10-Q 1 lmi10q081604.txt FORM 10-Q DATED 8/16/2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2004. |_| Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission file number: 000-24293 LMI AEROSPACE, INC. (Exact name of registrant as specified in its charter) Missouri 43-1309065 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3600 Mueller Road St. Charles, Missouri 63302-0900 (Address of principal executive offices) (Zip Code) (636) 946-6525 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No _X_ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares oustanding Title of class of common stock as of August 16, 2004. ------------------------------ --------------------------- Common Stock, par value $.02 per share 8,181,786 LMI AEROSPACE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDING JUNE 30, 2004 PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements (unaudited). Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003. 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003. 5 Notes to Condensed Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24 Item 4. Controls and Procedures. 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 26 Item 4. Submission of Matters to a Vote of Security Holders. 26 Item 6. Exhibits and Reports on Form 8-K. 27 SIGNATURE PAGE 28 EXHIBIT INDEX 29 LMI Aerospace, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands, except share and per share data)
(Unaudited) June 30, 2004 December 31, 2003 ------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 945 $ 441 Trade accounts receivable, net of allowance of $284 at June 2004 and $245 at December 31, 2003 9,781 9,158 Inventories 24,043 24,159 Prepaid expenses 1,102 787 Deferred income taxes 2,206 2,206 Income taxes receivable 718 1,933 ------------------------------------------------------- Total current assets 38,795 38,684 Property, plant and equipment, net 20,789 22,248 Goodwill 5,653 5,653 Customer intangible assets, net 3,600 3,792 Other assets 489 142 ------------------------------------------------------- Total assets $69,326 $70,519 ======================================================= Liabilities and stockholders' equity Current liabilities: Accounts payable $ 6,198 $ 4,570 Accrued expenses 2,977 2,126 Current installments of long-term debt and capital lease obligations 18,457 6,069 ------------------------------------------------------- Total current liabilities 27,632 12,765 Long-term debt and capital lease obligations, less current installments 7,108 21,756 Deferred income taxes 2,206 2,206 ------------------------------------------------------- Total long-term liabilities 9,314 23,962 Stockholders' equity: Common stock, $.02 par value per share; authorized 28,000,000 shares; issued 8,736,427 shares in both periods 175 175 Preferred stock, $.02 par value per share; authorized 2,000,000 shares; none issued in both periods - - Additional paid-in capital 26,171 26,171 Treasury stock, at cost, 554,641 shares in both periods (2,632) (2,632) Accumulated other comprehensive income (loss) (8) 20 Retained earnings 8,674 10,058 ------------------------------------------------------- Total stockholders' equity 32,380 33,792 ------------------------------------------------------- Total liabilities and stockholders' equity $69,326 $70,519 =======================================================
See accompanying notes. LMI Aerospace, Inc. Condensed Consolidated Statements of Operations (Amounts in thousands, except per share and per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ------------------------------------------------------------------- Net sales $ 21,875 $ 18,865 $ 40,415 $ 39,707 Cost of sales 17,548 16,436 33,417 35,059 ------------------------------------------------------------------- Gross profit 4,327 2,429 6,998 4,648 Selling, general and administrative expenses 3,406 3,249 6,622 6,559 Restructuring charges 156 - 685 - ------------------------------------------------------------------- Income (loss) from operations 765 (820) (309) (1,911) Other income (expense): Interest expense (563) (387) (1,008) (827) Other, net 8 30 8 29 ------------------------------------------------------------------- Income (loss) before income taxes 210 (1,177) (1,309) (2,709) Provision for (benefit of) income taxes 75 (438) 75 (1,012) ------------------------------------------------------------------- Net income (loss) $ 135 $ (739) $ (1,384) $ (1,697) =================================================================== Amounts per common share basic and dilutive: Net income (loss) per common share $ 0.02 $ (0.09) $ (0.17) $ (0.21) =================================================================== Weighted average common shares outstanding 8,181,786 8,181,786 8,181,786 8,181,786 ===================================================================
See accompanying notes. LMI Aerospace, Inc. Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited)
Six Months Ended June 30, 2004 2003 --------------------------------------- Operating activities: Net loss $ (1,384) $ (1,697) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,320 2,457 Non-cash loss on sale of equipment 18 - Changes in operating assets and liabilities: Trade accounts receivable (623) 3,370 Inventories 116 (1,935) Prepaid expenses and other assets (688) 29 Income taxes 1,254 (450) Accounts payable 1,628 (1,324) Accrued expenses 812 (378) --------------------------------------- Net cash provided by operating activities 3,453 72 Investing activities: Additions to property, plant and equipment (666) (636) Proceeds from sale of equipment 5 301 --------------------------------------- Net cash used by investing activities (661) (335) Financing activities: Net borrowings on revolving line of credit 1,093 3,241 Principal payments on long-term debt (3,353) (2,510) --------------------------------------- Net cash (used by) provided by financing activities (2,260) 731 Effect of exchange rate changes on cash (28) - --------------------------------------- Net increase (decrease) in cash and cash equivalents 504 468 Cash and cash equivalents, beginning of year 441 1,182 --------------------------------------- Cash and cash equivalents, end of quarter $ 945 $ 1,650 ======================================= Supplemental disclosures of cash flow information: Interest paid $ 869 $ 859 Income taxes paid (refunded), net $ (1,187) $ (550)
See accompanying notes. LMI Aerospace, Inc. Notes to Condensed Consolidated Financial Statements (Dollar amounts in thousands, except share and per share data) (Unaudited) June 30, 2004 1. Accounting Policies Description of Business LMI Aerospace, Inc. (the "Company") fabricates, machines and integrates formed, close tolerance aluminum and specialty alloy components for use by the aerospace and laser equipment industries. The Company is a Missouri corporation with headquarters in St. Charles, Missouri. The Company maintains facilities in St. Charles, Missouri; Auburn, Washington; Tulsa, Oklahoma; Wichita, Kansas; Irving, Texas; Sun Valley and Oceanside, California; Pooler, Georgia; and Langley, British Columbia. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results for the six months ending June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the condensed consolidated financial statements and accompanying footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission. The Company's losses from operations in recent years together with its inability to meet certain covenants under its loan agreement have raised substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is ultimately dependent on its ability to improve operating performance such that it can operate profitably, sustain positive operating cash flows and support its required financial covenants with its primary lender. Management is currently seeking alternative financing arrangements and pursuing the sale of certain assets to replace its current lender and secure additional funds. However, there is no assurance that the Company will be successful in improving its operating results, obtaining alternative financing or consummating the sale of assets. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared on the going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business, although the report of our independent accountant as of and for the year ended December 31, 2003 expresses substantial doubt as to the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Operating Results and Management's Plan In response to the substantial doubt about the Company's ability to continue as a going concern, management has reduced the Company's cost structure, improved the Company's processes and systems and implemented strict controls over capital spending. Management believes these activities will continue to improve the Company's results of operations, cash flows from operations and its future prospects. As a result of all the factors cited, management of the Company believes that the Company should be able to sustain its operations and continue as a going concern. However, the ultimate outcome of this uncertainty cannot be presently determined. Accordingly, there remains doubt as to whether the Company will be able to continue as a going concern. As discussed in the Company's Annual Report on Form 10-K, the Company has undertaken a plan to reduce operating expenses, increase efficiencies and align its cost structure with current levels of demand for its products. On July 23, 2003, as outlined in Note 7 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q, the Company announced the details of a restructuring plan for its St. Charles operations, which includes the rationalization of the work force and the closure of two of the four St. Charles facilities. In addition, in December 2003, the Company announced an additional restructuring program at its Wichita facility which included the reduction of workforce and the sale of an LMI owned building and excess equipment. On March 30, 2004, the Company and Union Planters Bank N.A. ("Union Planters") entered into a Thirteenth Amendment to Loan Agreement ("Thirteenth Amendment"), amending the Loan Agreement dated as of August 15, 1996 (the "Loan Agreement") between Leonard's Metal, Inc., the predecessor in interest to the Company, and Magna Bank, National Association, the predecessor in interest to Union Planters. The primary purposes of the Thirteenth Amendment were to (a) extend the maturity of the Company's Revolving Line of Credit provided under the Loan Agreement ("Revolving Credit Loan") from March 31, 2004 to March 31, 2005, and (b) waive a default arising under the Loan Agreement providing for the maintenance of a minimum consolidated EBITDA amount (the "EBITDA Covenant") for the period ended December 31, 2003. The Thirteenth Amendment contemplates the full repayment of all indebtedness under the Loan Agreement by March 31, 2005 through the sale of one or more businesses of the Company and/or the procurement of alternative financing. Please see Note 4 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q for more detailed information relating to the Company's debt and the Thirteenth Amendment. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock-Based Compensation The Company accounts for its stock-based compensation in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and provides the pro forma disclosures required by Statements of Financial Accounting Standards No. ("SFAS") 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. No stock-based employee compensation expense is recognized in the statement of operations, as all options granted had an exercise price equal to the fair value of the underlying common stock on the date of grant. Had the Company determined compensation cost based on the fair value of the underlying common stock at the grant date under SFAS No. 123, net income and earnings per share amounts would have been as follows:
Three Months Ended Six Months Ended June 30, June 30, ----------------------------------------------------------------- 2004 2003 2004 2003 Net income (loss) $ 135 $ (739) $ (1,384) $ (1,697) Total stock-based employee compensation expense determined under fair value based method, net of tax effect 2 (23) 12 (37) ----------------------------------------------------------------- Pro forma net income (loss) $ 137 $ (762) $ (1,372) $ (1,734) ================================================================= Net income (loss) per common share - basic and assuming dilution As reported $ 0.02 $ (0.09) $ (0.17) $ (0.21) Pro forma $ 0.02 $ (0.09) $ (0.17) $ (0.21)
2. Inventories Inventories consist of the following:
June 30, 2004 December 31, 2003 --------------------------- --------------------------- Gross inventory Raw materials $ 4,036 $ 3,877 Work in progress 6,901 6,238 Finished goods 16,032 16,864 ---------------------------- --------------------------- Total gross inventory 26,969 26,979 Reserves Lower of cost or market (314) (647) Obsolescence & slow moving (2,612) (2,173) ---------------------------- --------------------------- Total reserves (2,926) (2,820) Net inventory $ 24,043 $ 24,159 ============================ ===========================
The Company performed an in-depth analysis of inventory obsolescence and slow moving products at the end of the fourth quarter of 2003. This analysis was based on the current markets for the Company's products and the change in the buying patterns of the Company's major customers. The result of this analysis was the recording in the fourth quarter of 2003 of an additional obsolescence reserve of $1,421. The Company's reserve for obsolescence and slow moving products totaled $2,612 at June 30, 2004 and $2,173 at December 31, 2003. In the fourth quarter of 2002, the Company established a lower of cost or market (LOCOM) reserve to accrue losses on components which had inadequate pricing, high levels of scrap and high amounts of inefficient labor; on June 30, 2004 and December 31, 2003, this reserve was at $314 and $647, respectively. The total for both the reserve for obsolescence and slow moving products and the reserve for LOCOM was $2,926 and $2,820 for June 30, 2004 and December 31, 2003, respectively. 3. Goodwill and Intangibles As required by SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company performs an annual goodwill impairment test on a reporting segment basis. A fair value approach is utilized by management regarding projected cash flows and other factors to determine the fair value of the respective assets. If required, an impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its fair value. In the fourth quarter of 2003, the Company performed the required annual impairment test under SFAS No. 142 and concluded that the remaining goodwill balance, which relates to the Machining and Technology segment only, was not further impaired. The remaining goodwill was $5,653 at June 30, 2004 and December 31, 2003. Customer Related Intangibles The carrying amount of customer related intangibles at June 30, 2004 and December 31, 2003 were as follows:
Gross Accumulated Useful Amount Amortization Life ---------------- ----------------- ------------------ Versaform $ 3,975 $464 15 years Stretch Forming Corp. 329 240 3.5 years ---------------- ----------------- June 30, 2004 $ 4,304 $704 ================ ================= Versaform $ 3,975 $332 Stretch Forming Corp. 329 180 ---------------- ----------------- December 31, 2003 $ 4,304 $512 ================ =================
Customer related intangibles amortization expense was $192 for the six months ended both June 30, 2004 and June 30, 2003 and was $385 for the year ended December 31, 2003. 4. Long-Term Debt and Revolving Line of Credit Long-term debt and revolving line of credit consists of the following:
June 30, December 31, 2004 2003 ------------------------------ Term Loans: Tempco $ 7,458 $ 9,670 Versaform 8,381 9,167 Revolving line of credit 8,777 7,684 Note payable to director, principal and interest payable monthly at 7% 397 614 Notes payable, principal and interest payable monthly, at fixed rates, ranging from 6.99% to 10.00% 552 679 Capital lease obligations - 11 ------------------------------ Total debt 25,565 27,825 Less current installments 18,457 6,069 ------------------------------ Total long term debt $ 7,108 $21,756 ==============================
