an effective
contract.
Products
- --------
The Company is a leading fabricator, finisher and integrator of formed, close
tolerance aluminum and specialty alloy components for use by the aerospace
industry. For approximately 50 years, the Company has been engaged in
manufacturing components for a wide variety of aerospace applications. All
components are fabricated from designs prepared and furnished by its customers.
The following table describes some of the Company's principal products
(consisting of manufactured components and assemblies) and the models into which
they are integrated:
Product Aircraft Platform
------- -----------------
Wing leading edge skins, flapskins 737 NG
Detail interior components Boeing 737 Classic,
737 NG, 707, 727, 747, 757,
767, 777 and C-130
Wing panels and floorbeams 747
Door assembly and structural details 737 Classic, 737 NG, 747 and 757,
Challenger 604, Regional Jet, F-16
and C-130
Thrust reversers and engine G-IV, CL415, 737 Classic and 777
nacelles/cowlings
Cockpit window frames and landing 737NG, 747, 767, 777, Citation III,
light lens assembly VII and Excel, DC-8 and 9, MD-80,
KC-10 and F-16
Fuselage and wing skin Models 45 and 60
Dash-8
737 Classic, 737 NG, 747, 757, 767,
777, C-130 and F-16
Structural sheet metal & Various models
extruded components
Once a customer submits specifications for a product, the Company
utilizes its 40 person engineering and planning group to evaluate and develop
the tooling requirements, design the manufacturing process and prepare a product
flow plan. The Company utilizes an advanced computer assisted design system to
translate customer provided specifications into computer numerical control
("CNC") instructions for use with many of the Company's forming and milling
equipment.
Backlog
- -------
The Company's backlog is displayed in the following table:
As of December 31,
(in millions)
1996 1997 1998
---- ---- ----
Total $43.1 $48.9 $52.8
Portion deliverable within 12 months 34.1 40.5 35.6
Historically, cancellations of such orders have been infrequent and immaterial,
however OEMs 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.
Manufacturing Processes
- -----------------------
The manufacturing facilities are organized on a work center basis focusing on a
particular manufacturing 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 in order to provide more accurate pricing and scheduling information to its
customers as well as to establish production standards used to measure internal
performance.
Consistent with the Company's strategy of continually emphasizing quality, all
employees participate in an on-going training program which combines classroom,
hands-on and on-the-job instruction. New employees attend an extensive
orientation seminar to acquaint them with the aerospace components industry and
the Company's quality expectations, history, mission, safety procedures and
other rules. To motivate employees to meet and exceed the Company's production
efficiency objectives, management has implemented a bonus program under which
the bonus amount payable by the Company is based on the amount of sales per paid
manhour and the value of product produced.
Furthermore, through the use of lean manufacturing techniques, the Company seeks
to eliminate waste generated in the movement of people, in the use of materials
and products, in lengthy set-ups, in production breaks and by misused space. The
Company's lean manufacturing methods include: (i) one piece work flow as opposed
to batch processing, (ii) pull versus push production control and scheduling
systems, and (iii) disciplined, housekeeping and organization techniques. The
Company believes that its training and motivation programs, combined with
extensive use of lean manufacturing techniques, have greatly increased the
Company's efficiency, manufacturing capacity and profitability.
In manufacturing close tolerance components, 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, bladder press, sheet metal and
extrusion stretch, skin stretch, stretch draw, hot joggle and brake forming.
The following are more detailed descriptions of several of the Company's
processes:
Drop Hammer Forming. The Company utilizes drop hammer forming to shape work
pieces by placing them between a mated die and a moving punch. The work piece is
placed on the working surface of the die and is formed into a component through
repeated impacts of the punch on the work piece. The impact causes the work
piece to take the shape of the punch and die. This process provides an
economical means of producing parts ranging in size from a few inches up to ten
feet in length with complex, compound contours. The Company has one of the
largest capacities for drop hammer forming in the aerospace components industry.
Bladder Forming. The bladder forming process (fluid cell press) utilizes a
bladder filled with hydraulic fluid which is placed under pressure to form the
component. The work piece is placed on top of a die which rests on a table. A
rubber blanket is then placed over the work piece and the table is moved into
the press. As the bladder is placed under pressure, it expands to cover the
rubber blanket and forces it and the work piece to conform to the shape of the
die. The Company employs bladder forming for components with formed simple
contours.
Stretch Forming. The stretch forming process involves the stretching and
wrapping of a work piece along the surface of a precisely shaped die. To obtain
the desired component shape, opposite ends of the material are held in the jaws
of the stretch form machine, then hydraulically stretched and wrapped to conform
to the working surface of the die. The Company utilizes several different types
of stretch form machines, each type designed to stretch form extrusion, sheet
metal or leading edge wing skins.
Hot Joggle. The Company uses the hot joggle process to create a clearance step
for intersecting parts. A work piece is placed between a mated die and punch and
is heated to a precise temperature to make it malleable enough to set a form,
but not hot enough to alter the temper of the metal. The joggle press then
creates the joggle by stepping down a surface from the original plane of the
work piece.
Cutting and Punching. Various cutting and punching processes such as CNC turret
punch, CNC laser cutting, CNC and conventional milling, are used for cutting out
the shapes of flat pattern parts. Cutting, trimming and drilling functions such
as CNC and conventional milling, five axis CNC routing and other machine and
hand routing methods are used to complete formed components by trimming excess
material, cutting and drilling holes. CNC processes utilize computer programs
(generated by Company employees from CAD models provided by the customer) which
direct the cutting, punching and/or drilling pattern of the machine. Other
trimming processes use dies, templates or fixtures as the guide for trimming
and/or drilling.
Most parts require heat treating after forming which helps to strengthen and,
then through controlled cooling, harden the material. This process along with
older dies and tools, can cause slight distortion which is then modified with
manual forming techniques also referred to as "line-up" or "check and
straighten." The Company's highly skilled craftsmen provide the customer with
great flexibility in utilizing customer's tools and small order quantities often
associated with spares production.
Value-Added Services
- --------------------
The Company offers its customers both cost and time savings by having the
process capabilities necessary for the production of most components from start
to finish.
Tooling. While most of the dies, tools and fixtures needed in the manufacturing
process are owned and supplied by customers, the Company offers its customers
the ability to produce fiberglass route and drill tools, chemical milling
templates, kirksite extrusion and sheet stretch blocks, and other original
tooling. It also has extensive capabilities in the repair and rework of tools
and dies originally supplied by its customers. The Company supports the tooling
operations with its own foundry which pours lead and kirksite tops for drop
hammer dies.
Heat Treat and Age. Most components require heat treating and/or aging as part
of the production process. The heat treat process is used to alter the temper of
the material for increased formability and retention of the formed shape. The
process involves heating work pieces to a prescribed temperature, usually in the
range of 850 degrees to 950 degrees Fahrenheit, for a prescribed period of time.
