LMI Aerospace, Inc. Form 10-Q dated 09-30-06

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BjW5uHIBNdwdb/DD3sOz9/y81i7vSRmqScU9JVpqovEk2/pEYQkTFNN59UZmYMGF Za+46qRyTGkmqbPgSXuafw== 0001011240-06-000065.txt : 20061113 0001011240-06-000065.hdr.sgml : 20061110 20061113121859 ACCESSION NUMBER: 0001011240-06-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061113 DATE AS OF CHANGE: 20061113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LMI AEROSPACE INC CENTRAL INDEX KEY: 0001059562 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 431309065 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24293 FILM NUMBER: 061206950 BUSINESS ADDRESS: STREET 1: 3600 MUELLER RD CITY: ST CHARLES STATE: MO ZIP: 63302 BUSINESS PHONE: 6369466525 MAIL ADDRESS: STREET 1: P O BOX 900 CITY: ST CHARLES STATE: MO ZIP: 63302 10-Q 1 lmi10q111006.htm LMI AEROSPACE, INC. FORM 10-Q DATED 09-30-06 LMI Aerospace, Inc. Form 10-Q dated 09-30-06

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2006.

¨ 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 (State or other jurisdiction of incorporation or organization)	43-1309065 (I.R.S. Employer Identification No.)

3600 Mueller Road St. Charles, Missouri (Address of principal executive offices)	63302-0900 (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 ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

On November 6, 2006, there were 11,182,799 shares of our common stock, par value $0.02 per share outstanding.

LMI AEROSPACE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDING SEPTEMBER 30, 2006

PART I. FINANCIAL INFORMATION
	Page No.
Item 1. Financial Statements (unaudited).

Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005.	3

Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2006 and 2005.	4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005.	5

Notes to Condensed Consolidated Financial Statements.	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	19

Item 4. Controls and Procedures.	19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.	20

Item 1A. Risk Factors.	20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	20

Item 3. Defaults Upon Senior Securities.	20

Item 4. Submission of Matters to a Vote of Security Holders.	20

Item 5. Other Information.	20

Item 6. Exhibits.	20

SIGNATURE PAGE	21

EXHIBIT INDEX	22

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

LMI Aerospace, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

	(Unaudited) September 30, 2006			December 31, 2005
Assets
Current assets:
Cash and cash equivalents	$	11,015		$	35
Short-term investments		15,332			-
Trade accounts receivable, net of allowance of $227 at September 30, 2006 and $244 at December 31, 2005		14,908			16,088
Inventories		31,965			25,333
Prepaid expenses and other current assets		1,525			1,205
Deferred income taxes		1,610			1,610
Total current assets		76,355			44,271

Property, plant and equipment, net		19,923			18,162
Goodwill		5,653			5,653
Customer intangible assets, net		3,528			3,114
Other assets		634			757
Total assets	$	106,093		$	71,957

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,807		$	7,407
Accrued expenses		3,961			6,077
Current installments of long-term debt and capital lease obligations		1,433			1,846
Total current liabilities		15,201			15,330

Long-term debt and capital lease obligations, less current installments		2,088			14,462
Subordinated debt		-			1,000
Deferred income taxes		1,333			1,333
Total long-term liabilities		3,421			16,795

Stockholders’ equity:
Common stock, $.02 par value per share; authorized 28,000,000 shares; issued 11,571,181 shares and 8,797,909 shares at September 30, 2006 and December 31, 2005, respectively		231			176
Preferred stock, $.02 par value per share; authorized 2,000,000 shares; none issued in both periods		-			-
Additional paid-in capital		65,798			26,307
Treasury stock, at cost, 403,032 shares at September 30, 2006 and 433,972 shares at December 31, 2005		(1,912	)		(2,059	)
Retained earnings		23,354			15,408
Total stockholders’ equity		87,471			39,832
Total liabilities and stockholders’ equity	$	106,093		$	71,957

See accompanying Notes to Condensed Consolidated Financial Statements.

LMI Aerospace, Inc.

Condensed Consolidated Statements of Operations

(Amounts in thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005

Net sales	$	30,799		$	24,255		$	92,809		$	72,236
Cost of sales		22,430			17,917			67,271			55,051
Gross profit		8,369			6,338			25,538			17,185

Selling, general and administrative expenses		4,435			3,844			12,807			10,784
Income from operations		3,934			2,494			12,731			6,401

Other income (expense):
Interest expense		134			(406	)		(216	)		(1,249	)
Other, net		(63	)		2			(63	)		2
Income before income taxes		4,005			2,090			12,452			5,154

Provision for income taxes		1,289			787			4,470			1,958
Net income	$	2,716		$	1,303		$	7,982		$	3,196

Amounts per common share:
Net income per common share	$	0.24		$	0.16		$	0.78		$	0.39

Net income per common share,
assuming dilution	$	0.24		$	0.16		$	0.77		$	0.38

Weighted average common shares
outstanding		11,112,599			8,268,794			10,266,897			8,248,959

Weighted average dilutive common
shares outstanding		11,234,505			8,382,514			10,390,833			8,358,130

See accompanying Notes to Condensed Consolidated Financial Statements.

LMI Aerospace, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2006			2005
Operating activities:
Net income	$	7,982		$	3,196
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		2,763			3,278
Charges for inventory obsolescence and valuation		550			896
Restricted stock compensation		133			--
Changes in operating assets and liabilities:
Trade accounts receivable		1,180			(3,392	)
Inventories		(7,182	)		(3,249	)
Prepaid expenses and other assets		(133	)		(125	)
Income taxes		(3,425	)		1,687
Accounts payable		2,400			497
Accrued expenses		1,218			663
Net cash provided by operating activities		5,486			3,451

Investing activities:
Additions to property, plant and equipment		(4,381	)		(1,298	)
Proceeds from sale of equipment		127			21
Purchase of debt securities		(18,192	)		--
Proceeds from matured debt securities		2,979			--
Acquisition of Technical Change Associates		(626	)		--
Net cash used by investing activities		(20,093	)		(1,277	)

Financing activities:
Proceeds from public offering		39,249			--
Proceeds from issuance of debt		512			--
Net payments on revolving line of credit		(8,898	)		(1,174	)
Principal payments on long-term debt and notes payable		(5,401	)		(1,524	)
Proceeds from exercise of stock options		125			187
Net cash provided (used) by financing activities		25,587			(2,511	)

Net increase (decrease) in cash and cash equivalents		10,980			(337	)
Cash and cash equivalents, beginning of year		35			414
Cash and cash equivalents, end of quarter	$	11,015		$	77

Supplemental disclosures of cash flow information:
Interest paid	$	635		$	1,292
Income taxes paid (refunded), net	$	7,895		$	263

See accompanying Notes to Condensed Consolidated Financial Statements.

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

1. Overview and Accounting Policies

Description of Business

LMI Aerospace, Inc. (the “Company”) fabricates, machines and integrates formed, close tolerance aluminum and specialty alloy components and sheet metal products for use by the aerospace, semiconductor and medical products industries. The Company is a Missouri corporation with headquarters in St. Charles, Missouri. The Company maintains facilities in St. Charles, Missouri; Seattle, Washington; Tulsa, Oklahoma; Wichita, Kansas; Irving, Texas; Sun Valley, California; Vista, California; Savannah, Georgia; Ogden, Utah; and Mexicali, Mexico.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ending September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission.

Customer Concentration

Direct sales to the Company’s largest customer accounted for 32.6% and 33.8% of the Company’s total revenues at September 30, 2006 and September 30, 2005, respectively. Account receivable balances related to the largest customer based on direct sales were 36.3% and 47.4% of the Company's total account receivable balances at September 30, 2006 and December 31, 2005, respectively.

Direct sales to the Company’s second largest customer accounted for 15.4% and 19.8% of the Company’s total revenues at September 30, 2006 and September 30, 2005, respectively. Account receivable balances related to the second largest customer based on direct sales were 14.2% and 3.3% of the Company's total account receivable balances at September 30, 2006 and December 31, 2005, respectively.

Direct sales to the Company’s third largest customer accounted for 11.3% and 6.9% of the Company’s total revenues at September 30, 2006 and September 30, 2005, respectively. Account receivable balances related to the third largest customer based on direct sales were 12.9% and 9.6% of the Company's total account receivable balances at September 30, 2006 and December 31, 2005, respectively.

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

Income Taxes

The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). 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.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 these estimates.

2. Short-term Investments

Short-term investments consist of the following:

	September 30, 2006		December 31, 2005

Debt securities issued by U.S. Treasury and other U.S. government corporations and agencies	$	14,923	$	-
Debt securities issued by states of the United States and political subdivisions of the states		409		-
	$	15,332	$	-

The Company classifies all debt and equity securities maturing in less than one year as short-term investments. At September 30, 2006, all securities are classified as held-to-maturity and recorded at amortized costs.

3. Inventories

Inventories consist of the following:

	September 30, 2006		December 31, 2005

Raw materials	$	5,531	$	5,209
Work in progress		8,338		6,480
Finished goods		18,096		13,644
Total inventories	$	31,965	$	25,333

These amounts include reserves for obsolete and slow moving inventory of $2,075 and $1,802 and a reserve for lower of cost or market of $434 and $284 at September 30, 2006 and December 31, 2005, respectively.

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

4. Goodwill and Intangible Assets

As required by SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company performs a goodwill impairment test at least annually. 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 2005, the Company performed the required annual impairment test under SFAS No. 142 and concluded that the remaining goodwill balance was not further impaired. Goodwill balance was $5,653 at September 30, 2006 and December 31, 2005.

Customer-Related Intangible Assets

Customer-related intangible assets resulted from the acquisitions of Versaform Corporation and Technical Change Associates, Inc. and have an original estimated useful life of 5 to 15 years. The carrying value at September 30, 2006 and December 31, 2005 were as follows:

	September 30, 2006			December 31, 2005

Gross Amount	$	4,694		$	3,975
Accumulated Amortization		(1,166	)		(861	)
Intangible assets, net	$	3,528		$	3,114

Customer-related intangibles amortization expense was $103 and $66 for the three months ended September 30, 2006 and 2005, respectively, and $306 and $228 for the nine months ended September 30, 2006 and 2005, respectively.