The Loan Agreement with Union Planters consists of the Revolving Credit Loan, a term loan to finance the Company's purchase of Tempco ("Tempco Term Loan") and a term loan to finance the Company's purchase of Versaform ("Versaform Term Loan"). The Loan Agreement is secured by all the domestic assets of the Company and requires compliance with certain non-financial and financial covenants, including minimum levels of tangible net worth and the EBITDA Covenant. On January 5, 2004 the Company extended the term of its Loan Agreement to March 31, 2004, received a waiver for certain non-financial covenants and agreed to a fee of $75. Subsequently, on March 30, 2004, the Company and Union Planters entered into the Thirteenth Amendment. The primary purposes of the Thirteenth Amendment were to (a) extend the maturity of the Company's Revolving Credit Loan from March 31, 2004 to March 31, 2005 and (b) waive a default arising under the EBITDA Covenant for the period ended December 31, 2003. In addition, under the terms of the Thirteenth Amendment: o The maximum principal amount of the Revolving Credit Loan was increased from approximately $9,088 to $9,700 through September 30, 2004, subject to a borrowing base calculation and further subject to a newly established inventory reserve requirement and a more restrictive requirement for eligible receivables, which, notwithstanding the increased borrowing maximum amount provided by the Thirteenth Amendment, could reduce the amount of borrowing available under the Revolving Credit Loan. o The interest rate on the Revolving Credit Loan was changed from LIBOR plus 2.5% to prime plus 1.0%. (The prime rate was 4.0% at June 30, 2004.) Moreover, because the Company had not executed and delivered a letter of intent regarding (i) the sale of the stock or of all or substantially all of the assets of certain of its subsidiaries, and/or (ii) the procurement by the Company of debt financing providing the Company with sufficient funds to repay in full the Company's obligations to Union Planters ("Letter of Intent") on or before June 30, 2004, the interest rate on the Revolving Credit Loan was increased to prime plus 1.5% and will be further increased to prime plus 2.0% if the Company has not paid all of its obligations to Union Planters in full on or before September 30, 2004. The interest rate on the Tempco Term Loan provided under the Loan Agreement, which, as of June 30, 2004, had a total outstanding principal balance of approximately $7,458, was changed from LIBOR plus 3.0%, subject to a floor of 7.0% and a ceiling of 8.5%, to prime plus 2.0%, subject to a floor of 7.0%. The interest rate on the Versaform Term Loan provided under the Loan Agreement, which, as of June 30, 2004, had a total outstanding principal balance of approximately $8,381, was changed from LIBOR plus 3.0% to prime plus 2.0%. Moreover, because the Company had not executed and delivered a Letter of Intent on or before June 30, 2004, the interest rate on the Tempco Term Loan and the Versaform Term Loan was increased to prime plus 2.5% and will be further increased to prime plus 3.0% if the Company has not paid all of its obligations to Union Planters in full on or before September 30, 2004. o Because the Company did not enter into one or more Letters of Intent by June 30, 2004, a fee of $125 will be payable on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations. This fee has been accrued and recorded by the Company in interest expense in the second quarter of 2004. o If the Company fails to pay all of its obligations in full to Union Planters by September 30, 2004, a fee of $350 will be payable to Union Planters ($100 on October 1, 2004 and $250 on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations). o If the Company fails to pay all of its obligations in full to Union Planters by December 30, 2004, a fee of $200 will be payable to Union Planters ($100 on December 31, 2004 and $100 on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations). Thus, increased interest rates and additional fees will apply during the remaining term of the Loan Agreement (through March 31, 2005) if the indebtedness under the Loan Agreement is not repaid in full through alternative financing and/or sales of assets by certain prescribed dates. The Company has engaged Lincoln Partners LLC, a Chicago, Illinois based investment banking firm, to assist in these efforts. At December 31, 2003, the Company's Revolving Credit Loan allowed for a $9,088 line of credit, subject to a borrowing base calculation, to fund various corporate needs. Interest was payable monthly based on a ninety day LIBOR plus 2.25% and was 3.67% at December 31, 2003. The Company had $7,684 outstanding on this line at December 31, 2003. This facility was amended in January 2004 to extend maturities to March 31, 2004 and included an increase in interest to LIBOR plus 2.5%. On March 30, 2004, the Company further amended the Loan Agreement to extend the Revolving Credit Loan maturity to March 31, 2005 and establish the Revolving Credit Loan line at $9,700 until September 30, 2004, and $9,000 thereafter, each subject to a borrowing base. The Revolving Credit Loan interest was amended to prime plus 1.0% with possible adjustments as described above. This increase was due to the net loss in the first quarter of 2004. The Company's revolving credit line at June 30, 2004 was at $8,777, with an additional line capacity of $923. The credit facility prohibits the payment of cash dividends on common stock without the prior written consent of Union Planters. The Company borrowed $14,250 (Tempco Term Loan) on April 2, 2001 to finance the Tempco acquisition. The Tempco Term Loan required monthly principal and interest payments over three years using a seven-year amortization and bearing interest at the ninety day LIBOR plus 3.0%, subject to a cap of 8.5% and a floor of 7.0%. On March 30, 2004 the Company amended this note establishing a maturity of March 31, 2005 and interest at prime plus 2.0% with possible adjustments as described above. The interest rate was 7.0% at June 30, 2004 and December 31, 2003. The Versaform Term Loan was issued for $11,000 on May 15, 2002. The Versaform Term Loan required monthly principal and interest payments over three years using a seven-year amortization and bears interest at the ninety-day LIBOR plus 3.0%. The interest rate was 6.0% at June 30, 2004 and 4.2% at December 31, 2003. On March 30, 2004 the Company amended this note increasing interest to prime plus 2.0% with possible adjustments as described above. The March 30, 2004 amendment did not change the original maturity of October 15, 2005 as stated in the Versaform Term Loan agreement. The Company entered into a note payable for $1,300 with the prior owner of Versaform in connection with the acquisition. The prior owner has since become a member of the board of directors of the Company. This note is payable monthly over three years and bears interest at 7.0%. This note is secured by 65% of the stock of the Company's Canadian subsidiary. The Company entered into other various notes payable for the purchase of certain equipment. The notes are payable in monthly installments including interest ranging from 6.99% - 10.0% through November 2006. The notes payable are secured by equipment. 5. Business Segment Information As set forth in the criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company is organized into two reportable segments: the Sheet Metal segment and the Machining and Technology segment. The Sheet Metal segment fabricates, finishes and integrates close tolerance aluminum and specialty alloy components primarily for the aerospace industry. The Machining and Technology segment machines close tolerance aluminum and specialty alloy components for the aerospace, semiconductor and medical products industries. The accounting policies of the segments are the same as those described in Note 1 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q. Sales between segments are insignificant. Corporate assets, liabilities and expenses related to the Company's corporate offices are allocated to the segments, except for income taxes. The table below presents information about reported segments on the basis used internally to evaluate segment performance:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 --------------------------------------------------------- Net sales: Sheet Metal $ 17,472 $ 16,037 $ 32,222 $ 33,201 Machining and Technology 4,403 2,828 8,193 6,506 --------------------------------------------------------- $ 21,875 $ 18,865 $ 40,415 $ 39,707 ========================================================= Income (loss) from operations: Sheet Metal $ 103 $ (608) $ (1,375) $ (1,880) Machining and Technology 662 (212) 1,066 (31) --------------------------------------------------------- $ 765 $ (820) $ (309) $ (1,911) ========================================================= Interest expense: Sheet Metal $ 145 $ 117 $ 257 $ 275 Machining and Technology 144 188 311 395 Corporate 274 82 440 157 --------------------------------------------------------- $ 563 $ 387 $ 1,008 $ 827 ========================================================= Depreciation and amortization: Sheet Metal $ 1,013 $ 1,022 $ 1,897 $ 2,035 Machining and Technology 99 99 196 196 Corporate 45 110 227 226 --------------------------------------------------------- $ 1,157 $ 1,231 $ 2,320 $ 2,457 ========================================================= Capital expenditures: Sheet Metal $ 362 $ 175 $ 629 $ 464 Machining and Technology 7 50 16 76 Corporate 7 3 21 96 --------------------------------------------------------- $ 376 $ 228 $ 666 $ 636 =========================================================
