SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1998
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ________________ to ________________.
Commission file number 0-24293
LMI Aerospace, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Missouri 43-1309065
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3600 Mueller Road, St. Charles, Missouri 63302-0900
(Address of Principal Executive Officer) (ZIP Code)
(314) 946-6525
(Registrant's Telephone Number, Including Area code)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 par value
(Title of Class)
Indicate by check mark whether registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (computed by reference to the closing price of such voting stock on
the NASDAQ National Market on February 12, 1999 of $5.875) was approximately
$17,010,581.
There were 8,281,322 total shares of common stock outstanding as of February 12,
1999.
Documents Incorporated by Reference
1) The following document is incorporated into this Report by reference:
Part III: Portions of the definitive proxy statement of the Registrant
(to be filed pursuant to Regulation 14(A) for Registrant's 1999 Annual
Meeting of Shareholders, which involves the election of directors), are
incorporated by reference into Items 10, 11, 12 and 13 to the extent
stated in such items.
Forward-Looking Statements
Any forward-looking statements set forth in this report are necessarily subject
to uncertainties and risks. When used in this report, the words "believes,"
"anticipates," "intends," "plans," "projects," "estimate," "expects" and similar
expressions are intended to identify forward-looking statements. Actual results
could be materially different from those reflected in such forward-looking
statements as a result of various factors. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
Item 1. Business 4
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 4(a). Executive Officers of the Registrant 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7(a). Quantitative and Qualitative Disclosures about Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 31
<PAGE>
PART I
Item 1. Business.
General Overview
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LMI Aerospace, Inc. (the "Company") is a leader in fabricating, machining,
finishing and integrating formed, close tolerance aluminum and specialty alloy
components for use by the aerospace industry. For over 50 years, the Company has
been engaged in manufacturing components for a wide variety of aerospace
applications. Components manufactured by the Company include leading edge wing
slats, flaps and lens assemblies; cockpit window frame assemblies; fuselage
skins and supports; and passenger and cargo door frames and supports. The
Company maintains multi-year contracts with leading original equipment
manufacturers ("OEMs") and primary subcontractors ("Primes") of commercial,
corporate, regional and military aircraft. Such contracts, which govern the
majority of the Company's sales, designate the Company as the sole supplier of
the aerospace components sold under the contracts. Customers include Boeing,
Lockheed Martin, Northrop Grumman, Gulfstream, Learjet, Canadair, DeHavilland
and PPG. The Company manufactures more than 15,000 parts for integration into
such models as Boeing's 737, 747, 757, 767 and 777 commercial aircraft,
Gulfstream's G-IV and G-V corporate aircraft, Canadair's RJ regional aircraft,
and Lockheed Martin's F-16 and C-130 and Boeing F-15, F-18 and C-17 military
aircraft.
In addition to supplying quality components the Company provides its customers
with value-added services, including engineered tool design, production and
repair; heat treating; chemical milling; assembly; and metal finishing
processes, such as polishing and painting. The Company believes that such
value-added services provide significant benefits to its customers including:
(i) reduced administrative costs resulting from the Company's ability to serve
as a single point of purchase for a wide array of required products and
services, (ii) faster, more efficient production rates, and (iii) greater
consistency in meeting scheduled delivery dates. As a result, the Company
believes that its value-added services are an increasingly important factor in
the selection of the Company to provide aerospace components.
LMI Aerospace, Inc. is a Missouri corporation with headquarters at 3600 Mueller
Road, St. Charles, Missouri. The Company maintains facilities in St. Charles,
Missouri; Auburn, Washington; Tulsa, Oklahoma; Wichita, Kansas and Irving, Texas
Customer Concentration
- ----------------------
The Company manufacturers and supplies over 15,000 parts to leading OEMs and
Primes of commercial, corporate, regional and military aircraft, primarily under
multi-year contracts. Such contracts designate the Company as the sole supplier
of the aerospace components sold under the contracts. Customers include the
following leading OEMs and Primes:
Commercial Platforms
- ---------- ---------
Boeing 737 Classic, 737 Next Generation ("737NG"),
707, 727, 747, 757, 767 and 777
Northrop Grumman 747, 757 and 767
PPG 737NG, 747, 767, 777 and MD-80
National Machine 737NG
Canadair 767
Corporate and Regional Platforms
- ---------------------- ---------
Gulfstream G-IV and G-V
Canadair Regional Jet and Challenger 604
Learjet Models 31, 45 and 60
DeHavilland CL415 and Dash-8
Boeing 737 Business Jet
Nordam Citation V, VII, VIII, Ultra, Bravo and Excel,
Lear 60, and Beech 400A
PPG Citation III, VII, X and Excel
Northrop Grumman G-IV and G-V
Military Platforms
- -------- ---------
Lockheed Martin F-16 and C-130
Boeing AWACS, F-15, F-18 and C-17
The Company has a long-standing relationship with Boeing, which has steadily
grown to include several Boeing business units, including Boeing Commercial
Aircraft Group, Boeing North American, Boeing Military and Boeing Helicopter.
During 1996, 1997 and 1998, direct sales to Boeing business units accounted for
a total of approximately 46%, 59% and 62% of the Company's sales, respectively.
According to industry sources, Boeing holds more than a 50% share of the
worldwide commercial aircraft market. Each of Boeing's business units operate to
a significant degree as autonomous manufacturers, and as such, the Company has
entered into one or more multi-year contractual relationships with many of the
Boeing business units with which it does business. In general, these agreements
provide for: (i) payment on a net 30 day basis; (ii) termination for convenience
upon 30 days notice; (iii) reasonable manufacturing lead time for delivery of
components; (iv) limitations on and specifications for the scope of work to be
performed; and (v) pricing of components by quotes. In addition, these contracts
are typically "requirements" contracts under which the purchaser commits to
purchase all of its requirements of a particular component from the Company.
Specific orders are placed with the Company on a periodic basis covering
delivery dates as far in the future as the year 2000. The Company believes that
its relationship with Boeing extends beyond the expressed language of the
multi-year contracts. Such belief is based on, among other things, discussions
with Boeing personnel, the longevity and growth of the relationship, and the
Company's experience with Boeing during occasional periods without an effective
contract.
Products
- --------
The Company is a leading fabricator, finisher and integrator of formed, close
tolerance aluminum and specialty alloy components for use by the aerospace
industry. For approximately 50 years, the Company has been engaged in
manufacturing components for a wide variety of aerospace applications. All
components are fabricated from designs prepared and furnished by its customers.
The following table describes some of the Company's principal products
(consisting of manufactured components and assemblies) and the models into which
they are integrated:
Product Aircraft Platform
------- -----------------
Wing leading edge skins, flapskins 737 NG
Detail interior components Boeing 737 Classic,
737 NG, 707, 727, 747, 757,
767, 777 and C-130
Wing panels and floorbeams 747
Door assembly and structural details 737 Classic, 737 NG, 747 and 757,
Challenger 604, Regional Jet, F-16
and C-130
Thrust reversers and engine G-IV, CL415, 737 Classic and 777
nacelles/cowlings
Cockpit window frames and landing 737NG, 747, 767, 777, Citation III,
light lens assembly VII and Excel, DC-8 and 9, MD-80,
KC-10 and F-16
Fuselage and wing skin Models 45 and 60
Dash-8
737 Classic, 737 NG, 747, 757, 767,
777, C-130 and F-16
Structural sheet metal & Various models
extruded components
Once a customer submits specifications for a product, the Company
utilizes its 40 person engineering and planning group to evaluate and develop
the tooling requirements, design the manufacturing process and prepare a product
flow plan. The Company utilizes an advanced computer assisted design system to
translate customer provided specifications into computer numerical control
("CNC") instructions for use with many of the Company's forming and milling
equipment.
Backlog
- -------
The Company's backlog is displayed in the following table:
As of December 31,
(in millions)
1996 1997 1998
---- ---- ----
Total $43.1 $48.9 $52.8
Portion deliverable within 12 months 34.1 40.5 35.6
Historically, cancellations of such orders have been infrequent and immaterial,
however OEMs often modify purchase orders to accelerate or delay delivery dates.
The level of unfilled orders at any given time during the year will be
materially affected by the timing of the Company's receipt of orders and the
speed with which those orders are filled. Moreover, sales during any period may
include sales which are not part of the backlog at the end of the prior period.
Manufacturing Processes
- -----------------------
The manufacturing facilities are organized on a work center basis focusing on a
particular manufacturing process. Each work center is staffed by a team of
operators who are supported by a supervisor, lead operators and quality
inspectors. Throughout each stage of the manufacturing and finishing processes,
the Company collects, maintains and evaluates data, including customer design
inputs, process scheduling, material inventory, labor, inspection results and
completion and delivery dates. The Company's information systems employ this
data in order to provide more accurate pricing and scheduling information to its
customers as well as to establish production standards used to measure internal
performance.
Consistent with the Company's strategy of continually emphasizing quality, all
employees participate in an on-going training program which combines classroom,
hands-on and on-the-job instruction. New employees attend an extensive
orientation seminar to acquaint them with the aerospace components industry and
the Company's quality expectations, history, mission, safety procedures and
other rules. To motivate employees to meet and exceed the Company's production
efficiency objectives, management has implemented a bonus program under which
the bonus amount payable by the Company is based on the amount of sales per paid
manhour and the value of product produced.
Furthermore, through the use of lean manufacturing techniques, the Company seeks
to eliminate waste generated in the movement of people, in the use of materials
and products, in lengthy set-ups, in production breaks and by misused space. The
Company's lean manufacturing methods include: (i) one piece work flow as opposed
to batch processing, (ii) pull versus push production control and scheduling
systems, and (iii) disciplined, housekeeping and organization techniques. The
Company believes that its training and motivation programs, combined with
extensive use of lean manufacturing techniques, have greatly increased the
Company's efficiency, manufacturing capacity and profitability.
In manufacturing close tolerance components, the Company uses several forming
processes to shape or "form" a "work piece" (aluminum, stainless steel or
titanium sheet metal and extrusion) into components by applying pressure through
impact, stretching or pressing the raw material (sheet metal or extrusion) to
cause conformance to a die. The shapes may be simple with a single angle, bend
or curve, or may be complex with compound contours having multiple bends and
angles. Some processes incorporate heat to soften the metal prior to or during
forming. Forming processes include: drop hammer, bladder press, sheet metal and
extrusion stretch, skin stretch, stretch draw, hot joggle and brake forming.
The following are more detailed descriptions of several of the Company's
processes:
Drop Hammer Forming. The Company utilizes drop hammer forming to shape work
pieces by placing them between a mated die and a moving punch. The work piece is
placed on the working surface of the die and is formed into a component through
repeated impacts of the punch on the work piece. The impact causes the work
piece to take the shape of the punch and die. This process provides an
economical means of producing parts ranging in size from a few inches up to ten
feet in length with complex, compound contours. The Company has one of the
largest capacities for drop hammer forming in the aerospace components industry.
Bladder Forming. The bladder forming process (fluid cell press) utilizes a
bladder filled with hydraulic fluid which is placed under pressure to form the
component. The work piece is placed on top of a die which rests on a table. A
rubber blanket is then placed over the work piece and the table is moved into
the press. As the bladder is placed under pressure, it expands to cover the
rubber blanket and forces it and the work piece to conform to the shape of the
die. The Company employs bladder forming for components with formed simple
contours.
Stretch Forming. The stretch forming process involves the stretching and
wrapping of a work piece along the surface of a precisely shaped die. To obtain
the desired component shape, opposite ends of the material are held in the jaws
of the stretch form machine, then hydraulically stretched and wrapped to conform
to the working surface of the die. The Company utilizes several different types
of stretch form machines, each type designed to stretch form extrusion, sheet
metal or leading edge wing skins.
Hot Joggle. The Company uses the hot joggle process to create a clearance step
for intersecting parts. A work piece is placed between a mated die and punch and
is heated to a precise temperature to make it malleable enough to set a form,
but not hot enough to alter the temper of the metal. The joggle press then
creates the joggle by stepping down a surface from the original plane of the
work piece.
Cutting and Punching. Various cutting and punching processes such as CNC turret
punch, CNC laser cutting, CNC and conventional milling, are used for cutting out
the shapes of flat pattern parts. Cutting, trimming and drilling functions such
as CNC and conventional milling, five axis CNC routing and other machine and
hand routing methods are used to complete formed components by trimming excess
material, cutting and drilling holes. CNC processes utilize computer programs
(generated by Company employees from CAD models provided by the customer) which
direct the cutting, punching and/or drilling pattern of the machine. Other
trimming processes use dies, templates or fixtures as the guide for trimming
and/or drilling.
Most parts require heat treating after forming which helps to strengthen and,
then through controlled cooling, harden the material. This process along with
older dies and tools, can cause slight distortion which is then modified with
manual forming techniques also referred to as "line-up" or "check and
straighten." The Company's highly skilled craftsmen provide the customer with
great flexibility in utilizing customer's tools and small order quantities often
associated with spares production.
Value-Added Services
- --------------------
The Company offers its customers both cost and time savings by having the
process capabilities necessary for the production of most components from start
to finish.
Tooling. While most of the dies, tools and fixtures needed in the manufacturing
process are owned and supplied by customers, the Company offers its customers
the ability to produce fiberglass route and drill tools, chemical milling
templates, kirksite extrusion and sheet stretch blocks, and other original
tooling. It also has extensive capabilities in the repair and rework of tools
and dies originally supplied by its customers. The Company supports the tooling
operations with its own foundry which pours lead and kirksite tops for drop
hammer dies.
Heat Treat and Age. Most components require heat treating and/or aging as part
of the production process. The heat treat process is used to alter the temper of
the material for increased formability and retention of the formed shape. The
process involves heating work pieces to a prescribed temperature, usually in the
range of 850 degrees to 950 degrees Fahrenheit, for a prescribed period of time.
Multiple components can be heat treated at one time, so long as the prescribed
process time and temperature are the same. After heating, the components are
immediately submerged in a glycol solution or water to rapidly cool and suspend
the hardening of the metal. The components are then refrigerated at sub-zero
temperatures to retard work hardening until the forming process is completed. At
ambient temperatures the metal slowly hardens. After all forming, trimming and
drilling processes are complete, most components go through the age process,
which involves slow heating at lower temperatures (up to 400 degrees
Fahrenheit), to accelerate the hardening of the metal to its final temper.
CMM Inspection and Engineering. The computer controlled coordinate measuring
machine ("CMM") uses a computer operated touch probe to measure the accuracy of
angles, contours and other features on a tool or component relative to customer
defined models or coordinates permitting the Company to accurately inspect close
tolerance components. The CMM also is used to engineer a CAD model from an
existing part.
Chemical Milling. Chemical milling is used to reduce the amount of material in
specific places on a component in order to reduce weight within the aircraft and
to facilitate the mating of components. The working piece is first coated
(dipped or sprayed) with a maskant, which dries to a rubber-like finish sealing
the component. The Company uses a water based maskant which is much safer for
both employees and the environment than the traditional solvent based maskant.
After masking, the portion of the part to be reduced is scribed out by tracing a
template. These areas are then de-masked, and the part is dipped into the
chemical milling tank, containing an alkaline solution, for a prescribed period
of time. The solution then reduces the metal in the exposed areas.
Metal Finishing, Polishing and Painting. Through its Tulsa facility the Company
provides anodizing, painting, polishing and non-destructive testing. The chromic
acid anodizing process is performed prior to paint or polish to help control
rust, corrosion and part deterioration. Penetrant inspection is a
non-destructive inspection method during which components are dipped into a dye
solution which penetrates any small defects on the surface of the part and makes
them visible under ultra violet light.
Most components are painted or polished before final shipment. Paint is applied
according to customer specification; some components receive a simple primary
coat while others receive primary and finish coats. Skin quality components such
as those in the leading edge wing program are polished with electric polishers
and by hand to a mirror finish which is visible on the exterior of the aircraft
after final assembly.
Consistent with the Company's commitment to maintaining environmental and
employee safety, the Tulsa facility has a state-of-the-art air circulation and
filter system as well as its own waste water treatment equipment. Waste water
from both the anodizing and chemical milling processes pass through the
treatment equipment and all metals and toxic materials are removed, making the
water safe for disposal through the normal sewer system. The metals are
condensed into filter cakes which are then disposed of through certified
hazardous waste disposal vendors.
Assembly. The Company completes small and medium sized assemblies, incorporating
its manufactured parts and those produced by other vendors. In the assembly
process, the Company uses riveting, bolting, spot and fusion welding, and
bonding. Customer supplied and Company manufactured jigs and fixtures are used
to ensure the proper alignment of edges and holes. The Company's new information
system and the expansion of its purchasing department further increase its
ability to acquire and track parts and hardware details from multiple vendors to
integrate with its own components into assemblies.
Suppliers and Procurement Practices
- -----------------------------------
Most of the Company's aerospace components are manufactured from aerospace
quality aluminum sheet metal and extrusion. From time to time the Company, and
the aerospace components industry as a whole, has experienced shortages in the
availability of aerospace quality aluminum sheet metal and extrusion. Such
shortages could inhibit the Company's ability to deliver products to its
customers on a timely basis. In an attempt to secure adequate supplies the
Company has entered into a multi-year aluminum sheet metal supply agreement with
Aluminum Company of America ("ALCOA"), a dominant domestic supplier of aerospace
quality aluminum, extending until the end of year 2000.
The Company believes that its sources of supply of non-aluminum products and its
relationships with its suppliers are satisfactory. While the loss of any one
supplier could have a material adverse effect on the Company until alternative
suppliers are located and have commenced providing products, alternative
suppliers exist for substantially all of the products and services purchased by
the Company.
The Company has developed procurement practices to ensure that all supplies
received conform to contract specifications. Through its computerized material
resource planning system, the Company is able to track inventories and product
ordering to optimize purchasing decisions. For cost, quality control and
efficiency reasons, the Company generally purchases supplies only from vendors
approved by the Company's customers and/or with whom the Company has on-going
relationships. The Company chooses its vendors primarily based on the quality of
the products and services supplied, record for on-time performance and the
specification of such vendors by the Company's customers as the preferred source
of supply. The Company regularly evaluates and audits its approved vendors based
on their performance.
Quality Assurance and Control
- -----------------------------
The Company continually seeks to maintain high quality standards in the
processing of its products. Accordingly, the Company employs approximately 50
full time quality control and assurance personnel. Each work order introduced to
the Company's manufacturing facilities contains an inspection plan specifying
required inspection points. Quality inspectors are assigned to each work center
and are trained in the testing required in connection with products passing
through the assigned work center. Although a large percentage of the Company's
products are 100% inspected immediately prior to shipment by a customer employee
or a customer designated Company employee, Boeing has approved a sampling
inspection program for certain components using statistical process control data
maintained by the Company.
In March 1998, the Company became certified as compliant with Boeing's new
D1-9000 (Rev. A) quality assurance standard. During April 1998, the Company
distributed all revised procedures and integrated such new procedures with its
on-going employee training program and lean manufacturing techniques to assist
employees in becoming familiar with the new procedures. The Company has expanded
its existing internal audit program to ensure on-going compliance. In addition,
the Company intends to supplement its quality assurance and control program in
1999 with ISO 9002 certification of all of its facilities.
Sales and Marketing
- -------------------
The Company's sales and marketing organization consists of six program managers
and two independent sales representatives. The Company's sales personnel are
devoted to maintaining and expanding customer relationships through continual
education of existing and potential customers with respect to the Company's
capabilities. Specifically, the Company is focused on expanding its presence in
the fabrication of aftermarket spare parts and components for use in new
corporate, regional and military aircraft. As a result, sales personnel have
focused their efforts on diversifying the Company's product mix to include
aerospace programs unrelated to new commercial aircraft production.
A majority of the Company's sales to existing customers are awarded after
receipt of a request for quotation ("RFQ"). On receipt, the RFQ is preliminarily
reviewed by a team consisting of members of the Company's senior management, a
program manager, an estimator and the plant manager. If the Company determines
that the program is adequately compatible with the Company's capabilities and
objectives, a formal response is prepared by a member of the Company's estimator
group. Although a substantial percentage of programs are awarded on a
competitive bid basis, the Company has recognized a trend favoring direct
pricing. In direct pricing programs, the customer submits an indicated price
offer for acceptance or rejection by the Company. The Company expects that as
customers seek to limit the number of suppliers, direct pricing will become
increasingly common.
Competition
- -----------
Components for new aircraft and replacement components for existing aircraft are
provided by a large fragmented group of companies, including certain business
units of or affiliates of the Company's customers. Certain of the Company's
competitors, including business units affiliated with the Company's customers,
have substantially greater financial, production and other resources than the
Company.
Governmental Regulations; Environmental Compliance
- --------------------------------------------------
The Company's operations are subject to extensive and frequently changing
Federal, state and local laws and substantial regulation by government agencies,
including the United States Environmental Protection Agency ("EPA"), the United
States Occupational Safety and Health Administration ("OSHA") and the Federal
Aviation Administration ("FAA"). Among other matters these agencies impose
requirements that regulate the handling, transportation and disposal of
hazardous materials generated or used by the Company during the normal course of
its operations, govern the health and safety of the Company's employees and
require the Company to meet certain standards and licensing requirements for
aerospace components. This extensive regulatory framework imposes significant
compliance burdens and risks on the Company and, as a result, may substantially
affect its operational costs.
In addition, the Company may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its facilities
without regard to whether or not the Company knew of, or caused, the release of
such substances. The Company believes that it currently is in material
compliance with applicable laws and regulations and is not aware of any material
environmental violations at any of its current or former facilities. There can
be no assurance, however, that its prior activities did not create a material
environmental situation for which the Company could be responsible for that
future uses or conditions (including, without limitation, changes in applicable
environmental laws and regulation, or an increase in the amount of hazardous
substances generated or used by the Company's operations) will not result in any
material environmental liability to the Company or result in a material adverse
effect to the Company's financial condition or results of operations.
Employees
- ---------
As of December 31, 1998, the Company had 806 employees, of whom eight were
engaged in executive positions, 186 were engaged in administrative positions and
612 were in manufacturing operations. None of the Company's employees is subject
to a collective bargaining agreement, and the Company has not experienced any
material business interruption as a result of labor disputes since it was
formed. The Company believes that it has an excellent relationship with its
employees.
The Company strives to continuously train and educate its employees thereby
enhancing the skill and flexibility of its work force. Through the use of
internally developed programs, which include formal classroom and on-the-job,
hands-on training, and independently developed programs, the Company seeks to
attract, develop and retain the personnel necessary to achieve the Company's
growth and profitability objectives.