Multiple components can be heat treated at one time, so long as the prescribed
process time and temperature are the same. After heating, the components are
immediately submerged in a glycol solution or water to rapidly cool and suspend
the hardening of the metal. The components are then refrigerated at sub-zero
temperatures to retard work hardening until the forming process is completed. At
ambient temperatures the metal slowly hardens. After all forming, trimming and
drilling processes are complete, most components go through the age process,
which involves slow heating at lower temperatures (up to 400 degrees
Fahrenheit), to accelerate the hardening of the metal to its final temper.
CMM Inspection and Engineering. The computer controlled coordinate measuring
machine ("CMM") uses a computer operated touch probe to measure the accuracy of
angles, contours and other features on a tool or component relative to customer
defined models or coordinates permitting the Company to accurately inspect close
tolerance components. The CMM also is used to engineer a CAD model from an
existing part.
Chemical Milling. Chemical milling is used to reduce the amount of material in
specific places on a component in order to reduce weight within the aircraft and
to facilitate the mating of components. The working piece is first coated
(dipped or sprayed) with a maskant, which dries to a rubber-like finish sealing
the component. The Company uses a water based maskant which is much safer for
both employees and the environment than the traditional solvent based maskant.
After masking, the portion of the part to be reduced is scribed out by tracing a
template. These areas are then de-masked, and the part is dipped into the
chemical milling tank, containing an alkaline solution, for a prescribed period
of time. The solution then reduces the metal in the exposed areas.
Metal Finishing, Polishing and Painting. Through its Tulsa facility the Company
provides anodizing, painting, polishing and non-destructive testing. The chromic
acid anodizing process is performed prior to paint or polish to help control
rust, corrosion and part deterioration. Penetrant inspection is a
non-destructive inspection method during which components are dipped into a dye
solution which penetrates any small defects on the surface of the part and makes
them visible under ultra violet light.
Most components are painted or polished before final shipment. Paint is applied
according to customer specification; some components receive a simple primary
coat while others receive primary and finish coats. Skin quality components such
as those in the leading edge wing program are polished with electric polishers
and by hand to a mirror finish which is visible on the exterior of the aircraft
after final assembly.
Consistent with the Company's commitment to maintaining environmental and
employee safety, the Tulsa facility has a state-of-the-art air circulation and
filter system as well as its own waste water treatment equipment. Waste water
from both the anodizing and chemical milling processes pass through the
treatment equipment and all metals and toxic materials are removed, making the
water safe for disposal through the normal sewer system. The metals are
condensed into filter cakes which are then disposed of through certified
hazardous waste disposal vendors.
Assembly. The Company completes small and medium sized assemblies, incorporating
its manufactured parts and those produced by other vendors. In the assembly
process, the Company uses riveting, bolting, spot and fusion welding, and
bonding. Customer supplied and Company manufactured jigs and fixtures are used
to ensure the proper alignment of edges and holes. The Company's new information
system and the expansion of its purchasing department further increase its
ability to acquire and track parts and hardware details from multiple vendors to
integrate with its own components into assemblies.
Suppliers 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. In an attempt to secure adequate supplies the
Company has entered into a multi-year aluminum sheet metal supply agreement with
Aluminum Company of America ("ALCOA"), a dominant domestic supplier of aerospace
quality aluminum, extending until the end of year 2000.
The Company believes that its sources of supply of non-aluminum products 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.
The Company has developed procurement practices to ensure that all supplies
received conform to contract specifications. Through its computerized material
resource planning system, the Company is able to track inventories and product
ordering to optimize purchasing decisions. For cost, quality control and
efficiency reasons, the Company generally purchases supplies only from vendors
approved by the Company's customers and/or with whom the Company has on-going
relationships. The Company chooses its vendors primarily based on the quality of
the products and services supplied, record for on-time performance and the
specification of such vendors by the Company's customers as the preferred source
of supply. The Company regularly evaluates and audits its approved vendors based
on their performance.
Quality Assurance and Control
- -----------------------------
The Company continually seeks to maintain high quality standards in the
processing of its products. Accordingly, the Company employs approximately 50
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.
In March 1998, the Company became certified as compliant with Boeing's new
D1-9000 (Rev. A) quality assurance standard. During April 1998, the Company
distributed all revised procedures and integrated such new procedures with its
on-going employee training program and lean manufacturing techniques to assist
employees in becoming familiar with the new procedures. The Company has expanded
its existing internal audit program to ensure on-going compliance. In addition,
the Company intends to supplement its quality assurance and control program in
1999 with ISO 9002 certification of all of its facilities.
Sales and Marketing
- -------------------
The Company's sales and marketing organization consists of six program managers
and two independent sales representatives. The Company's sales personnel are
devoted to maintaining and expanding customer relationships through continual
education of existing and potential customers with respect to the Company's
capabilities. Specifically, the Company is focused on expanding its presence in
the fabrication of aftermarket spare parts and components for use in new
corporate, regional and military aircraft. As a result, sales personnel have
focused their efforts on diversifying the Company's product mix to include
aerospace programs unrelated to new commercial aircraft production.
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
that 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 trend favoring direct
pricing. In direct pricing programs, the customer submits an indicated price
offer for acceptance or rejection by the Company. The Company expects that as
customers seek to limit the number of suppliers, direct pricing will become
increasingly common.
Competition
- -----------
Components for new aircraft and replacement components for existing aircraft are
provided by a large fragmented group of companies, including certain business
units of or affiliates of the Company's customers. 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.
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 that 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 for 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, 1998, the Company had 806 employees, of whom eight were
engaged in executive positions, 186 were engaged in administrative positions and
612 were in manufacturing operations. None of the Company's employees is 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 that 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, and independently developed programs, the Company seeks to
attract, develop and retain the personnel necessary to achieve the Company's
growth and profitability objectives.
Acquisition Strategy
- --------------------
The Company seeks to leverage its core capabilities in existing and new markets
by identifying and pursuing complementary acquisitions in the aerospace industry
that offer strategic value, such as cost savings, increased manufacturing
capacity, increased process capability and/or new customer relationships. The
Company believes that the fragmented nature of the industry for aerospace
components should provide the Company with additional opportunities to exploit
industry consolidation trends.
Item 2. Properties.
Facilities
- ----------
The following table provides certain information with respect to the Company's
headquarters and manufacturing centers:
Square
Location Principal Use Footage Interest
- -------- ------------- ------- --------
3600 Mueller Road Executive and Administrative 56,943 Owned
St. Charles, MO Offices and Manufacturing Center
3030-3050 N. Hwy 94 Manufacturing Center and Storage 92,736 Owned
St. Charles, MO
3000-3010 N. Hwy 94 Assembly and Storage 30,074 Leased(1)
St. Charles, MO
101 Western Ave. So. Manufacturing Center 79,120 Leased(2)
Auburn, WA
2629-2635 Esthner Ct. Manufacturing Center 34,377 Owned
Wichita, KS
2621 W. Esthner Ct. Administrative Offices and 27,810 Leased(3)
Wichita, KS Storage
2104 N. 170th St. E. Ave. Finishing Facility 75,000 Owned
Tulsa, OK
2205 and 2215 River Hill Machining Facility 8,400 Leased(4)
Road, Irving, TX
(1) Subject to a yearly rental amount of $120,624 expiring on February 28,
2004.