June 30, 2004 December 31,2003 -------------------------------------------- Goodwill: Sheet Metal $ - $ - Machining and Technology 5,653 5,653 Corporate - - -------------------------------------------- $ 5,653 $ 5,653 ============================================ Total assets: Sheet Metal $ 49,239 49,896 Machining and Technology 14,971 15,016 Corporate 5,116 5,607 -------------------------------------------- $ 69,326 $ 70,519 ============================================
6. Comprehensive Loss Comprehensive loss includes adjustments to net loss for the change in foreign currency translations as follows:
Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 --------------------------------------------------------------- Net income (loss) $ 135 $ (739) $ (1,384) $ (1,697) Other comprehensive income (loss): Foreign currency translation adjustments (25) 42 (28) 73 --------------------------------------------------------------- Comprehensive loss $ 110 $ (697) $ (1,412) $ (1,624) ===============================================================
7. Restructuring Charges The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities, in 2003. SFAS No. 146 requires companies to recognize costs associated with exit and disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Costs covered include lease termination costs, costs to consolidate facilities and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. On July 23, 2003, the Company announced the details of a restructuring plan to reduce operating expenses and increase efficiencies at its St. Charles, Missouri location, which included a reduction of work force of approximately 30 people, the exit of two leased facilities and relocation of a significant amount of its manufacturing equipment. In December 2003, the Company announced an additional restructuring program at the Wichita, Kansas plant, including a staged reduction in workforce of approximately 60 employees, and the sale of a Company-owned building and excess equipment. The Wichita restructuring program is scheduled to occur over a nine-month period during which the Company plans to transfer from its Wichita facility all extrusion stretch work to its Auburn, Washington and Vista, California locations and its milling work packages to its Tulsa, Oklahoma and Auburn, Washington facilities and plans to transfer its high pressure forming work currently produced in Auburn to the Wichita, Kansas plant. Employee severance costs for the Wichita plant restructuring will be paid upon completion of the service term in 2004 and, therefore, were not accrued in 2003 per SFAS No. 146. The costs incurred for these restructuring plans as of June 30, 2004 were $685, incurred as follows: $539 for moving and relocation and $146 for severance costs. The Company expects to incur total restructuring costs for both of these programs of $910 for the year ending December 31, 2004. All restructuring costs are attributable to the Sheet Metal Segment and are classified as a separate component of Selling, General and Administrative expenses. 8. Income Taxes The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Pursuant to FASB 109, and due to the uncertainty of future taxable income, the Company has recorded a deferred tax asset and corresponding valuation reserve allowance relating to the Company's loss in the first half of 2004. As of June 30, 2004, the Company had a deferred tax asset of $2,206 and an offsetting deferred tax liability of $2,206. Differences between the effective rate of taxes recorded and income taxes at the statutory rates are due to anticipated utilization of available net operating loss carryforwards. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The Company makes forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Quarterly Report on Form 10-Q, which represent the Company's expectations or beliefs about future events and financial performance. When used in this report, the words "expect," "believe," "anticipate," "goal," "plan," "intend," "estimate," "may," "will" or similar words are intended to identify forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on April 15, 2004. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. In addition, actual results could differ materially from those suggested by the forward-looking statements. Accordingly, investors are cautioned not to place undue reliance on the forward-looking statements. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should, however, review additional disclosures made by the Company from time to time in its periodic filings with the Securities and Exchange Commission. This Quarterly Report on Form 10-Q should be read completely and with the understanding that the Company's actual future results may be materially different from what the Company expects. All forward-looking statements made by the Company in this Form 10-Q and in the Company's other filings with the Securities and Exchange Commission are qualified by these cautionary statements. The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. (See Note 1 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q). The Company believes that certain significant accounting policies have the potential to have a more significant impact on the financial statements either because of the significance of the financial statements to which they relate or because they involve a higher degree of judgment and complexity. A summary of such critical accounting policies can be found in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation" contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. OVERVIEW The Company is a leader in fabricating, machining, finishing and integrating formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, technology and commercial sheet metal industries. Aerospace components manufactured by the Company include leading edge wing slats, flaps and lens assemblies; cockpit window frame assemblies; fuselage skins and supports; and passenger and cargo door frames and supports. The Company manufactures more than 20,000 aerospace components for integration into a variety of civilian and military aircraft platforms manufactured by leading original equipment manufacturers and prime subcontractors. In addition, the Company produces components and assemblies for laser equipment used by semiconductor and medical equipment manufacturers in the technology industry. The Company also produces sheet metal products for various companies in the commercial sheet metal industry. In addition to manufacturing quality components, the Company provides its customers with value-added services related to the design, production and finishing of its components. Historically, the Company's business was primarily dependent on the commercial aircraft market, with Boeing Company as the Company's principal customer. In order to diversify its products and customer base, the Company implemented an acquisition and marketing strategy in the late 1990's that has broadened the number of industries to which the Company sells its components, and, within the aerospace industry, diversified its customer base to reduce the Company's dependence on Boeing Company. The following table specifies the Company's sales by market as a percentage of total sales for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003:
Six Months Ended Six Months Ended Market June 2004 June 2003 ---------------------------------------------------------------------------------- Commercial aircraft 27.9 % 27.8 % Corporate and regional aircraft 30.2 27.8 Military products 20.2 24.3 Technology products 13.1 9.7 Other (1) 8.6 10.4 --------------------------------------------- Total 100.0 % 100.0 % =============================================