Acquisition Strategy
- --------------------
The Company seeks to leverage its core capabilities in existing and new markets
by identifying and pursuing complementary acquisitions in the aerospace industry
that offer strategic value, such as cost savings, increased manufacturing
capacity, increased process capability and/or new customer relationships. The
Company believes that the fragmented nature of the industry for aerospace
components should provide the Company with additional opportunities to exploit
industry consolidation trends.
Item 2. Properties.
Facilities
- ----------
The following table provides certain information with respect to the Company's
headquarters and manufacturing centers:
Square
Location Principal Use Footage Interest
- -------- ------------- ------- --------
3600 Mueller Road Executive and Administrative 56,943 Owned
St. Charles, MO Offices and Manufacturing Center
3030-3050 N. Hwy 94 Manufacturing Center and Storage 92,736 Owned
St. Charles, MO
3000-3010 N. Hwy 94 Assembly and Storage 30,074 Leased(1)
St. Charles, MO
101 Western Ave. So. Manufacturing Center 79,120 Leased(2)
Auburn, WA
2629-2635 Esthner Ct. Manufacturing Center 34,377 Owned
Wichita, KS
2621 W. Esthner Ct. Administrative Offices and 27,810 Leased(3)
Wichita, KS Storage
2104 N. 170th St. E. Ave. Finishing Facility 75,000 Owned
Tulsa, OK
2205 and 2215 River Hill Machining Facility 8,400 Leased(4)
Road, Irving, TX
(1) Subject to a yearly rental amount of $120,624 expiring on February 28,
2004.
(2) Subject to graduated yearly payments of $333,600 to $418,800 during the
life of the lease. The lease expires in 2005, but the Company retains the
option to extend the lease until June 30, 2008 at the monthly rate of
$39,090.
(3) Subject to graduated yearly payments of $108,126 to $148,620 during the
life of the lease. The lease expires in 2009, but the Company retains an
option to extend the lease term for an additional 12 months.
(4) Subject to a yearly rental amount of $45,000 expiring on August 24, 2000.
The Company retains two options to extend the lease term for an
additional 5 years each.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings, other than routine claims
and lawsuits arising in the ordinary course of its business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 4(a). Executive Officers of the Registrant.1
The following is a list of the current executive officers of the Company, their
ages, their positions with the Company, and their principal occupations for at
least the past five years.
Name Age Position
- ---- --- --------
Ronald S. Saks 54 Chief Executive Officer, President and Director
Lawrence J. LeGrand 48 Chief Operating Officer and Director
Lawrence E. Dickinson 38 Chief Financial Officer and Secretary
Duane E. Hahn 46 Vice President, Regional Manager and Director
Robert T. Grah 44 General Manager (LMI Finishing, Inc.)
Phillip A. Lajeunesse 46 General Manager (Wichita, KS)
Bradley L. Nelson 40 General Manager (Auburn, WA)
Ernest R. Bailey 62 General Manager (St. Charles, MO)
John R. Krystinik 60 General Manager (Precise Machine Partners, L.L.P.)
- --------
1 This information is included in Part I as a separate item in accordance
with Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G to Form 10-K.
Set forth below are biographies of each executive officer of the Company.
Ronald S. Saks has served as President and as a director of the Company since
1984. Prior to his employment with the Company, Mr. Saks was an Executive Vice
President with Associated Transports, Inc. for eight years and was a Tax Manager
with Peat Marwick Mitchell & Co., now known as KPMG Peat Marwick LLP, for the
eight years prior thereto. Mr. Saks obtained his Bachelor's degree in Business
Administration from Washington University in 1966. He also studied engineering
at the Massachusetts Institute of Technology, and completed an Executive
Education program at Stanford University. Mr. Saks is a Certified Public
Accountant.
Lawrence J. LeGrand became Chief Operating Officer and a director of the Company
in April 1998. His previous 24 years were spent with KPMG Peat Marwick, LLP,
where he became a partner in 1980. Mr. LeGrand is a Certified Public Accountant
and has extensive experience in mergers and acquisitions where he has
represented both publicly held and privately owned buyers and sellers. Mr.
LeGrand graduated with a Bachelor's degree in Commerce and Finance from St.
Louis University in 1973 and presently serves as the Vice Chairman of the Board
of Trustees of St. Louis University. During 1998, Mr. LeGrand was appointed to
the Board of Directors of LaBarge, Inc.
Lawrence E. Dickinson has been the Chief Financial Officer of the Company since
1993. He served as a Financial Analyst and Controller for LaBarge, Inc. from
1984 to 1993 and as a Cost Accountant with Monsanto from 1981-1984. Mr.
Dickinson received his Bachelor's degree in Accounting from the University of
Alabama and received his Master's degree in Business Administration from
Washington University in 1994.
Duane E. Hahn joined the Company in 1984 and served as the Assistant General
Manager until 1988, at which time he moved to Auburn, Washington to set up and
manage the Auburn facility as Vice President and General Manager. In 1996, Mr.
Hahn became the Vice President of Manufacturing and Regional Manager of the
Company. Prior to joining the Company, Mr. Hahn served as a supervisor for
Associated Transport, Inc. Mr. Hahn received his Associate's Degree from
Nebraska Technical College in 1971. Mr. Hahn has extensive continuing education
experience in lean manufacturing, just-in-time, and other world class
manufacturing techniques. Mr. Hahn became a director of the Company in October
1990.
Robert T. Grah joined the Company in 1984 as Production Control Manager. Mr.
Grah has held various management positions with the Company including Purchasing
and Contracts Manager, Maintenance Manager, Facilities Manager, and was promoted
to his current position as General Manager of LMI Finishing, Inc. in 1996. Prior
to joining the Company, Mr. Grah was a supervisor for Associated Transport,
Inc., and a manager for Beneficial Finance. Mr. Grah's education has included
Florissant Valley Community College, and numerous continuing education courses
in management, Total Preventative Maintenance, and various environmental and
technical subjects.
Phillip A. Lajeunesse joined the Company in 1988 as the Corporate Quality
Assurance Manager. In 1990, he became the Plant Manager of the Company's St.
Charles facility, and in 1996, he became the General Manager of the Wichita
facility. Prior to joining the Company, Mr. Lajeunesse was a supervisor for
Kaman Aerospace for nine years, and for six years was a supervisor for United
Nuclear Corporation. Mr. Lajeunesse obtained an Associate's degree in Chemical
Engineering from Thames Valley State Technical College in 1973, an Associate's
degree in Business Administration from Bryant College in 1984, and a Master's of
Business Administration from Washington University in 1994.
Bradley L. Nelson joined the Company as a Production Supervisor in the Auburn
facility in 1990. In 1994, he was promoted to Manufacturing Manager, and in 1996
he assumed his current position as General Manager of the Auburn facility.
Previously, Mr. Nelson was Production Manager for Fabrication Technologies from
1989 to 1990, the owner of Totem Lake Service Center from 1984 to 1989, and
Plant Manager for Tonoro Growers from 1981 to 1984. Mr. Nelson's continuing
education courses include general management and manufacturing management and
methods.
Ernest R. Bailey joined the Company in 1997 as the General Manager of the St.
Charles facility. From 1996 to 1997, Mr. Bailey was the General Manager for
North American Machining Products, Inc. From 1994 to 1996, he was the Plant
Manager for Precision Machine Works, and from 1987 to 1993, he was the General
Manager for Rohr, Inc., in Auburn, Washington. His background also includes
administration and management experience at Kenworth Truck Company, KME
Manufacturing, and Heath Tecna, Inc. Mr. Bailey obtained his Associate's degree
in Business Administration from Green River Community College in 1976, and his
Bachelor's degree in Business Administration from Pacific Western University in
1995.
John R. Krystinik joined the Company in August, 1998, as the General Manager of
Precise Machine Partners, L.L.P. Mr. Krystinik founded Precise Machine Company
in 1978, and sold it to the Company in August 1998. From 1967 to 1978, he worked
for Philip Specialty Company as General Manager. Mr. Krystinik received a degree
in Business Administration from Arlington State College in 1962.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock is traded on the NASDAQ National Market under the symbol
"LMIA". The following table sets forth the range of high and low bid closing
prices for the Common Stock for the periods indicated beginning on June 30,
1998, the day on which trading commenced following the Company's initial public
offering:
High Low
Fiscal 1998 ---- ---
3rd quarter $11.88 $7.00
4th quarter 8.00 4.00
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of December 31, 1998, the reported closing price for the Common Stock was
$6.25. As of December 31, 1998, there were approximately 70 holders of record of
the Common Stock and the Company believes that its Common Stock was beneficially
owned by approximately 1400 persons.
The Company has not declared or paid cash dividends on any class of its Common
Stock in the past two years and does not anticipate paying any cash dividends in
the foreseeable future. The credit facility between the Company and Union
Planters Bank, N.A. ("Union") (formerly Magna Bank, N.A.) prohibits the Company
from declaring a dividend with respect to its capital stock without the approval
of Union. The Company currently intends to retain its earnings, if any, and
reinvest them in the development of its business.
On October 2, 1997, the Company issued 80,976 shares to the Guaranty Trust
Company of Missouri as trustee for the Profit Sharing Plan for $302,088 under
Rule 701 of the Securities Act. The Guaranty Trust Company has since been
replaced by Union Planters Trust and Investment Management as trustee of the
Profit Sharing Plan.
On December 31, 1997, the Company issued 3,290 shares to Ronald S. Saks as
Voting Trustee under Voting Trust No. I as a result of an exercise of part of an
option granted to a shareholder for an aggregate exercise price of $5,810, 1,392
shares to Ronald S. Saks as Voting Trustee under Voting Trust No. 1 for $21,228
and 324,420 shares in the aggregate to Sanford S. Neuman as Voting Trustee under
Voting Trust No. 2 for an aggregate purchase price of $1,503,772, under Section
4(2) of the Securities Act.
On April 27, 1998, the Company issued 32,900 shares to the Guaranty Trust
Company of Missouri as trustee for the Profit Sharing Plan for $325,710 (based
on 90% of an initial public offering price of $11.00 per share) under Rule 701
of the Securities Act and 32,900 shares as compensation to Ronald S. Saks as
Voting Trustee under Voting Trust No. I under Section 4(2) of the Securities Act
pursuant to a restricted stock agreement between the Company and Lawrence J.
LeGrand.
On June 1, 1998, as a result of an exercise of an option granted to a
shareholder, the Company issued 16,450 shares to Ronald S. Saks as Voting
Trustee under Voting Trust No. I for an aggregate exercise price $29,050 under
Section 4(2) of the Securities Act.
On September 12, 1998, as a result of an exercise of an option to purchase
shares in accordance with a certain Subscription Agreement, the Company issued
98,700 shares to the Lawrence J. LeGrand IRA Rollover Account, of which Mr.
LeGrand is the beneficial owner, for an aggregate exercise price of $600,000.00,
under Section 4(2) of the Securities Act.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data.
Year Ended December 31,
(in thousands, except Shares and per share data)
1994 1995 1996 1997 1998
Statement of Operations Data: ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 20,710 $ 25,424 $ 35,016 $ 55,080 $ 59,234
Cost of sales 17,274 20,366 26,725 38,932 41,152
------ ------ ------ ------ ------
Gross profit 3,437 5,058 8,291 16,148 18,082
Selling, general &
administrative expenses 3,337 3,883 5,256 6,549 7,591
------ ------ ------ ------ ------
Income from operations 100 1,175 3,035 9,599 10,491
Interest expense (522) (1,038) (1,123) (1,020) (642)
Other (expense) income(1), net 263 (48) 15 10 405
------ ------ ------ ------ ------
Income (loss) before income taxes (159) 89 1,927 8,589 10,254
Provision for income taxes (62) 52 740 3,306 3,764
------ ------ ------ ------ ------
Net income (loss) $ (97) $ 37 $ 1,187 $ 5,283 $ 6,490
====== ====== ====== ====== ======
Net income (loss) per common share:
Basic $ (0.02) $0.01 $0.21 $0.91 $0.89
Diluted (0.02) 0.01 0.20 0.89 0.88
Weighted average shares
outstanding 5,350,969 5,529,483 5,779,833 5,836,700 7,252,148
Other Financial Data:
EBITDA(2) $ 1,764 $ 3,091 $ 5,062 $ 11,788 $ 13,529
Capital expenditures 4,746 1,736 1,316 3,856 5,488
Cash flows from operating
activities 99 (888) 2,684 5,775 6,893
Cash flows from investing
activities (1,690) (4,700) (1,304) (3,713) (9,529)
Cash flows from financing
activities 1,620 5,246 (1,356) (2,023) 14,337
Gross profit margin 16.6% 19.9% 23.7% 29.3% 30.5%
EBITDA margin 8.5% 12.2% 14.5% 21.4% 22.8%
December 31,
(in thousands)
1994 1995 1996 1997 1998
----- ---- ---- ---- ----
Balance Sheet Data
Cash and equivalents $ 151 $ 181 $ 205 $ 244 $ 11,945
Working capital 6,933 8,919 8,626 11,256 27,971
Total assets 25,454 27,370 29,046 33,629 56,183
Total long-term debt,
excluding current portion 11,620 12,674 10,735 9,274 2,732
Stockholders' equity 9,147 9,966 11,161 16,751 45,291
<FN>
(1) Other (expense) income in 1994 includes income from insurance proceeds
(net of related flood expense) of $255. Other (expense) income in 1998
includes income from interest earned from public offering proceeds.
(2) EBITDA represents earnings before interest, income taxes, depreciation
and amortization. EBITDA is a widely accepted, supplemental financial
measurement used by many investors and analysts to analyze and compare
companies' performance. EBITDA as presented may not be comparable to
similarly titled indicators reported by other companies because not all
companies necessarily calculate EBITDA in an identical manner, and,
therefore, it is not necessarily an accurate means of comparison between
companies. EBITDA should only be read in conjunction with all of the
Company's financial data summarized above and its Consolidated Financial
Statements prepared in accordance with generally accepted accounting
principles ("GAAP"), appearing elsewhere herein. EBITDA is not intended
to represent cash flows (as determined in accordance with GAAP) or funds
available for management's discretionary use for the periods listed, nor
has it been presented as an alternative to operating income (as
determined in accordance with GAAP. EBITDA is presented as additional
information because management believes it to be a useful indicator of
the Company's ability to meet debt service and capital expenditure
requirements and because certain debt covenants of the Company utilize
EBITDA to measure compliance with such covenants.
</FN>
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net Sales. Net sales for 1998 increased 7.5% over 1997 levels, topping $59.2
million. This increase in net sales was primarily due to the Company's
participation on the Boeing 737 Next Generation ("737NG") aircraft which
contributed $12.0 million to net sales, an increase of $6.1 million over 1997.
The Company's net sales during 1998 were negatively impacted by Boeing's phase
out of the 737 Classic which contributed $5.5 million in 1998, down from $10.2
million in 1997. The Company expects to derive less than $1.0 million in net
sales for the 737 Classic in 1999. The Company's participation on the 747
contributed $14.1 million in 1998, down slightly from $14.6 million in 1997.
However, the Company expects Boeing's production rate decreases in the 747 to
decrease net sales by approximately $7.0 million in 1999. Net sales for the
fourth quarter were down 13.6% to $12.1 million from $14.0 million in 1997. The
production rate declines and inventory adjustment from Boeing on the 747 reduced
net sales to $2.0 million in the fourth quarter from $3.7 million in 1997.
The Company expects to offset the declines in net sales on the 737 Classic and
747 with new contracts from Gulfstream for steel components for the G-IV and
G-V, Boeing Military for components used on the F-15, F-18 and C-17, and
Lockheed Martin for components used on the F-16 and C-130. These new contracts
should more than offset the net sales declines referred to above.
The acquisition of Precise Machine contributed $1.3 million to net sales in
1998.
Gross Profit. The Company's gross profit continued to climb in 1998, increasing
to $18.1 million (30.5% of net sales) from $16.1 million (29.3% of net sales) in
1997. This improvement was mainly attributable to the advances made by the
Company in utilizing lean manufacturing techniques to more efficiently produce
product and additional coverage of fixed costs provided by increased volume.
The Company's gross margin has stabilized at approximately 30%. The Company
expects to maintain this gross margin by utilizing lean manufacturing techniques
to more efficiently produce its product and offering targeted price reductions
to share these benefits with its customers.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses increased to $7.6 million (12.8% of net sales) in 1998
from $6.5 million (11.9% of net sales) in 1997. Included in Selling, General and
Administrative Expenses in 1998 was the settlement and legal fees relating to a
claim against the Company of approximately $0.3 million.
Interest Expense. Certain of the proceeds of the public offering were used to
reduce the indebtedness of the Company, thereby reducing interest expense to
$0.6 million in 1998 from $1.0 million in 1997. The unused portion of the
proceeds of the public offering were invested by the Company and increased other
income to $0.4 million in 1998 from $0.0 million in 1997.
Income Taxes. The effective tax rate for 1998 was 36.7%, down from 38.5% in
1997. This reduction is primarily the result of state and federal tax credits
available to the Company.
Net Income. The Company generated net income of $6.5 million in 1998, an
increase of 22.8% over 1997. Net income per fully diluted share was down $0.01
to $0.88 in 1998 due to the additional shares outstanding after the initial
public offering completed during 1998.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996Net Sales.
Net Sales for 1997 increased 57.3% to $55.1 million from $35.0 million for 1996.
This increase in net sales was primarily due (i) to increased orders from
customers for components historically fabricated by the Company resulting from
increased demand for commercial and corporate/regional aircraft, (ii) orders for
components not previously fabricated by the Company and (iii) successful
re-negotiation of prices for certain components and assemblies fabricated for
the Company's customers. Net sales for the fourth quarter were down 13.6% to
$12.1 million from $14.0 million in 1997. The production rate declines and
inventory adjustment from Boeing on the 747 reduced net sales to $2.0 million in
the fourth quarter from $3.7 million in 1997.
Gross Profit. Gross profit in 1997 increased 94.8% to $16.1 million (or 29.3% of
net sales) from $8.3 million (or 23.7% of net sales) in 1996. This improvement
in gross profit was primarily due to: (i) the increase in sales volume,
resulting in a greater absorption of fixed costs, (ii) beneficial impacts from
the Company's employment of lean manufacturing techniques, (iii) expanded
employee training programs and (iv) targeted capital investment over recent
years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million to $6.5 million (11.9% of net
sales) in 1997 from $5.3 million (15.0% of net sales) in 1996. Costs for wages,
salaries and related fringe benefits included in selling, general and
administrative expenses accounted for $1.0 million of this increase.
Interest Expense. Interest expense decreased slightly to $1.0 million in 1997
from $1.1 million in 1996. Such decrease resulted primarily from decreased
borrowings. In early 1998, the Company negotiated a new lending agreement which
replaced the outstanding revolving credit agreement, subordinated debt, and
demand note to a shareholder, substantially reducing the Company's cost of
borrowing.
Income Taxes. The effective income tax rate for 1997 and 1996 was 38.5% and
38.4%, respectively, resulting in total tax expense of $3.3 million in 1997 and
$0.7 million in 1996.
Net Income. As a result of the foregoing the net income of the Company increased
445.1% to $5.3 million (or 9.6% of net sales) in 1997 from $1.2 million (or 3.4%
of net sales) in 1996.
Liquidity and Capital Resources
During 1998, the Company completed its initial public offering, selling
2,645,000 shares at $10.00 per share ($23.5 million after fees and expenses of
$2.9 million). Immediately upon receipt of the cash from the public offering,
the Company retired term debt of $3.3 million with Magna Bank, N.A. and $0.4
million with the Oklahoma Industrial Finance Authority. Both of these notes had
been secured by the Company's real estate. Additionally, the Company used $2.4
million of the proceeds to temporarily pay down the revolving line of credit
with Magna Bank, N.A. The Company maintains its ability to borrow up to $15
million under this revolving line of credit. The balance of these proceeds from
the public offering will be used to fund acquisitions, working capital needs, or
capital investment needs.
The Company has approval from its Board of Directors to repurchase up to
1,100,000 shares of its common stock. The Company had purchased 384,000 shares
by December 31, 1998 at a cost of $2.6 million.
In August, 1998, the Company completed the acquisition of Precise Machine
Company of Irving, Texas. The Company used $2.8 million of the public offering
proceeds to purchase the net assets of Precise.
The working capital needs of the Company are generally funded by cash flows from
operations. During 1998, operating activities generated $6.9 million. The
Company's inventory levels grew by $3.5 million. Finished goods growth accounted
for substantially all of the growth in inventories. The Company produced these
goods under firm purchase orders from its customers to allow its' employee base
to continue working as the Company manages through the impact of Boeing's
production rate decreases and the receipt of new Gulfstream, Lockheed Martin and
Boeing Military orders.
The Company invested over $5.5 million in property, plant and equipment during
1998. The Company completed a doubling of production space at its' Tulsa
facility, spending $1.1 million. Capital expenditures for 1999 are planned to be
approximately $3.5 million. Over $0.9 million of the investment was related to
an expansion of the Company's two St. Charles facilities, estimated to be
completed during the second quarter of 1999 for a total cost of $2.6 million.
The Company also invested $0.4 million in the build-out of a new facility it
leased in Auburn. Major equipment purchases during 1998 were $0.4 million for a
laser cutting machine in Auburn, creating a new capability for the Company, $0.2
million for an additional 5-axis machining center in St. Charles, and $0.2
million for a coordinate measuring machine in Wichita to support machining of
more complicated components. The Company also invested $0.6 million in computer
equipment and software.
Year 2000 Readiness Disclosure
The advent of the year 2000 poses certain technological challenges resulting
from computer technologies that recognize and process calendar years by the last
two digits rather than all four digits of such year (e.g., "98" for "1998").
Computer technologies programmed in this manner may not properly recognize or
process a year that begins with the digits "20" instead of "19." If not
corrected, such computer technologies could produce, among other problems,
inaccurate, erroneous or unpredictable results or system failures (such failures
and their related impact on business operations hereinafter being referred to as
the "Year 2000 Problem").
To address the Year 2000 Problem, the Company, beginning in late 1997,
formulated a three-step plan under which the Company's information technology
("IT") and non-information technology systems, such as embedded chip machines
("Non-IT"), would be (i) assessed; (ii) updated, replaced and tested as
necessary, and (iii) monitored for compliance (the "Plan").