5. Long-Term Debt and Revolving Line of Credit

Long-term debt and revolving line of credit consists of the following:

	September 30,		December 31,
	2006		2005
Term Loans:
Real estate	$	-	$	3,280
Equipment		2,655		3,540
Revolving line of credit		-		8,899
Notes payable, principal and interest payable monthly, at fixed rates, ranging from 6.99% to 7.20%		866		589
Total debt		3,521		16,308
Less current installments		1,433		1,846
Total	$	2,088	$	14,462
Subordinated notes due December 2007 payable to certain directors, interest payable monthly at 12%	$	-	$	1,000

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

Credit Facility

The Company amended its credit facility (the “Amended Facility”) with Wells Fargo Bank, NA (“Wells Fargo”) during the first quarter of 2006. The Amended Facility increases the total availability under the revolving line of credit to $23.3 million from $18.0 million, subject to a borrowing base calculation, and includes an over-advance capability of up to $3.0 million. The Amended Facility also extends the expiration of the lending agreement through November 2009. In addition, the Amended Facility reduces the interest rates on the equipment and real estate term loans to prime plus 0.5% from prime plus 4.0% after the payment of a $50 fee.

Specifically, the Amended Facility provides the following structure:

A revolving line of credit (the “Revolver”) of up to $23,250, subject to a borrowing base calculation. The borrowing base calculation at September 30, 2006 allowed the Company to borrow up to $22,280. The Revolver requires monthly payments of interest at Wells Fargo’s prime lending rate (8.25% at September 30, 2006) and matures on November 15, 2009.

An equipment term loan (the “Equipment Loan”) of $4,720 payable monthly over three years in equal monthly principal installments of $98. The Equipment Loan previously required monthly interest payments at Wells Fargo’s prime lending rate plus 4%. In January 2006, the rate was reduced to Wells Fargo’s prime lending rate plus 0.5% after the payment by the Company of a $50 fee. Effective as of September 1, 2006, the rate is reduced to prime plus 0.25% per the terms of the Amended Facility.

A real estate term loan (the “Real Estate Loan”) of $3,645 payable in equal monthly principal installments of $30 over three years, using a ten year amortization table. The Real Estate Loan previously required interest at Wells Fargo’s prime lending rate plus 4%. In January 2006, the rate was reduced to Wells Fargo’s prime lending rate plus 0.5% upon the satisfaction by the Company of the conditions that it maintain sufficient liquidity and reduce the borrowing base calculation by $1,800 over the first year of the agreement. On March 29, 2006, the remaining balance was repaid with proceeds from the Company’s public offering completed thereon.

Under each of the Revolver, the Equipment Loan and the Real Estate Loan, the Company has an option to fix the interest rate for a period not to exceed 90 days. The Amended Facility is secured by all assets of the Company and requires the Company to meet certain financial and non-financial covenants, including minimum levels of net income and net worth and limits on capital expenditures. For the first nine months of 2006, the amount of the Company’s capital expenditures paid from working capital exceeded the maximum allowed pursuant to the Amended Facility, resulting in a violation of the covenants. A waiver of default was obtained from Wells Fargo. The Amended Facility expires on November 15, 2009 and includes prepayment penalties for early termination.

In connection with the Company’s prior credit facility, the Company issued an aggregate of $1,000 of subordinated notes to certain of its directors. These subordinated notes provided for no principal payments and quarterly interest payments at 12% per annum and were scheduled to mature on December 31, 2007. On March 29, 2006, the outstanding balances of such subordinated notes were repaid with proceeds from the Company’s public offering completed thereon.

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

Other Notes

The Company has entered into various notes payable for the purchase of certain equipment. The notes are payable in monthly installments including interest ranging from 6.99% - 7.20% through July 2011. The notes payable are secured by certain equipment.

6. Earnings Per Common Share

Basic net income per common share is based upon the weighted average number of common shares outstanding. Diluted net income per common share is based upon the weighted average number of common shares outstanding, including the dilutive effect of stock options and restricted stock, using the treasury stock and if converted methods. The number of such shares as of September 30, 2006 and September 30, 2005 subject to stock options was 108,299 and 113,720, respectively. The number of such shares as of September 30, 2006 and September 30, 2005 subject to restricted stock was 13,607 and 0, respectively.

7. Stock-Based Compensation

On July 7, 2005, the Company’s shareholders approved the LMI Aerospace, Inc. 2005 Long-term Incentive Plan (the “2005 Plan”). The 2005 Plan replaces the Amended and Restated LMI Aerospace, Inc. 1998 Stock Option Plan as the Company’s only compensation plan under which shares of the Company’s common stock are authorized for issuance to employees or directors. The 2005 Plan provides for the grant of non-qualified stock options, incentive stock options, shares of restricted stock, restricted stock units, stock appreciation rights, performance awards and other stock-based awards and cash bonus awards.

Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Shared Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and amends SFAS Statement No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires that compensation expense be recognized for all share-based payments based on the grant date fair value. The Company adopted SFAS No. 123(R) using the modified prospective method of transition. Accordingly, prior periods have not been restated. In accordance with the adoption of SFAS No. 123(R), the Company’s pre-tax income from operations for the three and nine months ended September 30, 2006 was not materially different than if it had continued to account for share-based compensation under APB No. 25, as the majority of outstanding options was vested at December 31, 2005. The Company did not grant any options during the three and nine months ended September 30, 2006.

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

A summary of stock option activity under the Company’s share-based compensation plans for the nine months ended September 30, 2006 is presented below:

Stock Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at January 1, 2006		198,024		$	3.30
Granted		-		$	-
Exercised		(34,140	)	$	3.56
Forfeited or expired		(8,900	)	$	4.05

Outstanding at September 30, 2006		154,984		$	3.20		4.3 yrs	$	2,371

Exercisable at September 30, 2006		154,609		$	3.20		4.3 yrs	$	2,365

The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005, based upon the market price on exercise date, was approximately $494 and $182, respectively.

The following table summarizes information about stock options outstanding at September 30, 2006:

Range of Exercise Prices	Number of Outstanding Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
$1.31 - $1.95	15,000	7.8	$ 1.31	15,000	$ 1.31
$1.96 - $2.90	86,184	3.9	2.57	85,809	2.58
$2.91 - $4.35	18,500	3.9	3.41	18,500	3.41
$4.36 - $6.06	35,300	3.9	5.42	35,300	5.42
Total	154,984	4.3	$ 3.20	154,609	$ 3.20

LMI Aerospace, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

September 30, 2006

A summary of the activity for non-vested restricted stock awards as of September 30, 2006 and changes during the nine-month period is presented below:

Restricted Stock Awards	Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2006		15,750	$	9.06
Granted		21,250		15.65
Vested		—		—
Forfeited		—		—

Outstanding at September 30, 2006		37,000	$	12.85

Common stock compensation expense related to restricted stock awards granted under the 2005 Plan was $54 and $126 for the three and nine months ended September 30, 2006, respectively. There was no such expense incurred for the three and nine months ended September 30, 2005.

Total unrecognized compensation costs related to non-vested restricted stock awards granted under the 2005 Plan were $334 and $127 as of September 30, 2006 and December 31, 2005, respectively. These costs are expected to be recognized over a weighted average period of 1.9 years and 2.7 years, respectively.

Prior to the adoption of SFAS No. 123(R), the Company applied APB No. 25 and the fair value method under SFAS No. 123 to account for nonqualified stock options. Accordingly, no compensation expense was recognized for stock options granted for periods prior to January 1, 2006. Had compensation expense for the Company’s stock option plans been determined based on the fair value method, the Company’s net income and basic and diluted income per share would have been adjusted as follows:

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005

Net income	$	1,303		$	3,196
Total stock-based employee compensation expense determined under fair value based method, net of tax effect		(1	)		(19	)
Pro forma net income	$	1,302		$	3,177

Net income per common share - basic and assuming dilution¹
As reported	$	0.16		$	0.39
Pro forma	$	0.16		$	0.38

Options to purchase 10,500 shares of common stock were outstanding at September 30, 2005, but were not included in the computations of diluted EPS because the options’ exercise price was greater than the Year-to-Date average market price of the common shares.

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, 2005, as filed with the Securities and Exchange Commission on March 31, 2006.

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 of America, 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 Operations” contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

OVERVIEW

We manufacture and distribute formed and machined components for use in the aerospace, technology and commercial sheet metal industries. We primarily sell our products to the large commercial aircraft, military, corporate and regional aircraft and technology markets within the aerospace and technology industries. Historically, our business was primarily dependent on the large commercial aircraft market, with The Boeing Company as our principal customer. In order to diversify our product and customer base, we implemented an acquisition and marketing strategy in the late 1990’s that broadened the number of industries to which we sell our components, and, within the aerospace industry, diversified our customer base to reduce our dependence on Boeing.

Beginning in 2001, we began an aggressive acquisition campaign that resulted in the consummation of four transactions through 2002. In April 2001, we acquired Tempco Engineering, Inc. and its affiliates, which expanded our aerospace product line and introduced us to the technology industry. In 2002, we acquired Versaform Corporation and certain of its affiliates, as well as Stretch Forming Corporation and Southern Stretch Forming and Fabrication, Inc. The Versaform acquisition significantly increased our presence in the corporate and regional aircraft market while adding various military products to our product line. The Stretch Forming acquisition further supplemented our military product line. Finally, our acquisition of Southern Stretch Forming and Fabrication increased our business in the corporate and regional aircraft market.

In January 2006, we acquired the assets of Technical Change Associates, Inc., a provider of lean manufacturing, facility layout and business planning consulting services. This acquisition will facilitate our continued efforts in improving production efficiency as well as supporting our other operational objectives.

RESULTS OF OPERATIONS

Three months ended September 30, 2006 compared to three months ended September 30, 2005

The following table is a summary of our operating results for the three months ended September 30, 2006 and September 30, 2005, respectively:

	Three Months Ended September 30, 2006		Three Months Ended September 30, 2005
	($ in millions)
Net sales	$	30.8	$	24.2
Cost of sales		22.4		17.9
Gross profit		8.4		6.3
S,G & A		4.5		3.8
Income from operations		3.9		2.5
Interest income (expense), net		0.1		(0.4	)
Income before income taxes		4.0		2.1
Provision for income taxes		1.3		0.8
Net income	$	2.7	$	1.3

Net Sales. The following table specifies the amount of net sales by category for the third quarter of 2006 and 2005 and the percentage of total net sales for each period represented by each category.