(1) Includes commercial sheet metal and various aerospace products. Beginning in 2001, the Company began an aggressive acquisition campaign that resulted in the consummation of four transactions through 2002. In April 2001, the Company acquired Tempco Engineering Inc. ("Tempco") and its affiliates, which expanded the Company's aerospace product line and introduced the Company to the technology industry. The Company acquired Versaform Corporation ("Versaform") and its affiliates on May 16, 2002, Stretch Forming Corporation ("SFC") on June 12, 2002 and Southern Stretch Forming and Fabrication, Inc. ("SSFF") on September 30, 2002. The Versaform acquisition significantly increased the Company's presence in the corporate and regional aircraft market while adding various military products to the Company's product line. The SFC acquisition further supplemented the Company's military product line. Finally, the Company's acquisition of SSFF increased the Company's business in the corporate and regional aircraft market. Unlike the other acquisitions, Tempco operates and is managed as an autonomous unit. Accordingly, it is treated as a business segment separate from the Company's other businesses. The Tempco business, which sells machined components to both the aerospace and technology industries, is referred to in this discussion as the Machining and Technology segment, and the Company's other businesses are referred to as the Sheet Metal segment. RESULTS OF OPERATIONS Three months ended June 30, 2004 compared to June 30, 2003 The following table is a summary of the Company's operating results for the three months ended June 30, 2004 and June 30, 2003:
($ in millions) Three Months Ended Three Months Ended June 30, 2004 June 30, 2003 Sheet Machining & Sheet Machining & Metal Technology Total Metal Technology Total ------------ ---------------- --------------- ------------- ----------------- ------------ Net sales $ 17.5 $ 4.4 $ 21.9 $ 16.0 $ 2.8 $ 18.8 Cost of sales 14.2 3.3 17.5 13.8 2.6 16.4 ------------ ---------------- --------------- ------------- ----------------- ------------ Gross profit 3.3 1.1 4.4 2.2 .2 2.4 S,G & A 3.0 .4 3.4 2.8 .4 3.2 Restructuring expenses .2 - .2 - - - ------------ ---------------- --------------- ------------- ----------------- ------------ Income (loss) from operations $ .1 $ .7 $ .8 $ (.6) $ (.2) $ (.8) ============ ================ =============== ============= ================= ============
Sheet Metal Segment Net Sales. The following table specifies the amount of Sheet Metal segment's net sales by category for the second quarters of 2004 and 2003 and the percentage of the segment's total net sales for each period represented by each category: ($ in millions)
2nd Qtr % of 2nd Qtr % of Category 2004 Total 2003 Total ---------------------------------------------------------------------------- Commercial aircraft $ 5.7 32.6 % $ 5.8 36.3 % Military products 3.0 17.1 4.6 28.8 Corporate and regional 7.3 41.7 5.3 33.1 Other 1.5 8.6 .3 1.8 ------------------------------------------------- Total $17.5 100.0 % $16.0 100.0 % =================================================
Net sales for the Sheet Metal segment were $17.5 million for the three months ended June 30, 2004, $1.5 million higher than net sales for the three months ended June 30, 2003. Corporate and Regional sales of $7.3 million for the second quarter of 2004 were $2.0 million 37.7% higher than corporate and regional sales for the comparable period of the prior year primarily due to strong Gulfstream shipments. Partly offsetting were military sales in the second quarter of 2004 at $3.0 million, $1.6 million lower than military sales in the second quarter of 2003 due to reduced demand by Lockheed Martin Corporation for the F-16 program. Commercial aircraft sales were $5.7 million in the second quarter of 2004, $0.1 million lower than commercial aircraft sales in the second quarter of the prior year, primarily reflecting lower demand from Boeing for components and the 747 and 767 programs, which were partly offset by higher sales relating to the 737 program. Gross Profit. Gross profit for the quarter ended June 30, 2004 was $3.3 million (18.9% of net sales), an increase from $2.2 million (13.8% of net sales) for the quarter ended June 30, 2003. Gross profit increased primarily due to the higher volume leverage and cost reductions and restructuring efforts during the second half of 2003 and the first half of 2004 at the Company's St. Charles, MO and Wichita, KS facilities. The Company continues to encounter production difficulties on certain products for the C-130 for which it is preparing a claim to attempt to recover losses incurred. No benefit from any potential claim for the C-130 components has been accrued. The benefit of a claim, if any, will not be recorded until such time as the customer and the Company agree on a settlement. Components responsible for the majority of these production inefficiencies will be transferred to other suppliers in the third quarter of 2004. Selling, General and Administrative Expenses ("SGA"). SGA expenses, excluding restructuring charges, for the second quarter of 2004 were $3.0 million (17.1% of net sales), up $0.2 million compared to the second quarter of 2003 due primarily to the higher legal fees associated with the DOD investigation at Versaform. (See Part II, Item 1. Legal Proceedings.) Restructuring Charges. During the second quarter of 2004, the Company continued its plans of transferring specific forming capabilities and related production out of its Wichita operation and into other locations within the Company. During the second quarter, the Company incurred total restructuring charges of $0.2 million for moving and relocation. Interest Expense. Interest expense for the second quarter of 2004 was at $0.1 million, even with interest expense in the prior year's second quarter. Machining and Technology Segment Net Sales. The following table specifies the amount of Machining and Technology segment's net sales by category for the second quarters of 2004 and 2003 and the percentage of the segment's total net sales for each period represented by each category: ($ in millions)
2nd Qtr % of 2nd Qtr % of Category of 2004 Total of 2003 Total -------------------------------------------------------------------------- Technology products $ 3.1 70.5 % $1.6 57.1 % Aerospace products 1.0 22.7 .9 32.1 Other .3 6.8 .3 10.8 ------------------------------------------------ Total $ 4.4 100.0 % $2.8 100.0 % ================================================
Net sales for the Machining and Technology segment were $4.4 million in the second quarter of 2004, up 57.1% from $2.8 million in the prior year's second quarter. Net sales of technology products were $3.1 million in the second quarter of 2004, up $1.5 million from the prior year's second quarter. This increase is primarily attributable to a rebound in the demand for equipment used in the production of semiconductors. Aerospace products sales were also higher with sales of $1.0 million in the second quarter of 2004, up from $0.9 million in the second quarter of 2003, reflecting increased defense spending for the Apache Helicopter program. The above described net sales increases, together with the net sales increases experienced by the Sheet Metal segment, contributed to the $1.6 million increase in the Company's income from operations in the second quarter of 2004 over that in the second quarter of 2003. Gross Profit. The gross profit for the segment was $1.1 million (24.4% of net sales) in the second quarter of 2004, an increase from $0.2 million (7.1% of net sales) in the second quarter of 2003. The increase in gross profit in the second quarter of 2004 was due to higher volume, favorable leverage of fixed costs and implemented cost containment programs. Selling, General and Administrative Expenses. SGA expenses for the quarter ended June 30, 2004 of $0.4 million were unchanged from the prior year's quarter. Interest Expense. Interest expense for the second quarter of 2004 was $0.1 million for the segment, unchanged from the prior year's second quarter. Non-Segment Expenses Interest Expense. Interest expense not assigned to a segment is primarily the result of the Company's revolving credit agreement, which is used to fund both segments' cash needs. Interest expense not assigned to a segment was $0.3 million in the second quarter of 2004, compared to $0.1 million in the second quarter of 2003, primarily due to an accrual of a $0.1 million fee relating to the Company's debt obligation with Union Planters. (See the Liquidity and Capital Resources section in this Item 2.) Income Taxes. During the second quarter of 2004, the Company recorded an income tax expense relating to its Canadian Operation and other state taxes that did not have offsetting loss carry forward provisions. The Company did not record any income tax benefit in the second quarter of 2004, compared to a benefit of $0.4 million in the second quarter of 2003. In 2003, the Company had net operating loss carrybacks available, which were fully utilized in 2003. Six months ended June 30, 2004 compared to June 30, 2003 The following table is a summary of the Company's operating results for the six months ended June 30, 2004 and June 30, 2003: ($ in millions)