As of December 31, 1998, the Company had substantially completed the assessment
phase of the Plan. This phase involves, among other things, identification of
those IT and non-IT systems that were impacted in some way by the Year 2000
Problem, and of such systems, identifying which are principal to the Company's
principal business operations. As part of this assessment, the Company reviewed
its principal IT system which was installed in late 1997 as part of a previously
formulated strategic growth plan and found it to have satisfied the Company's
Year 2000 concerns. The Company also identified the other IT systems which have
certain Year 2000 concerns and has plans to replace such programs. Additionally,
based on internal reviews of the non-IT systems and inquiries made of the
manufacturers of the non-IT systems, the Company believes that such systems do
not have any material Year 2000 concerns. Finally, the Company assessed the
compliance of Precise's information systems and has opted to install the
Company's principal IT system at Precise. This installation was begun in the
first quarter of 1999 and should be complete in the second quarter of 1999.
What remains of this assessment phase is the completion of an assessment of the
Tulsa facility. Based on its preliminary results, the Year 2000 concerns at the
Tulsa facility (which supplies services to the other divisions of the Company
and operates with a backlog of less than 30 days) should be limited and
immaterial to the Company.
Updating and replacing critical IT systems and components, other than its
systems in Tulsa and at Precise, was substantially completed by the end of 1997,
as a result of an upgrade to the Company's IT systems which had been planned and
scheduled prior to the Company's review of the Year 2000 Problem. Updating and
replacing noncritical IT systems is scheduled to be completed prior to June 30,
1999.
Monitoring of Year 2000 concerns generally, is on-going and the Company
anticipates it will continue throughout 1999.
During all phases of the Plan, the Company has actively monitored the Y2K
preparedness of its key suppliers, distributors, customers and service
providers. Based on the inquiries made, correspondence received and other
verification procedures conducted, the Company believes that its significant
business partners are resolving their respective Year 2000 Problems in a
reasonable fashion in line with industry practice.
However, the Company has not yet engaged in discussions with its utility
providers (e.g., electricity, gas, telecommunications) regarding Year 2000
concerns. As part of the Plan, however, the Company will continue to monitor
Year 2000 disclosures by, and make certain inquiries of, key providers and
agencies to the businesses that rely on them and will generally strive for Year
2000 preparedness against industry-wide and geographic Year 2000 systemic risks
comparable to that maintained by similarly situated organizations exercising
appropriate due care.
Because the Company had recently upgraded its IT systems prior to directly
addressing any Year 2000 concerns, to date, the Company has incurred an
immaterial amount of costs that are directly attributable to addressing its Year
2000 Problem. Moreover, the Company expects additional Year 2000 expenditures to
be similarly immaterial. The Company has funded, and plans to fund, its Year
2000 related expenditures out of general operating income.
The Company believes that it has substantially completed its Plan and that all
remaining actions are not significant. The Company also believes that such Plan
provides a reasonable course of action to prepare the Company for the year 2000
and significantly reduce the risks faced by the Company with respect to the Year
2000 Problem. However, the uncertainty of the Year 2000 Problem could lead to a
failure of the Company's Plan which may result in an interruption in or failure
of certain normal business activities or operations. Such failures could
materially adversely affect the Company's results of operations, liquidity and
financial condition.
The Company could face some risk from the possible failure of one or more of its
suppliers, distributors and service providers to continue to provide
uninterrupted service through the changeover to the Year 2000. While an
evaluation of the Year 2000 preparedness of such parties has been part of the
Company's Plan, the Company's ability to evaluate is limited to some extent by
the willingness of such parties to supply information and the ability of such
parties to verify the Year 2000 preparedness of their own systems or their
sub-providers. The Company does not currently anticipate that any of such
parties will fail to provide continuing service due to the Year 2000 Problem.
The Company, like similarly-situated enterprises, is subject to certain risks as
a result of possible industry-wide or area-wide failures triggered by the Year
2000 Problem. For example, the failure of certain utility providers (e.g.,
electricity, gas, telecommunications) to avoid disruption of service in
connection with the transition from 1999 to 2000 could materially adversely
affect the Company's results of operations, liquidity and financial condition.
In management's estimate, such a system-wide or area-wide failure presents the
most significant risk to the Company in connection with the Year 2000 Problem
because the resulting disruption may be entirely beyond the ability of the
Company to cure. The significance of any such disruption would depend on its
duration and systemic and geographic magnitude. Of course, any such disruption
would likely impact businesses other than the Company.
In order to reduce the risks enumerated above, the Company is developing and
evaluating contingency plans to deal with events affecting the Company or one of
its business partners arising from the Year 2000 Problem. These contingency
plans include identifying alternative suppliers, distribution networks and
service providers. Certain catastrophic events (such as the loss of utilities or
the failure of certain governmental bodies to function) are outside the scope of
the Company's contingency plans, although the Company anticipates that it would
respond to any such catastrophe in a manner designed to minimize disruptions in
customer service, and in full cooperation with its peer providers, community
leaders and service organizations.
The foregoing discussion of the Company's Year 2000 Readiness Disclosure
contains a substantial number of forward-looking statements, indicated by such
words as "expects," "believes," "estimates," "anticipates," "plans,"
"assessment," "should," "will," and similar words. These forward-looking
statements are based on the Company's and management's beliefs, assumptions,
expectations, estimates and projections any or all of which are subject to
future change, depending on unknown developments and facts. These
forward-looking statements should be read in conjunction with the Company's
disclosures located at the beginning of Management's Discussion and Analysis.
Item 7(a). Quantitative and Qualitative Disclosures About Market Risk.
The Company has determined that its market risk exposures, which arise primarily
from exposures to fluctuation in interest rates, are not material to its future
earnings, fair value, and cash flows.
Item 8. Financial Statements and Supplementary Data.
The following financial statements are included in Item 8 of this report:
Financial Statement Page
------------------- ----
Report of Ernst & Young LLP, Independent Auditors 18
Consolidated Balance Sheets as of December 31, 1997 and 1998 19
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998 20
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 22
Notes to Consolidated Financial Statements 23
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
LMI Aerospace, Inc.
We have audited the accompanying consolidated balance sheets of LMI Aerospace,
Inc. (the "Company") as of December 31, 1997 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LMI
Aerospace, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 5, 1999
<PAGE>
LMI Aerospace, Inc.
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
December 31
1997 1998
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 244 $ 11,945
Investments - 1,250
Trade accounts receivable, net of allowance
of $25 and $50, respectively 8,058 7,535
Inventories 8,701 12,619
Prepaid expenses 147 279
Deferred income taxes 502 876
Other current assets 109 256
-----------------------------
Total current assets 17,761 34,760
Property, plant, and equipment, net 15,652 19,489
Other assets 216 1,934
=============================
$ 33,629 $ 56,183
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,318 $ 3,768
Accrued expenses 1,940 2,437
Income taxes payable 430 442
Demand note payable to stockholder 250 -
Current installments of long-term debt 567 142
-----------------------------
Total current liabilities 6,505 6,789
Long-term debt, less current installments 9,274 2,732
Deferred income taxes 1,099 1,371
-----------------------------
Total noncurrent liabilities 10,373 4,103
Stockholders' equity:
Common stock of $.02 par value; authorized
28,000,000 shares; issued 5,908,471 and
8,734,422 shares in 1997 and 1998,
respectively
118 175
Preferred stock; authorized 2,000,000 shares;
none issued - --
Additional paid-in capital 1,543 26,164
Treasury stock, at cost, 384,000 shares
in 1998 -- (2,628)
Retained earnings 15,090 21,580
-----------------------------
Total stockholders' equity 16,751 45,291
=============================
$ 33,629 $ 56,183
=============================
See accompanying notes.
<PAGE>
LMI Aerospace, Inc.
Consolidated Statements of Income
(Amounts in thousands, except per share data)
Year ended December 31
1996 1997 1998
----------------------------------------------
Net sales $35,016 $55,080 $59,234
Cost of sales 26,725 38,932 41,152
----------------------------------------------
Gross profit 8,291 16,148 18,082
Selling, general, and
administrative expenses
5,256 6,549 7,591
----------------------------------------------
Income from operations 3,035 9,599 10,491
Other income (expense):
Interest expense (1,123) (1,020) (642)
Other, net 15 10 405
----------------------------------------------
(1,108) (1,010) (237)
----------------------------------------------
Income before income taxes 1,927 8,589 10,254
Provision for income taxes 740 3,306 3,764
==============================================
Net income $ 1,187 $ 5,283 $ 6,490
==============================================
Net income per common share $0.21 $0.91 $0.89
==============================================
Net income per common share -
assuming dilution $0.20 $0.89 $0.88
==============================================
Weighted average common shares
outstanding 5,779,833 5,836,700 7,252,148
==============================================
Weighted average dilutive
stock options outstanding 11,150 76,104 146,942
==============================================
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
LMI Aerospace, Inc.
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share and per share data)
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Capital Earnings Stock Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 116 $ 1,268 $ 8,620 $ (38) $ 9,966
Sale of 7,896 shares of treasury
stock - - - 15 15
Purchase of 30,646 shares of
outstanding stock for treasury - - - (58) (58)
Exercise of options to purchase
41,125 shares of stock - (27) - 78 51
Net income - - 1,187 - 1,187
------------------------------------------------------------------------
Balance at December 31, 1996 116 1,241 9,807 (3) 11,161
Sale of 1,365 shares of treasury
stock - 2 - 3 5
Issuance of 80,977 shares of stock 2 295 - - 297
Exercise of options to purchase
3,290 shares of stock - 5 - - 5
Net income - - 5,283 - 5,283
------------------------------------------------------------------------
Balance at December 31, 1997 118 1,543 15,090 - 16,751
Issuance of 2,809,500 shares of
common stock 57 24,592 - - 24,649
Exercise of options to purchase
16,450 shares of stock - 29 - - 29
Purchase of 384,000 shares of
outstanding stock for treasury - - - (2,628) (2,628)
Net income - - 6,490 - 6,490
========================================================================
Balance at December 31, 1998 $ 175 $ 26,164 $ 21,580 $ (2,628) $ 45,291
========================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LMI Aerospace, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Year ended December 31
1996 1997 1998
-------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,187 $ 5,283 $ 6,490
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,012 2,179 2,633
Deferred income taxes 214 14 (102)
Changes in operating assets and liabilities:
Trade accounts receivable (595) (1,472) 874
Inventories (1,544) (1,506) (3,455)
Prepaid expenses and other assets (232) 63 (519)
Income taxes payable 513 (85) 12
Accounts payable 609 719 413
Accrued expenses 520 580 547
-------------------------------------------------------
Net cash from operating activities 2,684 5,775 6,893
Investing activities
Additions to property, plant, and equipment, net (1,304) (3,713) (5,488)
Purchases of investments - - (3,138)
Proceeds from sale of investments, net - - 1,888
Acquisition of company, net of cash acquired - - (2,791)
-------------------------------------------------------
Net cash from investing activities (1,304) (3,713) (9,529)
Financing activities
Proceeds from issuance of long-term debt 3,550 3,782 2,074
Principal payments on long-term debt (4,914) (6,112) (9,291)
Purchases of/proceeds from treasury stock
transactions, net (43) 5 (2,628)
Proceeds from exercise of stock options 51 5 29
Proceeds from issuance of common stock, net - 297 24,153
-------------------------------------------------------
Net cash from financing activities (1,356) (2,023) 14,337
-------------------------------------------------------
Net increase in cash and cash equivalents 24 39 11,701
Cash and cash equivalents, beginning of year 181 205 244
=======================================================
Cash and cash equivalents, end of year $ 205 $ 244 $ 11,945
=======================================================
Supplemental disclosures of cash flow information:
Interest paid $ 1,191 $ 996 $ 601
Income taxes paid 14 3,378 3,733
Common stock contributed to profit sharing plan - - 296
Stock bonus issued to officer of the company - - 200
=======================================================
See accompanying notes.
</TABLE>
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except Share and per Share data)
December 31, 1998
1. Accounting Policies
Description of Business
LMI Aerospace, Inc. (the "Company") is a fabricator, finisher, and integrator of
formed, close tolerance aluminum and specialty alloy components for use by the
aerospace industry. The Company is a Missouri corporation with headquarters in
St. Charles, Missouri. The Company maintains facilities in St. Charles,
Missouri; Seattle, Washington; Tulsa, Oklahoma; Wichita, Kansas; and Irving,
Texas (see Note 3).
The accompanying financial statements include the consolidated financial
position, results of operations, and cash flows of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Customer and Supplier Concentration
Direct sales to the Company's largest customer accounted for 46 percent, 59
percent, and 62 percent of the Company's total revenues in 1996, 1997, and 1998.
Accounts receivable balances related to direct sales to this customer were 62
percent in 1997 and 1998. Indirect sales to the Company's largest customer
accounted for 20 percent, 17 percent and 12 percent of the Company's total sales
in 1996, 1997, and 1998, respectively.
Direct sales to the Company's second largest customer accounted for 19 percent,
13 percent and 12 percent of the Company's total revenues in 1996, 1997 and 1998
and represented 14 percent and 9 percent of the accounts receivable balance at
December 31, 1997 and 1998, respectively.
The Company purchased approximately 50 percent and 58 percent of the materials
used in production from three suppliers in 1997 and 1998, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, and all
highly liquid investment instruments with an initial maturity of three months or
less.
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
Investments
During 1998, the Company purchased, sold and repurchased common stock. This
investment is classified as a trading security. The Company's investment is
stated at current market value using the quoted market price at December 31,
1998. The overall position of this investment at December 31, 1998 resulted in
an immaterial gain which was recorded in the Consolidated Statements of Income.
Subsequent to December 31, 1998, the Company liquidated its investment position
for an overall immaterial gain.
Inventories
Inventories are stated at the lower of cost or market using actual cost for raw
materials and work-in-process and average cost for finished goods. Inventories
include certain deferred production costs related to long-term production
contracts. These costs are included in cost of sales over the life of the
contract based on a percentage of completion method (units-of-delivery basis).
Revenue Recognition
Revenues are recorded when services are performed or when products are shipped,
except for long-term contracts which are recorded on the percentage of
completion method (units-of-delivery basis). Sales from long-term contracts were
less than 10 percent of total sales for each year in the three-year period ended
in 1998. Revenues which have been deferred under long-term contracts are $321
and $728 as of December 31, 1997 and 1998, respectively and are included in
accrued expenses.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of the minimum lease payments. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets. Equipment held under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or estimated useful life of the asset. Estimated useful lives for buildings and
machinery and equipment are 20 years and 4 to 10 years, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement and
income tax basis of the Company's assets and liabilities.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company
has elected to continue to measure its cost of stock-based compensation under
the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
Financial Instruments
Fair values of the Company's fixed rate long-term obligations approximate their
carrying value, as the rates approximate those which could be obtained by the
Company for similar issues with similar maturities. The Company's investments
are carried at market value. The Company's other financial instruments have fair
values which approximate their respective carrying values, due to their short
maturities or variable rate characteristics.
Earnings per Common Share
In 1997, the Company adopted SFAS No. 128, Earnings per Share, which replaced
the calculation of primary and fully diluted earnings per share with basic and
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented or, where appropriate, restated to conform to SFAS No. 128.
Earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the applicable periods.
2. Initial Public Offering
In April 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission relating to
an initial public offering of the Company's unissued common stock. In connection
with the initial public offering, the Company effected a 2.29-for-1 stock
dividend of the Company's common stock payable June 1, 1998 to shareholders of
record on May 1, 1998. All references in the accompanying financial statements
to the number of shares of common stock and per common share amounts have been
retroactively adjusted to reflect the stock dividend. In addition, the Company's
capital structure was changed to reflect 28,000,000 shares of common stock and
2,000,000 shares of preferred stock authorized. In June 1998, the Company
completed its initial public offering selling 2,645,000 shares (including the
underwriters 15 percent over allotment) at $10.00 per share ($23.5 million after
fees and expenses of $2.9 million).
3. Acquisition
On August 11, 1998, the Company announced it had reached an agreement in
principal to acquire the assets of Precise Machine Company ("Precise"), based in
Irving, Texas. Precise manufactures precision machined components used primarily
by the defense, aerospace and financial services industries and had sales of
approximately $3 million for the year ended 1997. The sale was completed on
August 25, 1998. The purchase price for the net assets acquired, net of cash
acquired, was approximately $2,791 in cash.
This acquisition has been accounted for by the purchase method, and accordingly,
the results of operations were included in the Company's Consolidated Statements
of Income from the date of acquisition. The purchase price has been allocated to
the assets acquired and liabilities assumed based on their fair value at the
date of the acquisition. The excess of the purchase price over the fair value of
net assets acquired, totaling $1,557, was allocated to goodwill and is being
amortized over a 25-year period on a straight-line basis. Amortization of
goodwill through December 31, 1998 was approximately $24.
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
4. Treasury Stock Transactions
On September 25, 1998, the Company announced its Board of Directors authorized
the Company's repurchase of up to 600,000 shares of the Company's common stock.
Over the remainder of the year, the Company purchased 384,000 shares in the open
market at prices ranging from $5.25 to $7.125 per share. These transactions were
recorded at cost in stockholders' equity.
5. Inventories
Inventories consist of the following:
1997 1998
------------------------------------------
Raw materials $2,990 $ 3,483
Work in process 3,875 3,717
Finished goods 1,836 5,419
==========================================
$8,701 $ 12,619
==========================================
6. Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
1997 1998
------------------------------------------
Land $ 638 $ 690
Buildings 7,405 8,714
Machinery and equipment 18,376 21,660
Leasehold improvements 426 950
Construction in progress 298 1,037
Other assets 523 875
------------------------------------------
27,666 33,926
Less accumulated depreciation 12,014 14,437
==========================================
$ 15,652 $ 19,489
==========================================
Depreciation expense (including amortization expense on capital leases) recorded
by the Company totaled $1,907, $2,058, and $ 2,550 for 1996, 1997, and 1998,
respectively.
<TABLE>
<CAPTION>
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
7. Long-Term Debt
Long-term debt consists of the following:
1997 1998
-----------------------------------------
<S> <C> <C>
Revolving line of credit, interest payable monthly, at a
variable rate $ 1,281 $ --
Industrial Development Revenue Bond, interest payable
monthly, at a variable rate 2,500 2,500
Term loan note payable, principal and interest payable
monthly, at a fixed rate of 9.0% 3,482 --
Real estate note payable, principal and interest payable
monthly, at a variable rate 428 --
Notes payable, principal and interest payable monthly, at
fixed rates, ranging from 8.78% to 9.56% 1,233 308
Subordinated debentures, interest payable monthly, at a fixed
rate of 11% 800 --
Capital lease obligations 117 66
-----------------------------------------
9,841 2,874
Less current installments 567 142
=========================================
$ 9,274 $ 2,732
=========================================
</TABLE>
On March 31, 1998, the Company obtained a $15,000 unsecured line of credit with
Magna Bank N.A, now Union Planters Bank, N.A. ("Union"), to fund various
corporate needs. Interest is payable monthly based on a quarterly cash flow
leverage calculation and the LIBOR rate. This facility matures on March 30, 2000
and requires compliance with certain non-financial and financial covenants
including minimum tangible net worth and EBITDA, as defined, requirements. The
credit facility prohibits the payment of cash dividends on common stock without
Union's prior written consent.
The Industrial Development Revenue Bond ("IRB") bears interest at a variable
rate, which is based on the existing market rates for comparable outstanding
tax-exempt bonds (4.1 percent and 4.2 percent at December 31, 1997 and 1998,
respectively), not to exceed 12 percent. The IRB is secured by a letter of
credit, and Union, which holds 100 percent participation in the letter of
credit, has a security interest in certain equipment. The bond matures in
November 2000.
The aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
Year ending December 31:
1999 $ 142
2000 2,598
2001 89
2002 45
==================
$ 2,874
==================
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
8. Leases
The Company leases certain facilities and equipment under various noncancelable
operating lease agreements which expire at various dates throughout 2009. At
December 31, 1998, the future minimum lease payments under operating leases with
initial noncancelable terms in excess of one year are as follows:
Year ending December 31:
1999 $ 842
2000 683
2001 678
2002 667
2003 673
Thereafter 1,458
===================
$ 5,001
===================
Rent expense totaled $364, $539, and $836 in 1996, 1997, and 1998, respectively.
9. Defined Contribution Plans
The Company has a noncontributory profit sharing plan and a contributory 401(k)
plan which covers substantially all full-time employees. Employees are eligible
to participate in both plans after reaching 1,000 hours of accredited service.
Contributions to the profit sharing plan are at the discretion of management and
become fully vested to the employees after seven years. Contributions by the
Company to the profit sharing plan totaled $74, $150 and $256 for 1996, 1997,
and 1998, respectively. Contributions by the Company to the 401(k) plan, which
are fully vested to the employees immediately upon contribution, are based upon
a percentage of employee contributions, up to a maximum of $225 per employee.
The Company's contributions to the 401(k) plan totaled $52, $78, and $104 for
1996, 1997, and 1998, respectively.
10. Stock Options
In December 1989, the Company adopted the Employee Incentive Stock Option Plan
(the "1989 Plan"), which provides options for up to 1,398,250 shares to be
granted to key employees at exercise prices greater than or equal to the fair
market value per share on the date the option is granted. All options vest
immediately upon grant. During 1998, the Company discontinued the 1989 Plan, and
the options granted under this plan will expire if unexercised by December 31,
1999.
In 1998, the Company adopted the 1998 Employee Stock Option Plan (the "1998
Plan"), which provides options for up to 600,000 shares to be granted to key
employees at exercise prices greater than or equal to the fair market value per
share on the date the option is granted. Options issued under the 1998 Plan are
at the discretion of management and may be in the form of Incentive Stock
Options or Non-Qualified Stock Options. Vesting periods may apply.
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
During 1998, the Company granted 34,500 options to key employees under the terms
and conditions of the 1998 Plan and 44,086 options to key employees under the
terms and conditions of the 1989 Plan prior to its discontinuance.
Stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------------- ---------------------------- -----------------------------
Number of Option Number of Option Number of Option
Shares Prices Shares Prices Shares Prices
------------ --------------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 174,370 $1.24 to $1.90 241,815 $1.77 to $1.90 232,192 $1.77 to $3.67
Granted 116,795 $1.90 59,467 $2.60 to $3.67 78,586 $4.64 to $6.25
Exercised (41,125) $1.24 (3,290 $1.77 (16,450) $1.77
Canceled (8,225) $1.64 (65,800) $1.90 - -
------------ ------------- -------------
Options outstanding at
end of year 241,815 $1.77 to $1.90 232,192 $1.77 to $3.67 294,328 $1.77 to $6.25
============ =============== ============= ============== ============= ===============
Options exercisable at
end of year 241,815 - 232,192 - 263,278 -
============ =============== ============= ============== ============= ===============
Options available for
grant at end of year 1,033,060 - 1,039,393 - 565,500 -
============ =============== ============= ============== ============= ===============
</TABLE>
The weighted average exercise price of outstanding options at December 31, 1996,
1997 and 1998 was $1.88, $2.31 and $3.21, respectively. The weighted average
fair value per stock option granted during 1996, 1997, and 1998 was $.41, $.67
and $2.35 respectively, measured on the date of grant using the Black-Scholes
Option Pricing model with the following assumptions: volatility of 71.8 percent;
0 percent dividend yield; an expected life of 2.5 years, 1.5 to 2.25 years, and
1 to 4.75 years for 1996, 1997, and 1998, respectively; and a risk-free rate of
5.20 percent, 5.26 percent, and 4.52 percent for 1996, 1997, and 1998. The
Company applied APB Opinion No. 25 in accounting for its stock option plans, and
accordingly, no compensation cost has been recognized for stock options granted.
Had the Company determined compensation cost based on the fair value at the
grant date under SFAS No. 123, net income and earnings per share amounts would
have been as follows:
1996 1997 1998
----------------------------------------------
Net income:
As reported $ 1,187 $ 5,283 $ 6,490
Pro forma 1,155 5,256 6,408
Net income per common share
As reported .21 .91 .89
Pro forma .20 .90 .88
Net income per common share
Assuming dilution:
As reported .20 .89 .88
Pro forma .20 .89 .87
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
11. Income Taxes
The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to the deferred tax assets and
deferred tax liabilities are as follows:
1997 1998
----------------------------------------
Deferred tax asset:
Accrued vacation $ 158 $ 179
Inventory 186 296
Other 158 401
----------------------------------------
Total deferred tax assets 502 876
Deferred tax liabilities:
Depreciation (1,074) (1,180)
Software costs -- (191)
Other (25) --
----------------------------------------
Total deferred tax liabilities (1,099) (1,371)
========================================
Net deferred tax liability $ (597) $ (495)
========================================
The Company's income tax provision consisted of the following for the year ended
December 31:
1996 1997 1998
---------------------------------------------------------
Federal:
Current $ 471 $ 2,937 $ 3,579
Deferred 182 (17) (90)
---------------------------------------------------------
653 2,920 3,489
State:
Current 55 355 287
Deferred 32 31 (12)
---------------------------------------------------------
$740 $3,306 $ 3,764
=========================================================
The federal corporate statutory rate is reconciled to the Company's effective
income tax rate as follows:
1996 1997 1998
------------------------------------------------
Federal taxes $ 653 $2,920 $ 3,489
State and local taxes,
net of federal
benefit 57 258 305
Other 30 128 (30)
================================================
Provision for income taxes $740 $3,306 $ 3,764
================================================
<PAGE>
LMI Aerospace, Inc.
Notes to Consolidated Financial Statements - (Continued)
12. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position.
13. Quarterly Financial Data (Unaudited)
First Second Third Fourth
-------------------------------------------------
1997
Net sales $12,690 $14,383 $13,975 $14,032
Cost of sales 9,393 10,266 9,598 9,675
Net income 939 1,350 1,577 1,417
Net income per common share .16 .23 .27 .24
Net income per common share -
assuming dilution .16 .23 .27 .24
1998
Net sales $ 16,335 $ 15,657 $ 15,165 $ 12,077
Cost of sales 11,502 10,841 10,454 8,355
Net income 1,659 1,723 1,678 1,430
Net income per common share .28 .29 .19 .17
Net income per common share -
assuming dilution .28 .28 .19 .17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers.
The information contained under the caption "Information About the Nominees and
Current Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14(a) for the Company's 1999 Annual Meeting of Shareholders, which involves the
election of directors, is incorporated herein by this reference. Also see item
4(a) of Part I hereof.
Item 11. Executive Compensation.
The information contained under the captions "Directors Compensation,"
"Executive Compensation," "Option/SAR Grants in Last Fiscal Year," "Aggregated
Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option SAR Values,"
and "Employment Arrangements with Named Officers" in the Company's definitive
proxy statement to be filed pursuant to Regulation 14(a) for the Company's 1999
Annual Meeting of Shareholders, which involves the election of directors, is
incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the caption "Voting Securities and Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement to be filed pursuant to Regulation 14(a) for the
Company's 1999 Annual Meeting of Shareholders, which involves the election of
directors, is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions.
The information contained under the caption "Certain Transactions" in the
Company's definitive proxy statement to be filed pursuant to Regulation 14(a)
for the Company's Annual Meeting of Shareholders, which involves the election of
directors, is incorporated herein by this reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. For a list of the Consolidated Financial Statements of the
Company included as part of this report, see the index at
Item 8.
2. All schedules have been omitted as the required information is
not present in sufficient amounts or the required information
is included elsewhere in the Consolidated Financial Statement
or notes thereto.
3. Exhibits:
See Exhibit Index
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Company during
the fourth quarter of the Registrant's fiscal year ended
December 31, 1998.
(c) Exhibits:
See Exhibit Index
(d) All schedules have been omitted as the required information is
not present in sufficient amounts or the required information
is included elsewhere in the Consolidated Financial Statement
or notes thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of St.
Charles and State of Missouri on the 30th day of March, 1999.
LMI AEROSPACE, INC.
(Registrant)
By: /s/ Ronald S. Saks
-------------------------------------------
Ronald S. Saks
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald S. Saks
- ---------------------------- Chief Executive Officer, March 30, 1999
Ronald S. Saks President, and Director
- ---------------------------- Chairman of the Board,
Joseph Burstein and Director March ___, 1999
/s/ Lawrence J. LeGrand
- ----------------------------- Chief Operating Officer and March 30, 1999
Lawrence J. LeGrand Director
/s/ Lawrence E. Dickinson
- ----------------------------- Chief Financial Officer and March 30, 1999
Lawrence E. Dickinson Secretary
/s/ Duane Hahn
- ----------------------------- Vice President, Regional March 30, 1999
Duane Hahn Manager and Director
/s/ Sanford S. Neuman
- ----------------------------- Assistant Secretary March 30, 1999
Sanford S. Neuman and Director
- ----------------------------- Director March ___, 1999
Thomas M. Gunn
/s/ Alfred H. Kerth
- ----------------------------- Director March 30, 1999
Alfred H. Kerth
- ----------------------------- Director March ___, 1999
Thomas Unger
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of the Registrant previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
3.2 Amended and Restated By-Laws of the Registrant previously filed on
Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
4.1 Form of the Registrant's Common Stock Certificate previously filed
on Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
10.1 1989 Stock Option Plan, including all amendments previously filed on
Form S-1 dated as of June 29, 1998 and incorporated herein by
reference
10.2 Employment Agreement, dated January 1, 1997, between the Registrant
and Ronald S. Saks, as previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.3 Employment Agreement, effective as of May 1, 1998, between the
Registrant and Lawrence J. LeGrand, as previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
10.4 Employment Agreement, dated January 1, 1998, between the Registrant
and Duane E. Hahn as previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.5 Employment Agreement, dated January 1, 1998, between the Registrant
and Phillip A. Lajeunesse previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.6 Employment Agreement, dated January 1, 1998, between the Registrant
and Robert T. Grah previously filed on Form S-1 dated as of June 29,
1998 and incorporated herein by reference
10.7 Employment Agreement, dated January 1, 1998, between the Registrant
and Bradley L. Nelson previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.8 Lease Agreement, dated November 25, 1991, between the Registrant and
Roy R. Thoele and Madonna J. Thoele, including all amendments
(Leased premises at 3000 Highway 94 North) previously filed on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.9 Lease Agreement, dated June 28, 1988, between the Registrant and J &
R Sales, including all amendments (Leased premises at 204 H Street)
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.10 Lease Agreement, dated May 6, 1997, between the Registrant and
Victor Enterprises, LLC, including all amendments (Leased premises
at 101 Western Avenue S) previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.11 Lease Agreement, dated February 1, 1995, between the Registrant and
RFS Investments (Leased premises at 2621 West Esthner Court)
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.12 Profit Sharing and Savings Plan and Trust, including all amendments
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.13 Loan Agreement between the Registrant and Magna Bank, N.A. dated
August 15, 1996, including all amendments previously filed on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.14 Indenture of Trust and Loan Agreement, both with the Industrial
Development Authority of St. Charles County, Missouri and dated as
of September 1, 1990 previously filed on Form S-1 dated as of June
29, 1998 and incorporated herein by reference
10.15 General Terms Agreement, Special Terms Agreement and Warranty
Agreements, between the Registrant and Boeing Seattle previously
filed on Form S-1 dated as of June 29, 1998 and incorporated herein
by reference
10.16 Form of Master Order Agreement covering Boeing 777 and 747 Programs
and Master Order Agreement covering Boeing 737 Leading Edge Program,
both between the Registrant and Boeing North American, previously
filed on Form S-1 dated as of June 29, 1998 and incorporated herein
by reference
10.17 Form of Contract between the Registrant and Boeing Wichita
previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.18 General Conditions (Fixed Price - Non-Governmental) for the
G-14/F100 Program, General Conditions for the Wing Stub/Lower 45
Program Boeing Model 767 Commercial Aircraft and Form of Master
Agreement, all with Northrop Grumman previously filed on Form S-1
dated as of June 29, 1998 and incorporated herein by reference
10.19 1998 Stock Option Plan, previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
10.20 Amendment No. 5 to 1989 Stock Option Plan, previously filed on Form
S-1 dated as of June 29, 1998 and incorporated herein by reference
10.21 Restricted Stock Agreement with Lawrence J. LeGrand, dated as of
April 27, 1998, previously filed on Form S-1 dated as of June 29,
1998 and incorporated herein by reference
10.22 Subscription Agreement with Lawrence J. LeGrand, dated as of April
27, 1998, previously filed on Form S-1 dated as of June 29, 1998 and
incorporated herein by reference
10.23 General Terms Agreement between Boeing Company and Leonard's Metal,
Inc. with Special Business Provision attached, previously filed on
Form 10-Q dated as of November 16, 1998 and incorporated herein by
reference
10.24 Lease Agreement between Mother Goose Corporation and Precise Machine
Partners L.L.P. (Leased premises at 2205 and 2215 River Hill Road,
Irving, Texas) dated August 25, 1998 (filed herewith)
10.25 Employment Agreement dated August 25, 1998, between Precise Machine
Partners, L.L.P. and John R. Krystinik (filed herewith)
10.26 First Amendment to Restricted Stock Agreement with Lawrence J.
LeGrand, dated as of April 27, 1998 (filed herewith)
10.27 Second Amendment to Restricted Stock Agreement with Lawrence J.
LeGrand, dated March 26, 1999 (filed herewith)
10.28 First Amendment to Subscription Agreement with Lawrence J. LeGrand,
dated April 27, 1998 (filed herewith)
10.29 Second Amendment to Subscription Agreement with Lawrence J. LeGrand,
dated March 26, 1999 (filed herewith)
16.1 Letter from KPMG Peat Marwick, LLP as to statements regarding change
in certified accountants previously filed on Form S-1 dated as of
June 29, 1998 and incorporated herein by reference
21.1 List of Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
27.1 Financial Data Schedule (filed herewith)
================================================================================
LEASE AGREEMENT
BETWEEN
MOTHER GOOSE CORPORATION,
AS LANDLORD
AND
PRECISE MACHINE PARTNERS, L.L.P.,
AS TENANT
2205 and 2215 RIVER HILL ROAD
DALLAS, TEXAS
================================================================================
<PAGE>
TABLE OF CONTENTS
Section Page No.
- ------- --------
1. Definitions and Basic Provisions..............................1
2. Lease of Premises.............................................2
2A. Option to Renew...............................................2
3. Payments and Performance......................................3
4. Absolute Net Lease; Non-Terminability.........................4
5. Taxes and Assessments.........................................6
6. Compliance with Law; Environmental Matters....................7
7. Indemnification...............................................9
8. Required Insurance...........................................10
9. Fire or Other Casualty.......................................13
10. Repairs and Reentry..........................................14
11. Assignment and Subletting....................................14
12. Alterations and Additions by Tenant..........................16
13. Legal Use; Violations of Insurance Coverage; Nuisance........16
14. Laws and Regulations.........................................16
15. Rules of the Premises........................................16
16. Entry for Repairs and Inspection.............................17
17. Condemnation.................................................17
18. Landlord's Lien..............................................18
19. Abandoned Property...........................................18
20. Holding Over.................................................18
21. Entire Agreement and Amendment; No Representations
or Warranties; No Memorandum of Lease.......................18
22. Transfer of Landlord's Rights................................19
23. Default......................................................19
24. Remedies; Attorney's Fees....................................23
25. Quiet Possession.............................................24
26. Severability.................................................24
27. Security Deposit.............................................24
28. No Subrogation...............................................24
29. Binding Effect...............................................24
30. Notices......................................................25
31. Brokerage....................................................25
32. Subordination; Nondisturbance................................25
33. Estoppel Certificates; Financial Statements..................26
34. [Intentionally deleted]......................................27
35. Premises Name and Address....................................27
36. Mechanic's Liens.............................................27
37. INTENTIONALLY DELETED........................................27
38. Constructive Eviction........................................27
39. Personal Liability...........................................27
40. [Intentionally Deleted]......................................27
41. No Waiver....................................................28
42. No Third Party Beneficiary...................................28
43. Number and Gender............................................28
44. Force Majeure................................................28
45. Applicable Law, Consent to Jurisdiction......................28
Exhibit "A" Legal Description
Exhibit "B" Buildings Rules and Regulations
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREE (the "Lease") is made and entered into as of the 25th
day of August 1998, by and between the Landlord and Tenant hereinafter named.
1. Definitions and Basic Provisions. The terms defined below shall have
the respective meanings stated when used elsewhere in this Lease, and such terms
and the following basic provisions constitute an integral part of this Lease:
(a) "Landlord": Mother Goose Corporation, a Texas corporation.
(b) "Tenant": Precise Machine Partners, L.L.P., a Texas
limited liability partnership.
(c) "Premises": Landlord's land described on Exhibit "A"
attached hereto and made a part hereof, together with all buildings,
improvements, fixtures, rights, easements and appurtenances benefiting
or appertaining thereto, and commonly referred to as 2205 River Hill
Road and 2215 River Hill Road, Dallas, Texas, 75061. Said Premises are
deemed to contain a total of 8,400 square feet of Rentable Space, as
follows:
2205 River Hill Road 6,000 square feet
2215 River Hill Road 2,400 square feet
(d) "Lease Term": The Lease is for a term of two (2) years,
commencing on August 25, 1998 (the "Commencement Date") and ending on
August 24, 2000.
(e) "Monthly Rent": The total monthly rental fee of $3,750
which Tenant agrees to pay to Landlord at 1247 Shady Bend, Dallas,
Texas, 75244 (or at such place as Landlord from time to time may
designate in writing) in advance and, without demand on the first (1st)
day of each calendar month during and throughout the Lease Term.
(f) "Security Deposit": $7,500.00.
(g) "Sole Permitted Use": Design, fabrication and assembly of
metal parts and components for use in aerospace and other industry and
general office use, subject to the other provisions hereof.
(h) "Leasing Agent": None.
(i) "Rentable Space": All floor area of the Premises, being
8,400 square feet.
(j) "Exhibits": The following Exhibits are attached to and
made a part of this Lease for all purposes:
Exhibit "A" - Legal Description of the Premises
Exhibit "B" - Premises Rules and Regulations
(k) "Impositions": All taxes (as limited by Section 5 below),
costs, expenses, obligations, assessments or impositions of every kind
or nature whatsoever which may be levied, assessed, charged or imposed
upon the Premises and the business carried on therein which may arise
or become due during the Term of this Lease, unless otherwise expressly
provided in this Lease. The term "Impositions" shall not include any
federal income taxes, state and local taxes, federal excess profit
taxes, franchise, capital stock and federal or state estate or
inheritance taxes of Landlord.
(l) "Renewal Terms": Two successive terms of five (5) years
each, commencing on the next day following the last day of the then
immediately preceding term.
2. Lease of Premises. In consideration of the obligation of Tenant to
pay rent as herein provided and in consideration of the other terms, covenants,
and conditions hereof Landlord hereby demises and leases to Tenant, and Tenant
hereby leases and takes from Landlord, the Premises for the Lease Term specified
herein and, upon proper and timely exercise of Tenant's options to renew as
described in Section 2A hereof, for each Renewal Term, all upon and subject to
the terms and conditions set forth herein. This Lease and the obligations of
Landlord hereunder are conditioned upon faithful performance by Tenant of all of
the agreements and covenants herein set out and agreed to by Tenant.
2A. Option to Renew. Landlord hereby grants to Tenant the option to
renew this Lease for two (2) successive five (5) year Renewal Terms provided
that (a) Tenant provides to Landlord written notice of its exercise of the
option to renew no fewer than 180 days prior to the expiration of the then
current Term of this Lease, and (b) Tenant is not in uncured default under this
Lease at the time it gives notice of its exercise of the option to renew or
during any interval between providing such notice and the commencement of the
applicable Renewal Term. This option to renew shall not be assigned or
transferred in any manner to any subtenant or assignee of Tenant without
Landlord's written consent in Landlord's sole and absolute discretion, and shall
at the option of Landlord terminate upon such assignment or sublet if not
previously exercised.
Upon timely and proper notification and exercise by Tenant of its
option to renew, all of the terms and conditions of this Lease shall remain in
full force and effect throughout the ensuing Renewal Term; provided, however,
that the Monthly Rent payable hereunder shall, at Landlord's option be adjusted
on the first day of such Renewal Term and subsequently as hereinafter set out.
Promptly following timely and proper notification and exercise by
Tenant of its option to renew, Tenant and Landlord shall, if Landlord so elects,
jointly contact the North Texas Chapter of the Appraisal Institute (the
"Chapter"), whose current address and particulars are P.O. Box 801807, Dallas,
Texas, 75380-1807, Telephone 972-233-2244, Facsimile 972-239-6857, E-Mail
[email protected]. Landlord and Tenant shall contact the Chapter in a
writing signed by both of them. The writing shall request that the Chapter
select a neutral Member of the Appraisal Institute ("MAI') to determine the fair
market rental rate of the Premises. The writing shall request that the Chapter
notify Landlord and Tenant in writing of the MAI appraiser selected by the
Chapter. In the event that the Appraisal Institute no longer has a North Texas
Chapter, Landlord and Tenant shall choose a comparable appraisal organization
reasonably acceptable to both of them.
Landlord and Tenant shall jointly contact such appraiser and instruct
him to determine the fair market rental rate for the Premises as of the time of
the expiration of the then-current Lease Term. The cost of such appraisal shall
be jointly borne by Landlord and Tenant. The appraiser shall be instructed to
provide the fair market rate in writing and within 30 days. The rate set in such
appraisal shall be final.
Within 30 days following its receipt of the said appraiser's report but
in no case less than 60 days prior to the expiration of the then applicable
Lease Term, Tenant shall inform Landlord in writing of its decision to renew
this Lease or vacate the Premises by the expiration of such Lease Term.
During any Renewal Term, beginning on the first day of the 31st month
of such term, the Monthly Rent shall escalate or decrease for the remainder of
such Renewal Term by an amount equal to the product of (i) a fraction, the
numerator of which is the CPI for the previous December, and the denominator of
which is the CPI for December immediately prior to the commencement of such
Renewal Term, multiplied by (ii) the Monthly Rental then in effect. As used in
this paragraph, "CPI" means the Consumer Price Index for all Urban Consumers
(All Items and Commodity Groups--Dallas Area Only) (1982-84 = 100). If such
index is changed so that the base year differs from that used as of the
Commencement Date, the CPI shall be converted in accordance with the conversion
factor published by the U.S. Department of Labor, Bureau of Labor Statistics. If
the CPI is discontinued during any Renewal Term, such other successor government
index as may be applicable to the Dallas, Texas metropolitan area shall be used
in order to obtain substantially the same result as would be obtained as if the
CPI had not been discontinued.
3. Payments and Performance. Tenant agrees to pay all rents and sums
provided to be paid by Tenant hereunder at the times and in the manner herein
provided, without any setoff, deduction or counterclaim whatsoever. Should this
Lease commence on a day other than the first day of a calendar month or
terminate on a day other than the last day of a calendar month, the rent for
such partial month shall be proportionately reduced. The Monthly Rent for the
first partial month, if any, shall be payable at the beginning of said period or
as prepaid rental. The obligation of Tenant to pay such rent is an independent
covenant, and no act or circumstance whatsoever, whether such act or
circumstance constitutes a breach of covenant by Landlord or not, shall release
Tenant from the obligation to pay rent as and when the same is due. Time is of
the essence in the performance of all of Tenant's obligations hereunder. Any
amount which becomes owing by Tenant to Landlord hereunder shall bear interest
at the highest lawful rate per annum from the due date until paid, unless there
is no highest lawful rate of interest provided by law with respect to such
amount, in which event such amount shall bear interest at the rate of one and
one-half percent (1-1/2%) per month from the due date until paid.
4. Absolute Net Lease; Non-Terminability.
(a) THIS IS AN ABSOLUTELY NET LEASE TO LANDLORD. It is the
intent of the parties hereto that the Monthly Rent payable under this
Lease shall be an absolutely net return to Landlord and that Tenant
shall pay all Impositions. Any amount or obligation herein relating to
the Premises which is not expressly declared to be that of Landlord
shall be deemed to be an obligation of Tenant to be performed by Tenant
at Tenant's expense, and Tenant agrees to indemnify and save Landlord
harmless from and against the same. Tenant hereby assumes and agrees to
perform all duties and obligations with respect to the Premises, as
well as to the use, operation and maintenance thereof, even though such
duties and obligations would otherwise be construed to be those of the
Landlord. Monthly Rent, additional rent and all other sums payable
hereunder by Tenant shall be paid without notice (except as expressly
provided herein), demand, setoff, counterclaim, abatement, suspension,
deduction or defense.