Category	Three Months Ended September 30, 2006		% of Total			Three Months Ended September 30, 2005		% of Total
Corporate and regional aircraft	$	11.6		37.7	%	$	10.2		42.1	%
Large commercial aircraft		9.5		30.8			7.2		29.8
Military		7.6		24.7			3.8		15.7
Technology		1.0		3.2			1.7		7.0
Other (1)		1.1		3.6			1.3		5.4
Total	$	30.8		100.0	%	$	24.2		100.0	%

(1) Includes various aerospace products and consulting revenue.

Net sales for the third quarter of 2006 were $30.8 million, up 27.3% from $24.2 million in the third quarter of 2005. While we experienced growth in each aerospace market we serve, changes in certain inventory management processes and delays within our supply chain negatively impacted the timing of shipments to certain customers. As previously announced, we expect that such inventory management process changes and supply chain delays may continue to impact the timing of shipments through the first quarter of 2007.

Net sales of components for corporate and regional aircraft were $11.6 million for the quarter ended September 30, 2006, up 13.7% from $10.2 million for the quarter ended September 30, 2005. This increase was primarily attributable to increased production rates for components used on aircraft manufactured by Gulfstream Aerospace Corporation.

Net sales of products used in large commercial aircraft were $9.5 million for the third quarter of 2006, compared to $7.2 million for the third quarter of 2005, an increase of 31.9%, primarily as a result of increasing production rates on the Boeing 737 and 777 aircraft.

Military products generated $7.6 million of net sales in the third quarter of 2006, compared to $3.8 million in the third quarter of 2005, an increase of 100%. New programs supporting the Sikorsky Aircraft Corporation Black Hawk helicopter program generated $4.1 million of net sales in the third quarter of 2006, compared to $0.2 million in the third quarter of 2005. Net sales for the Boeing Apache helicopter platform were $1.1 million in the third quarter of 2006, compared to $0.6 million in the third quarter of 2005. These increases were offset by declining sales volume on the Lockheed Martin Corporation F-16 aircraft platform, which generated $0.4 million in the third quarter of 2006 compared to $1.2 million in the third quarter of 2005.

Technology products generated $1.0 million of net sales for the third quarter of 2006, compared to $1.7 million for the third quarter of 2005. This decline was attributable to inventory management programs at a semiconductor equipment manufacturer and a decreasing work statement with a medical equipment provider.

Gross Profit. Gross profit for the third quarter of 2006 was $8.4 million (27.3% of net sales), compared to $6.3 million (26.0% of net sales) for the third quarter of 2005. The increase resulted from higher sales volumes to our aerospace customers, which provided better coverage of fixed costs. This was partially offset by lower sales volumes to our technology customers, which created inefficient labor utilization and lower coverage of fixed costs. Additionally, start-up costs on the new Blackhawk assembly program were approximately $0.4 million in the third quarter of 2006, compared to zero in the third quarter of 2005 and $0.6 million in the second quarter of 2006. Also, start-up costs at our Mexicali, Mexico facility were approximately $0.1 million in the third quarter of 2006, compared to zero in the third quarter of 2005 and $0.3 million in the second quarter of 2006.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.5 million (14.6% of net sales) in the quarter ended September 30, 2006, up from $3.8 million (15.7% of net sales) in the quarter ended September 30, 2005. This increase was primarily attributable to higher payroll and fringe benefit costs due to added personnel to support anticipated sales growth and approximately $0.3 million of costs related to Technical Change Associates, acquired in the first quarter of 2006.

Net Interest Income. Net interest income for the third quarter of 2006 was $0.1 million, compared to net interest expense of $0.4 million in the third quarter of 2005. This increase was attributable to the benefit derived from the application of the net proceeds from the public offering of common shares concluded in the first quarter of 2006 for the repayment of debt and investment in short-term interest bearing securities. The Company continues to pay interest on various equipment term loans of approximately $3.5 million at September 30, 2006.

Income Tax Expense. Income tax expense for the third quarter of 2006 was $1.3 million, compared to $0.8 million for the third quarter of 2005. The effective tax rate for the third quarter of 2006 was approximately 32.2%, compared to 37.7 % for the third quarter of 2005. The improvement in effective tax rate was primarily attributable to the recognition of the benefit of approximately $0.2 million in research and development tax credits.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

The following table is a summary of the Company’s operating results for the nine months ended September 30, 2006 and September 30, 2005, respectively:

	Nine Months Ended September 30, 2006		Nine Months Ended September 30, 2005
	($ in millions)
Net sales	$	92.8	$	72.2
Cost of sales		67.3		55.0
Gross profit		25.5		17.2
S,G & A		12.8		10.8
Income from operations		12.7		6.4
Interest expense, net		0.2		1.2
Income before income taxes		12.5		5.2
Provision for income taxes		4.5		2.0
Net income	$	8.0	$	3.2

Net Sales. The following table specifies the amount of net sales by category for the nine months ended September 30, 2006 and 2005, respectively, and the percentage of total net sales for each period represented by each category.

Category	Nine Months Ended September 30, 2006		% of Total			Nine Months Ended September 30, 2005		% of Total
Corporate and regional aircraft	$	35.7		38.5	%	$	30.2		41.8	%
Large commercial aircraft		28.1		30.3			20.1		27.9
Military		20.4		22.0			12.2		16.9
Technology		4.7		5.1			3.5		4.8
Other (1)		3.9		4.2			6.2		8.6
Total	$	92.8		100.0	%	$	72.2		100.0	%

(1) Includes various aerospace products and consulting revenue.

Net sales for the first nine months of 2006 were $92.8 million, up 28.5% from $72.2 million in the first nine months of 2005.

Corporate and regional aircraft product sales were $35.7 million in the first nine months of 2006, compared to $30.2 million for the first nine months of 2005, an increase of 18.2%. Increasing production rates at Gulfstream combined with new work generated $31.3 million of revenue in the nine months ended September 30, 2006, compared to $24.9 million in the nine months ended September 30, 2005, an increase of 25.7%. Net sales of components for Bombardier, Inc. aircraft platforms were unchanged at $3.5 million.

Net sales of product used in large commercial aircraft were $28.1 million for the nine months ended September 30, 2006, an increase of 39.8% from $20.1 million for the nine months ended September 30, 2005. This increase was driven by production rate increases on Boeing 737 and 777, a large cargo freighter program, and a 777 wing component offload that was substantially completed in the second quarter of 2006.

Military products generated $20.4 million of net sales in the first nine months of 2006, compared to $12.2 million in the first nine months of 2005, an increase of 67.2%. This increase was primarily attributable to sales of components and assemblies for Sikorsky’s Black Hawk program which generated $10.1 million in the first nine months of 2006, compared to $0.2 million in the first nine months of 2005. Offsetting this increase was a decline in revenue from the Lockheed F-16 aircraft program due to declining production rates and the reduced use of our components on the aircraft. Net sales on the F-16 program were $1.1 million in the first nine months of 2006, compared to $3.7 million in the first nine months of 2005.

Technology products generated $4.7 million of net sales for the nine months ended September 30, 2006, compared to $3.5 million for the nine months ended September 30, 2005, an increase of 34.3%. This increase was due to higher net sales of products used in semiconductor equipment, deliveries of which experienced a 5-year low point in the second quarter of 2005. Net sales of components for medical technology products declined.

Gross Profit. Gross profit for the nine months ended September 30, 2006 was $25.5 million (27.5% of net sales), up from $17.2 million (23.8% of net sales) for the nine months ended September 30, 2005. Improved labor efficiency and better coverage of fixed costs afforded by the higher net sales during 2006 were only partially offset by start-up costs on both the Blackhawk assembly program of $1.1 million and our Mexicali facility of $0.4 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the first nine months of 2006 were $12.8 million (13.8% of net sales), up from $10.8 million (15.0% of net sales) in the prior year period. This increase is primarily attributable to additional payroll and fringe benefit costs for personnel added to support the additional net sales and $0.9 million of costs related to Technical Changes Associates, acquired in the first quarter of 2006.

Net Interest Expense. Interest expense for the first nine months of 2006 was $0.2 million, compared to $1.2 million in the first nine months of 2005. During the first quarter of 2006, we concluded a public offering of common stock that generated proceeds of approximately $39.2 million in cash. We used a portion of the proceeds to reduce a significant portion of our indebtedness and currently have invested the remaining balance plus the cash generated from our operations.

Income Tax Expense. During the nine months ended September 30, 2006, we had income tax expense of $4.5 million compared to $2.0 million in the nine months ended September 30, 2005. Our effective tax rate was 35.9% for the first nine months of 2006, down from 38.0% for the first nine months of 2005, primarily due to the benefit of certain research and development tax credits and higher taxable income generated in states with lower tax rates.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of 2006, we sold 2,735,000 shares of common stock in a public offering that generated proceeds of approximately $39.2 million in cash, net of expenses. We used a substantial portion of the net proceeds from this offering to pay down approximately $10.8 million outstanding balance under our revolving line of credit, to extinguish our real estate term loan of $3.2 million and to repay subordinated notes outstanding to certain of our directors of $1.0 million. The balance of the proceeds remains in cash and short-term investments and is available for general corporate needs.

We also amended our lending agreement with Wells Fargo Bank, NA during the first quarter of 2006. The amended agreement increases the total availability under our revolving line of credit to $23.3 million, subject to a borrowing base calculation, from $18.0 million and includes an over-advance capability of up to $3.0 million. The amendment also extends the expiration of our lending agreement through November 2009 and reduces the interest rates on our equipment and real estate term loans to prime plus 0.5% from prime plus 4.0% after the payment of a fifty thousand dollar fee. The real estate term loan was subsequently repaid with a portion of the proceeds of our public offering. Effective as of September 1, 2006, the interest rate on the equipment term loan is reduced to prime plus 0.25% per the terms of the amended agreement. As of September 30, 2006, the revolving line of credit has no outstanding balance but remains available to us, subject to the borrowing base calculation, through 2009.