(2) Subject to graduated yearly payments of $333,600 to $418,800 during the
life of the lease. The lease expires in 2005, but the Company retains the
option to extend the lease until June 30, 2008 at the monthly rate of
$39,090.
(3) Subject to graduated yearly payments of $108,126 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 12 months.
(4) Subject to a yearly rental amount of $45,000 expiring on August 24, 2000.
The Company retains two options to extend the lease term for an
additional 5 years each.
Item 3. Legal Proceedings.
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 that 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.
Not applicable.
Item 4(a). Executive Officers of the Registrant.1
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 54 Chief Executive Officer, President and Director
Lawrence J. LeGrand 48 Chief Operating Officer and Director
Lawrence E. Dickinson 38 Chief Financial Officer and Secretary
Duane E. Hahn 46 Vice President, Regional Manager and Director
Robert T. Grah 44 General Manager (LMI Finishing, Inc.)
Phillip A. Lajeunesse 46 General Manager (Wichita, KS)
Bradley L. Nelson 40 General Manager (Auburn, WA)
Ernest R. Bailey 62 General Manager (St. Charles, MO)
John R. Krystinik 60 General Manager (Precise Machine Partners, L.L.P.)
- --------
1 This information is included in Part I as a separate item in accordance
with Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G to Form 10-K.
Set forth below are biographies of each executive officer of the Company.
Ronald S. Saks has served as 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.
Lawrence J. LeGrand became Chief Operating Officer and a director of the Company
in April 1998. His previous 24 years were spent with KPMG Peat Marwick, LLP,
where he became a partner in 1980. Mr. LeGrand is a Certified Public Accountant
and has extensive experience in mergers and acquisitions where he has
represented both publicly held and privately owned buyers and sellers. Mr.
LeGrand graduated with a Bachelor's degree in Commerce and Finance from St.
Louis University in 1973 and presently serves as the Vice Chairman of the Board
of Trustees of St. Louis University. During 1998, Mr. LeGrand was appointed to
the Board of Directors of LaBarge, Inc.
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 1981-1984. 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.
Duane E. Hahn joined the Company in 1984 and served as the Assistant General
Manager until 1988, at which time he moved to Auburn, Washington to set up and
manage the Auburn facility as Vice President and General Manager. In 1996, Mr.
Hahn became the Vice President of Manufacturing and Regional Manager of the
Company. Prior to joining the Company, Mr. Hahn served as a supervisor for
Associated Transport, Inc. Mr. Hahn received his Associate's Degree from
Nebraska Technical College in 1971. Mr. Hahn has extensive continuing education
experience in lean manufacturing, just-in-time, and other world class
manufacturing techniques. Mr. Hahn became a director of the Company in October
1990.
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, and was promoted
to his current position as General Manager of LMI Finishing, Inc. in 1996. Prior
to joining the Company, Mr. Grah was a supervisor for Associated Transport,
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.
Phillip A. Lajeunesse joined the Company in 1988 as the Corporate Quality
Assurance Manager. In 1990, he became the Plant Manager of the Company's St.
Charles facility, and in 1996, he became the General Manager of the Wichita
facility. Prior to joining the Company, Mr. Lajeunesse was a supervisor for
Kaman Aerospace for nine years, and for six years was a supervisor for United
Nuclear Corporation. Mr. Lajeunesse obtained an Associate's degree in Chemical
Engineering from Thames Valley State Technical College in 1973, an Associate's
degree in Business Administration from Bryant College in 1984, and a Master's of
Business Administration from Washington University in 1994.
Bradley L. Nelson joined the Company as a Production Supervisor in the Auburn
facility in 1990. In 1994, he was promoted to Manufacturing Manager, and in 1996
he assumed his current position as General Manager of the Auburn facility.
Previously, Mr. Nelson was Production Manager for Fabrication Technologies from
1989 to 1990, the owner of Totem Lake Service Center from 1984 to 1989, and
Plant Manager for Tonoro Growers from 1981 to 1984. Mr. Nelson's continuing
education courses include general management and manufacturing management and
methods.
Ernest R. Bailey joined the Company in 1997 as the General Manager of the St.
Charles facility. From 1996 to 1997, Mr. Bailey was the General Manager for
North American Machining Products, Inc. From 1994 to 1996, he was the Plant
Manager for Precision Machine Works, and from 1987 to 1993, he was the General
Manager for Rohr, Inc., in Auburn, Washington. His background also includes
administration and management experience at Kenworth Truck Company, KME
Manufacturing, and Heath Tecna, Inc. Mr. Bailey obtained his Associate's degree
in Business Administration from Green River Community College in 1976, and his
Bachelor's degree in Business Administration from Pacific Western University in
1995.
John R. Krystinik joined the Company in August, 1998, as the General Manager of
Precise Machine Partners, L.L.P. Mr. Krystinik founded Precise Machine Company
in 1978, and sold it to the Company in August 1998. From 1967 to 1978, he worked
for Philip Specialty Company as General Manager. Mr. Krystinik received a degree
in Business Administration from Arlington State College in 1962.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The 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 closing
prices for the Common Stock for the periods indicated beginning on June 30,
1998, the day on which trading commenced following the Company's initial public
offering:
High Low
Fiscal 1998 ---- ---
3rd quarter $11.88 $7.00
4th quarter 8.00 4.00
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of December 31, 1998, the reported closing price for the Common Stock was
$6.25. As of December 31, 1998, there were approximately 70 holders of record of
the Common Stock and the Company believes that its Common Stock was beneficially
owned by approximately 1400 persons.
The Company has not declared or paid cash dividends on any class of its Common
Stock in the past two years and does not anticipate paying any cash dividends in
the foreseeable future. The credit facility between the Company and Union
Planters Bank, N.A. ("Union") (formerly Magna Bank, N.A.) prohibits the Company
from declaring a dividend with respect to its capital stock without the approval
of Union. The Company currently intends to retain its earnings, if any, and
reinvest them in the development of its business.
On October 2, 1997, the Company issued 80,976 shares to the Guaranty Trust
Company of Missouri as trustee for the Profit Sharing Plan for $302,088 under
Rule 701 of the Securities Act. The Guaranty Trust Company has since been
replaced by Union Planters Trust and Investment Management as trustee of the
Profit Sharing Plan.
On December 31, 1997, the Company issued 3,290 shares to Ronald S. Saks as
Voting Trustee under Voting Trust No. I as a result of an exercise of part of an
option granted to a shareholder for an aggregate exercise price of $5,810, 1,392
shares to Ronald S. Saks as Voting Trustee under Voting Trust No. 1 for $21,228
and 324,420 shares in the aggregate to Sanford S. Neuman as Voting Trustee under
Voting Trust No. 2 for an aggregate purchase price of $1,503,772, under Section
4(2) of the Securities Act.