(b) Landlord hereby represents and warrants to Tenant only
that to Landlord's current, actual knowledge as of the date hereof, (i)
all utilities presently used on and from the Premises are connected to
the Premises and separately metered and (ii) the utility systems on the
Premises are fully operational and in good condition. Tenant shall,
during the Lease Term, pay and discharge as and when the same shall
become due and payable without penalty all water and sewer rents,
rates, and charges, charges for removal of waste materials, and charges
for water, steam, heat, gas, electricity, light, and power, telephone
and cable charges and other service or services furnished to the
Premises or occupants thereof during the Lease Term, and shall
indemnify Landlord against any and all liabilities on such account.
Landlord shall be required to repair and maintain the
structural integrity of the foundation, roof and exterior walls of the
improvements constructed on the Premises. In addition, Landlord shall
be responsible for maintaining in good repair the sewer, water and gas
lines from the exterior boundary of the Premises to the point at which
same enter the improvements constructed on the Premises. Such work will
be performed at Landlord's sole cost and expense unless the damage to
same is caused by the negligence, intentional misconduct or other fault
of Tenant. Except as provided in the preceding sentences of this
subparagraph, Landlord shall not be required to undertake any
maintenance or repairs or furnish any services or facilities to the
Premises whatsoever, and shall not be liable for damages to Tenant due
to any failure of electric current, heating, ventilating or air
conditioning systems, nor for injury or damage to person (including
death) or property caused by or resulting from steam, gas, electricity,
water, heat, or by rain or snow that may flow or leak from or into any
part of the Premises, including but not limited to the walls, roof or
foundation, or from any lines, pipes, appliances, or plumbing works of
the same or from the street or subsurface or from any other place, nor
for interference with light, air or other incorporeal hereditaments or
easements, however caused, unless solely due to the affirmative grossly
negligent acts or intentional malfeasance of Landlord.
If Landlord fails to commence and prosecute in good faith
repairs to items for which it is responsible pursuant to the
subparagraph immediately above within 30 days following Landlord's
receipt of written notice from Tenant (or within such period as is
reasonable under the circumstances in the event of any emergency),
Tenant shall have the option to terminate this Lease by written notice
to Landlord. In the case of an emergency, in the event that the
principal of Landlord is not immediately available (e.g., out of town,
ill or on vacation), Tenant may commence emergency repairs on
Landlord's account, and Landlord shall reimburse Tenant for Tenant's
reasonable, documented out-of-pocket costs as promptly as is possible
under the circumstances.
In the event that any utility service reasonably necessary to
Tenant's permitted uses hereunder shall be interrupted or materially
curtailed for more than five (5) business days for any reason other
than Tenant's failure to pay amounts owed to the applicable utility
service or the negligence, intentional misconduct or other fault of
Tenant, and provided that Tenant (i) immediately notifies Landlord in
writing of such interruption or curtailment and (ii) immediately and in
good faith commences to undertake repairs or take such steps as are
necessary to restore utility service, then Monthly Rent shall be
equitably abated or reimbursed by Landlord beginning after the
expiration of such five (5) business day period.
(c) Except as may otherwise be expressly provided herein, this
Lease shall not terminate, nor shall Tenant have any right to terminate
this Lease, nor shall Tenant be entitled to any abatement or reduction
of rent hereunder, nor shall the obligations of Tenant under this Lease
be affected, by reason of (i) any damage to or destruction of all or
any part of the Premises from whatever cause, (ii) the taking of the
Premises or any portion thereof by condemnation, requisition or
otherwise, (iii) any lawful or unlawful prohibition, limitation or
restriction of Tenant's use of all or any part of the Premises, or any
interference with such use by private person, corporation or other
entity, (iv) any eviction by paramount title or otherwise, (v) any
default or breach of any representation, or warranty on the part of
Landlord under this Lease, or under any other agreement to which
Landlord and Tenant may be parties, (vi) the failure of Landlord to
deliver possession of the Premises on the commencement of the term
hereof, (vii) any inconvenience, interruption, cessation, or loss of
business, caused directly or indirectly by any present or future laws,
rules, requirements, orders, directions, ordinances, or regulations of
the United States of America or of the state, county or city
government, or any other municipal government or lawful authority
whatsoever, or by priorities, rationing, or curtailment of labor or
materials or by war or any matter or thing, resulting therefrom, or
(viii) any other cause whether similar or dissimilar to the foregoing,
any present or future law to the contrary notwithstanding. It is the
intention of the parties hereto that the obligations of Tenant
hereunder shall be separate and independent covenants and agreements,
that the Monthly Rent and all other sums payable by Tenant hereunder
shall continue to be payable in all events except as otherwise provided
herein, and that the obligations of Tenant hereunder shall continue
unaffected, unless the requirement to pay or perform the same shall
have been properly terminated pursuant to an express provision of this
Lease, including Sections 4(b) and 9(a), and except to the extent
equitably abated as provided in Section 4(b) or 9(a).
(d) Tenant agrees that it will be obligated under this Lease
in accordance with its terms, and that it will not take any action to
terminate, rescind or avoid this Lease except as may be permitted
pursuant to bankruptcy, insolvency, receivership or reorganization
laws.
(e) Tenant waives all rights which may now or hereafter be
conferred by law to quit, terminate or surrender this Lease or the
Premises or any part thereof or (ii) to abate, suspend, defer or reduce
the Monthly Rent or any other sums payable under this Lease, except as
otherwise expressly provided herein.
5. Taxes and Assessments.
(a) Tenant shall pay or discharge all Impositions when due.
Notwithstanding the foregoing sentence, Tenant shall not be required to
pay any franchise, corporate, estate, inheritance, succession,
transfer, income, excess profits or revenue taxes of Landlord except
any such tax, assessment, charge or levy imposed or levied upon or
assessed against Landlord in substitution for or in place of an
Imposition. Tenant agrees to furnish to Landlord, at least ten (10)
days before said Impositions would otherwise become delinquent,
official receipts evidencing the payment of all Impositions. In the
event that any Imposition levied or assessed against the Premises
becomes due and payable during the Term hereof and may be legally paid
in installments, Tenant shall have the option to pay such Imposition in
installments. In such event, Tenant shall be liable on1y for those
installments which become due and payable during the Term hereof.
(b) If Tenant shall, in good faith, desire to contest the
validity of any such Impositions, Tenant shall have the right to do so
without being in default hereunder provided that Tenant shall give
Landlord prompt written notice of Tenant's intention to institute such
legal proceedings as are appropriate, which proceedings shall be
promptly instituted and conducted in good faith and with due diligence;
such proceedings shall suspend the collection of such Impositions, and
the Premises shall not be in danger of being sold, forfeited, or lost;
and Tenant shall furnish to Landlord or the appropriate governmental
agency with a bond made by a surety company qualified to do business in
the State of Texas, or shall pay cash to a recognized escrow agent in
Dallas County, State of Texas in one and one-half (1-1/2) times the
amount of such Impositions, conditioned to pay such Impositions when
the validity thereof shall have been finally determined, which said
written notice and security shall be given by Tenant to Landlord or the
appropriate governmental agency not fewer than ten (10) days before
such Impositions proposed to be contested, would otherwise become
delinquent and, upon the conclusion of such contest Landlord shall
return to Tenant the security hereinabove required to be deposited by
Tenant, provided that Tenant shall first furnish to Landlord official
receipts evidencing payment of such Impositions.
(c) If Tenant shall fail, refuse, or neglect to make any of
the payments in this Section required prior to the date when a
delinquent rate would be imposed, then Landlord may, at its option and
without wavier of the default thus committed by Tenant, pay same, and
the amount of money so paid, including reasonable attorney's fees and
expenses incurred in connection with such payments, together with
interest on all of such amounts at the lower of the maximum legal rate
or fifteen percent (15%) per annum, shall be repaid by Tenant to
Landlord upon demand, and the payment thereof may be collected by
Landlord in the same manner as though said amount were an installment
of Monthly Rent specifically required by the terms of this Lease to be
paid by Tenant to Landlord.
(d) In the event the financing institution where Landlord has
financing on the Premises shall require Landlord to pay all or any part
of the Impositions and/or the premiums for the Required Insurance (as
defined in Section 8 hereof in monthly installments of one-twelfth
(1/12th) of the annual amount of such Impositions and premiums, then
Tenant shall make to Landlord, in addition to the rent reserved
hereunder, monthly payments of one-twelfth (1/12th) of the amount of
such Impositions and the premiums for the Required Insurance.
(e) Tenant shall be liable for all Impositions levied or
assessed against personal property, furniture or fixtures placed by
Tenant in the Premises. If any such taxes for which Tenant is liable
are levied or assessed against Landlord or Landlord's property and if
Landlord elects to pay the same or if the assessed value of Landlord's
property is increased by inclusion of personal property, furniture or
fixtures placed by Tenant in the Premises, and Landlord elects to pay
the taxes based on such increase, Tenant shall pay Landlord upon demand
that part of such taxes for which Tenant is liable hereunder.
6. Compliance with Law; Environmental Matters.
(a) Landlord shall, at its expense, cause those portions of
the Premises for which Landlord is responsible as specifically
enumerated in Section 4(b) to comply with all governmental statutes,
laws, rules, orders, regulations and ordinances (including, without
limitation. the Americans With Disabilities Act) the failure to comply
with which at any time would affect such portions of the Premises, or
the use thereof. including those which require the making of any
structural, unforeseen or extraordinary changes, whether or not any of
the same involve a change of policy on the part of the body enacting
the same.
Except for those portions of the Premises for which Landlord
is responsible, Tenant shall. at its expense, comply with and shall
cause the Premises to comply with all governmental statutes, laws,
rules, orders, regulations and ordinances (including, without
limitation, the Americans With Disabilities Act) the failure to comply
with which at any time would affect the Premises or any part thereof,
or the use thereof, including those which require the making of any
structural, unforeseen or extraordinary changes, whether or not any of
the same involve a change of policy on the part of the body enacting
the same.
To the current, actual knowledge of Landlord, Landlord has
received no written notice that the Premises are not in compliance with
such statutes, laws, rules, orders, regulations and ordinances, Tenant
shall, at its expense, comply with all changes required in order to
obtain the Required Insurance (as hereinafter defined), and with the
provisions of all contracts, agreements, instruments and restrictions
existing uses or any at the commencement of this Lease or thereafter
suffered or permitted by Tenant affecting the Premises or any part
thereof or the ownership, occupancy or use thereof.
(b) Tenant shall:
(i) not cause, suffer or permit any Hazardous
Material (as defined below) to exist on or discharge from the
Premises (whether originating thereon or migrating to the
Premises from other property), and shall promptly: (A) pay any
claim against Tenant, Landlord, any lender providing financing
to Landlord secured by Landlord's interest in the Premises and
improvements thereon and/or the Lease (hereinafter, "Permitted
Beneficiary") or any claim against the Premises, (B) remove
any charge or lien upon any of the Premises, and (C) defend,
indemnify and hold Landlord and Permitted Beneficiary harmless
from any and all claims, expenses, liability, loss or damage
resulting from any Hazardous Material that exists on or is
discharged from the Premises:
(ii) not cause, suffer or permit any Hazardous
Material to exist on or discharge from any property owned or
used by Tenant which would result in any charge or lien upon
the Premises and shall promptly: (A) pay any claim against
Tenant, Landlord, Permitted Beneficiary or the Premises; (B)
remove any charge or lien upon the Premises; and (C) defend,
indemnify and hold Landlord and Permitted Beneficiary harmless
from any and all claims, expenses. liability, loss or damage,
resulting from the existence of any such Hazardous Material;
(iii) notify Landlord and Permitted Beneficiary of
any Hazardous Material that exists on or is discharged from or
onto the Premises (whether originating thereon or migrating to
the Premises from other property) or of any suit, claim.
demand, complaint. order. citation. or notice with regard to
such Hazardous Material or to air emissions. water discharges,
noise emissions or any other environmental, health or safety
matter affecting the Premises or Tenant from any person or
entity, including, without limitation, the United States
Environmental Protection Agency or the Texas Natural Resources
& Conservation Commission. after Tenant first has knowledge of
the same; and
(iv) comply, and cause the Premises to comply, with
all statutes, laws, ordinances, rules and regulations of all
local, state or federal authorities having authority over the
Premises or any portion thereof or their use, including
without limitation, relative to any Hazardous Material,
petroleum products. asbestos-containing materials or PCBS.
(v) "Hazardous Material" means any hazardous or toxic
material, substance or waste which is defined by those or
similar terms or is regulated as such under any Environmental
Laws. "Environmental Laws" means any statue, law, ordinance,
rule or regulation now in effect and as they may be amended or
enacted hereafter of any local, county, state or federal
authority having jurisdiction over the Premises or any portion
thereof or its use. including but not limited to: (A) the
Federal Water Pollution Control Act (33 U.S.C. ss.1317) as
amended; (B) the Federal Resource Conservation and Recovery
Act (42 U.S.C. ss.6901 et seq.) as amended; (C) the
Comprehensive Environmental Response Compensation and
Liability Act (42 U.S.C. ss.9601 et seq.). as amended; (D) the
Toxic Substance Control Act (12 U.S.C. ss.2601), as amended,
and (E) the Clean Air Act (42 U.S.C. ss.7401), as amended.
(vi) The Tenant's obligations and liabilities under
Section 6(b)(i)(C) and 6(b)(ii)(C) shall survive the
expiration or earlier termination of this Lease.
7. Indemnification. Tenant agrees to pay, and to protect, defend,
indemnify and save harmless Landlord, Permitted Beneficiary and their respective
officers, directors, employees and agents from and against any and all
liabilities, losses, damages, costs, expenses (including all attorney's fees and
expenses), causes of action, suits, claims, demands or judgments of any nature
whatsoever (i) arising from any injury to, or the death of, any person or damage
to property on the Premises or upon adjoining sidewalks, streets or ways, in any
manner growing out of or connected with Tenant's possession, use, non-use,
misuse, maintenance or occupation of the Premises or any part thereof or
resulting from the condition thereof during the Lease Term or of adjoining
sidewalks, streets or ways, so long as not occasioned solely by the affirmative,
grossly negligent act or intentional malfeasance of Landlord or Permitted
Beneficiary, and/ or (ii) arising from violation by Tenant of any agreement or
condition of this Lease, or any contract or agreement to which Tenant is a
party, or any restriction, law, ordinance or regulation, in each case affecting
the Premises or any part thereof or the ownership, occupancy or use thereof, so
long as not occasioned solely by the affirmative, grossly negligent act or
intentional fault of Landlord or Permitted Beneficiary. If Landlord, Permitted
Beneficiary or any officer, director, employee or agent of Landlord or Permitted
Beneficiary shall be made a party to any such litigation, and if Tenant, at its
expense, shall fail to provide Landlord, Permitted Beneficiary and their
officers, directors, employees and agents with counsel (upon Landlord's request)
reasonably acceptable to Landlord, Tenant shall pay all costs and attorneys'
fees and expenses incurred or paid by Landlord, Permitted Beneficiary and their
officers, directors, employees and agents in connection with such litigation.
Tenant's obligations and liabilities under this Section 7 herein shall survive
the expiration or earlier termination of this Lease.
8. Required Insurance.
(a) Tenant shall maintain or cause to be maintained, at its
sole expense, the following insurance on the Premises (herein called
the "Required Insurance"):
(i) Insurance against loss or damage by fire,
lightning and other risks from time to time included under
"all risk" policies, including, without limitation, plate
glass insurance, sprinkler leakage, collapse and vandalism and
malicious mischief coverage. in amounts sufficient to prevent
Landlord or Tenant from becoming a co-insurer of any loss
under the applicable policies but in any event in amounts not
less than the full insurable value of the improvements
including those fixtures and equipment appurtenant to and used
in connection with the operation of the Premises. In addition
to the foregoing, Tenant shall, at Tenant's sole cost and
expense, provide and keep in force for the benefit of Landlord
and Tenant throughout the Term of this Lease, flood insurance,
provided the Premises are located within the "Federal Flood
Plain Area" of the United States, as well as insurance against
loss or destruction of or damage or injury to any improvements
now or hereafter erected oil the Premises resulting from water
or earthquake damage. The "deductible" under each of said
policies shall be an amount not greater than Five Thousand
Dollars ($5.000). The term "full insurable value", as used
herein, means actual replacement value (i.e., including the
cost of debris removal but excluding foundation and
excavations) as reasonably determined by Landlord from time to
time.
(ii) Comprehensive general public liability insurance
for the benefit of Landlord, Tenant and Permitted Beneficiary,
including blanket contractual liability coverage specifically
endorsed to provide coverage for the obligations assumed by
Tenant pursuant to this Lease, against claims and liability
for personal injury, bodily injury, death or property damage
occurring on, in or about the Premises and the adjoining
streets, sidewalks, gutters, curbs, passageways and other
areas adjacent thereto, if any, with limits of liability of
not less than Two Million Dollars ($2,000,000) arising out of
any one occurrence or annual aggregate or such greater limits
as may be required from time to time by the Permitted
Beneficiary or as may reasonably be required by Landlord
consistent with coverage on properties similarly constructed,
occupied and maintained, such insurance to include full
coverage of the indemnity set forth in Section 7. Policies for
such insurance shall be for the mutual benefit of Landlord,
Tenant and any Permitted Beneficiary, as their respective
interests may appear.
(iii) Tenant shall also provide and maintain
insurance at Tenant's cost and expense throughout the Term of
this Lease, for loss or damage caused by or resulting from
explosion of steam boilers, pressure vessels, air conditioning
systems, or similar apparatus now or hereafter installed upon
the Premises, to the extent applicable. Said insurance shall
be on a Boiler and Machinery, Broad Form policy on a repair
and replacement basis.
(iv) Worker's compensation insurance covering all
persons employed in connection with any work or operations
done or performed on or about the Premises with respect to
which claims for death or bodily injury could be asserted
against Landlord, Tenant or the Premises, with statutory
limits of liability and employee's liability insurance with
limits of liability of not less than Two Million Dollars
($2,000,000).
(v) At any time when any portion of the Premises are
being constructed, altered or replaced, builder's risk (in
completed value nonreporting form) in an amount not less than
the actual replacement value of the Improvements, exclusive of
foundations and excavations.
(vi) Such other insurance on the Premises. in such
amounts and against such other hazards which at the time are
commonly obtained in the case of property similar to the
Premises, including, without limitation, war risk insurance
(at and during such times as war risk insurance is obtained in
the case of property similar to the Premises), when and to the
extent obtainable from the United States Government or any
agency thereof
(b) The Required Insurance shall be written by companies of
recognized financial standing authorized to do insurance business in
the State of Texas and shall be satisfactory to Landlord and Permitted
Beneficiary and have a rating of not less than A+ in Best's Insurance
Guide or any successor thereto. The Required Insurance shall name as
the insured parties thereunder Landlord and Tenant, as their interests
may appear, and the Permitted Beneficiary as an additional insured
under a standard "non-contributory mortgagee" endorsement or its
equivalent. Landlord shall not be required to prosecute any claim
against, or to contest any settlement proposed by, an insurer. Tenant
may, at its expense, prosecute any such claim or contest any such
settlement in the name of Landlord, Tenant or both, and Landlord will
join therein at Tenant's written request upon the receipt by Landlord
of an indemnity from Tenant against all costs, liabilities and expenses
in connection therewith.
(c) Every policy of Required Insurance shall contain an
agreement that the insurer will not cancel such policy except after
thirty (30) days written notice to Landlord and Permitted Beneficiary
and that any loss otherwise payable thereunder shall be payable
notwithstanding any act or negligence of Landlord, Tenant or Permitted
Beneficiary which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment and notwithstanding (i) any
foreclosure or other action taken by a Permitted Beneficiary pursuant
to any provision of any Permitted Deed of Trust upon the happening of a
default or Event of Default thereunder or (ii) any change in ownership
of the Premises.
(d) Tenant shall deliver to Landlord promptly after the
delivery of this Lease the original or duplicate policies or
certificates of insurers, satisfactory to any Permitted Beneficiary,
evidencing all of the Required Insurance. Tenant shall, within thirty
(30) days prior to the expiration of any such policy, deliver to
Landlord other original or duplicate policies or such certificates
evidencing the renewal of any such policy. If Tenant fails to maintain
or renew any Required Insurance, or to pay the premium therefor, or to
deliver any such policy or certificate, then Landlord, at its option,
but without obligation to do so, may procure such insurance. Any sums
so expended by Landlord shall be additional rent hereunder and shall be
repaid by Tenant within five (5) days after notice to Tenant of such
expenditure and the amount thereof.
(e) Neither Tenant nor Landlord shall obtain or carry separate
insurance covering the same risks as any Required Insurance unless
Tenant, Landlord and the Permitted Beneficiary are included therein as
named insured, with loss payable as provided in this Lease and the
policy contains a first mortgagee endorsement in favor of the Permitted
Beneficiary. Tenant and Landlord shall immediately notify each other
whenever any such separate insurance is obtained and shall deliver to
each other the policies or certificates evidencing the same.
(f) Anything contained in this Section 8 to the contrary
notwithstanding, all Required Insurance may be carried under a
"blanket" or "umbrella" policy or policies covering other properties or
liabilities of Tenant, provided, that such policies otherwise comply
with the provisions of this Lease and specify the coverages and amounts
thereof with respect to the Premises.
(g) Landlord or Permitted Beneficiary shall not be limited in
the proof of any damages which Landlord or Permitted Beneficiary may
claim against Tenant arising out of or by reason of Tenant's failure to
provide and keep in force insurance, as provided above, to the amount
of the Insurance premium or premiums not paid or incurred by Tenant and
which would have been payable under such insurance; but Landlord and
Permitted Beneficiary shall also be entitled to recover as damages for
such breach, the uninsured amount of any loss to the extent of any
deficiency in the Required Insurance and damages, costs and expenses of
suit suffered or incurred by reason of or damage to, or destruction of.
the Premises, occurring during any period when Tenant shall have failed
or neglected to provide the Required Insurance. Tenant shall indemnify
and hold harmless Landlord and Permitted Beneficiary for any liability
incurred by Landlord or Permitted Beneficiary arising out of any
deductibles for Required Insurance.
9. Fire or Other Casualty.
(a) In the event of damage to or destruction of all or part of
the improvements on the Premises (the "Improvements") during the Term
of this Lease by fire, the elements, or other casualty for which the
insurance carried pursuant to Section 8 of this Lease entitled
"Required Insurance" is payable, said insurance proceeds so paid shall
be deposited in a joint account of Landlord and Tenant in a bank
designated by Landlord and shall be used by Tenant for the prompt
reconstruction or repair, as the case may be, of the Improvements.