During the first nine months of 2006, cash generated from operating activities was $5.5 million, compared to $3.5 million for the first nine months of 2005. Our increased cash is primarily attributable to our increased net income and accounts payable in the 2006 period over the 2005 period. Our net income for the first nine months of 2006 was $8.0 million, compared to $3.2 million in the first nine months of 2005, an increase of $4.8 million. The increase in our accounts payable during the 2006 period was $2.4 million, primarily due to extended terms negotiated with a customer for the purchase of components used in Black Hawk assemblies, compared to $0.5 million in the 2005 period. Offsetting the increase in cash generated from operating activities was an increase in inventory of $7.2 million as work in process increased by $1.9 million, in order to support our growth in net sales, and finished goods increased by $4.5 million, primarily due to changes in inventory management processes at Gulfstream and Sikorsky. Additionally, we used $7.9 million of cash to fund income tax obligations.

Cash used in investing activities was $20.1 million for the nine months ended September 30, 2006, compared to $1.3 million for the nine months ended September 30, 2005. We purchased $18.2 million of various government securities as investment vehicles for our cash balance. We also spent $4.4 million for capital equipment, primarily related to equipment purchased for our new Mexicali, Mexico facility, riveting equipment purchased for the St. Charles, Missouri facility to support the Black Hawk assembly program and certain information technology hardware and software upgrades, customized stretching equipment and milling equipment in order to meet expected customer demand. We plan to spend a total of approximately $7.0 million on capital expenditures during 2006 and again in 2007.

Net cash provided from financing activities was $25.6 million for the first nine months of 2006, compared to $2.5 million cash used for the first nine months of 2005. The increase in cash flow primarily related to our public offering of common stock and repayment of debt discussed above.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Since December 31, 2005, there have been no material changes in the total amount of contractual obligations outside the ordinary course of our business or the timing of cash flows from those specified and reported in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the risk of loss that may impact our consolidated financial position, results of operations or cash flows. We are exposed to market risk primarily due to fluctuations in interest rates. We do not utilize any particular strategy or instruments to manage our interest rate risk.

Our outstanding credit facility carries an interest rate that varies in accordance with the prime rate. We are, therefore, subject to potential fluctuations in our debt service as the prime rate changes. Based on the amount of our outstanding debt as of September 30, 2006, a hypothetical 1% change in the interest rate of our outstanding credit facility would not result in significant changes in our annual interest expense.

Item 4. Controls and Procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(c) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2006. Based upon and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

In February 2004, Versaform Corporation, our wholly-owned subsidiary, was served with a grand jury subpoena and we were informed that the U.S. Attorney's Office for the Southern District of California, Department of Defense, Office of Inspector General, Defense Criminal Investigative Service and the Federal Bureau of Investigation was conducting an investigation relating to structural components of B-52 engine cowlings Versaform manufactured for Nordam Corporation, components of auxiliary power units Versaform manufactured for Hamilton Sundstrand, a United Technologies Company, and certain tools Versaform manufactured for Lockheed Martin Corporation.

Although the investigation is ongoing, neither we nor Versaform have been served with notice of any pending, related legal action, and Versaform continues to cooperate with the government. Documents responsive to the subpoena have been produced.

In May 2005, we presented a $4.0 million claim accompanied by supporting documentation to a customer regarding a dispute over a price increase and certain extraordinary costs we incurred. In response, the customer presented us with a claim for $9.5 million alleging certain of our parts were non-conforming. No lawsuit has been filed by either party and discussions are ongoing about possible resolution of the claims. Nonetheless, we are vigorously pursuing our claim against the customer and defending against the customer's allegations. As with any dispute, however, the outcome is uncertain. Moreover, pending our receipt of supporting documentation for the customer's allegations, we are unable to assess whether our products liability policies would cover the potential liability, if any, resulting from the customer's allegations.

Other than noted above, we are not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of our business. We do not believe such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on our business.

Item 1A. Risk Factors.

There have been no material changes to the risk factors as previously disclosed in our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LMI AEROSPACE, INC.

Date: November 13, 2006		/s/ Ronald S. Saks
		Ronald S. Saks President and Chief Executive Officer (Principal Executive Officer)

Date: November 13, 2006		/s/ Lawrence E. Dickinson
		Lawrence E. Dickinson Chief Financial Officer and Secretary (Principal Financial and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit Number	Description

10.1	Memorandum of Agreement effective as of January 1, 2006 between LMI Aerospace, Inc. and Gulfstream Aerospace Corporation.

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, Chief Financial Officer and Secretary.

32	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

EX-10.1 2 lmi10q111006ex101.htm LMI AEROSPACE, INC. EXHIBIT 10.1 TO FORM 10-Q DATED 9-30-06 LMI Aerospace, Inc. Exhibit 10.1 to Form 10-Q dated 9-30-06

EXHIBIT 10.1

GULFSTREAM AEROSPACE CORPORATION

MEMORANDUM OF AGREEMENT

PREAMBLE

This Memorandum of Agreement (“MOA”) is executed on this day, January 1, 2006 between GULFSTREAM Aerospace Corporation (hereinafter "GULFSTREAM”), a Georgia corporation having its principal place of business at 500 GULFSTREAM Rd., Savannah, GA 31407 and LMI Aerospace, Inc. (hereinafter "LMI") a Missouri corporation having its principal place of business at 3600 Mueller Road, St.Charles, MO. 63301. GULFSTREAM and LMI may also be referenced to as a "Party" or the "Parties" for the manufacture, delivery and product support of GULFSTREAM’s statement of work as described in this MOA.

TABLE OF CONTENTS

A. SCOPE OF MOA

B. PRICING, OPTIONS, AND PAYMENT

C. PERIOD OF PERFORMANCE

D. DELIVERIES

E. INSPECTION AND ACCEPTANCE

F. PACKAGING AND SHIPPING

G. WARRANTY

H. TITLE AND RISK OF LOSS

I. DESIGN CHANGES

J. INTELLECTUAL PROPERTY RIGHTS, TOOLING AND DATA OWNERSHIP

K. EXCUSABLE DELAYS

L. PATENT INDEMNITY

M. INDEMNITY BY SUPPLIERS ENTERING GULFSTREAM PREMISES

N. SPECIAL CONSIDERATIONS

O. GENERAL

A. SCOPE OF MOA

1. Product Description / Specification

General Description of “Goods”

Attachment A contains a list of detail sheet metal part numbers, attachment B contains kits, attachment C contains Leading Edge details, attachment D contains Versaform/Tulsa details, attachment E contains estimated annual build rate for 2006. Attachments A thru D include lead time for parts and price list for years 2006-2010. This listing is subject to revision during the performance period of this MOA. GULFSTREAM is not obligated to procure any minimum number of units to obtain the ship set pricing set forth in this MOA. Lead-times will be adjusted as mutually agreed upon by both parties (GULFSTREAM and LMI Aerospace) with the primary focus of reducing manufacturing lead-times.

2. Certification

a. LMI agrees to deliver products and parts hereunder that will meet applicable FAA requirements as defined in the current FAR, Part 21, and the JAA requirements as defined in the JAR for supplied products. GULFSTREAM shall be responsible for maintaining FAA Certification and JAA as applicable, on the aircraft.

b. LMI will support GULFSTREAM in its efforts to obtain Foreign Type Certificates as mutually agreed. GULFSTREAM will provide reasonable advance notice to LMI of the Foreign certifications that it intends to pursue and of the requirements to be met.

c. Integrated Logistics Support -LMI agrees to perform all work and provide all deliverables as identified in the attached GULFSTREAM Document #GER-2011 entitled “Integrated Logistics Support Requirements” dated September 4, 2001 at no cost to GULFSTREAM. These requirements include Technical Publications, Manuals, Technical and Product Support, Technical Training, Reliability, Maintainability, Material Services/Ground Support Equipment MSGE and Warranty Administration and other data requirements.

3. Supplier Performance

a. Performance Level

This MOA is predicated upon LMI maintaining a “green” level of performance as defined by GULFSTREAM in all tasks required for commitment to the program and timely satisfaction of all requirements including without limitation performance in the areas of quality, product support and on-time deliveries.

·	A green level of performance in quality is defined as an acceptance rating of ^* or better.

·	A green level of performance in the area of Product Support is defined as having no more than * deliveries received past the original due on dock date as agreed to by LMI per quarter.

A green level of performance for deliveries is defined as ^* or above on-time deliveries regarding discrete purchase orders with a ship window of * early and * late to the purchase order delivery date, or maintaining a * on time delivery performance rating utilizing the min/max procurement process to the established min/max levels.

^* The text noted by asterisks has been redacted in connection with a request to the Securities and Exchange Commission for confidential treatment of such text pursuant to Rule 24b-2. A copy of this Agreement including the redacted information has been submitted to the Securities and Exchange Commission as part of such request.

The time frame for measurement of the items delivered using min/max levels will be mutually negotiated by the parties.

During the performance of this MOA, LMI will be measured and tracked via a supplier report card. During the MOA period of performance, * If LMI fails to achieve the improvement plan, then nothing stated within this Section 3.a. prevents GULFSTREAM from immediately pursuing termination of the MOA as outlined in Section K.

b. Quality Assurance

Consistent with industry practice, GULFSTREAM has developed Supplier Quality Assurance Requirements SQAR-0003 which address such things as Quality programs, onsite evaluation inspection and testing of equipment and supplies and failure analysis.

LMI shall adhere to the requirements of SQAR-0003 as may be amended from time to time. GULFSTREAM will provide LMI with revisions to SQAR- 0003.

In addition, the terms and conditions as cited in GULFSTREAM Form GA270 Rev 4/05 apply to this MOA, and the specific clauses will be indicated as applicable at the time purchase orders are released.

c. Production Line Support

1. LMI understands the criticality of schedule compliance and will have a minimum of * of all parts either in work or in stock to support abnormal production shortages. If this contract were to be terminated for any reason, GULFSTREAM would include the * requirement in the calculation utilizing the language in termination of convenience as referenced in paragraph J.2. LMI agrees to provide reasonable efforts necessary to comply with the dates on the purchase order for abnormal production shortages. Any additional costs incurred by LMI to support these efforts shall be submitted, reviewed, and, approved by GULFSTREAM. LMI will use its best efforts to ship in stock requirements within ^* of GULFSTREAM’s request via Air Express.

2. In the event that GULFSTREAM orders parts utilizing a min/max ordering system, LMI agrees to maintain minimum levels of stock at their facility or forward stocking location (eventually LMI Tulsa) to guarantee minimum and maximum levels of product at GULFSTREAM as set forth by GULFSTREAM. GULFSTREAM and LMI will work together to reduce manufacturing lead times due to benefit of utilizing Min/Max

procurement process. All purchase orders released for Min/Max will be estimated annual usage quantities only. Gulfstream is not under any obligation to purchase set quantities. Quantities to be used for planning purposes only. Gulfstream will be accountable for manufacturing lead-times for parts on order as referenced on attachment A, B, C, and D.