On April 27, 1998, the Company issued 32,900 shares to the Guaranty Trust
Company of Missouri as trustee for the Profit Sharing Plan for $325,710 (based
on 90% of an initial public offering price of $11.00 per share) under Rule 701
of the Securities Act and 32,900 shares as compensation to Ronald S. Saks as
Voting Trustee under Voting Trust No. I under Section 4(2) of the Securities Act
pursuant to a restricted stock agreement between the Company and Lawrence J.
LeGrand.
On June 1, 1998, as a result of an exercise of an option granted to a
shareholder, the Company issued 16,450 shares to Ronald S. Saks as Voting
Trustee under Voting Trust No. I for an aggregate exercise price $29,050 under
Section 4(2) of the Securities Act.
On September 12, 1998, as a result of an exercise of an option to purchase
shares in accordance with a certain Subscription Agreement, the Company issued
98,700 shares to the Lawrence J. LeGrand IRA Rollover Account, of which Mr.
LeGrand is the beneficial owner, for an aggregate exercise price of $600,000.00,
under Section 4(2) of the Securities Act.
Item 6. Selected Financial Data.
Year Ended December 31,
(in thousands, except Shares and per share data)
1994 1995 1996 1997 1998
Statement of Operations Data: ---- ---- ---- ---- ----
Net sales $ 20,710 $ 25,424 $ 35,016 $ 55,080 $ 59,234
Cost of sales 17,274 20,366 26,725 38,932 41,152
------ ------ ------ ------ ------
Gross profit 3,437 5,058 8,291 16,148 18,082
Selling, general &
administrative expenses 3,337 3,883 5,256 6,549 7,591
------ ------ ------ ------ ------
Income from operations 100 1,175 3,035 9,599 10,491
Interest expense (522) (1,038) (1,123) (1,020) (642)
Other (expense) income(1), net 263 (48) 15 10 405
------ ------ ------ ------ ------
Income (loss) before income taxes (159) 89 1,927 8,589 10,254
Provision for income taxes (62) 52 740 3,306 3,764
------ ------ ------ ------ ------
Net income (loss) $ (97) $ 37 $ 1,187 $ 5,283 $ 6,490
====== ====== ====== ====== ======
Net income (loss) per common share:
Basic $ (0.02) $0.01 $0.21 $0.91 $0.89
Diluted (0.02) 0.01 0.20 0.89 0.88
Weighted average shares
outstanding 5,350,969 5,529,483 5,779,833 5,836,700 7,252,148
Other Financial Data:
EBITDA(2) $ 1,764 $ 3,091 $ 5,062 $ 11,788 $ 13,529
Capital expenditures 4,746 1,736 1,316 3,856 5,488
Cash flows from operating
activities 99 (888) 2,684 5,775 6,893
Cash flows from investing
activities (1,690) (4,700) (1,304) (3,713) (9,529)
Cash flows from financing
activities 1,620 5,246 (1,356) (2,023) 14,337
Gross profit margin 16.6% 19.9% 23.7% 29.3% 30.5%
EBITDA margin 8.5% 12.2% 14.5% 21.4% 22.8%
December 31,
(in thousands)
1994 1995 1996 1997 1998
----- ---- ---- ---- ----
Balance Sheet Data
Cash and equivalents $ 151 $ 181 $ 205 $ 244 $ 11,945
Working capital 6,933 8,919 8,626 11,256 27,971
Total assets 25,454 27,370 29,046 33,629 56,183
Total long-term debt,
excluding current portion 11,620 12,674 10,735 9,274 2,732
Stockholders' equity 9,147 9,966 11,161 16,751 45,291
<FN>
(1) Other (expense) income in 1994 includes income from insurance proceeds
(net of related flood expense) of $255. Other (expense) income in 1998
includes income from interest earned from public offering proceeds.
(2) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBITDA is a widely accepted, supplemental financial
measurement used by many investors and analysts to analyze and compare
companies' performance. EBITDA as presented may not be comparable to
similarly titled indicators reported by other companies because not all
companies necessarily calculate EBITDA in an identical manner, and,
therefore, it is not necessarily an accurate means of comparison between
companies. EBITDA should only be read in conjunction with all of the
Company's financial data summarized above and its Consolidated Financial
Statements prepared in accordance with generally accepted accounting
principles ("GAAP"), appearing elsewhere herein. EBITDA is not intended
to represent cash flows (as determined in accordance with GAAP) or funds
available for management's discretionary use for the periods listed, nor
has it been presented as an alternative to operating income (as
determined in accordance with GAAP. EBITDA is presented as additional
information because management believes it to be a useful indicator of
the Company's ability to meet debt service and capital expenditure
requirements and because certain debt covenants of the Company utilize
EBITDA to measure compliance with such covenants.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net Sales. Net sales for 1998 increased 7.5% over 1997 levels, topping $59.2
million. This increase in net sales was primarily due to the Company's
participation on the Boeing 737 Next Generation ("737NG") aircraft which
contributed $12.0 million to net sales, an increase of $6.1 million over 1997.
The Company's net sales during 1998 were negatively impacted by Boeing's phase
out of the 737 Classic which contributed $5.5 million in 1998, down from $10.2
million in 1997. The Company expects to derive less than $1.0 million in net
sales for the 737 Classic in 1999. The Company's participation on the 747
contributed $14.1 million in 1998, down slightly from $14.6 million in 1997.
However, the Company expects Boeing's production rate decreases in the 747 to
decrease net sales by approximately $7.0 million in 1999. Net sales for the
fourth quarter were down 13.6% to $12.1 million from $14.0 million in 1997. The
production rate declines and inventory adjustment from Boeing on the 747 reduced
net sales to $2.0 million in the fourth quarter from $3.7 million in 1997.
The Company expects to offset the declines in net sales on the 737 Classic and
747 with new contracts from Gulfstream for steel components for the G-IV and
G-V, Boeing Military for components used on the F-15, F-18 and C-17, and
Lockheed Martin for components used on the F-16 and C-130. These new contracts
should more than offset the net sales declines referred to above.
The acquisition of Precise Machine contributed $1.3 million to net sales in
1998.
Gross Profit. The Company's gross profit continued to climb in 1998, increasing
to $18.1 million (30.5% of net sales) from $16.1 million (29.3% of net sales) in
1997. This improvement was mainly attributable to the advances made by the
Company in utilizing lean manufacturing techniques to more efficiently produce
product and additional coverage of fixed costs provided by increased volume.
The Company's gross margin has stabilized at approximately 30%. The Company
expects to maintain this gross margin by utilizing lean manufacturing techniques
to more efficiently produce its product and offering targeted price reductions
to share these benefits with its customers.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses increased to $7.6 million (12.8% of net sales) in 1998
from $6.5 million (11.9% of net sales) in 1997. Included in Selling, General and
Administrative Expenses in 1998 was the settlement and legal fees relating to a
claim against the Company of approximately $0.3 million.
Interest Expense. Certain of the proceeds of the public offering were used to
reduce the indebtedness of the Company, thereby reducing interest expense to
$0.6 million in 1998 from $1.0 million in 1997. The unused portion of the
proceeds of the public offering were invested by the Company and increased other
income to $0.4 million in 1998 from $0.0 million in 1997.