June 30, 2004 June 30, 2003 --------------------------------------- --------------------------------------------- Sheet Machining & Sheet Machining & Total Metal Technology Total Metal Technology --------------------------------------- --------------------------------------------- Net sales $ 32.2 $ 8.2 $ 40.4 $33.3 $6.5 $39.8 Cost of sales 27.2 6.2 33.4 29.5 5.7 35.2 --------------------------------------- --------------------------------------------- Gross profit 5.0 2.0 7.0 3.8 .8 4.6 S, G & A 5.7 .9 6.6 5.7 .8 6.5 Restructuring expenses .7 - .7 - - - --------------------------------------- --------------------------------------------- Income (loss) from operations $ (1.4) $ 1.1 $ (.3) $ (1.9) $ - $ (1.9) ======================================= =============================================
Sheet Metal Segment Net Sales. The following table specifies the amount of Sheet Metal segment's net sales by category for the first half of each of 2004 and 2003 and the percentage of the segment's total net sales for each period represented by each category: ($ in millions)
1st Half % of 1st Half % of Category of 2004 Total of 2003 Total ----------------------------------------------------------- ------------------------------- Commercial aircraft $11.3 35.1 % $11.1 33.3 % Military products 6.1 18.9 8.4 25.2 Corporate and regional 12.2 37.9 12.0 36.0 Other 2.6 8.1 1.8 5.5 ---------------------------------------------------------- ------------------------------- Total $32.2 100.0 % $33.3 100.0 % ========================================================== ===============================
Net sales for the Sheet Metal segment were $32.2 million for the six months ended June 30, 2004, $1.1 million lower than net sales for the six months ended June 30, 2003. Military sales in the first half of 2004 were at $6.1 million, $2.0 million lower than military sales in the first half of 2003, due to reduced demand by Lockheed Martin Corporation for the F-16 program. Partly offsetting were: increased commercial aircraft sales of $11.3 million in the first half 2004, $0.2 million higher than commercial aircraft sales in the first half of the prior year, primarily reflecting increased Boeing Company volume in the 737 program; corporate and regional sales of $12.2 million for the first half of 2004, $0.2 million higher than corporate and regional sales for the comparable period of the prior year, primarily due to higher Gulfstream shipments. Gross Profit. Gross profit for the first half of 2004 was $5.0 million (15.5% of net sales), an increase from $3.8 million (11.4% of net sales) for the first half of 2003. Gross profit increased primarily due to cost reduction and restructuring efforts during the second half of 2003 and the first half of 2004 at the Company's St. Charles, MO and Wichita, KS facilities. The Company continues to encounter production difficulties on certain products for the C-130 for which it is preparing a claim to attempt to recover losses incurred. No benefit from any potential claim for the C-130 components has been accrued. The benefit of a claim, if any, will not be recorded until such time as the customer and the Company agree on a settlement. Components responsible for the majority of these production inefficiencies will be transferred to other suppliers in the third quarter of 2004. Also, additional costs hindered performance on the B-52 refurbishment program, which was substantially complete at the end of the second quarter 2004. Selling, General and Administrative Expenses ("SGA"). SGA expenses excluding restructuring charges, for the first half of 2004 were $5.7 million (17.5% of net sales), even with expenses for the first half of 2003 as lower salaries and depreciation expenses were offset by higher legal fees relating to the Department of Defense investigation. (See Part II, Item 1. Legal Proceedings.) Restructuring Charges. During the first half of 2004, the Company continued its plans of reducing employment levels at its St. Charles and Wichita operations. During the first half of 2004 the Company incurred total restructuring charges of $0.7 million: severance costs of $0.1 million and moving and relocation costs of $0.6 million. The Company expects to spend a total of $0.9 million in 2004 to complete this restructuring. Interest Expense. Interest expense for the first half of 2004 was $0.3 million, even with interest expense reported in the first quarter of the prior year. Machining and Technology Segment Net Sales. The following table specifies the amount of Machining and Technology segment's net sales by category for the first half of each of 2004 and 2003 and the percentage of the segment's total net sales for each period represented by each category: ($ in millions)
1st Half % of 1st Half % of Category of 2004 Total of 2003 Total ----------------------------------------------------- ---------------------------- Technology products $5.3 64.6 % $4.1 63.1 % Aerospace products 2.1 25.6 1.6 24.6 Other .8 9.8 .8 12.3 ----------------------------------------------------- ---------------------------- Total $8.2 100.0 % $6.5 100.0 % ===================================================== ============================
Net sales for the Machining and Technology segment were $8.2 million for the six months ended June 30, 2004, up 26.2% from $6.5 million in the prior year's six month period. Net sales of technology products were $5.3 million in the first half of 2004, up $1.2 million from the prior year's first half. This increase is primarily attributable to the additional demand for equipment used in the production of semicondutors and an increase in medical lasers. Aerospace products sales of $2.1 million in the first half of 2004 were also up from $1.6 million in the first half of 2003, reflecting increased defense spending on the Apache Helicopter program. Gross Profit. The gross profit for the segment was $2.0 million (24.6% of net sales) in the first half of 2004, increased from a gross profit of $0.8 million (12.3% of net sales) in the first half of 2003. The increase in gross profit in the first half of 2004 was due to the higher volume and the favorable leverage of fixed costs. Selling, General and Administrative Expenses. SGA expenses for the first half ended June 30, 2004 were $0.9 million, slightly higher than the $0.8 million reported in the first half of last year due to higher corporate allocated expenses. Interest Expense. Interest expense for the first half of 2004 was $0.3 million for the segment, $0.1 million lower than the prior year's first half due to a lower debt level. Non-Segment Expenses Interest Expense. Interest expense not assigned to a segment is primarily the result of the Company's revolving credit agreement, which is used to fund both segments' cash needs. Interest expense not assigned to a segment was $0.4 million in the second half of 2004, compared to $0.2 million in the second half of 2003, due primarily to the accrual of a $0.1 million fee relating to the Company's debt obligation with Union Planters. Income Taxes. In the first half of 2004, the Company recorded an income tax expense relating to its Canadian Operations and state taxes that did not have offsetting loss carryforward provisions. The Company did not record an income tax benefit in the second half of 2004, compared to a benefit of $1.0 million in the second half of 2003. In 2003, the Company had net operating loss carrybacks available, which were fully utilized in 2003. Liquidity and Capital Resources Primarily as a result of our continuing losses, inability to meet our covenants and lack of liquidity, our independent certified public accountants modified their opinion on the Company's December 31, 2003 Consolidated Financial Statement to contain a paragraph wherein they expressed a substantial doubt about our ability to continue as a going concern. The Company has taken steps to improve our current liquidity and provide the capital necessary to fund our