3. If LMI determines that it is in its best interest to move work from either one division to another or to a sub-tier supplier from internal make, LMI will notify GULFSTREAM of the move along with a transition plan to include a move timeline and estimated build plan that includes build ahead quantities to support the stated transition.

d. Raw Material Support

1. LMI has the ability to utilize all contracts in place by GULFSTREAM for raw material support of product. LMI will be responsible for all over wide material purchases and contracts. LMI has agreed to support GULFSTREAM and it’s sub-tiers with over wide material distribution when applicable. LMI will submit pricing for over wide materials and agree to sell when applicable over-wide material to GULFSTREAM sub-tiers with that price plus not to exceed *. Please see section P.3 for assignment of raw material contracts.

e. Aircraft on Ground (AOG) Support

LMI will provide 24 hours, 7 days a week, 365 days AOG coverage, * , with the exception of out of production or special configuration requests if applicable, with which additional cost will be agreed upon by both parties.. LMI will provide GULFSTREAM a listing of individual AOG contacts with E-Mail addresses, phone and fax numbers. The listing will be maintained by LMI with any revisions being provided GULFSTREAM prior to or at the time the revision is implemented.

The standard AOG response time is as follows:

LMI will, in good faith, replace those assets used by GULFSTREAM for warranty (if applicable) support * on an AOG critical expedite turnaround.

Defective components or units will be expeditiously returned to LMI for verification of the failure. Upon verification that the failure is covered under the warranty LMI at its cost agrees to replace the failed unit or components within thirty (30) days ^* . In such cases where this fee may apply, GULFSTREAM will provide LMI a detailed listing of such cases for review and approval by LMI. In the event that the unit or component is not verified as a warranty failure, GULFSTREAM shall compensate LMI within thirty (30) days, as mutually agreed.

f. Parts Obsolescence

LMI agrees to continue all manufacturing capabilities and/or provide alternate support for the form, fit and functional requirements for the original configurations on any/all of the “out-of-production” configurations, modifications or enhancements, so long as the model aircraft for which it was designed remains in service. Provided that the GULFSTREAM furnished tooling is capable of producing original configuration. LMI further agrees to provide GULFSTREAM * for “last-time-buy” options for any obsolete end items and parts of assemblies at the pricing set forth in this MOA where applicable.

B. PRICING, OPTIONS AND PAYMENT

1. Supplies to be furnished

Attachment A, B, C, and D contains the MOA statement of work and associated pricing

2. OPTIONS

a. LMI’s pricing structure contained in attachment A, B, C, and D shall cover (5) years and defined as the period of performance. GULFSTREAM and LMI shall review this contract in the 12 months prior to end of MOA to discuss exercising an additional option period. Pricing terms for this MOA shall be as documented in attachment A, B, C, and D for five years. Upon mutual agreement of the parties this agreement may be extended prior to end of MOA. *

b. In the event of engineering changes, ‘800’ Part Number rolls and/or Part Number replacements, the Gulfstream letter purchase order will cover any increase or decrease in unit pricing pending agreed upon pricing by both parties. The products listed in Attachment A, B ,C and D will be subject to the same pricing or de-escalated pricing from the pricing of the Part Numbers being replaced. If a fair price cannot be reached then it is understood that GULFSTREAM will quote the rolled part number to other suppliers to obtain the best value possible, excluding kits and components used in kits supplied by LMI Savannah.

c. The prices set forth in this MOA in no way obligates GULFSTREAM to maintain a certain level of buy and will remain as stated in Attachment A,B,C and D regardless of the quantity purchased by GULFSTREAM.

3. All invoices, except as noted, shall be sent separately to:

GULFSTREAM Aerospace Corporation

Attn: Accounts Payable, M/S B-10

P.O.Box 2206

Savannah, GA 31402-2206

4. Payment Terms: ^*

5. Spares

a. Spares Pricing

GULFSTREAM reserves the right to purchase planned and unplanned requirements of these parts for in production, *.

6. Taxes

6.1

Except as otherwise provided under Subsection 6.2, Seller is responsible for, and indemnifies GULFSTREAM against, any and all taxes (including without limitation any related penalties, interest, fees, etc. associated therewith) arising out of or in connection with Seller’s (a) sale of Product(s) or services to GULFSTREAM under this Agreement; or (b) business operations to produce or procure the Product(s) and services to be sold to GULFSTREAM under this Agreement. In no event will Seller attempt to bill or invoice GULFSTREAM for any taxes described in this Subsection 6.1.

6.2

Seller agrees that the prices contained herein include any and all Transfer Taxes (as defined in this Subsection 6.2). Seller accepts GULFSTREAM's representation that the Product(s) and services purchased by GULFSTREAM hereunder are for resale purposes. Seller will cooperate with GULFSTREAM in obtaining any exemptions from Transfer Taxes where applicable. In the event Seller determines that it has a duty under applicable law to charge and collect from GULFSTREAM and remit to the applicable taxing authority any Transfer Tax upon the sale of Product(s) and services to GULFSTREAM under this Agreement, GULFSTREAM will be responsible for and will pay or reimburse Seller for such Transfer Taxes. Seller will separately state any Transfer Taxes charged to GULFSTREAM on any bill or invoice. For purposes of Section 6.4, “Transfer Taxes” means sales, use, excise, value-added, goods and services or similar-type taxes (including without limitation any related penalties, interest, fees, etc. associated therewith).

6.3

If a claim is made against any Party for taxes with respect to which the other Party is liable for a payment or indemnity hereunder, the Party receiving such claim will promptly give the other Party notice in writing within fifteen (15) days of receipt of such claim; provided, however, that failure to give notice will not relieve any Party of its obligations hereunder. The Party liable for the tax under this Section 6.4 will be required to remit payment to the other Party or the tax authority, as appropriate, unless the Party liable for the tax under this Section 6.4 is permitted by applicable law to contest such claim and defer payment in accordance with the law. The Party upon whom the tax is being legally imposed will coordinate such contest. The expense of such contest will be borne by the Party liable for the tax under this Section 6.4. If either Party receives any refund on account of any suit or action for a tax for which the other Party has provided funds hereunder, such Party shall promptly, but in any event, within thirty (30) days of receipt of such refund, remit such refund to the other Party, together with any interest and penalties refunded on such amount. Additionally, GULFSTREAM shall reimburse LMI for all personal property taxes applicable to tooling or other assets owned by GULFSTREAM and stored by LMI, after receipt by GULFSTREAM of LMI’s invoice for such taxes for the amount of tax imposed by the state or local taxing authority.

6.4

The obligations provided under this Section 6.4 shall survive termination or expiration of this Agreement.

7. Sole Distribution Rights / Parts Manufacturing Authority

LMI acknowledges that all rights to the distribution of any components designated for use on any GULFSTREAM aircraft, belongs solely to GULFSTREAM, LMI's shall not solicit Parts Manufacturing Authority (PMA) from FAA.

LMI shall provide all components to GULFSTREAM only, for resale to GULFSTREAM customers through the GULFSTREAM distribution network.

C. PERIOD OF PERFORMANCE

The period of performance for this MOA will be from January 1, 2006 through December 31, 2010. The pricing (and relevant provision of this MOA) provided for shipsets will apply for orders placed by GULFSTREAM prior to the end of the period of performance even if the delivery and acceptance by GULFSTREAM occurs after the period of performance. Time is of the essence in the performance of obligations set out in this MOA.

D. DELIVERIES

1. Delivery Schedules

The delivery schedules in this MOA are estimated delivery schedules.

GULFSTREAM will issue purchase orders segregated by year for the supplies acquired under this MOA. Individual items ordered will be identified on the purchase orders with GULFSTREAM’s part number. The required delivery schedule for supplies will be established on purchase orders. In addition, with Min/Max purchase orders, LMI is obligated to perform to the conditions as referenced in Section A.3.c.2, Supplier Performance.

2. JIT (Just In Time) deliveries

The JIT delivery schedule herein permits receipts no earlier than ^* prior to the Due-On-Dock date and not later than * late to Due-On-Dock date. Components delivered * or more in advance of the Due-On-Dock date will not be accepted until, and unless, appropriate Purchasing approval is provided for all detail parts. Kit JIT delivery permits receipts no earlier than * to the due on dock date. If such approval has not been provided in writing, the components will be returned collect.

3. Delivery requirements change to the actual Delivery Schedule

GULFSTREAM will provide a minimum of 30 days notice to LMI in the event of production schedule decelerations and/or production schedule accelerations. GULFSTREAM will be allowed *. GULFSTREAM and LMI will work together on a best effort basis to provide as much advance notice as possible for schedule changes. In the event of “short lead-time” requests of support, LMI Aerospace will provide the best “Promise Date” of delivery to GULFSTREAM. That date will be used to track on-time delivery performance. All efforts to support GULFSTREAM’s required need dates will be expected of LMI Aerospace.

4. *

3. Local Distribution Center

LMI agrees to maintain at its expense its GULFSTREAM Distribution Center within a fifty (50) mile radius from GULFSTREAM’s Savannah facility.

LMI agrees to maintain at its expense a facility that will be sufficient in size and functionality to support all roles pertaining to this MOA such as but not limited to:

·	Warehousing minimum agreed upon shipsets of LMI and Versaform parts.

·	Capacity and reliable capability to perform required processes in order to supply GULFSTREAM with the highest possible quality kitted products defined within this MOA.

·	A facility adequately secure from natural elements and outside influences.

E. INSPECTION, ACCEPTANCE AND REMEDIES FOR NON-CONFORMING SUPPLIES

1. Inspections and Acceptance of Supplies

GULFSTREAM has the right to perform an incoming inspection on each supplied good upon delivery prior to acceptance. Acceptance of material ordered under this MOA will occur at the designated GULFSTREAM facility as soon as possible following delivery of material and all required material documentation (i.e. Correct Packing Tickets, Certificates of Conformance, 8130 forms, etc.), but no more than forty-five (45) days after delivery to GULFSTREAM’s facility.

Notwithstanding any prior inspection or test, payment, or receiving documents, supplied goods are subject to final inspection, test, and acceptance at destination stated herein or at the GULFSTREAM Facility, which orders part(s).