Income Taxes. The effective tax rate for 1998 was 36.7%, down from 38.5% in
1997. This reduction is primarily the result of state and federal tax credits
available to the Company.
Net Income. The Company generated net income of $6.5 million in 1998, an
increase of 22.8% over 1997. Net income per fully diluted share was down $0.01
to $0.88 in 1998 due to the additional shares outstanding after the initial
public offering completed during 1998.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996Net Sales.
Net Sales for 1997 increased 57.3% to $55.1 million from $35.0 million for 1996.
This increase in net sales was primarily due (i) to increased orders from
customers for components historically fabricated by the Company resulting from
increased demand for commercial and corporate/regional aircraft, (ii) orders for
components not previously fabricated by the Company and (iii) successful
re-negotiation of prices for certain components and assemblies fabricated for
the Company's customers. Net sales for the fourth quarter were down 13.6% to
$12.1 million from $14.0 million in 1997. The production rate declines and
inventory adjustment from Boeing on the 747 reduced net sales to $2.0 million in
the fourth quarter from $3.7 million in 1997.
Gross Profit. Gross profit in 1997 increased 94.8% to $16.1 million (or 29.3% of
net sales) from $8.3 million (or 23.7% of net sales) in 1996. This improvement
in gross profit was primarily due to: (i) the increase in sales volume,
resulting in a greater absorption of fixed costs, (ii) beneficial impacts from
the Company's employment of lean manufacturing techniques, (iii) expanded
employee training programs and (iv) targeted capital investment over recent
years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million to $6.5 million (11.9% of net
sales) in 1997 from $5.3 million (15.0% of net sales) in 1996. Costs for wages,
salaries and related fringe benefits included in selling, general and
administrative expenses accounted for $1.0 million of this increase.
Interest Expense. Interest expense decreased slightly to $1.0 million in 1997
from $1.1 million in 1996. Such decrease resulted primarily from decreased
borrowings. In early 1998, the Company negotiated a new lending agreement which
replaced the outstanding revolving credit agreement, subordinated debt, and
demand note to a shareholder, substantially reducing the Company's cost of
borrowing.
Income Taxes. The effective income tax rate for 1997 and 1996 was 38.5% and
38.4%, respectively, resulting in total tax expense of $3.3 million in 1997 and
$0.7 million in 1996.
Net Income. As a result of the foregoing the net income of the Company increased
445.1% to $5.3 million (or 9.6% of net sales) in 1997 from $1.2 million (or 3.4%
of net sales) in 1996.
Liquidity and Capital Resources
During 1998, the Company completed its initial public offering, selling
2,645,000 shares at $10.00 per share ($23.5 million after fees and expenses of
$2.9 million). Immediately upon receipt of the cash from the public offering,
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 had
been secured by the Company's real estate. 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 public offering will be used to fund acquisitions, working capital needs, or
capital investment needs.
The Company has approval from its Board of Directors to repurchase up to
1,100,000 shares of its common stock. The Company had purchased 384,000 shares
by December 31, 1998 at a cost of $2.6 million.
In August, 1998, the Company completed the acquisition of Precise Machine
Company of Irving, Texas. The Company used $2.8 million of the public offering
proceeds to purchase the net assets of Precise.
The working capital needs of the Company are generally funded by cash flows from
operations. During 1998, operating activities generated $6.9 million. The
Company's inventory levels grew by $3.5 million. Finished goods growth accounted
for substantially all of the growth in inventories. The Company produced these
goods under firm purchase orders from its customers to allow its' employee base
to continue working as the Company manages through the impact of Boeing's
production rate decreases and the receipt of new Gulfstream, Lockheed Martin and
Boeing Military orders.
The Company invested over $5.5 million in property, plant and equipment during
1998. The Company completed a doubling of production space at its' Tulsa
facility, spending $1.1 million. Capital expenditures for 1999 are planned to be
approximately $3.5 million. Over $0.9 million of the investment was related to
an expansion of the Company's two St. Charles facilities, estimated to be
completed during the second quarter of 1999 for a total cost of $2.6 million.
The Company also invested $0.4 million in the build-out of a new facility it
leased in Auburn. Major equipment purchases during 1998 were $0.4 million for a
laser cutting machine in Auburn, creating a new capability for the Company, $0.2
million for an additional 5-axis machining center in St. Charles, and $0.2
million for a coordinate measuring machine in Wichita to support machining of
more complicated components. The Company also invested $0.6 million in computer
equipment and software.
Year 2000 Readiness Disclosure
The advent of the year 2000 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." If not
corrected, such computer technologies could produce, among other problems,
inaccurate, erroneous or unpredictable results or system failures (such failures
and their related impact on business operations hereinafter being referred to as
the "Year 2000 Problem").
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 systems, such as embedded chip machines
("Non-IT"), would be (i) assessed; (ii) updated, replaced and tested as
necessary, and (iii) monitored for compliance (the "Plan").
As of December 31, 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
Year 2000 concerns. The Company also identified the other IT systems which have
certain Year 2000 concerns and has plans to replace such programs. Additionally,
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 Year 2000 concerns. Finally, the Company assessed the
compliance of Precise's information systems and has opted to install the
Company's principal IT system at Precise. This installation was begun in the
first quarter of 1999 and should be complete in the second quarter of 1999.
What remains of this assessment phase is the completion of an assessment of the
Tulsa facility. Based on its preliminary results, the Year 2000 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
systems in Tulsa and at Precise, 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 Year 2000 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 Year 2000
concerns. As part of the Plan, however, the Company will continue to monitor
Year 2000 disclosures by, and make certain inquiries of, key providers and
agencies to the businesses that rely on them and will generally strive for Year
2000 preparedness against industry-wide and geographic Year 2000 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 Year 2000 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 Year 2000 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 of 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 Readiness Disclosure
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.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
The Company has determined that its market risk exposures, which arise primarily
from exposures to fluctuation in interest rates, are not material to its future
earnings, fair value, and cash flows.
Item 8. Financial Statements and Supplementary Data.
The following financial statements are included in Item 8 of this report:
Financial Statement Page
------------------- ----
Report of Ernst & Young LLP, Independent Auditors 18
Consolidated Balance Sheets as of December 31, 1997 and 1998 19
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998 20
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 22
Notes to Consolidated Financial Statements 23
Report of Independent Auditors
The Board of Directors and Stockholders
LMI Aerospace, Inc.