plan for future growth. The Company believes that the effect of these steps can be seen in the $1.4 million increase in net income (loss) between the second quarter of 2004 and 2003 and the first six months of 2004 and 2003. Our efforts to raise alternative capital are discussed below, and additional information is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The Company's balance of cash and equivalents was $0.9 million as of June 30, 2004, compared to a balance of $0.4 million as of December 31, 2003. Cash flow generated by operating activities for the first half of 2004 was $3.5 million, reflecting non-cash depreciation and amortization, higher accounts payable and a collection of an income tax receivable; offsetting were the Company's $1.4 million net loss, higher prepaid expenses and higher trade receivables. Cash used by investing activities was $0.6 million in the first half of 2004 and reflected capital expenditures. The Company's financing activities in 2004 was a use of $2.3 million, reflecting the pay down of long-term debt and notes payable, which was partly offset by additional borrowings on the Company's revolving credit line. The Company's ratio of total debt to capitalization (debt plus stockholders equity) was 44.1% as of June 30, 2004 and 45.2% as of December 31, 2003. This decrease was primarily due to the paydown in the first half of 2004 of the long-term debt and notes payable. The Company's revolving credit line at June 30, 2004 was at $8.8 million with an additional line capacity of $0.9 million. In 2003, the Company's failure to meet certain financial covenants with its primary lender resulted in a renegotiation of its Loan Agreement on January 5, 2004 and again on March 30, 2004. On March 30, 2004, the Company and Union Planters entered into the Thirteenth Amendment, amending the Loan Agreement. The primary purposes of the Thirteenth Amendment were to (a) extend the maturity of the Company's Revolving Credit Loan provided under the Loan Agreement from March 31, 2004 to March 31, 2005 and (b) waive a default arising under the Loan Agreement of the EBITDA Covenant for the period ended December 31, 2003. In addition, under the terms of the Thirteenth Amendment to Loan Agreement: o The maximum principal amount of the Revolving Credit Loan was increased from $9.1 million to $9.7 million through September 30, 2004, subject to a borrowing base calculation and further subject to a newly established inventory reserve requirement and a more restrictive requirement for eligible receivables, which could reduce the amount of borrowing availability under the Revolving Credit Loan. o The interest rate on the Revolving Credit Loan was changed from LIBOR plus 2.5% to prime plus 1.0%. Moreover, because the Company had not executed and delivered a Letter of Intent on or before June 30, 2004, the interest rate on the Revolving Credit Loan was increased to prime plus 1.5% and will be further increased to prime plus 2.0% if the Company has not paid all of its obligations to Union Planters in full on or before September 30, 2004. The interest rate on the Tempco Term Loan provided under the Loan Agreement, which, as of June 30, 2004, had a total outstanding principal balance of $7.5 million, was changed from LIBOR plus 3.0%, subject to a floor of 7.0% and a ceiling of 8.5%, to prime plus 2.0%, subject to a floor of 7.0%. The interest rate on the Versaform Term Loan provided under the Loan Agreement, which, as of June 30, 2004, had a total outstanding principal balance of $8.4 million, was changed from LIBOR plus 3.0% to prime plus 2.0%. Moreover, because the Company had not executed and delivered a Letter of Intent on or before June 30, 2004, the interest rate on the Tempco Term Loan and the Versaform Term Loan was be increased to prime plus 2.5% and will be further increased to prime plus 3.0% if the Company has not paid all of its obligations to Union Planters in full on or before September 30, 2004. Based on the amount of the Company's outstanding debt as of June 30, 2004, the aforementioned effective interest rate increases will result in additional interest expense of approximately $29,000 per quarter. o Because the Company did not enter into one or more Letters of Intent by June 30, 2004, a fee of $0.1 million will be payable on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations. This fee has been accrued and recorded by the Company in interest expense in the second quarter of 2004. o If the Company fails to pay all of its obligations in full to Union Planters by September 30, 2004, a fee of $0.1 million will be payable to Union Planters ($0.1 million on October 1, 2004 and $0.3 million on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations). o If the Company fails to pay all of its obligations in full to Union Planters by December 30, 2004, a fee of $0.2 million will be payable to Union Planters ($0.1 million on December 31, 2004 and $0.1 million on the earliest of March 31, 2005, the date the Company repays all of its obligations to Union Planters or the date on which Union Planters accelerates all of the Company's obligations). In addition, the Company has executed a $1.3 million note in favor of a former owner of Versaform, now a director of the Company, in connection with the Company's purchase of Versaform. This note is secured by a pledge of 65% of the Company's interest in its Canadian subsidiary, and as part of its obligations under this note, the Company's Canadian subsidiary is subject to various restrictive covenants relating to its financial performance. This note, payable monthly over three years, had a balance at June 30, 2004 of $0.4 million and bears interest at 7.0%. The Company has entered into other various notes payable for the purchase of certain equipment. The notes are payable in monthly installments, including interest ranging from 6.99% - 10.0%, through November 2006. The notes payable are secured by equipment. The Company also has entered into capital lease agreements for the purchase of certain equipment. The leases are payable in monthly installments, including interest ranging from 4.98% - 9.15%, through August 2005. Please see Note 4 of the Condensed Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q for more detailed information relating to the Company's debt and the Thirteenth Amendment. As a result of the above-described debt, the Company is required to utilize a significant portion of its cash generated from operations to meet its debt service obligations. Furthermore, if the Company were to fail in the future to comply with the restrictive covenants in the Loan Agreement or in the promissory note, the Company's operations could be negatively impacted and the Company's ability to take advantage of potential business opportunities as they arise could be limited. Moreover, the Company's failure to comply with these restrictive financial and other covenants could result in a default that, if not cured or waived, could cause the Company to be required to repay its borrowings before their due dates. If the Company were unable to make this repayment or otherwise refinance these borrowings, the Company's creditors could foreclose on the assets securing its borrowings. Although in the Thirteenth Amendment Union Planters waived the default arising from a failure of the Company to meet the EBITDA Covenant, such waiver was limited to and valid only for the specific purposes given. Union Planters is not obligated solely by reason of such waiver to agree to any additional waivers. In addition to the cash requirements for debt service, the Company anticipates that it will incur significant additional costs in 2004 to meet the increased requirements of Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls and procedures. Please see Part II, Item 4. Controls and Procedures of this Quarterly Report on Form 10-Q for more detailed information relating to the Company's internal controls and procedures. Based upon forecasted operating results and cash flows, management believes the current lending agreement is sufficient to meet its cash needs in 2004. Management has also developed a plan that includes restructuring or possibly disposing of segments of our business, increasing sales and raising alternative capital. However, the Company's losses from operations in recent years, together with its inability to meet the EBITDA Covenant and certain other covenants under the Loan Agreement, have raised substantial doubt about the Company's ability