Tenant shall rebuild or repair the improvements in such manner that the
Improvements, as so rebuilt or repaired, shall be of the same value as
they were prior to such damage or destruction, and shall have same
rebuilt or repaired and ready for occupancy within six (6) months from
the time the loss or destruction occurred. Amounts shall be paid out by
Landlord and Tenant from said joint account from time to time upon the
certification of that person having supervision of such construction or
repair (said person having been chosen by Landlord and said
construction contract approved by Landlord) that said amount is being
applied to the payment of the reconstruction or repair at a reasonable
cost therefor and that the disbursement then requested, plus all
previous disbursements and the amount of any applicable deductible, do
not exceed the cost of the repair or restoration already completed and
paid for, and that the balance in said joint account is sufficient to
pay for the estimated cost of completing the repair or restoration. If
the insurance proceeds shall be less than the cost of repair or
restoration, Tenant shall pay the excess cost. If the insurance
proceeds exceed the cost of repair or restoration, Tenant shall receive
said excess upon final completion of such repair or restoration. To the
extent that the Improvements are rendered unusable by any casualty,
Monthly Rent shall be equitably abated provided that Tenant proceeds to
undertake repairs promptly and prosecutes repairs diligently and to the
reasonable satisfaction of Landlord.
Notwithstanding the foregoing subparagraph, Tenant shall not
be obligated to restore the Improvements if the reasonable cost of
doing so exceeds $100,000 or if, in the reasonable estimate of
Landlord, such restoration cannot be completed within six (6) months
following the date of the casualty. In such event(s), Tenant may elect
to terminate the Lease by written notice to Landlord within 21 days
following the casualty. If Tenant elects to terminate (i) Monthly Rent
and other amounts payable by Tenant under this Lease shall be
apportioned on a per diem basis and paid to the date of damage or
destruction, (ii) Tenant shall remit to Landlord any deductible payable
under the Required Insurance, and (iii) Tenant shall assign to Landlord
all of its right, title and interest in and to the proceeds payable
under the Required Insurance with respect to the Improvements.
In the event of any casualty that materially impairs Tenant's
use of the Premises and that is not caused in whole or in part by
Tenant, its agents, employees, invitees or contractors, and provided
that Tenant promptly commences to undertake repairs and prosecutes
repairs to the Premises diligently and to the reasonable satisfaction
of Landlord, Landlord shall equitably abate Monthly Rent during the
interval within which Tenant's use of the Premises is materially
impaired.
(b) If, at any time after such insurance proceeds come into
possession of Landlord and Tenant after destruction or damage by
casualty, Tenant is in default of any Monthly Rent, then Landlord shall
be entitled to so much of said proceeds as may be necessary to pay and
discharge any such Monthly Rent or other charges of which Tenant is in
default, whenever and as often as any such default shall occur. Tenant
shall forthwith reimburse such joint bank account by depositing therein
any amount so paid out on account of Tenant's default. Nothing herein
contained, however, shall be construed as permitting Tenant to default
in the payment of Monthly Rent or other charges herein stipulated to be
paid or in the performance of any other covenants of this Lease, and
Landlord may, at its option, proceed against Tenant for the collection
of such Monthly Rent or other charges in default and recover and take
possession of the Premises in accordance with the provisions of this
Lease without prejudice to Landlord's right to the benefit of such
insurance money as security for Tenant's performance under the terms of
this Lease.
(c) All provisions herein contained relative to the
disposition of payments from insurance companies are subject to the
requirement that, if any mortgagee who holds a mortgage on the Premises
elects, in accordance with the terms of such mortgage, to require such
insurance proceeds be paid to the mortgagee on account of the mortgage,
then such payment shall be made, but in such event, Tenant must create
the complete fund in the manner set forth in this Section 9 to assure
and complete the payment for the work of reconstruction or repair.
10. Repairs and Reentry. Tenant will. at Tenant's own cost and expense,
maintain and keep tile Premises and any alterations and additions thereto in
sound condition and good repair, and shall pay for the immediate repair of any
damage or injury done to the Premises or any part thereof by Tenant or Tenant's
agents, employees and invitees; provided, however, that Tenant shall make no
repairs to the Premises without the prior written consent of Landlord. The
performance by Tenant of its obligation to maintain and make repairs shall be
conducted only by contractors approved by Landlord after plans and
specifications therefor have been approved by Landlord. Tenant will not continue
or allow any waste or damage to be committed on any portion of the Premises, and
upon the termination of this Lease by lapse of time or otherwise, Tenant shall
deliver up the Premises to Landlord in as good condition as at date of
possession, ordinary wear and tear excepted. Upon such termination of this
Lease, Landlord shall have the immediate right to reenter and resume possession
of the Premises. Notwithstanding the foregoing provisions of this Section, any
repairs to the Premises that are necessitated because of any damage caused by
fire or other casualty shall be governed by the provisions of Section 9. Tenant
shall be responsible for maintenance to all of the Premises including the
exterior, structural, any common areas, landscaping, parking lot, driveways and
sidewalks of the Premises.
11. Assignment and Subletting. In the event that Tenant desires to
assign this Lease or sublet all or any part of the Premises or grant any
license, concession or other right of occupancy of any portion of the Premises.
Tenant shall notify Landlord in writing and shall state the name of the proposed
assignee, sublease or other transferee and the terms of the proposed assignment,
sublease or transfer. Tenant shall also provide detailed financial information
and state the nature and character of the business of the proposed assignee,
sublease or transferee.
Tenant shall not assign or mortgage this Lease or any right hereunder
or interest herein, and Tenant shall not sublet the Premises in whole or in part
or grant any license, concession or other right of occupancy of any portion of
the Premises, without the prior written consent of Landlord. Landlord may
withhold its consent to any assignment of all or any portion of the Premises in
the absolute discretion of Landlord. Landlord's consent to a sublease of all or
any portion of the Premises shall not be unreasonably withheld or delayed,
provided that the terms of the sublease are reasonably acceptable to Landlord
and further provided that the sublease forwarded to Landlord for its review is
accompanied by Tenant's check for $750.00, being Landlord's reasonable estimate
of the cost to Landlord of legal review by Landlord's counsel.
Any assignment, mortgage or subletting without such consent shall be
void and shall, at the sole option of the Landlord, be deemed an event of
default by Tenant under this Lease. Notwithstanding any assignment or subletting
consented to by Landlord, Tenant and any guarantor of Tenant's obligations under
this Lease and each assignee shall at all times remain fully responsible and
liable for the payment of the rent herein specified and for compliance with all
of Tenant's other covenants and obligations under this Lease. No consent to any
assignment or mortgage of this Lease or any subletting of the Premises shall
constitute a waiver of the provisions of this Section except as to the specific
instance covered thereby.
In the event that the monthly rental per square foot of space subleased
which is payable by any sublessee to Tenant shall exceed the monthly rental per
square foot for the same space payable for the same month by Tenant to Landlord
(including any bonuses or any other consideration paid directly or indirectly by
the sublessee to Tenant), Tenant shall be obligated to pay one-half of the
amount of such excess to Landlord as additional rent hereunder on the same date
it is received by Tenant from the sublessee. In the event Tenant shall receive
any consideration from an assignee other than the assumption by the assignee of
Tenant's obligations hereunder, Tenant shall be obligated to pay the one half of
such consideration to Landlord as additional rent hereunder on the same date it
is received by Tenant.
Landlord, at Landlord's option, may elect to require that rental
payable by any sublessee be paid directly to Landlord and offset Tenant's rent
obligations accordingly. At no time during the Lease Term shall Tenant be
entitled to (i) advertise the Premises for sublease without the prior written
consent of Landlord and (ii) market the Premises for sublease at a rate less
than the fair market value of the Premises. If Tenant is a corporation or
partnership, an assignment prohibited by this Section shall be deemed to include
one or more sales or transfers by operation of law or otherwise, or creation of
new stock or partnership shall be vested in a party or parties who are not
owners of a majority of the voting shares or partnership interests of Tenant as
of the date hereof, provided, however, that the foregoing provisions of this
sentence shall not be applicable if (i) Tenant's stock is listed on a recognized
securities exchange or (ii) at least eighty percent (80%) of Tenant's stock is
owned by a corporation whose stock is listed on a recognized securities
exchange. For the purpose hereof, stock ownership shall be determined in
accordance with the principles set forth in section 544 of the Internal Revenue
Code of 1986, as amended to the date hereof. Any transfer by operation of law
shall also constitute an assignment prohibited by this Section.
12. Alterations and Additions by Tenant. Tenant shall make no
alterations in or additions to the Premises without the prior written consent of
the Landlord; and all alterations, additions, and improvements made to or
fixtures or improvements placed in or upon the Premises by either party (except
only moveable trade fixtures installed by Tenant and removable without material
damage to the Premises) shall be deemed a part of the Premises and the property
of the Landlord at the time they are placed in or upon the Premises, and they
shall remain upon and be surrendered with the Premises as a part thereof at the
termination of this Lease, unless Landlord shall elect otherwise, whether such
termination shall occur by the lapse of time or otherwise. In the event Landlord
shall elect that certain alterations, fixtures, additions and improvements made
or added by Tenant in the Premises shall be removed by Tenant, Tenant shall
remove them and Tenant shall restore the Premises to their original condition,
at Tenant's own cost and expense, prior to the termination of the Lease Term.
Approved alterations and additions to the Premises may at Landlord's option be
performed by Landlord at Tenant's cost and expense.
13. Legal Use; Violations of Insurance Coverage; Nuisance. Tenant will
not occupy or use any portion of the Premises for any purpose other than the
Sole Permitted Use or for any purpose which is unlawful or which, in the
reasonable judgment of Landlord, is disreputable or which is hazardous due to
risk of fire, explosion or other casualty, nor permit anything to be done which
will in any way (i) increase the rate of fire and casualty insurance on the
Premises or their contents, or (ii) tend to lower the existing character and
reputation of the Premises, or (iii) create unreasonable elevator loads or
otherwise interfere with standard Premises operations, or (iv) affect the
structural integrity or design capabilities of the Premises. In the event that,
by reason of any act or conduct of business of Tenant, there shall be any
increase in the rate of insurance on the Premises or their contents created by
Tenant's acts or conduct of business, then Tenant hereby agrees to pay Landlord
the amount of such increase on demand. Tenant shall not erect, place, or allow
to be placed any sign, advertising matter, stand, booth or showcase in, upon or
visible from the vestibules, halls, corridors, doors, outside walls, outside
windows or pavement of the Premises without the prior written consent of
Landlord. Tenant will conduct its business, and control its agents, employees,
and invitees in such a manner as not to create any nuisance or interfere with,
annoy or disturb Landlord in the management of the Premises.
14. Laws and Regulations. Tenant at its sole expense will maintain the
Premises in a clean and healthful condition and will comply with all zoning
provisions and restrictive covenants, and all laws, ordinances, orders, rules
and regulations of any governmental authority having jurisdiction over the use,
conditions or occupancy of the Premises.
15. Rules of the Premises. Tenant will comply fully, and will cause
Tenant's agents, employees, and invitees; to comply fully with all Rules and
Regulations of the Premises which are attached hereto as Exhibit "B" and made a
part hereof as though fully set out herein. As more particularly provided
therein, Landlord shall at all times have the right to change such Rules and
Regulations or to amend them in such reasonable manner as Landlord may deem
advisable for the safety, protection, care and cleanliness of the Premises and
appurtenances and for preservation of good order therein, all of which Rules and
Regulations, changes and amendments will be forwarded to Tenant in writing and
shall be complied with and observed by Tenant and Tenant's agents, employees and
invitees.
16. Entry for Repairs and Inspection. Landlord and its agents and
representatives shall have the right to enter into and upon any and all parts of
the Premises at all reasonable hours (or, in an emergency, at any hour) to
inspect same or clean or make repairs or alterations or additions to the
Premises and the Premises (whether structural or otherwise) as Landlord may deem
necessary, and during the continuance of any such work, Landlord may temporarily
close doors, entryways, public spaces and corridors and interrupt or temporarily
suspend Premises services and facilities, and Tenant shall not be entitled to
any abatement or reduction of rent by reason thereof. During the Lease Term,
Landlord may exhibit the Premises to prospective purchasers and lenders at
reasonable hours and upon prior notice to Tenant. Furthermore, during the
nine-month period prior to the expiration date of this Lease, Landlord and
Landlord's agents may exhibit the Premises to prospective tenants during normal
business hours and upon prior notice to Tenant.
17. Condemnation. If either of the Premises, or so much thereof as
would materially interfere with Tenant's use of the remainder, shall be taken or
condemned for any public use or purpose by fight of eminent domain, with or
without litigation, or be transferred by agreement in connection with or in lieu
of or under threat of condemnation, then the Lease Term and the leasehold estate
created hereby shall at Landlord's option terminate as of the date title shall
vest in the condemnor or transferee. As used in the previous sentence,
"materially interfere" shall mean a taking or condemnation of (i) Tenant's
ingress or egress to the Premises such that no functionally equivalent
substitute remains, (ii) more than 25% of the Rentable Space or the parking or
loading area of the Premises, (iii) more than 10% of the Rentable Space devoted
to office use.
If less than a portion that will "materially interfere" with Tenant's
use of the remainder is taken or so transferred, this Lease shall remain in full
force and effect, but Monthly Rent for the remainder of the Premises shall be
equitably reduced, and Landlord shall, promptly following receipt of
condemnation award(s), remit to Tenant so much of same as is requisite for
Tenant to make such repairs and restorations as is necessary to return the
Premises to as near to its former condition as circumstances will permit.
If all or any portion of either of the Premises is taken or condemned
or transferred as aforesaid, Landlord shall receive the entire award from any
taking or condemnation (or the entire compensation paid because of any transfer
by agreement), and Tenant shall have no claim thereto other than for
compensation paid for disruption to Tenant's business; provided, however, that
Tenant shall have the right separately to pursue against the condemning
authority an award in respect of any loss to leasehold improvements approved by
Landlord and paid for by Tenant and any moving expenses incurred without any
credit or allowance from Landlord.
18. Landlord's Lien. Landlord shall have a landlord's statutory lien to
the extent provided by Texas law on the property of Tenant located in, upon or
about the Premises.
19. Abandoned Property. All personal property of Tenant remaining in
the Premises five (5) business days after the termination or expiration of the
Lease Term or one (1) business day after the abandonment of the Premises by
Tenant may be treated by Landlord as having been abandoned by Tenant. and
Landlord may, at its option and election, thereafter take possession of such
property and either (i) declare same to be the property of Landlord, or (ii) at
the cost and expense of Tenant, store and/or dispose of such property in any
manner and for whatever consideration, Landlord, in its sole discretion, shall
deem advisable. Tenant shall be presumed conclusively to have abandoned the
Premises if the amount of Tenant's property removed by Tenant from the Premises
is substantial enough to indicate a probable intent to abandon the Premises and
such removal is not in the normal course of Tenant's business, or if Tenant
removes any material amount of Tenant's personal property from the Premises, at
a time when Tenant is in default in the payment of rental due hereunder or in
the performance of any other obligation of Tenant hereunder and such removal is
not in the normal course of Tenant's business. Nothing contained in this Section
shall prejudice or impair Landlord's rights as a lienholder and secured party
under Section 18 hereof, and the rights granted to Landlord under this Section
shall be cumulative of its rights as a lienholder and secured party.
20. Holding Over. Should Tenant continue to hold the Premises after
this Lease terminates, whether by lapse of time or otherwise, such holding over
shall, unless otherwise agreed by Landlord in writing, constitute and be
construed as a tenancy at will at a daily rental equal to one-thirtieth (1/30)
of an amount equal to double the amount of the monthly rental payable during the
last month prior to the termination of this Lease and upon and subject to all of
the other terms and provisions set forth herein except any right to renew this
Lease, expand the Premises or lease additional space. This provision shall not
be construed, however, as permission by Landlord for Tenant to holdover. No
payments of money by Tenant to Landlord after the termination of this Lease
shall reinstate, continue, or extend the Lease Term, and no extension of this
Lease after the termination hereof shall be valid unless and until the same
shall be reduced to writing and signed by both Landlord and Tenant. Tenant shall
be liable to Landlord for all damage which Landlord shall suffer by reason of
any holding over by Tenant, and Tenant shall indemnify Landlord against all
claims made by any other tenant or prospective tenant against Landlord resulting
from delay by Landlord in delivering possession of the Premises (or any portion
thereof) to such other tenant or prospective tenant.
21. Entire Agreement and Amendment; No Representations or Warranties;
No Memorandum of Lease. This Lease contains the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes any and
all prior and contemporaneous, oral or written agreements, understandings,
promises, and representations made by either party to the other concerning the
subject matter hereof and the terms applicable hereto. It is expressly agreed by
Tenant, as a material consideration to Landlord for the execution of this Lease,
that there have been no representations, understandings, stipulations,
agreements or promises pertaining to the Premises, the Premises or this Lease
not incorporated in writing herein. This Lease shall not be altered, waived,
amended or extended, except by a written agreement signed by the parties hereto,
unless otherwise expressly provided herein. LANDLORD'S DUTIES AND WARRANTIES ARE
LIMITED TO THOSE SET FORTH IN THIS LEASE, AND SHALL NOT INCLUDE ANY IMPLIED
DUTIES OR WARRANTIES, ALL OF WHICH ARE HEREBY DISCLAIMED BY LANDLORD AND WAIVED
BY TENANT. Neither this Lease nor a memorandum of this Lease shall be recorded
in the public records of the county in which the Premises is located without the
prior written consent of Landlord.
22. Transfer of Landlord's Rights. In the event Landlord transfers its
interest in the Premises, Landlord shall thereby automatically be released from
any further obligations hereunder, and Tenant agrees to look solely to the
successor in interest of Landlord for the performance of such obligations.
23. Default.
(a) The following events shall be deemed to be events of
default (herein so called) by Tenant under this Lease:
(i) Tenant shall fail to pay any rental or other sum
payable by Tenant hereunder as and when such rental or other
sum becomes due and payable, provided. however, that Tenant
shall be entitled to receive, one (1) time each calendar year,
a written notice of such failure from Landlord and a five (5)
day period thereafter to cure such payment default;
(ii) Tenant shall fail to comply with any other
provision. condition or covenant of this Lease and any such
failure is not cured within fifteen (15) days after Landlord
gives written notice of such failure to Tenant, provided that
such failure shall not be deemed an event of default if Tenant
commences to cure such failure within such 15-day period and
thereafter continues to pursue such cure diligently and in
good faith;
(iii) Tenant shall desert. vacate or fail to
physically occupy any substantial portion of the Premises;
(iv) Tenant shall assign this Lease or sublet all or
any, part of the Premises or grant any license, concession or
other fight of occupancy of any portion of the Premises.
without the prior written consent of Landlord;
(v) Any petition shall be filed by or against Tenant
or any guarantor of Tenant's obligations under this Lease
pursuant to any section or chapter of the resent federal
Bankruptcy Act or under any future federal Bankruptcy Act or
under similar law or statute of the United States or any state
thereof (which as to any involuntary petition shall not be and
remain discharged or stayed within a period of sixty (60) days
after its entry), or Tenant or any guarantor of Tenant's
obligations under this Lease shall be adjudged bankrupt or
insolvent in proceedings filed under any section or chapter of
the present federal Bankruptcy Act or under any future federal
Bankruptcy Act or tinder any similar law or statute of the
United States or any state thereof;
(vi) Tenant or any guarantor of Tenant's obligations
under this Lease shall become insolvent or make a transfer in
fraud of creditors;
(vii) Tenant or any guarantor of this Lease shall
make an assignment for the benefit of creditors; or
(viii) A receiver or trustee shall be appointed for
Tenant or any guarantor of this Lease or for any of the assets
of Tenant or any guarantor of this Lease.
(b) Upon the occurrence of any event of default, Landlord
shall have the option to do any one or more of the following without
any further notice or demand, in addition to and not in limitation of
any other remedy permitted by law, equity or by this Lease:
(i) Enforce, by all legal suits and other means, its
rights hereunder, including the collection of Monthly Rent and
other sums payable by Tenant hereunder and the reimbursement
for all unamortized tenant allowances and concessions, without
reentering or resuming possession of the Premises and without
terminating this Lease.
(ii) Terminate this Lease by issuing written notice
of termination to Tenant, in which event Tenant shall
immediately surrender the Premises to Landlord, but if Tenant
shall fail to do so, Landlord may without notice and without
prejudice to any other remedy Landlord may have, enter upon
and take possession of the Premises and expel or remove Tenant
and its effects without being liable to prosecution or any
claim for damages therefor, and upon any such termination,
Tenant agrees that in addition to its liability for the
payment of arrearages of Monthly Rent and other sums due and
owing by Tenant to Landlord under this Lease upon such
termination, Tenant shall be liable to Landlord for damages.
Tenant shall pay to Landlord as damages on the same days as
Monthly Rent and other payments which are expressed to be due
under the provisions of this Lease, the total amount of such
Monthly Rent and other payments plus a reimbursement for all
unamortized tenant allowances and concessions, less such part,
if any. of such payments that Landlord shall have been able to
collect from a new tenant upon reletting; provided, however,
that Landlord shall have no obligation to relet the Premises
so as to mitigate the amount for which Tenant is liable.
Landlord shall have the right at any time to demand final
settlement. Upon demand for a final settlement, Landlord shall
have the right to receive, and Tenant hereby agrees to pay, as
damages for Tenant's breach, the difference between the total
rental provided for in this Lease for the remainder of the
Lease Term and the reasonable rental value of the Premises for
such period, such difference to be discounted to present value
at a rate equal to the rate of interest allowed by law (at the
time the demand for final settlement is made) when the parties
to a contract have not agreed on any particular rate of
interest (or, in the absence of such law, at the rate of 8%
per annum).