We have audited the accompanying consolidated balance sheets of LMI Aerospace,
Inc. (the "Company") as of December 31, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LMI
Aerospace, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 5, 1999
LMI Aerospace, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31
1997 1998
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 244 $ 11,945
Investments - 1,250
Trade accounts receivable, net of allowance
of $25 and $50, respectively 8,058 7,535
Inventories 8,701 12,619
Prepaid expenses 147 279
Deferred income taxes 502 876
Other current assets 109 256
-----------------------------
Total current assets 17,761 34,760
Property, plant, and equipment, net 15,652 19,489
Other assets 216 1,934
=============================
$ 33,629 $ 56,183
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,318 $ 3,768
Accrued expenses 1,940 2,437
Income taxes payable 430 442
Demand note payable to stockholder 250 -
Current installments of long-term debt 567 142
-----------------------------
Total current liabilities 6,505 6,789
Long-term debt, less current installments 9,274 2,732
Deferred income taxes 1,099 1,371
-----------------------------
Total noncurrent liabilities 10,373 4,103
Stockholders' equity:
Common stock of $.02 par value; authorized
28,000,000 shares; issued 5,908,471 and
8,734,422 shares in 1997 and 1998,
respectively
118 175
Preferred stock; authorized 2,000,000 shares;
none issued - --
Additional paid-in capital 1,543 26,164
Treasury stock, at cost, 384,000 shares
in 1998 -- (2,628)
Retained earnings 15,090 21,580
-----------------------------
Total stockholders' equity 16,751 45,291
=============================
$ 33,629 $ 56,183
=============================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Income
(Amounts in thousands, except per share data)
Year ended December 31
1996 1997 1998
----------------------------------------------
Net sales $35,016 $55,080 $59,234
Cost of sales 26,725 38,932 41,152
----------------------------------------------
Gross profit 8,291 16,148 18,082
Selling, general, and
administrative expenses
5,256 6,549 7,591
----------------------------------------------
Income from operations 3,035 9,599 10,491
Other income (expense):
Interest expense (1,123) (1,020) (642)
Other, net 15 10 405
----------------------------------------------
(1,108) (1,010) (237)
----------------------------------------------
Income before income taxes 1,927 8,589 10,254
Provision for income taxes 740 3,306 3,764
==============================================
Net income $ 1,187 $ 5,283 $ 6,490
==============================================
Net income per common share $0.21 $0.91 $0.89
==============================================
Net income per common share -
assuming dilution $0.20 $0.89 $0.88
==============================================
Weighted average common shares
outstanding 5,779,833 5,836,700 7,252,148
==============================================
Weighted average dilutive
stock options outstanding 11,150 76,104 146,942
==============================================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share and per share data)
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Capital Earnings Stock Equity
------------------------------------------------------------------------
Balance at December 31, 1995 $ 116 $ 1,268 $ 8,620 $ (38) $ 9,966
Sale of 7,896 shares of treasury
stock - - - 15 15
Purchase of 30,646 shares of
outstanding stock for treasury - - - (58) (58)
Exercise of options to purchase
41,125 shares of stock - (27) - 78 51
Net income - - 1,187 - 1,187
------------------------------------------------------------------------
Balance at December 31, 1996 116 1,241 9,807 (3) 11,161
Sale of 1,365 shares of treasury
stock - 2 - 3 5
Issuance of 80,977 shares of stock 2 295 - - 297
Exercise of options to purchase
3,290 shares of stock - 5 - - 5
Net income - - 5,283 - 5,283
------------------------------------------------------------------------
Balance at December 31, 1997 118 1,543 15,090 - 16,751
Issuance of 2,809,500 shares of
common stock 57 24,592 - - 24,649
Exercise of options to purchase
16,450 shares of stock - 29 - - 29
Purchase of 384,000 shares of
outstanding stock for treasury - - - (2,628) (2,628)
Net income - - 6,490 - 6,490
========================================================================
Balance at December 31, 1998 $ 175 $ 26,164 $ 21,580 $ (2,628) $ 45,291
========================================================================
See accompanying notes.
LMI Aerospace, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year ended December 31
1996 1997 1998
-------------------------------------------------------
Operating activities
Net income $ 1,187 $ 5,283 $ 6,490
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,012 2,179 2,633
Deferred income taxes 214 14 (102)
Changes in operating assets and liabilities:
Trade accounts receivable (595) (1,472) 874
Inventories (1,544) (1,506) (3,455)
Prepaid expenses and other assets (232) 63 (519)
Income taxes payable 513 (85) 12
Accounts payable 609 719 413
Accrued expenses 520 580 547
-------------------------------------------------------
Net cash from operating activities 2,684 5,775 6,893
Investing activities
Additions to property, plant, and equipment, net (1,304) (3,713) (5,488)
Purchases of investments - - (3,138)
Proceeds from sale of investments, net - - 1,888
Acquisition of company, net of cash acquired - - (2,791)
-------------------------------------------------------
Net cash from investing activities (1,304) (3,713) (9,529)
Financing activities
Proceeds from issuance of long-term debt 3,550 3,782 2,074
Principal payments on long-term debt (4,914) (6,112) (9,291)
Purchases of/proceeds from treasury stock
transactions, net (43) 5 (2,628)
Proceeds from exercise of stock options 51 5 29
Proceeds from issuance of common stock, net - 297 24,153
-------------------------------------------------------
Net cash from financing activities (1,356) (2,023) 14,337
-------------------------------------------------------
Net increase in cash and cash equivalents 24 39 11,701
Cash and cash equivalents, beginning of year 181 205 244
=======================================================
Cash and cash equivalents, end of year $ 205 $ 244 $ 11,945
=======================================================
Supplemental disclosures of cash flow information:
Interest paid $ 1,191 $ 996 $ 601
Income taxes paid 14 3,378 3,733
Common stock contributed to profit sharing plan - - 296
Stock bonus issued to officer of the company - - 200
=======================================================
See accompanying notes.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except Share and per Share data)
December 31, 1998
1. Accounting Policies
Description of Business
LMI Aerospace, Inc. (the "Company") 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 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 46 percent, 59
percent, and 62 percent of the Company's total revenues in 1996, 1997, and 1998.
Accounts receivable balances related to direct sales to this customer were 62
percent in 1997 and 1998. Indirect sales to the Company's largest customer
accounted for 20 percent, 17 percent and 12 percent of the Company's total sales
in 1996, 1997, and 1998, respectively.
Direct sales to the Company's second largest customer accounted for 19 percent,
13 percent and 12 percent of the Company's total revenues in 1996, 1997 and 1998
and represented 14 percent and 9 percent of the accounts receivable balance at
December 31, 1997 and 1998, respectively.
The Company purchased approximately 50 percent and 58 percent of the materials
used in production from three suppliers in 1997 and 1998, respectively.
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.
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.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
Investments
During 1998, the Company purchased, sold and repurchased common stock. This
investment is classified as a trading security. The Company's investment is
stated at current market value using the quoted market price at December 31,
1998. The overall position of this investment at December 31, 1998 resulted in
an immaterial gain which was recorded in the Consolidated Statements of Income.
Subsequent to December 31, 1998, the Company liquidated its investment position
for an overall immaterial gain.
Inventories
Inventories are stated at the lower of cost or market using actual cost for raw
materials and work-in-process and average cost for finished goods. Inventories
include certain deferred production costs related to long-term production
contracts. These costs are included in cost of sales over the life of the
contract based on a percentage of completion method (units-of-delivery basis).