to continue as a going concern. If the Company fails to meet its covenants, fails to comply with the refinancing or sale of assets contemplated in the Loan Agreement, or is unable to fund its operations within the limits of the Loan Agreement, no assurance can be given that additional and/or replacement financing can be obtained on reasonable or acceptable terms or that the Company will be able to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern although the report of our independent accountant as of and for the year ended December 31, 2003 expresses substantial doubt as to the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk primarily due to fluctuations in interest rates. The Company does not utilize any particular strategy or instruments to manage its interest rate risk. The Company's outstanding credit facility carries an interest rate that varies in accordance with the prime rate. The Company is subject to potential fluctuations in its debt service as the prime rate changes. Based on the amount of the Company's outstanding debt as of June 30, 2004, a hypothetical 1% change in the interest rate of the Company's outstanding credit facility would result in a change in annual interest expense of approximately $0.3 million. Item 4. Controls and Procedures. As of end of the fiscal quarter ended June 30, 2004, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation, with the participation of other members of the Company's management as they deemed appropriate, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective in all material respects in ensuring that material information required to be disclosed in the periodic reports the Company files with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner. This portion of our Quarterly Report on Form 10-Q is our disclosure of the conclusions of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, based on management's evaluation of those disclosure controls and procedures. You should read this disclosure in conjunction with the certifications attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q for a more complete understanding of the topics presented. In connection with its 2003 year-end audit, our independent certified public accountant identified a material weakness relating to our internal controls and procedures. While we are in the process of implementing a more effective system of controls and procedures, we have instituted certain interim controls, procedures and other changes to ensure that information required to be disclosed in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported accurately. The interim steps that we have taken as a result of the aforementioned control deficiencies to ensure that all material information about the Company is accurately disclosed in this Quarterly Report on Form 10-Q included the application of additional methods and techniques to evaluate the accuracy of inventory costing and adequacy of inventory reserves. Based in part on the steps listed above, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that the information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in Securities and Exchange Commission rules and forms. In addition, in order to address further the deficiencies described above and to improve our internal disclosure and control procedures for future periods, we will: 1. Review, select and implement available improvements to information systems for inventory accounting; 2. Perform a review of internal controls and procedures in connection with Section 404 of Sarbanes Oxley legislative requirements; 3. Perform more detailed quarterly reconciliations and analyses of the company's inventory accounts; 4. Continue to enhance staffing to provide sufficient resources to accomplish the foregoing objectives. These steps will constitute significant changes in internal controls. We will continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, and will take further action as appropriate. Other than as discussed above, no significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls during the second quarter of 2004. PART II OTHER INFORMATION Item 1. Legal Proceedings. On February 6, 2004, Versaform, a wholly-owned subsidiary of the Company acquired on May 16, 2002, was served a subpoena by the federal government. The subpoena relates to the time period January 1, 1999 through February 6, 2004 and was issued in connection with an investigation by certain government agencies including the Department of Defense, Office of Inspector General, Defense Criminal Investigative Service and the Federal Bureau of Investigation. The subpoena refers to structural components Versaform manufactured for Nordam Corporation for B-52 engine cowlings, components for auxiliary power units Versaform manufactured for Hamilton Sundstrand, a United Technologies Company, and certain tools Versaform manufactured for Lockheed Martin Corporation. The Company has not been served with any notice of any pending legal action filed by any government agency. Accordingly, the Company has no knowledge of any specific allegations of wrongdoing against Versaform by any regulatory authority. The Company intends to cooperate fully with the federal government in connection with any investigation of this matter and has currently provided all information and support of related manufacturing and sales activity requested. Other than as noted above, the Company is not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of its business. The Company does not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on the Company's business. Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of the stockholders of the Company was held on June 29, 2004. Of the 8,181,786 shares of common stock entitled to vote at such meeting, 7,843,204 shares were present at the meeting in person or by proxy. (b) The individuals listed below were elected as Class III directors of the Company at the meeting: Ronald S. Saks Joseph Burstein Brian Geary The term of office of each individual director listed below continued after the meeting: Sanford S. Neuman (Class I director) Duane E. Hahn (Class I director) Thomas Unger (Class II director) John M. Roeder (Class II director) Paul L. Miller, Jr. (Class II director) (c) The stockholders elected each of the following Class III directors at the meeting, and with respect to each director, the number of shares voted for and withheld were as follows:
Number of Shares Voted Name of Nominees For Withheld ----------------------------------------------------------------------- Ronald S. Saks 7,637,184 206,020 Joseph Burstein 7,793,734 49,470 Brian Geary 7,297,457 545,747
The stockholders ratified the appointment of BDO Seidman, LLP as the Company's independent auditors with 7,807,114 shares voting for the proposal, 32,790 shares voting against the proposal and 3,300 shares abstaining. There were no brokers' non-votes with respect to the above matters, and all abstentions with respect to the election of directors were treated as votes withheld. (d) None. Item 6. Exhibits and Report on Form 8-K. (a) Exhibits: See Exhibit Index. (b) The Company filed the following report on Form 8-K during the quarter ended June 30, 2004 (excluding Items 9 and 12): On June 30, 2004, the Company filed a Current Report on Form 8-K, announcing its possible move to the Nasdaq Small Cap Market. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of St. Charles and State of Missouri on the 16th day of August, 2004. LMI AEROSPACE, INC. /s/ Ronald S. Saks ------------------------------------- Ronald S. Saks, President and Chief Executive Officer /s/ Lawrence E. Dickinson ------------------------------------- Lawrence E. Dickinson Chief Financial Officer and Secretary EXHIBIT INDEX Exhibit No. Description 10.1 Employment Agreement between the Company and Robert T. Grah effective as of January 1, 2004. 10.2 Employment Agreement between the Company and Brian P. Olsen effective as of January 1, 2004. 10.3 Employment Agreement between the Company and Duane E. Hahn effective as of January 1, 2004. 10.4 Employment Agreement between the Company and Michael J. Biffignani effective as of January 1, 2004. 10.5 Employment Agreement between the Company and Ronald S. Saks effective as of January 1, 2004. 31.1 Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief Executive Officer. 31.2 Rule 13a-14(a) Certification of Lawrence E. Dickinson, Secretary and Chief Financial Officer. 32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.