2. Remedies for Non-Conforming Supplies

3. Quality Assurance Inspections of Systems

LMI and LMI subcontractors will maintain reasonable quality control and inspection systems and will provide the Supplier’s Quality Organization a failure analysis and corrective action program for all design, tooling, test equipment, manufacturing and test operations supplied to GULFSTREAM. Each type of non-conformance shall be documented, investigated, and the appropriate corrective action implemented. The supplier will have a method for positive identification, recall, and replacement of priority parts in the event of a nonconformance.

At all reasonable times, including the period of manufacture, GULFSTREAM may inspect and test the supplied goods and inspect the involved plants of LMI and LMI subcontractors. LMI and its subcontractors will at their expense provide GULFSTREAM with reasonable assistance to effectively and efficiently conduct the inspections and LMI and its subcontractors will at their expense promptly comply with written directions by GULFSTREAM reasonably necessary to correct deficiencies in such systems.

F. PACKAGING AND SHIPPING - GULFSTREAM document GA 75

1. Packing tickets

LMI will submit a packing ticket with each shipment. Packing tickets shall include the following:

All packing tickets shall include purchase order number(s), MRA/MRP release numbers, item number(s), quantity, serial number(s) (as applicable), and nomenclature exactly as it appears on the purchase order.

All parts shall be identified either on the part itself or on the container in which the part is shipped as specified per GULFSTREAM’s purchase order and/or engineering specification.

All components, which are serialized, must have the serial numbers stated on the packing ticket.

The serial number on the packing ticket and the serial number on the component must be identical. Copies of functional test results must be included.

Due to FAA requirements, two sets of paperwork must be sent with each kit shipment. One set for GULFSTREAM receiving to process receipt of the kit and one set inside the kit-packaging container for review by GULFSTREAM’s Composite Bond Room.

LMI will be accountable for all shipping costs between its own divisions and from the LMI Savannah facility to GULFSTREAM Savannah for kit deliveries.

i. Once LMI and GULFSTREAM have completed transition of all details being procured from LMI for Savannah production requirements

utilizing Min/Max, GULFSTREAM has agreed to allow LMI to ship kit detail parts on the same truck that is carrying regular details

to GULFSTREAM Savannah from LMI Tulsa. Kit detail parts will be dropped off at the LMI Savannah facility at GULFSTREAM cost.

All information of kit details being shipped to LMI Savannah is required prior to shipment.

ii. All expedite costs or special delivery costs for kit details going to LMI Savannah that are necessary to make delivery schedule will be the responsibility of LMI when LMI is found to be at fault. It is LMI’s responsibility to have personnel available at LMI Savannah to unload kit details off the GULFSTREAM truck.

Failure to comply with shipping documentation requirements in excess of 3% of all deliveries quarterly, thus displaying a chronic problem shall cause LMI’s account to be debited in the amount of $200.00 to compensate for time expended in correcting discrepancies at the buyers own discretion..

2. Shipping, Marking and Packing Instructions

Unless otherwise stated herein, all Shipping, Marking and Packing instructions will be in accordance with GULFSTREAM Document Number GA 75, 9/05 as amended from time to time.

3. Certification of country of manufacture

U.S. Customs has increased requirements for the identification of foreign made items entering the United States of America. Therefore, proof of Country of Manufacture is required for all end items. Please complete form GA3707, 3/05.

- EXPORT/IMPORT COMPLIANCE

Compliance with Export Laws. Each Party shall perform under this Agreement in compliance with all applicable export control laws and regulations, including without limitation the U.S. Department of Commerce’s Export Administration Regulations (“EAR") and, to the extent applicable, the U.S. Department of State’s International Traffic in Arms Regulations (“ITAR").

Export Representations and Warranties. Seller represents and warrants that all Deliverables (as defined below) provided by Seller to Gulfstream under this Agreement shall:

a. not be subject to any controls, requirements or restrictions set forth under the ITAR;

b. to the extent that the Deliverables are subject to the EAR and except for prohibitions relating to exports or re-exports destined for countries listed in Country Group E of the EAR, be classified under the EAR, or be otherwise eligible for an exemption or license exception available under the EAR, such that the Deliverables may be exported from the United States, and thereafter re-exported to a country other than the United States (a “Foreign Country"), without first requiring authorization by, or notification to, the U.S. Department of Commerce’s Bureau of Industry and Security; and

c. to the extent that the Deliverables are subject to export control laws or regulations promulgated in any Foreign Country, be classified under such foreign laws or regulations such that the Deliverables may be imported into and exported from the United States, and thereafter re-exported to a Foreign Country, without first requiring authorization by, or notification to, any other foreign governmental authority.

“Deliverables" means all items supplied by Seller to Gulfstream under this Agreement, including without limitation goods, components, spare parts, accessories, software and technical data thereof.

Remedy. In the event that Seller determines that any Deliverable fails to satisfy the representations and warranties of Section F.5, then Seller shall promptly provide notice thereof to Gulfstream. Seller shall fully indemnify the Gulfstream Parties (as defined below) with respect to all losses, damages, expenses, penalties and judgments arising from a breach by Seller of Section F.5, including without limitation those arising from or related to obtaining and retrofitting a substitute item that conforms to the representations and warranties of Sections

Certification of Export Classification. Prior to the first shipment to Gulfstream of each unique part number of any of the Deliverables, and prior to the first shipment following a change to the export classification of any Deliverable, Seller shall provide to Gulfstream written certification for each such part number of the following: (a) for each Deliverable supplied from the United States, its EAR Export Classification Control Number (“ECCN") number and Schedule B number; and (b) for each Deliverable supplied from a Foreign Country, its Harmonized Tariff Schedule (“HTS") number. Such information shall be certified in writing using Gulfstream Part Information Request Form GA3688 or other mutually agreeable format.

Possible Future Export Restricted Activity. The Parties acknowledge that from time to time Gulfstream develops proposals for and enters into contracts with governments and other customers that involve equipment and/or modifications subject to control under the ITAR or under sections of the EAR that require individual licenses. If in connection with any such effort Gulfstream desires technical assistance, equipment or any other item from Seller that is subject to control under the ITAR or to individual license requirements under the EAR, and Seller agrees to provide such support, then the Parties shall enter into either an amendment to this Agreement or a separate agreement concerning such support. Any such amendment or agreement shall address written certification by Seller of the applicable export control classification of Deliverables, including without limitation USML Category Number(s), and the Parties’ respective obligations regarding compliance with applicable licensing requirements.

G. WARRANTY

1. General

Subject to the limitations and conditions hereinafter set forth, LMI warrants that the supplied goods and its components supplied hereunder shall:

At the Date of Delivery, be free from:

Defects in material or workmanship

ii.

Defects arising from the selection of material or process of manufacture other than as specified by GULFSTREAM or contained in GULFSTREAM’s provided design under the Product Description; or GULFSTREAM approved design.

iii.

Defects inherent in the design thereof, in view of the state of the art at the time of design thereof, except for those portions which have been retained from the prior G350/G450 and G500/G550 design or which are based upon GULFSTREAM directed or furnished engineering criteria but, only to the extent such criteria is defective or incorrect.

At the Date of Delivery, and throughout the duration of the warranty, be free from: Defects arising from the failure to conform to the Type Design specifications and drawings, as certified by the FAA or other airworthiness authorities, developed by LMI pursuant to the Product Description or the Engineering Statement of Work. For the purpose of this section, a nonconformance recognized, documented and approved by LMI quality control and inspection system shall not be considered a defect.

2. Duration

3. Remedies

LMI’s obligation for a breach of a warranty provided under this Section during the periods described in this Section. shall be to promptly repair, replace or correct (to include all costs associated with removal and reinstallation) at LMI’s sole election and cost, the defective part or condition with reasonable care and dispatch. LMI will reimburse GULFSTREAM for the costs associated with the removal of defective units, installation of the replacement unit and required operational checks provided the work is performed by GULFSTREAM, an Authorized Warranty Repair Facility or by a facility as directed by GULFSTREAM. Reimbursement will be based on standard hours applicable to the removal and replacement of each unit, utilizing standard published GULFSTREAM post-production labor rates.

4. Removal and Reinstallation of LMI Components

a. *

b. *

LMI will have 60 days from the date of notification to take exception to any item(s) submitted. If upon review, GULFSTREAM concurs with said exception, GULFSTREAM will adjust debit amount accordingly. If GULFSTREAM does not concur with such exception, the parties agree to submit the dispute to their respective Vice President’s responsible for oversight of this MOA for resolution. In the event that no resolution is reached, the parties agree to seek resolution through mediation. Any claims not contested by LMI within the 60 day period will be debited to LMI account.

5. Disclaimer

THE WARRANTIES SET FORTH IN THIS MOA ARE EXCLUSIVE AND NO OTHER WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED, INCLUDING ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND ALL WARRANTIES ARISING FROM THE COURSE OF DEALING OR USAGE OF TRADE, SHALL APPLY. THE REMEDIES SET FORTH IN THIS MOA ARE THE SOLE AND EXCLUSIVE REMEDIES OF GULFSTREAM FOR ANY CLAIMS, EXPENSES, OR DAMAGE ARISING OUT OF OR RELATED TO PRODUCTS DELIVERED UNDER THIS MOA.

IN NO EVENT SHALL EITHER PARTY BE LIABLE IN TORT OR IN CONTRACT FOR ANY INCIDENTAL, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES.

H. TITLE AND RISK OF LOSS

1. Title and Shipping Point

Title to all property to be delivered hereunder shall transfer to GULFSTREAM at such time material is transferred to the designated shipping company, all risks of loss or damage to property shall be borne by GULFSTREAM at time of shipment, except for KIT details traveling to LMI Savannah as referenced in Section F.1.f.ii LMI will retain all risk of loss or damage until delivery to GULFSTREAM Savannah.

2. Risk of Loss

Notwithstanding the foregoing, LMI shall bear risk of loss or damage to property subsequently rejected by GULFSTREAM and placed on transport for return to LMI until such property is redelivered to GULFSTREAM, except for the loss, destruction of, or damage to such rejected property resulting from the negligence of officers, agents or employees of GULFSTREAM acting within the scope of their employment. GULFSTREAM shall notify LMI prior to shipping the supplied goods back to LMI to ensure proper receipt and handling.