Revenue Recognition
Revenues are recorded when services are performed or when products are shipped,
except for long-term contracts which are recorded on the percentage of
completion method (units-of-delivery basis). Sales from long-term contracts were
less than 10 percent of total sales for each year in the three-year period ended
in 1998. Revenues which have been deferred under long-term contracts are $321
and $728 as of December 31, 1997 and 1998, respectively and are included in
accrued expenses.
Property and Equipment
Property 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.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement and
income tax basis of the Company's assets and liabilities.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company
has elected to continue to measure its cost of stock-based compensation under
the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
Financial Instruments
Fair values of the Company's fixed rate long-term obligations approximate their
carrying value, as the rates approximate those which could be obtained by the
Company for similar issues with similar maturities. The Company's investments
are carried at market value. 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
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
fully 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.
Earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the applicable periods.
2. Initial Public Offering
In April 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 the Company's unissued common stock. In connection
with the initial public offering, the Company effected a 2.29-for-1 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. In June 1998, the Company
completed its initial public offering selling 2,645,000 shares (including the
underwriters 15 percent 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 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 services 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, net of cash
acquired, was approximately $2,791 in cash.
This acquisition has been accounted for by the purchase method, and accordingly,
the results of operations were included in the Company's Consolidated Statements
of Income 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 $1,557, was allocated to goodwill and is being
amortized over a 25-year period on a straight-line basis. Amortization of
goodwill through December 31, 1998 was approximately $24.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
4. Treasury Stock Transactions
On September 25, 1998, the Company announced its Board of Directors authorized
the Company's repurchase of up to 600,000 shares of the Company's common stock.
Over the remainder of the year, the Company purchased 384,000 shares in the open
market at prices ranging from $5.25 to $7.125 per share. These transactions were
recorded at cost in stockholders' equity.
5. Inventories
Inventories consist of the following:
1997 1998
------------------------------------------
Raw materials $2,990 $ 3,483
Work in process 3,875 3,717
Finished goods 1,836 5,419
==========================================
$8,701 $ 12,619
==========================================
6. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
1997 1998
------------------------------------------
Land $ 638 $ 690
Buildings 7,405 8,714
Machinery and equipment 18,376 21,660
Leasehold improvements 426 950
Construction in progress 298 1,037
Other assets 523 875
------------------------------------------
27,666 33,926
Less accumulated depreciation 12,014 14,437
==========================================
$ 15,652 $ 19,489
==========================================
Depreciation expense (including amortization expense on capital leases) recorded
by the Company totaled $1,907, $2,058, and $ 2,550 for 1996, 1997, and 1998,
respectively.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
7. Long-Term Debt
Long-term debt consists of the following:
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% 1,233 308
Subordinated debentures, interest payable monthly, at a fixed
rate of 11% 800 --
Capital lease obligations 117 66
-----------------------------------------
9,841 2,874
Less current installments 567 142
=========================================
$ 9,274 $ 2,732
=========================================
On March 31, 1998, the Company obtained a $15,000 unsecured line of credit with
Magna Bank N.A, now Union Planters Bank, N.A. ("Union"), 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, as defined, requirements. The
credit facility prohibits the payment of cash dividends on common stock without
Union's prior written consent.
The Industrial Development 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 1998,
respectively), not to exceed 12 percent. The IRB is secured by a letter of
credit, and Union, which holds 100 percent participation in the letter of
credit, has a security interest in certain equipment. The bond matures in
November 2000.
The aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
Year ending December 31:
1999 $ 142
2000 2,598
2001 89
2002 45
==================
$ 2,874
==================
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
8. Leases
The Company leases certain facilities and equipment under various noncancelable
operating lease agreements which expire at various dates throughout 2009. At
December 31, 1998, the future minimum lease payments under operating leases with
initial noncancelable terms in excess of one year are as follows:
Year ending December 31:
1999 $ 842
2000 683
2001 678
2002 667
2003 673
Thereafter 1,458
===================
$ 5,001
===================
Rent expense totaled $364, $539, and $836 in 1996, 1997, and 1998, respectively.
9. 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 to the employees after seven years. Contributions by the
Company to the profit sharing plan totaled $74, $150 and $256 for 1996, 1997,
and 1998, 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 $225 per employee.
The Company's contributions to the 401(k) plan totaled $52, $78, and $104 for
1996, 1997, and 1998, respectively.
10. Stock Options
In December 1989, the Company adopted the Employee Incentive Stock Option Plan
(the "1989 Plan"), which provides options for up to 1,398,250 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. All options vest
immediately upon grant. During 1998, the Company discontinued the 1989 Plan, and
the options granted under this plan will expire if unexercised by December 31,
1999.
In 1998, the Company adopted the 1998 Employee Stock Option Plan (the "1998
Plan"), which provides options for up to 600,000 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 1998 Plan are
at the discretion of management and may be in the form of Incentive Stock
Options or Non-Qualified Stock Options. Vesting periods may apply.
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
During 1998, the Company granted 34,500 options to key employees under the terms
and conditions of the 1998 Plan and 44,086 options to key employees under the
terms and conditions of the 1989 Plan prior to its discontinuance.
Stock option activity under the plans is as follows:
1996 1997 1998
---------------------------- ---------------------------- -----------------------------
Number of Option Number of Option Number of Option
Shares Prices Shares Prices Shares Prices
------------ --------------- ------------- -------------- ------------- ---------------
Options outstanding at
beginning of year 174,370 $1.24 to $1.90 241,815 $1.77 to $1.90 232,192 $1.77 to $3.67
Granted 116,795 $1.90 59,467 $2.60 to $3.67 78,586 $4.64 to $6.25
Exercised (41,125) $1.24 (3,290 $1.77 (16,450) $1.77
Canceled (8,225) $1.64 (65,800) $1.90 - -
------------ ------------- -------------
Options outstanding at
end of year 241,815 $1.77 to $1.90 232,192 $1.77 to $3.67 294,328 $1.77 to $6.25
============ =============== ============= ============== ============= ===============
Options exercisable at
end of year 241,815 - 232,192 - 263,278 -
============ =============== ============= ============== ============= ===============
Options available for
grant at end of year 1,033,060 - 1,039,393 - 565,500 -
============ =============== ============= ============== ============= ===============
The weighted average exercise price of outstanding options at December 31, 1996,
1997 and 1998 was $1.88, $2.31 and $3.21, respectively. The weighted average
fair value per stock option granted during 1996, 1997, and 1998 was $.41, $.67
and $2.35 respectively, measured on the date of grant using the Black-Scholes
Option Pricing model with the following assumptions: volatility of 71.8 percent;
0 percent dividend yield; an expected life of 2.5 years, 1.5 to 2.25 years, and
1 to 4.75 years for 1996, 1997, and 1998, respectively; and a risk-free rate of
5.20 percent, 5.26 percent, and 4.52 percent for 1996, 1997, and 1998. 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.