(iii) Enter upon and take possession of the Premises
without terminating this Lease and expel or remove Tenant and
its effects therefrom without being liable to prosecution or
any claim for damages therefor, and Landlord may relet the
Premises for the account of Tenant. Tenant shall pay to
Landlord all arrearages of Monthly Rent and other sums due and
owing by Tenant to Landlord, and Tenant shall also pay to
Landlord during each month of the unexpired Lease Term the
installments of Monthly Rent and other sums due hereunder,
less such part, if any, that Landlord shall have been able to
collect from a new tenant upon reletting; provided, however,
that Landlord shall have no obligation to relet the Premises
so as to mitigate the amount for which Tenant is liable. In
the event Landlord exercises the rights and remedies afforded
to it under this Section 23(b)(iii) and then subsequently
elects to terminate this Lease, Tenant shall be liable to
Landlord for damages as set forth in Section 23(b)(ii) above
and Landlord shall have the right at any time to demand final
settlement as provided therein.
(iv) Landlord may do whatever Tenant is obligated to
do by the provisions of this Lease and may enter the Premises
in order to accomplish this purpose. Tenant agrees to
reimburse Landlord immediately upon demand for any expenses
which Landlord may incur in his actions pursuant to this
subparagraph, and Tenant further agrees that Landlord shall
note be liable for damages resulting to Tenant from such
action, whether caused by the negligence of Landlord or
otherwise.
(v) Landlord may enter upon the Premises and change,
alter, or modify the door locks on all entry doors of the
Premises, and permanently to temporarily exclude Tenant, and
its agents, employees, representatives and invitees, from the
Premises. In the event that Landlord either permanently
excludes Tenant from the Premises or terminates this Lease on
account of Tenant's default, Landlord shall not be obligated
thereafter to provide Tenant with a key to reenter the
Premises at any time, regardless of any amounts subsequently
paid by Tenant. If Landlord elects to exclude Tenant from the
Premises temporarily without permanently repossessing the
Premises or termination the Lease, then Landlord shall not be
obligated to provide Tenant with a key to reenter the Premises
until such time as all delinquent rent and other amounts due
under this Lease have been paid in full and all other
defaults, if any, have been cured and Tenant shall have given
Landlord evidence reasonably satisfactory to Landlord that
Tenant has the ability to comply with its remaining
obligations under this Lease; and if Landlord temporarily
excludes Tenant from the Premises. Landlord shall have the
right thereafter to permanently exclude Tenant from the
Premises or terminate this Lease at any time before Tenant
pays all delinquent rent, cures all other defaults and
furnishes such evidence to Landlord. Landlord's exclusion of
Tenant from the Premises shall not constitute a permanent
exclusion of Tenant from the Premises or a termination of this
Lease unless Landlord so notifies Tenant in writing. Landlord
shall not be obligated to place a written notice on the
Premises on the front door thereof explaining Landlord's
action or stating the name, address or telephone number of any
individual or company from which a new key may be obtained. In
the event Landlord permanently or temporarily excludes Tenant
from the Premises or terminates this Lease, and Tenant owns
property that has been left in the Premises but which is not
subject to any statutory or contractual lien or security
interest held by Landlord as security for Tenant's
obligations, Tenant shall have the right to promptly so notify
Landlord in writing, specifying the items of property not
covered by any such lien or security interest and which Tenant
desires to retrieve from the Premises. Landlord shall have the
right to either (i) escort Tenant to the Premises to allow
Tenant to retrieve Tenant's property not covered by any such
lien or security interest, or (ii) remove such property
himself and make it available to Tenant at a time and place
designated by Landlord. In the event Landlord elects to remove
such property himself as provided in the immediately preceding
clause (ii), Landlord shall not be obligated to remove such
property or deliver it to Tenant unless Tenant shall pay to
Landlord, in advance, an amount of cash equal to the amount
that Landlord estimates Landlord will be required to expend in
order to remove such property and make it available to Tenant,
including all moving or storage charges theretofore or
thereafter incurred by Landlord with respect to such property.
If Tenant pays such estimated amount to Landlord and the
actual amount incurred by Landlord differs from the estimated
amount, Tenant shall pay any additional amounts to Landlord on
demand or Landlord shall refund any excess amounts paid by
Tenant to Tenant on demand.
Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies herein provided or any other
remedies provided by law or equity. Any entry by Landlord upon the
Premises may be by use of a master or duplicate key or electronic pass
card or any locksmith's entry procedure or other means. Any reletting
by Landlord shall be without notice to Tenant, and if Landlord has not
terminated this Lease, the reletting may be in the name of Tenant or
Landlord, as Landlord shall elect. Any reletting shall be for such term
or terms (which may be greater or less than the period which. in the
absence of a termination of this Lease, would otherwise constitute the
balance of the Lease Term) and on such terms and conditions (which may
include free rent, rental concessions or tenant inducements of any
nature) as Landlord in its absolute discretion may determine, and
Landlord may collect and receive any rents payable by reason of such
reletting. In the event of any reletting, Tenant shall pay to Landlord
on demand the cost of renovating, repairing and altering the Premises
for a new tenant or tenants, and the cost of advertisements, brokerage
fees, reasonable attorney's fees and other costs and expenses incurred
by Landlord in connection with such reletting. In the event any rentals
actually collected by Landlord upon any such reletting for any calendar
month are in excess of the amount of rental payable by Tenant under
this Lease for the same calendar month, the amount of such excess shall
belong solely to Landlord and Tenant shall have no right with respect
thereto. In the event it is necessary for Landlord to institute suit
against Tenant in order to collect the rental due hereunder or any
deficiency between the rental provided for by this Lease for a calendar
month and the rental actually collected by Landlord for such calendar
month, Landlord shall have the right to allow such deficiency to
accumulate and to bring in action upon several or all of such rental
deficiencies at one time. No suit shall prejudice in any way the right
of Landlord to bring a similar action for any subsequent rental
deficiency or deficiencies.
24. Remedies; Attorney's Fees. No act or thing done by Landlord or its
agents during the Lease Term shall be deemed an acceptance of an attempted
surrender of the Premises, and no agreement to accept a surrender of the
Premises shall be valid unless made in writing and signed by Landlord. No
reentry or taking possession of the Premises by Landlord shall be construed as
an election on its part to terminate this Lease, unless a written notice of such
intention, signed by Landlord, is given by Landlord to Tenant. Notwithstanding
any such reletting or reentry or taking possession, Landlord may at any time
thereafter elect to terminate this Lease for a previous event of default.
Landlord's acceptance of rent following an event of default hereunder shall not
be construed as Landlord's waiver of such event of default. No waiver by
Landlord of any violation or breach of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other violation or breach of any of the terms, provisions and covenants
herein contained. Forbearance by Landlord to enforce one or more of the remedies
herein provided upon an event of default shall not be deemed or construed to
constitute a waiver of any other violation or default. The failure of Landlord
to enforce any of the Rules and Regulations described in Section 15 against
Tenant or any other tenant in the Premises shall not be deemed a waiver of any
such Rules and Regulations. No provision of this Lease shall be deemed to have
been waived by Landlord unless such waiver is in writing and is signed by
Landlord. The rights granted to Landlord in this Lease shall be cumulative of
every other right or remedy which Landlord may otherwise have at law or in
equity, and the exercise of one or more rights or remedies shall not prejudice
or impair the concurrent or subsequent exercise of other rights or remedies.
If either party brings any action under this Lease, the prevailing
party shall pay the reasonable attorneys' fees and all other costs and expenses
incurred by the nonprevailing party in connection therewith. As used in the
previous sentence, "reasonable attorneys' fees" shall mean fees charged by
attorneys of comparable expertise and experience in the downtown Dallas or
Preston Center, Dallas areas.
25. Quiet Possession. Landlord hereby covenants that Tenant, upon
paving rent as herein reserved, and performing all covenants and agreements
herein contained on the part of Tenant, shall and may peacefully and quietly
have, hold and enjoy the Premises without any disturbance from Landlord or from
any other person claiming by, through or under Landlord, subject to the terms,
provisions, covenants, agreements and conditions of this Lease.
26. Severability. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws effective during the Lease
Term, then and in that event, it is the intention of the parties hereto that the
remainder of this Lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
that is illegal, invalid or unenforceable, there be added as a part of this
Lease a clause or provision as similar in terms to such illegal, invalid or
unenforceable clause or provision as may be possible and be legal, valid and
enforceable.
27. Security Deposit. The Security Deposit shall be held by Landlord
without liability for interest and as security for the performance by Tenant of
Tenant's covenants and obligations under this Lease, it being expressly
understood that the Security Deposit shall not be considered an advance payment
of rental or a measure of Landlord's damages in case of default by Tenant upon
the occurrence of any event of default by Tenant or upon termination of this
Lease. Landlord may commingle the Security Deposit with other funds. Landlord
may, from time to time, without prejudice to any other remedy, use the Security
Deposit to the extent necessary to make good any arrearages of rent or to
satisfy any other covenant or obligation of Tenant hereunder. Following any such
application of the Security Deposit, Tenant shall pay to Landlord on demand the
amount so applied in order to restore the Security Deposit to it s original
amount. If Tenant is not in default at the termination of this Lease, the
balance of the Security Deposit remaining after any such application shall be
returned by Landlord to Tenant. If Landlord transfers its interest in the
Premises during the Lease Term, Landlord may assign the Security Deposit to the
transferee and thereafter shall have no further liability for the return of, or
any other matter relating to, such Security Deposit.
28. No Subrogation. Tenant hereby waives any cause of action it might
have against Landlord on account of any loss or damage that is insured against
under any insurance policy that covers the Premises, Tenant's fixtures, personal
property, leasehold improvements or business and which names Tenant as a party
insured. Landlord hereby waives any cause of action it might have against Tenant
because of any loss or damage that is insured against under any insurance policy
that covers the Premises or any property of Landlord used in connection with the
Premises and which names Landlord as a party insured, provided that if the cost
of restoring the loss or damage exceeds the amount of property damage insurance
proceeds paid to Landlord on account of the loss or damage, Tenant shall remain
liable to Landlord for the amount of such excess. This provision is cumulative
of Section 19.
29. Binding Effect. The provisions of this Lease shall be binding upon
and inure to the benefit of Landlord and Tenant, respectively, and to their
respective heirs, personal representatives, successors and assigns, subject to
the provisions of Sections 11, 22 and 39 hereof.
30. Notices. Any notice required or permitted to be given hereunder by
one party to the other shall be deemed to be given when deposited in the United
States mail, certified or registered, return receipt requested, with sufficient
postage prepaid, or when hand delivered, addressed to the respective party to
whom notice is intended to be given at the address of such party set forth below
its name where it has executed this Lease. Either party hereto may at any time
by giving written notice to the other party in the aforesaid manner designate
any other address, which, in regard to notices to be given to Tenant, must be
within the continental United States, in substitution of the foregoing address
to which any such notice shall be given.
31. Brokerage. Tenant warrants that it has not had any dealings with
any broker or agent in connection with the negotiation or execution of this
Lease, and Tenant agrees to indemnify Landlord and hold Landlord harmless from
and against any and all cost, expense or liability for commissions or other
compensation or charges claimed by any other broker or agent with respect to
this Lease.
32. Subordination; Nondisturbance. This Lease and all rights of Tenant
hereunder are subject and subordinate to any deed of trust. mortgage or other
instrument of security which does now or may hereafter cover the Premises and
the Land or any interest of Landlord therein, and to any and all advances made
on the security thereof, and to any and all increases, renewals, modifications,
consolidations, replacements and extensions of any of such deed of trust,
mortgage or instrument of security. This provision is hereby declared by
Landlord and Tenant to be self-operative and no further instrument shall be
required to effect such subordination of this Lease. Tenant shall, however, upon
demand at any time or times execute, acknowledge and deliver to Landlord any and
all instruments and certificates that, in the judgement of Landlord, may be
necessary or proper to confirm or evidence such subordination. However,
notwithstanding the generality of the foregoing provisions of this Section,
Tenant agrees that any such mortgagee shall have the right at any time to
subordinate any such deed of trust, mortgage or other instrument of security to
this Lease on such terms and subject to such conditions as such mortgage may
deem appropriate in its discretion. Tenant further covenants and agrees upon
demand by Landlord's mortgagee at any time, before or after the institution of
any proceedings for the foreclosure of any such deed of trust, mortgage or other
instrument of security, or sale of the Premises pursuant to any such deed of
trust, mortgage or other instrument of security or voluntary sale, to attorn to
the purchaser upon any such sale and to recognize and attorn to such purchaser
as Landlord under this Lease. The agreement of Tenant to attorn upon demand of
Landlord's mortgagee contained in the immediately preceding sentence shall
survive any such foreclosure sale or trustee's sale. Tenant hereby agrees to
execute, acknowledge and deliver to Landlord's mortgagee any and all instruments
and certificates that Landlord's mortgagee may request in order to confirm or
evidence such attornment.
In the event that Landlord hereafter grants or enters into any deed of
trust, mortgage or instrument of security secured by the Premises or any portion
thereof, Landlord shall make its good faith best efforts to cause such
lienholder to recognize Tenant's interest hereunder and agree to refrain from
disturbing Tenant's possession of the Premises so long as Tenant is not in
default under this Lease.
33. Estoppel Certificates; Financial Statements.
(a) Tenant agrees to furnish from time to time, within ten
(10) business days following the request by Landlord or any successor
to Landlord or by the holder of any deed of trust or mortgage covering
the Land and Premises or any interest of Landlord therein, an estoppel
certificate signed by Tenant to the effect that this Lease is then
presently in full force and effect and specifying any modifications;
that the Lease Term has commenced and the full rental is then accruing
hereunder; that Tenant has accepted possession of the Premises and that
any improvements required by the terms of this Lease to be made by
Landlord have been completed to the satisfaction of Tenant; that no
rent under this Lease has been paid more than thirty (30) days in
advance of its due date; that the address for notices to be sent to
Tenant is as set forth in this Lease; that Tenant, as of the date of
such certificate, has no charge, lien or claim of offset under this
Lease or otherwise against rents or other charges due or to become due
hereunder; and that to the knowledge of Tenant, Landlord is not then in
default under this Lease. To the extent that Tenant believes any of the
foregoing to be inaccurate, Tenant shall specifically enumerate in the
certificate the alleged inaccuracy and Tenant's basis for refusing to
certify to such facts. At Landlord's option, any such certificate may
also contain an acknowledgment by Tenant of receipt of notice of the
assignment of this Lease to such holder and the agreement by Tenant
with such holder that from and after the date of such certificate,
Tenant will not pay any rent under this Lease more than thirty (30)
days in advance of its due date, will not surrender or consent to the
modification of any of the terms of this Lease nor to the termination
of this Lease by Landlord, and will not seek to terminate this Lease by
reason of any act or omission of Landlord until Tenant shall have given
written notice of such act or omission to the holder of such deed of
trust or mortgage (at such holder's last address furnished to Tenant)
and until a reasonable period of time shall have elapsed following the
giving of such notice, during which period such holder shall have the
right, but shall not be obligated, to remedy such act or omission;
provided, however, that (i) the agreement of Tenant described in this
sentence will be of no effect under such certificate unless Tenant is
furnished by such holder with a copy of any assignment to such holder
of Landlord's interest in this Lease within ninety (90) days after the
date of such certificate, and (ii) the agreement of Tenant with such
holder that is embodied in such certificate shall terminate upon the
subsequent termination of any such assignment.
(b) Tenant shall also furnish to Landlord when requested by
Landlord, but no more often than one time per calendar year, a complete
statement of the most recently released financial condition of Tenant
or its ultimate corporate parent, if consolidated statements are
prepared by same (balance sheet, income statement and funds sheet)
prepared by an independent certified public accountant according to
generally accepted accounting principles or in a form reasonably
satisfactory to Landlord.
34. [Intentionally deleted]
35. Premises Name and Address. Landlord reserves the right at any time
to change the name by which the Premises are designated, if any, and their
addresses, and Landlord shall have no obligation or liability whatsoever for
costs or expenses incurred by Tenant as a result of such name change or address
change of the Premises.
36. Mechanic's Liens. Nothing contained in this Lease shall authorize
Tenant to do any act which shall in any way encumber the title of Landlord in
and to the Premises or any part thereof; and if any mechanic's or materialman's
lien is filed or claimed against the Premises or any part thereof in connection
with any work performed, materials furnished or obligation incurred by or at the
request of Tenant, Tenant will promptly pay same or cause it to be released of
record. If the lien is not released of record within, or default in payment
thereof shall continue for twenty (20) days after written notice thereof from
Landlord to Tenant, without limiting or otherwise affecting any of Landlord's
other rights or remedies and without waiving any event of default by Tenant,
Landlord shall have the right and privilege so paid, including expenses and
interest, shall be so much additional rent hereunder from Tenant to Landlord and
shall be repaid to Landlord immediately on demand therefor.
37. Intentionally Deleted.
38. Constructive Eviction. Tenant shall not be entitled to claim a
constructive eviction from the Premises unless Tenant shall have first notified
Landlord in writing of the condition or conditions giving rise thereto,
including but not limited to the affirmative, grossly negligent acts or
intentional malfeasance of Landlord, and, if the complaints be justified, unless
Landlord shall have failed to remedy such conditions within a reasonable time
after receipt of said notice.
39. Personal Liability. The liability of Landlord to Tenant for any
default by Landlord under the terms of this Lease shall be limited to the
interest of Landlord in the Premises and the Land, and Landlord shall not be
personally liable for any deficiency. This clause shall not be deemed to limit
or deny any remedies which Tenant may have in the event of default by Landlord
hereunder which do not involve the personal liability of Landlord.
Notwithstanding anything to the contrary contained in this Lease, in the event
Landlord sells, assigns, transfers or conveys its interest in the Land, Landlord
shall have no liability for any acts or omissions that occur after the date of
said sale, assignment, transfer or conveyance.
40. [Intentionally Deleted]
41. No Waiver. No waiver by either party of any of its rights or
remedies hereunder, or otherwise, shall be considered a waiver of any other or
subsequent right or remedy of such party; no delay or omission in the exercise
or enforcement of any rights or remedies shall ever by construed as a waiver of
any right or remedy; and no exercise or enforcement of any such rights or
remedies shall ever be held to exhaust any night or remedy.
42. No Third Party Beneficiary. This Lease is for the sole benefit of
Landlord, its heirs, successors and assigns, and Tenant, its permitted
successors and assigns, and it is not for the benefit of any third party.
43. Number and Gender. Words of any gender used in this Lease shall be
held and construed to include any other gender, and words in the singular number
shall be held to include the plural, unless tile context otherwise requires.
Except where the context indicates otherwise, all of the terms, covenants and
conditions of this Lease for the Term hereof shall also apply to any Renewal
Term.
44. Force Majeure. Whenever a period of time is herein prescribed for
action to betaken by either party, such party shall not be liable or responsible
for, and there shall be excluded from the computation for any such period of
time, any delays due to strikes, riots, acts of God, shortages and/or
unavailability of labor or materials, war, governmental laws, regulations or
restrictions, or any other cause of any kind whatsoever which are beyond the
reasonable control of such party.
45. APPLICABLE LAW; CONSENT TO JURISDICTION. THIS LEASE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND
THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN THE STATE OF TEXAS.
TENANT HEREBY IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING AGAINST IT
WITH RESPECT TO THIS LEASE MAY BE MAINTAINED IN THE COURTS OF DALLAS COUNTY,
TEXAS OR IN THE U.S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, AND
TENANT HEREBY CONSENTS TO THE JURISDICTION AND VENUE OF SUCH COURTS.
IN WITNESS WHEREOF, this Lease Agreement, including the indemnity
provisions in Sections 4, 6, 7, 8, 20 and 31 and the disclaimer of Landlord
warranty in Section 21, is executed in multiple counterparts, all of which shall
together constitute one and the same original, and entered into by the parties
hereto on the day and year first set forth above.
LANDLORD:
MOTHER GOOSE CORPORATION,
a Texas corporation
By: /s/ John R. Krystinik
--------------------------------------------
John R. Krystinik, President
Address: 2201 River Hill Road
Dallas, Texas 75061
TENANT:
PRECISE MACHINE PARTNERS, L.L.P., a
Texas limited liability partnership
By: Precise Machine Company,
Managing Partner
By: /s/ Lawrence J. LeGrand
-----------------------------------
Printed Name: Lawrence J. LeGrand
Title: Executive Vice President
Address: 3600 Mueller Road
St. Charles, Missouri 63301
<PAGE>
EXHIBIT "A" TO LEASE AGREEMENT
Legal Description
Being 2 tracts of land in the JESSE MOON SURVEY, Abstract No. 879, City of
Irving, Dallas County, Texas, and being more particularly described as follows:
Tract 1:
Being Lot 1, in Block A of SNEED ADDITION, an Addition to the City of Irving,
Dallas, County, Texas, according to the Map thereof recorded in Volume 79152,
Page 1378, Map Records of Dallas County, Texas.
Tract 2:
Being Lot 1, in Block A of HANDCRAFT ENGRAVING ADDITION, an Addition to the City
of Irving, Dallas County, Texas, according to the Map thereof recorded in Volume
87132, Page 996, Map Records of Dallas County, Texas.
<PAGE>
EXHIBIT "B" TO LEASE AGREEMENT
Premises Rules and Regulations
1. Sidewalks, doorways, vestibules, corridors, stairways and other
similar areas shall not be obstructed by Tenant or used by Tenant for any
purpose other than ingress and egress to and from the Premises and for going
from or to another part of the Premises.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which designed, and no sweepings, rubbish, rags or other unsuitable
materials shall be thrown or placed therein. Damage resulting to any such
fixtures or appliances or surrounding areas from misuse by Tenant shall be
repaired at the sole cost and expense of Tenant, and Landlord shall not in any
case be responsible therefor.
3. No signs, advertisements or notices shall be painted or affixed on
or to any windows or doors or other parts of the Premises except of such color,
size and style and in such places as shall be first approved in writing by
Landlord. No nails, hooks or screws shall be driven or inserted in any part of
the Premises except by the Premises personnel nor shall any part of the Premises
be defaced by Tenant. No curtains or other window treatments will be placed
between the glass and the Premises' window treatments.
4. Tenant shall not place any additional lock or locks on any doors in
or to the Premises without Landlord's prior written consent. A reasonable number
of keys to the locks on the doors which access the Premises shall be furnished
by Landlord to Tenant, and Tenant shall not have any duplicate keys made. Upon
termination of the Lease, Tenant shall return all keys to Landlord and shall
provide to Landlord a means of opening all safes, cabinets and vaults being left
with the Premises.