If property is furnished by GULFSTREAM for performance of this MOA all risks of loss or damage to such property shall be upon LMI until the said property has been redelivered to GULFSTREAM. LMI shall properly segregate, identify and protect all such property.

Processing of claims relating to loss of or damage to property to be furnished hereunder shall be accomplished by the party responsible for risk of loss or damage to such property at the time the claim arises.

I. DESIGN CHANGES

1. Design Changes

GULFSTREAM may at any time make changes in drawings, designs, specifications, materials, packaging, time and place of delivery, method of transportation or other terms of this MOA, which changes GULFSTREAM shall document in writing and which LMI will exhaust all means to implement changes in an expeditious manner. If such changes cause an increase or decrease in the cost of performance of this MOA or in time required for performance, an equitable adjustment shall be made, as applicable, to the price and/or the delivery schedule of the affected performance and this MOA shall be amended in writing accordingly. Any claim by LMI for an equitable adjustment under this clause must be asserted ^* effecting the changes or GULFSTREAM shall not be obligated to consider LMI’s claim for an equitable adjustment. In no event shall GULFSTREAM be liable for any claim for an increase in price after payment for the supplies. If property is made obsolete as a result of a change, GULFSTREAM shall have the right to prescribe the manner of disposition of such property.

2. Class 1 & 2 Design Changes - Supplier Requested Changes

Class 1 changes are those that affect fit, form, function, interchangeability, safety, strength, performance, flight characteristics, weight, balance, product qualifications, service life or installation of the next assembly. These changes are required to be submitted to and approved by GULFSTREAM Engineering prior to incorporation.

Class 2 changes (those that do not affect fit, form, function, interchangeability, safety, strength, performance, flight characteristics, weight, balance, product qualification, service life or installation of the next assembly) must also be submitted for GULFSTREAM Engineering’s review and concurrence with respect to classification prior to incorporation. GULFSTREAM will respond with said concurrence or any exceptions taken within 2 weeks after receipt of supplier notification.

All Class 1 and Class 2 Design changes shall be submitted in writing via a “Seller Engineering Memo” (SEM) to GULFSTREAM Engineering with copies to GULFSTREAM Purchasing and Quality Assurance.

3. Supplier Escapes

LMI will immediately notify GULFSTREAM, in writing, of any material/component escapes. Escapes are any material/ component issue that may result in performance, airworthiness, FAR non-compliance, or non-conformance as defined below:

Material or component issues that might affect the item’s ability to perform to original specifications.

Airworthiness of the component or end use product in question.

FAR non-compliance has been identified with components.

Non-conformance to original specification (component or material does not conform to Engineering specification, drawing or document).

Written notification must include:

Nature of the Issue

“What, why, how and when” information

Inspections/Action

State if it is satisfactory to simply inspect for this condition and what inspection methods are required. If the item needs to be replaced, state NDT standards, tools, and inspection resources available. Identify specific series (by serial number, by date of manufacture, by location of manufacture, etc.) if possible.

Compliance Time

State the urgency of the issue and recommended compliance time.

Spares

State if replacement or return to supplier for repair is required, whether or not adequate spares exist to either replace outright, or to develop a rotable pool to keep in service aircraft flying.

Remedy

If appropriate, recommend actions to preclude this event from happening again, both short term and long term.

Suppliers identification of the issue

State if Airworthiness issue, Quality issue, FAR non-compliance (or all of the above).

Service Bulletin

If the above information is the basis of a Service Bulletin, then LMI should provide a draft Service Bulletin at this time if possible.

However, in those cases where LMI has the Material Review Board (MRB) authority and the escape disposition meets type design, then a separate submission, other than MRB with the component, is not necessary.

J. TERMINATION

1. For default

GULFSTREAM may terminate this MOA or any part thereof, by giving notice of default to LMI under any of the following circumstances.

If LMI refuses or fails to make deliveries or perform the services within the time specified in this MOA or fails to satisfy all performance criteria as stated in Section A.3 performance level.

If LMI fails to comply with any of the other provisions of this MOA, or so fails to make progress as to endanger performance of this MOA in accordance with its terms, and does not cure or make reasonable progress to cure any such failure within a period of Ninety (90) days (or such longer period as GULFSTREAM may authorize in writing) after receipt of written notice from GULFSTREAM specifying such failure. If circumstances warrant and that GULFSTREAM and LMI AEROSPACE agree that performance will not improve in the cure period then termination for default will be implemented.

If LMI becomes insolvent or is subject to proceedings under any law relating to bankruptcy, insolvency or the relief of debtors.

b. In the event of such termination, GULFSTREAM may purchase

or manufacture similar product and/or require LMI to transfer title and deliver to GULFSTREAM any or all property produced or procured by LMI under this MOA, and LMI shall be liable to GULFSTREAM for any excess cost to GULFSTREAM; provided, however, LMI shall not be liable to GULFSTREAM for such excess cost when the default of LMI is due to causes beyond the control and without the fault or negligence of LMI; provided further, and LMI has exercised due diligence to remove delay, LMI shall not be excused from liability unless LMI has notified GULFSTREAM in writing of the existence of such cause within ten (10) days from the beginning thereof.

GULFSTREAM's liability in the event of a default termination shall be limited to the agreed price of items delivered and accepted, subject to downward equitable adjustment if such product(s) are nonconforming, and to the reasonable value of any property, inclusive of tooling, design data, survival of warranties and obligations thereunder that GULFSTREAM may require to be delivered pursuant to b. above.

2. For Convenience

GULFSTREAM may terminate this MOA, or any part thereof, by giving written notice thereof to LMI. In the event of such termination, GULFSTREAM shall pay to LMI costs incurred by LMI determined in accordance with sound accounting practices plus a reasonable allowance for profit earned thereon for all active production parts or open purchase order on order within manufacture lead-time as stated on "Attachment A,B, C and D", provided that LMI shall not be entitled to any profits with respect to work and/or services not performed prior to effective date of such termination, nor shall the total termination sum payable to LMI exceed the total agreed to price as reduced by the amount of payments otherwise made, and as further reduced by the agreed to price of work not terminated. In no event will GULFSTREAM pay LMI more than the purchase order/contract price. LMI must provide its internal inventory and WIP position to GULFSTREAM as of the day of termination no later than 60 days after receipt of termination. If the inventory information is not provided within stated time period, GULFSTREAM is under no obligation to accept the data.

K. INTELLECTUAL PROPERTY RIGHTS, TOOLING AND DATA OWNERSHIP

1. Ownership of Design Drawings/Data

Title and rights to all design and design data (drawings) created by LMI under this MOA are owned by GULFSTREAM upon full payment for supplies.

If the supplies have been either originated or designed by GULFSTREAM in accordance with specifications or other data furnished by GULFSTREAM, all rights to supplies or other data and the reproduction, use or sale thereof are owned solely by GULFSTREAM.

2. Ownership of Tooling, Design and Data

All tooling, the cost of which is included in the price of this MOA, whether designed by LMI, by GULFSTREAM or by a third party, shall become, upon acquisition or manufacture, the property of GULFSTREAM. LMI shall deliver such tooling to GULFSTREAM or GULFSTREAM’s designees after performance is completed hereunder or upon termination, unless such tooling is needed to fill further orders from GULFSTREAM and retention by LMI of such tooling has been consented to in writing by GULFSTREAM.

The term “tooling” shall include, but not be limited to, all tools, catia or NC programs, dies, jigs, fixtures, molds, patterns, special taps, special gauges, special test equipment, other special equipment and manufacturing aids, and replacement thereof, acquired or manufactured by LMI for the performance of this MOA, which are of such a specialized nature that without substantial modification or alteration, their use is limited to the production of supplies or parts hereof, or the performance of such services as are to be supplied to GULFSTREAM hereunder. LMI agrees to comply with the provisions of the GULFSTREAM Tooling Manual for Subcontractors and SD 20 Tool Manual.

3. Disposition of Tools

LMI is wholly responsible for all GULFSTREAM tooling located in its facility/facilities against loss or damage, fire, theft and will have adequate insurance coverage for the replacement of all Gulfstream owned tooling in the event a catastrophe. LMI shall maintain tool control per GULFSTREAM "SQAR 0003 Rev D, paragraph 5.11".When tooling is deemed no longer necessary, LMI will receive, in writing, from GULFSTREAM guidance on disposition for said tools.

Upon completion of payments, all tooling shall be properly marked to indicate its ownership by GULFSTREAM in accordance with the mutually agreed to tooling philosophy by GULFSTREAM and LMI. GULFSTREAM may file, with the cooperation of LMI, a UCC Financing statement confirming GULFSTREAM's ownership interest.

Upon completion of contract GULFSTREAM will be responsible for the transportation of all tooling associated with the supplied goods referenced in Attachment A, B, C, and D.

L. EXCUSABLE DELAYS

Neither party hereto shall be responsible for, nor deemed to be in default, on account of delays in performance of the MOA due to causes beyond its control and not occasioned by its fault or negligence. Such causes include, but are not limited to: acts of God, force majeure, action by the Governments, delays in transportation, labor disputes or strikes; provided, however, that the existence of such causes shall not excuse the delaying party from the resulting delay unless such party shall have given the other party written notice on any excusable delays referred to above, within 10 days (or such additional time as may be approved by the other party) after the delaying party has actual knowledge that such occurrences will result in a delay in delivery and the delaying party.

In the event the delivery of any product from LMI is delayed for any cause deemed excusable hereunder, so that the extent of such delay in delivery of any product will exceed 1 month from the date of scheduled delivery, the MOA, for the undelivered delayed products, may be terminated by GULFSTREAM upon written notice to LMI. Any termination under this paragraph shall be treated as a termination for default as described elsewhere in these terms and conditions.

In the event of a significant force majeure event, terrorist act or other act or declaration of war that materially impacts GULFSTREAM’s aircraft backlog or sales activities, GULFSTREAM may in addition to the other rights set forth in this MOA reschedule or cancel deliveries affected by such an event, as required (in GULFSTREAM’s sole determination). In the event GULFSTREAM determines a requirement to either reschedule or cancel deliveries, GULFSTREAM will notify the supplier in writing of the deliveries impacted by GULFSTREAM’s determination. The MOA will be modified accordingly and all other deliveries, rights and obligations under the MOA will remain unchanged and there shall be no penalty, additional costs or liability assessed to GULFSTREAM as a result of its cancellation or rescheduling of deliveries under this section.