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:
1996 1997 1998
----------------------------------------------
Net income:
As reported $ 1,187 $ 5,283 $ 6,490
Pro forma 1,155 5,256 6,408
Net income per common share
As reported .21 .91 .89
Pro forma .20 .90 .88
Net income per common share
Assuming dilution:
As reported .20 .89 .88
Pro forma .20 .89 .87
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
11. 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
deferred tax liabilities are as follows:
1997 1998
----------------------------------------
Deferred tax asset:
Accrued vacation $ 158 $ 179
Inventory 186 296
Other 158 401
----------------------------------------
Total deferred tax assets 502 876
Deferred tax liabilities:
Depreciation (1,074) (1,180)
Software costs -- (191)
Other (25) --
----------------------------------------
Total deferred tax liabilities (1,099) (1,371)
========================================
Net deferred tax liability $ (597) $ (495)
========================================
The Company's income tax provision consisted of the following for the year ended
December 31:
1996 1997 1998
---------------------------------------------------------
Federal:
Current $ 471 $ 2,937 $ 3,579
Deferred 182 (17) (90)
---------------------------------------------------------
653 2,920 3,489
State:
Current 55 355 287
Deferred 32 31 (12)
---------------------------------------------------------
$740 $3,306 $ 3,764
=========================================================
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
1996 1997 1998
------------------------------------------------
Federal taxes $ 653 $2,920 $ 3,489
State and local taxes,
net of federal
benefit 57 258 305
Other 30 128 (30)
================================================
Provision for income taxes $740 $3,306 $ 3,764
================================================
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
12. 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.
13. Quarterly Financial Data (Unaudited)
First Second Third Fourth
-------------------------------------------------
1997
Net sales $12,690 $14,383 $13,975 $14,032
Cost of sales 9,393 10,266 9,598 9,675
Net income 939 1,350 1,577 1,417
Net income per common share .16 .23 .27 .24
Net income per common share -
assuming dilution .16 .23 .27 .24
1998
Net sales $ 16,335 $ 15,657 $ 15,165 $ 12,077
Cost of sales 11,502 10,841 10,454 8,355
Net income 1,659 1,723 1,678 1,430
Net income per common share .28 .29 .19 .17
Net income per common share -
assuming dilution .28 .28 .19 .17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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
14(a) for the Company's 1999 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference. Also see item
4(a) of Part I hereof.
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,"
and "Employment Arrangements with Named Officers" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1999
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 "Voting Securities and Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14(a) for the
Company's 1999 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 14(a)
for the Company's Annual Meeting of Shareholders, which involves the election of
directors, is incorporated herein by this reference.
PART IV
Item 14. 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. 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
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Company during
the fourth quarter of the Registrant's fiscal year ended
December 31, 1998.
(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 30th day of March, 1999.
LMI AEROSPACE, INC.
(Registrant)
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, March 30, 1999
Ronald S. Saks President, and Director
- ---------------------------- Chairman of the Board,
Joseph Burstein and Director March ___, 1999
/s/ Lawrence J. LeGrand
- ----------------------------- Chief Operating Officer and March 30, 1999
Lawrence J. LeGrand Director
/s/ Lawrence E. Dickinson
- ----------------------------- Chief Financial Officer and March 30, 1999
Lawrence E. Dickinson Secretary
/s/ Duane Hahn
- ----------------------------- Vice President, Regional March 30, 1999
Duane Hahn Manager and Director
/s/ Sanford S. Neuman
- ----------------------------- Assistant Secretary March 30, 1999
Sanford S. Neuman and Director
- ----------------------------- Director March ___, 1999
Thomas M. Gunn
/s/ Alfred H. Kerth
- ----------------------------- Director March 30, 1999
Alfred H. Kerth
- ----------------------------- Director March ___, 1999
Thomas Unger
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of the Registrant previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
3.2 Amended and Restated By-Laws of the Registrant previously filed on
Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
4.1 Form of the Registrant's Common Stock Certificate previously filed
on Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
10.1 1989 Stock Option Plan, including all amendments previously filed on
Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
10.2 Employment Agreement, dated January 1, 1997, between the Registrant
and Ronald S. Saks, as previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.3 Employment Agreement, effective as of May 1, 1998, between the
Registrant and Lawrence J. LeGrand, as previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
10.4 Employment Agreement, dated January 1, 1998, between the Registrant
and Duane E. Hahn as previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.5 Employment Agreement, dated January 1, 1998, between the Registrant
and Phillip A. Lajeunesse previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.6 Employment Agreement, dated January 1, 1998, between the Registrant
and Robert T. Grah previously filed on Form S-1 dated as of June 29,
1998 and incorporated herein by reference
10.7 Employment Agreement, dated January 1, 1998, between the Registrant
and Bradley L. Nelson previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.8 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 on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.9 Lease Agreement, dated June 28, 1988, between the Registrant and J &
R Sales, including all amendments (Leased premises at 204 H Street)
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.10 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 on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.11 Lease Agreement, dated February 1, 1995, between the Registrant and
RFS Investments (Leased premises at 2621 West Esthner Court)
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.12 Profit Sharing and Savings Plan and Trust, including all amendments
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.13 Loan Agreement between the Registrant and Magna Bank, N.A. dated
August 15, 1996, including all amendments previously filed on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.14 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 on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.15 General Terms Agreement, Special Terms Agreement and Warranty
Agreements, between the Registrant and Boeing Seattle previously
filed on Form S-1 dated as of June 29, 1998 and incorporated herein
by reference
10.16 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 on Form S-1 dated as of June 29, 1998 and incorporated herein
by reference
10.17 Form of Contract between the Registrant and Boeing Wichita
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.18 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 Northrop Grumman previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
10.19 1998 Stock Option Plan, previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.20 Amendment No. 5 to 1989 Stock Option Plan, previously filed on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.21 Restricted Stock Agreement with Lawrence J. LeGrand, dated as of
April 27, 1998, previously filed on Form S-1 dated as of June 29,
1998 and incorporated herein by reference
10.22 Subscription Agreement with Lawrence J. LeGrand, dated as of April
27, 1998, previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.23 General Terms Agreement between Boeing Company and Leonard's Metal,
Inc. with Special Business Provision attached, previously filed on
Form 10-Q dated as of November 16, 1998 and incorporated herein by
reference
10.24 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 (filed herewith)
10.25 Employment Agreement dated August 25, 1998, between Precise Machine
Partners, L.L.P. and John R. Krystinik (filed herewith)
10.26 First Amendment to Restricted Stock Agreement with Lawrence J.
LeGrand, dated as of April 27, 1998 (filed herewith)
10.27 Second Amendment to Restricted Stock Agreement with Lawrence J.
LeGrand, dated March 26, 1999 (filed herewith)
10.28 First Amendment to Subscription Agreement with Lawrence J. LeGrand,
dated April 27, 1998 (filed herewith)
10.29 Second Amendment to Subscription Agreement with Lawrence J. LeGrand,
dated March 26, 1999 (filed herewith)
16.1 Letter from KPMG Peat Marwick, LLP as to statements regarding change
in certified accountants previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
21.1 List of Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)