M. PATENT INDEMNITY

Unless the supplied goods are made to the detailed design of GULFSTREAM, LMI shall at its expense defend and indemnify GULFSTREAM against any claim of patent infringement provided timely notice of such claim be given LMI.

GULFSTREAM agrees to pay LMI all costs and expenses in its defense and to pay LMI the amount of any judgment against LMI in any suit proceeding against LMI, based upon a claim of infringement resulting solely from GULFSTREAM connecting any equipment purchased herein with any article or device not manufactured or supplied by LMI, or from the sale or use of any such combination by GULFSTREAM.

INDEMNITY BY LMI ENTERING GULFSTREAM PREMISES OR GULFSTREAM ENTERING LMI PREMISES

If LMI enters the premises of GULFSTREAM or its customer, LMI shall indemnify and hold harmless GULFSTREAM, its officers, agents, and employees from any loss or liability by reason of property damage, personal injury or death arising out of LMI presence thereon including loss or liability as a result of GULFSTREAMS negligence. LMI shall maintain adequate Worker’s Compensation, public liability, property damage and automobile liability insurance and will, upon request, provide a certificate of insurance.

If GULFSTREAM enters the premises of LMI or its customer, GULFSTREAM shall indemnify and hold harmless LMI, its officers, agents, and employees from any loss or liability by reason of property damage, personal injury or death arising out of GULFSTREAM presence thereon including loss or liability as a result of LMI’s negligence. GULFSTREAM shall maintain adequate Worker’s Compensation, public liability, property damage and automobile liability insurance and will, upon request, provide a certificate of insurance.

SPECIAL CONSIDERATIONS SECTION

1. GULFSTREAM and LMI agree to openly negotiate research and development cost associated with the transition from side pull to end pull for GULFSTREAM skins and doublers currently manufactured at Versaform/LMI. GULFSTREAM is under no obligation to enter into an agreement for the manufacturing of the development details. If GULFSTREAM and LMI do not enter into agreement for these details in this MOA this MOA will stay in full force and effect as written to all other aspects without any adjustments to price.

2. LMI and Sub-tier suppliers to LMI: LMI agrees to secure, maintain, and oversee contractual agreements with sub-tier suppliers that insure the level of performance defined in terms of this MOA. Such contracts should include, but not be limited to, terms that support the quality, pricing, and delivery requirements defined in this MOA and for the period of performance of this MOA. If LMI Aerospace sub-tier suppliers are not meeting performance requirements GULFSTREAM agrees to assist LMI Aerospace in their needs to approve additional sub-tier suppliers upon LMI Aerospace request.

P. GENERAL

1. Disputes

Any controversy or claim between the parties arising out of or relating to this MOA, or breach thereof, shall be governed by the laws of the State of Georgia and shall be settled by arbitration in Savannah, Georgia under the Commercial Arbitration Rules of the American Arbitration Association (“AAA”) and administered by the AAA. Pending settlement by agreement or a final judgment, LMI shall proceed diligently with the performance hereof according to GULFSTREAM’s decision and instructions.

2. Substance Abuse Policy

LMI, its subcontractors, agent and employees acknowledges and understands that:

The possession, sale, transfer, purchase and/or presence in one’s system of a controlled substance(s) or alcohol by any person on GULFSTREAM property is prohibited;

Entry onto GULFSTREAM property constitutes consent to an inspection of any individual and their personal effects when entering, on, or leaving GULFSTREAM property;

Any individual found in violation of (1) above or who refuses to permit an inspection may be removed and barred from GULFSTREAM property at the discretion of GULFSTREAM.

LMI agrees to abide by and to advise its subcontractors, agents and its employees of the provisions herein.

GULFSTREAM Aerospace Corporation’s Substance Abuse Policy (GA 3059) is enclosed and incorporated by reference and will apply while LMI and/or any of its subcontractors are on GULFSTREAM’s premises.

3. TSO (Technical Services Order)

The G350/G450 and G500/G550 will be covered by TSO, if applicable.

4. Press Releases

All press releases by LMI regarding the goods and services identified herein require GULFSTREAM’s written approval prior to release.

5. Marketing/Advertising Assistance

LMI agrees, at its expense, and upon the direction of GULFSTREAM to provide reasonable and normal assistance in support of the following:

a. Green Aircraft Sales

b. Customer/Options/Retrofits

c. Air Shows/Trade Shows

d. GULFSTREAM’s Customer Workshops

e. Other GULFSTREAM sponsored activities

6. Assignment

Except as to the sale of the business to which this MOA relates, the rights of the parties under this MOA may not be assigned or transferred, in whole or in part, to any person, firm, corporation, or subcontractors without the express prior consent of the other party.

7. Entire Agreement

This MOA constitutes the entire understanding between the parties and supersedes all previous understandings, agreements, communications and representations, whether written or oral, concerning the subject matter of the agreement.

8. MOA Acceptance

Agreement by LMI to furnish materials or services hereby ordered or partial performance hereunder or shipment of any supplied goods ordered hereby constitutes acceptance of the terms and conditions of this MOA. The terms and conditions set forth shall be the only applicable terms and conditions for this purchase, unless changes or substitutions are agreed to, in writing, by an authorized agent or representative for GULFSTREAM and LMI.

9. Offset Credits

Any order placed by LMI with a sub-contractor outside the United States may be used to satisfy GULFSTREAM’s (including its parent company, General Dynamics Corporation, and all other affiliated entities) contractual obligations, current and future to procure goods and/or services from firms in said country to offset, in part, their sales of goods and services into that country and their impact on that country’s balance-of-trade accounts. GULFSTREAM shall reimburse for any LMI cost associated in implementing / obtaining these offset credits.

10. Most Favored Customers

LMI shall warrant that prices, terms and warranties under this MOA are at least as favorable as those being offered to any other purchaser of similar products under the same or similar circumstances.

11. Records Review

To aid in the establishment of reasonable pricing, LMI agrees to permit an on-site review of cost data, rationale and related documentation used by LMI to develop proposed pricing.

13. Order of Precedence

In the event of conflict in terms, conditions or other GULFSTREAM documents, the following order of precedence will apply:

Memorandum of Agreement

Purchase Order Issues per MOA (PO text can supercede MOA language)

Statement of Work

GV-GER-608, Rev. A, July 15, 1993

SQAR-0003, Rev. N/C, Quality

GA 270 5/04 Additional Conditions

GA75 3/05 SHIPPING, MARKING AND PACKING INSTRUCTIONS

12. Attachments

A. Part Numbers steel and sheetmetal details

B. Part numbers for Kits and Versaform details

C. Part numbers for Leading Edges

D. G350/G400 and G500/G550 current schedule

IN WITNESS WHEREOF, the parties hereunto have signed, by their duly authorized representatives.

LMI AEROSPACE, INC.		GULFSTREAM AEROSPACE CORPORATION


/s/ Ronald Saks		/s/ Jim McQueeny
Ronald Saks		Jim McQueeny
President		Vice President, Materials



/s/ Ron Llopis		/s/ Bill Williams
Ron Llopis		Bill Williams
Field Service Rep.		Director, Initial Phase Procurement


		/s/ Larry Nelson
		Larry Nelson
		Manager, Procurement


		/s/ Dianne Lantz
		Dianne Lantz
		Senior Buyer


		/s/ Jessica Steptoe
		Jessica Steptoe
		Senior Buyer

Attachment “A”

Part Number

Current Plant

Lead Time

(in weeks)

Pricing Category

2006 change

2006

price

2007 change

2007

price

2008 change

2008

price

2009 change

2009

price

2010 change

2010

price

Attachment “B”

Used on Model

Part

Number

Part

Description

Lead Time

(in weeks)

2006 change

2006

price

2007 change

2007

price

2008 change

2008

price

2009 change

2009

price

2010 change

2010

price

Attachment “C”

Part

Number

Current

Plant

Lead Time

(in weeks)

Pricing Category

2006

change

2006

price

2007

change

2007

price

2008

change

2008

price

2009

change

2009

price

2010 change

2010

price

Attachment “D”

Part

Number

Current

Plant

Lead Time

(in weeks)

Pricing Category

2006

change

2006

price

2007

change

2007

price

2008

change

2008

price

2009

change

2009

price

2010 change

2010

price

Attachment “E”

2006 Delivery Schedule

Bsin

48.0

G550 Aircraft C of A

G450 Aircraft C of A

Qtr

A/C

Sch

Proj

Act

Qty

Qtr

A/C

Sch

Proj

Act

Qty

EX-31.1 3 lmi10q111006ex311.htm EX. 31.1 - RULE 13A-14(A) CERTIFICATION OF RONALD S. SAKS, PRESIDENT AND CHIEF EXECUTIVE OFFICER Ex. 31.1 - Rule 13a-14(a) Certification of Ronald S. Saks, President and Chief Executive Officer

EXHIBIT 31.1

CERTIFICATIONS

I, Ronald S. Saks, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of LMI Aerospace, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2006	/s/ Ronald S. Saks
	Ronald S. Saks President and Chief Executive Officer (Principal Executive Officer)

EX-31.2 4 lmi10q111006ex312.htm EX. 31.2 - RULE 13A-14(A) CERTIFICATION OF LAWRENCE E. DICKINSON, CHIEF FINANCIAL OFFICER AND SECRETARY Ex. 31.2 - Rule 13a-14(a) Certification of Lawrence E. Dickinson, Chief Financial Officer and Secretary

EXHIBIT 31.2

CERTIFICATIONS

I, Lawrence E. Dickinson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of LMI Aerospace, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2006	/s/ Lawrence E. Dickinson
	Lawrence E. Dickinson Chief Financial Officer and Secretary (Principal Financial and Principal Accounting Officer)

EX-32 5 lmi10q111006ex32.htm EX. 32 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002. Ex. 32 - Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

EXHIBIT 32

Certifications of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of LMI Aerospace, Inc., a Missouri corporation (the “Company”), does hereby certify that, to the best of their knowledge:

The Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2006 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2006	/s/ Ronald S. Saks
	Ronald S. Saks President and Chief Executive Officer (Principal Executive Officer)

Date: November 13, 2006	/s/ Lawrence E. Dickinson
	Lawrence E. Dickinson Chief Financial Officer and Secretary (Principal Financial and Principal Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to LMI Aerospace, Inc. and will be retained by LMI Aerospace, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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