5. With respect to work being performed by Tenant in the Premises with
the approval of Landlord, Tenant will refer all contractors, contractor's
representatives and installation technicians rendering any service to them to
Landlord for Landlord's supervision, approval and control before the performance
of any contractual services. This provision shall apply to work performed in the
Premises including, but not limited to, installation of telephones, telegraph
equipment, electrical devices and attachments, and any and all installation of
even, nature affecting floors, walls, woodwork, trim, windows, ceilings,
equipment and any other physical portion of the Premises. Tenant must have
Landlord's written approval prior to employing any contractor. Any and all such
contractors shall comply with these Rules and Regulations for such services
including, but not limited to, insurance requirements. Any work in or on the
Premises shall comply with any and all codes.
6. Movement in or out of the Premises of furniture or office equipment
or other equipment, or dispatch or receipt by Tenant of any bulky materials,
merchandise or materials which require use of elevators or stairways, or hall
through the Premises entrances or lobby shall be restricted to such hours as
Landlord shall designate. All such movement shall be under the supervision of
Landlord and in the manner agreed between Tenant and Landlord by prearrangement
before performance. Such prearrangement initiated by Tenant will include
determination by Landlord, and subject to its decision and control, as to the
time, method and routing of movement and as to limitations for safety or other
concerns which may prohibit any article, equipment or any other item from being
brought into the Premises. Tenant is to assume all risk as to damage to articles
moved and injury to person or public engaged or not engaged in such movement,
including equipment, property and personnel of Landlord and other tenants if
damaged or injured as a result of acts in connection with carrying out this
service for Tenant from the time of entering the property to completion of work,
and Landlord shall not be liable for acts of any person engaged in, or any
damage or loss to any of said property or persons resulting from any act in
connection with such service performed for Tenant.
7. Landlord shall have the power to prescribe the weight and position
of safes and other heavy equipment, which shall, in all cases, be positioned to
distribute the weight and stand on supporting devices approved by Landlord. All
damage done to the Premises by taking in or putting out any property of Tenant,
or done by Tenant's property while in the Premises, shall be repaired at the
expense of Tenant.
8. Tenant shall employ cleaning and maintenance personnel for the
purpose of cleaning the Premises. Landlord shall be in no way responsible to
Tenant, its agents, employees or invitees for any loss of property from the
Premises or public areas or for any damage to any property thereon from any
cause whatsoever.
9. To insure orderly operation of the Premises, no ice, mineral or
other water, towels, newspapers, etc. shall be delivered to the Premises except
by persons appointed or approved by Landlord in writing.
10. Should Tenant require telegraphic, telephonic, annunciator or other
communication service, Landlord must approve where and how wires are to be
introduced and placed and none shall be introduced or placed except as Landlord
shall approve. Electric current shall not be used for power in excess of
standard office use or heating without Landlord's prior written permission.
11. Nothing shall be swept or thrown into the corridors, halls,
elevator shafts or stairways. No animals shall be brought into to kept in, on or
about the Premises.
12. No machinery shall be operated by Tenant in its Premises without
the prior written consent of Landlord except as necessary to Tenant's normal
business operations, nor shall Tenant use or keep in the Premises any flammable
or explosive fluid or substance.
13. No portion of the Premises shall at any time be used or occupied as
sleeping or lodging quarters.
14. Landlord will not be responsible for money, jewelry or other
personal property lost or stolen in or from the Premises or public areas
regardless of whether such loss or theft occurs when the area is locked against
entry or not.
15. The Premises shall not be occupied by an average of more than one
(1) person per 100 square feet of Rentable Space in the Premises without the
prior written consent of Landlord.
16. Landlord reserves the right to rescind any of these rules and
regulations and to make such other and further rules and regulations as in its
judgment shall from time to time be advisable for the safety, protection, care
and cleanliness of the Premises, the use and operation thereof, the preservation
of good order therein and the protection and comfort of the Tenant and its
agents, employees and invitees, which rules and regulations, when made and
written notice thereof is given to Tenant, shall be binding upon Tenant in like
manner as if originally herein prescribed.
EMPLOYMENT AGREEMENT
PRECISE MACHINE PARTNERS, L.L.P. a Texas limited liability partnership
(the "Partnership"), and JOHN R. KRYSTINIK ("Employee") hereby agree as follows:
1. Employment. The Partnership hereby employs Employee, and Employee
accepts employment from the Partnership, upon the terms and conditions
hereinafter set forth. Any and all employment agreements heretofore entered into
between the Partnership and Employee are hereby terminated and cancelled, and
each of the parties hereto mutually releases and discharges the other from any
and all obligations and liabilities heretofore or now existing under or by
virtue of any such employment agreements, it being the intention of the parties
hereto that this Agreement, effective immediately, shall supersede and be in
lieu of any and all prior employment agreements between them.
2. Term of Employment. The initial term of Employee's employment under
this Agreement shall commence as of August __, 1998 and shall continue for a one
(1) year period terminating August __, 1999; provided, however, that the term of
employment may be terminated upon the earlier occurrence of any of the following
events:
(a) Upon the termination of the business or corporate
existence of the Partnership;
(b) Upon the death of the Employee;
(c) At the Partnership's option if Employee shall suffer a
permanent disability; (For purpose of this Agreement "permanent
disability" shall be defined as Employee's inability, through physical
or mental illness or other cause, to perform the essential functions of
Employee's usual duties, with or without a reasonable accommodation
that would not cause an undue hardship to the Partnership, for a period
of 3 months or more. The Partnership's option in this regard shall be
exercised in writing and mailed or delivered to Employee or Employee's
personal representative, and shall be effective on the date of mailing
or delivery of the option as exercised.) or
(d) At the Partnership's option upon ten (10) days written
notice to Employee in the event of any breach or default by Employee of
any of the terms of this Agreement or of any of Employee's duties or
obligations hereunder, or in the event the Partnership determines that
Employee is not performing the duties required of him hereunder to the
satisfaction of the Partnership.
Upon termination of employment for any reason, Employee shall be entitled to
receive only the Base Salary and Performance Bonus (as such terms are
hereinafter defined) accrued but unpaid as of the date of termination and shall
not be entitled to additional compensation except as expressly provided in this
Agreement.
3. Compensation.
(a) During the term of this Agreement the Partnership shall
compensate Employee for Employee's services rendered hereunder by
paying to Employee an annual salary (the "Base Salary") of One Hundred
Thirty Thousand Dollars ($130,000.00) payable in equal monthly
installments during the term of employment.
(b) In addition the Base Salary payable under Section 3(a)
above, the Partnership shall pay to Employee a "Performance Bonus". The
amount of the annual Performance Bonus shall be equal to Thirty
Thousand Dollars ($30,000.00) and shall deemed earned on a pro rata
basis during the term of employment hereunder. Such Performance Bonus
shall be paid in a single payment not later than the last day of the
term of employment hereunder.
(c) In addition to the Base Salary and Performance Bonus
Employee shall be entitled to receive such bonus compensation as the
Managing Partner of the Partnership may authorize from time to time.
4. Duties of Employee.
(a) Employee shall serve as General Manager of the
Partnership's. plant located in Dallas, Texas or in such other
positions as may be determined by the Managing Partner of the
Partnership, and Employee shall perform such duties on behalf of the
Partnership and its subsidiaries by such means and in such manner as
may be specified from time to time by the officers or Managing Partner
of the Partnership. At all times during the term of employment
hereunder, Employee shall be headquartered in Irving, Texas.
(b) Employee agrees to abide by and conform to all rules
established by the Partnership applicable to its employees.
(c) Employee acknowledges that he is being employed as a
full-time employee, and Employee agrees to devote so much of Employee's
entire time, attention and energies to the business of the Partnership
as is necessary for the successful operation of the Partnership and
shall endeavor at all times to improve the business of the Partnership.
5. Expenses. During the period of Employee's employment, except as
otherwise specifically provided in this Agreement, the Partnership will pay
directly, or reimburse Employee for, all items of reasonable and necessary
business expenses approved in advance by the Partnership if such expenses are
incurred by Employee in the interest of the business of the Partnership. The
Partnership shall also reimburse Employee for automobile expenses incurred by
Employee in the performance of Employee's duties hereunder. The amount of such
reimbursement shall be in accordance with the automobile expense reimbursement
policy adopted (and as it may be modified from time to time) by the
Partnership's Managing Partner. All such expenses paid by Employee will be
reimbursed by the Partnership upon presentation by Employee, from time to time
(but not less than quarterly), of an itemized account of such expenditures in
accordance with the Partnership's policy for verifying such expenditures.
6. Fringe Benefits.
(a) Employee shall be entitled to participate in any health,
accident and life insurance program and other benefits which have been
or may be established by the Partnership for other employees of the
Partnership performing duties similar to those of Employee.
(b) Employee shall be entitled to an annual vacation without
loss of compensation for period of three (3) weeks.
7. Covenants of Employee.
(a) During the term of Employee's employment with the
Partnership and for all time thereafter Employee covenants and agrees
that Employee will not in any manner directly or indirectly, except as
required in Employee's duties to the Partnership, disclose or divulge
to any person, entity, firm or company whatsoever, or use for
Employee's own benefit or the benefit of any other person, entity, firm
or company, directly or indirectly, any knowledge, devices,
information, techniques, customer lists, business plans or other data
belonging to the Partnership or developed by Employee on behalf of the
Partnership during his employment with the Partnership, without regard
to whether all of the foregoing matters will be deemed confidential,
material or important, the parties hereto stipulating, as between them,
that the same are important, material, confidential and the property of
the Partnership, that disclosure of the same to or use of the same by
third parties would greatly affect the effective and successful conduct
of the business of the Partnership and the goodwill of the Partnership,
and that any breach of the terms of this subparagraph (A) shall be a
material breach of this Agreement.
(b) During the term of Employee's employment with the
Partnership and for a period of two (2) years (the "Covenant Term")
after cessation for whatever reason of such employment (except as
hereinafter provided in subparagraph (C) of this paragraph 7), Employee
covenants and agrees that Employee will not in any manner directly or
indirectly:
(i) solicit, divert, take away or interfere with any
of the customers (or their respective affiliates or
successors) of the Partnership;
(ii) engage directly or indirectly, either personally
or as an employee, partner, associate partner, officer,
manager, agent, advisor, consultant or otherwise, or by means
of any corporate or other entity or device, in any business
which is competitive with the business of the Partnership. For
purposes of this covenant a business will be deemed
competitive if it is conducted in whole or in part within any
geographic area wherein the Partnership is engaged in
marketing its products, and if it involves the manufacture of
component parts for commercial aircraft or any other business
which is in any manner competitive, as of the date of
cessation of Employee's employment, with any business then
being conducted by the Partnership or as to which the
Partnership has then formulated definitive plans to enter;
(iii) induce any salesman, distributor, supplier,
manufacturer, representative, agent, jobber or other person
transacting business with the Partnership to terminate their
relationship with the Partnership, or to represent, distribute
or sell products in competition with products of the
Partnership; or
(iv) induce or cause any employee of the Partnership
to leave the employ of the Partnership.
(c) The parties agree that the Covenant Term provided for in
the preceding subparagraph (b) shall be:
(i) reduced to six (6) months in the event all of the
operating assets or all of the common stock of the Partnership
is sold to any entity or individuals unaffiliated with the
Partnership, its successors or assigns; or
(ii) eliminated if the business currently operated by
the Partnership is terminated and the assets of the
Partnership are liquidated.
(d) All the covenants of Employee contained in this paragraph
7 shall be construed as agreements independent of any other provision
of this Agreement, and the existence of any claim or cause of action
against the Partnership, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the
Partnership of these covenants.
(e) It is the intention of the parties to restrict the
activities of Employee under this paragraph 7 only to the extent
necessary for the protection of legitimate business interests of the
Partnership, and the parties specifically covenant and agree that
should any of the provisions set forth therein, under any set of
circumstances not now foreseen by the parties, be deemed too broad for
such purpose, said provisions will nevertheless be valid and
enforceable to the extent necessary for such protection.
8. Documents. Upon cessation of Employee's employment with the
Partnership, for whatever reason, all documents, records (including without
limitation, customer records), notebooks, invoices, statements or
correspondence, including copies thereof, relating to the business of the
Partnership then in Employee's possession, whether prepared by Employee or
others, will be delivered to and left with the Partnership, and Employee agrees
not to retain copies of the foregoing documents without the written consent of
the Partnership.
9. Remedies. In the event of the breach by Employee of any of the terms
of this Agreement, notwithstanding anything to the contrary contained in this
Agreement, the Partnership may terminate the employment of Employee by written
notice thereof to Employee and with payment of the Base Salary to Employee only
to the date of such termination. It is further agreed that any breach or evasion
of any of the terms of this Agreement by Employee will result in immediate and
irreparable injury to the Partnership and will authorize recourse to injunction
and/or specific performance as well as to other legal or equitable remedies to
which the Partnership may be entitled. No remedy conferred by any of the
specific provisions of this Agreement is intended to be exclusive of any other
remedy and each and every remedy given hereunder or now or hereafter existing at
law or in equity by statute or otherwise. The election of any one or more
remedies by the Partnership shall not constitute a waiver of the right to pursue
other available remedies. In the event it becomes necessary for the Partnership
to institute a suit at law or in equity for the purpose of enforcing any of the
provisions of this Agreement, the Partnership shall be entitled to recover from
Employee the Partnership's reasonable attorneys' fees plus court costs and
expenses.
10. Severability. All agreements and covenants contained herein are
severable, and in the event any of them shall be held to be invalid by any court
of competent jurisdiction, this Agreement, subject to subparagraph 7(e) hereof,
shall continue in full force and effect and shall be interpreted as if such
invalid agreements or covenants were not contained herein.
11. Waiver or Modification. No waiver or modification of this Agreement
or of any covenant, condition or limitation herein shall be valid unless in
writing and duly executed by the party to be charged therewith, and no evidence
of any waiver or modification shall be offered or received in evidence in any
proceeding, arbitration or litigation between the parties hereto arising out of
or affecting this Agreement, or the rights or obligations of the parties
hereunder, unless such waiver or modification is in writing, duly executed as
aforesaid, and the parties further agree that the provisions of this Paragraph
may not be waived except as herein set forth. Failure of the Partnership to
exercise or otherwise act with respect to any of its rights hereunder in the
event of a breach of any of the terms or conditions hereof by Employee shall not
be construed as a waiver of such breach nor prevent the Partnership from
thereafter enforcing strict compliance with any and all of the terms and
conditions hereof.
12. Assignability. The services to be performed by Employee hereunder
are personal in nature and, therefore, Employee shall not assign Employee's
rights or delegate Employee's obligations under this Agreement, and any
attempted or purported assignment or delegation not herein permitted shall be
null and void.
13. Successors. Subject to the provisions of paragraph 12, this
Agreement shall be binding upon and shall inure to the benefit of the
Partnership and Employee and their respective heirs, executors, administrators,
legal administrators, successors and assigns.
14. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been given if
delivered personally or mailed by certified or registered mail, return receipt
requested, if to the Partnership, to:
Lawrence J. LeGrand, Executive Vice President
Precise Machine Company
P.O. Box 900
St. Charles, MO 63302-0678
and, if to Employee, to:
Mr. John R. Krystinik
4247 Shady Bend Drive
Dallas, TX 75244
or to such other address as may be specified by either of the parties in the
manner provided under this paragraph 14.
15. Construction. This Agreement shall be deemed for all purposes to
have been made in the State of Missouri and shall be governed by and construed
in accordance with the laws of the State of Missouri, notwithstanding either the
place of execution hereof, nor the performance of any acts in connection
herewith or hereunder in any other jurisdiction.
16. Venue. The parties hereto agree that any suit filed arising out of
or in connection with this Agreement shall be brought only in the Federal Court
for the Eastern District of Missouri, unless said Court shall lack jurisdiction,
in which case such action shall be brought only in the circuit Court in the
County of St. Louis, Missouri.
<PAGE>
The parties have executed this Agreement as of August __, 1998.
PRECISE MACHINE PARTNERS, L.L.P.
("Partnership")
By: Precise Machine Company, Managing
Partner
By: /s/ Lawrence J. LeGrand
--------------------------------------------
Lawrence J. LeGrand, Executive Vice
President
/s/ John R. Krystinik
-------------------------------------------------------
John R. Krystinik
("Employee")
LMI AEROSPACE, INC.
FIRST AMENDMENT TO
RESTRICTED STOCK AGREEMENT
THIS AMENDMENT is made as of the 27th day of April 1998, between LMI
AEROSPACE, INC., a Missouri corporation (the "Corporation"), and LAWRENCE J.
LEGRAND ("LeGrand").
RECITALS
A. The Corporation awarded LeGrand 10,000 shares of common stock ($0.02
par value) of the Corporation as an inducement to become employed as an officer
of the Corporation and to work for the success of the Corporation and its
subsidiaries.
B. All of the common stock awarded to LeGrand was subject to
restrictions and substantial risks of forfeiture under a Restricted Stock
Agreement dated as of April 27, 1998 (the "Restricted Stock Agreement").
C. The Corporation and LeGrand have determined that the Restricted
Stock Agreement did not accurately memorialize their agreement.
D. Accordingly, the parties desire to reform the Restricted Stock
Agreement to reflect their agreements.
The parties hereby reform the Restricted Stock Agreement by amending
its terms as follows:
1. Section 4 of the Restricted Stock Agreement is hereby deleted and
the following section substituted in lieu thereof:
" 4. Right of First Refusal. In consideration of the award of the
Restricted Stock LeGrand, contemporaneously herewith LeGrand gives the
Corporation a right of first refusal with respect to the Restricted
Stock. After the Termination Date if LeGrand shall receive a bona fide
written offer from a third party to purchase some or all of the
Restricted Stock at a specified purchase price and upon specified terms
and conditions (the "Third Party Offer"), LeGrand shall promptly give
written notice and a copy of such offer to the Corporation (the "Third
Party Notice"). The Corporation shall have an option, but not the
obligation, to purchase the Restricted Stock which is subject to the
Third Party Offer, which option may be exercised within ten (10) days
of the receipt by the Corporation of the Third Party Notice by giving
notice of such exercise to LeGrand ("Notice of Exercise of Option"). If
the Corporation elects to purchase the Restricted Stock which is
subject to the Third Party Offer, the closing shall take place no later
than twenty (20) days after the Notice of Exercise of Option at the
offices of the Corporation. The purchase price per share of the
Restricted Stock shall be seventy-five percent (75%) of the traded
market value on the date of the Third Party Notice multiplied by the
number of shares of Restricted Stock to be purchased. The purchase
price shall be paid by cashier's check. If The Corporation does not
elect to purchase the Restricted Stock which is subject to the Third
Party Offer, the Restricted Stock may be sold pursuant to the Third
Party Offer, subject to the restrictions contained in this Agreement
and such limitations on transfer, if any, as may exist under applicable
law or any other agreement binding upon LeGrand.
The parties hereto have executed this Amendment as of the date first
above written.
LMI AEROSPACE, INC.
By: /s/ Ronald S. Saks
---------------------------------
(Authorized Officer)
/s/ Lawrence J. LeGrand
--------------------------------------
Lawrence J. LeGrand
LMI AEROSPACE, INC.
SECOND AMENDMENT TO
RESTRICTED STOCK AGREEMENT
THIS AMENDMENT is made as of the 26th day of March, 1999, between LMI
AEROSPACE, INC., a Missouri corporation (the "Corporation"), and LAWRENCE J.
LEGRAND ("LeGrand").
RECITALS
A. The Corporation awarded LeGrand 10,000 shares of common stock ($0.02
par value) of the Corporation as an inducement to become employed as an officer
of the Corporation and to work for the success of the Corporation and its
subsidiaries.
B. All of the common stock awarded to LeGrand was subject to
restrictions and substantial risks of forfeiture under a Restricted Stock
Agreement dated as of April 27, 1998, as amended (the "Restricted Stock
Agreement").
The parties hereby amend the Restricted Stock Agreement by deleting
Section 4 thereof in its entirety.
The parties hereto have executed this Amendment as of the date first
above written.
LMI AEROSPACE, INC.
By: /s/ Ronald S. Saks
--------------------------------
(Authorized Officer)
/s/ Lawrence J. LeGrand
------------------------------------
Lawrence J. LeGrand
FIRST AMENDMENT TO
SUBSCRIPTION AGREEMENT
LMI Aerospace, Inc. (f/k/a Leonard's Metal, Inc.)
3030 Highway 94 North
St. Charles, Missouri 63301
Ladies and Gentlemen:
The undersigned, Lawrence J. LeGrand ("LeGrand"), as the beneficial
owner of the Lawrence J. LeGrand IRA Rollover Account (the "IRA"), subscribed
for and agreed to cause the IRA to purchase from LMI Aerospace, Inc. (f/k/a
Leonard's Metal, Inc.), a Missouri corporation (the "Company") an aggregate of
30,000 shares of the common stock, $0.02 par value per share (the "Shares"), for
an aggregate purchase price of $600,000.00. such subscription and agreement was
memorialized by a written subscription agreement dated as of April 27, 1998 (the
"Subscription Agreement"). The parties to the Subscription Agreement have
recognized that such writing does not reflect the substance of their agreements.
Accordingly, LeGrand and the Company hereby amend the Subscription Agreement as
follows:
1. The following sentence shall be added to the end of Section 4 of the
Subscription Agreement:
"If during the Period of Restriction LeGrand desires to dispose of all
or any portion of the Shares, he shall have right to require the
Company to purchase such Shares for a per share price equal to the
lesser of (i) the per share price paid by LeGrand to purchase such
Shares, and (ii) the average of the closing bid prices of the Company's
as reported by the Nasdaq Stock Market for the 10 trading days
immediately preceding the date LeGrand notifies the company of his
desire to sell."
The parties have executed this First Amendment as of April 27, 1998.
/s/ Lawrence J. LeGrand LMI Aerospace, Inc.
- -------------------------------- (f/k/a Leonard's Metal, Inc.)
Lawrence J. LeGrand,
the Beneficial Owner of the
Lawrence J. LeGrand IRA
Rollover Account By: /s/ Ronald S. Saks
----------------------------------
Ronald S. Saks, President
Social Security No._________________
908 Claymark Dr.
St. Louis, MO 63131
SECOND AMENDMENT TO
SUBSCRIPTION AGREEMENT
LMI Aerospace, Inc. (f/k/a Leonard's Metal, Inc.)
3030 Highway 94 North
St. Charles, Missouri 63301
Ladies and Gentlemen:
The undersigned, Lawrence J. LeGrand ("LeGrand"), as the beneficial
owner of the Lawrence J. LeGrand IRA Rollover Account (the "IRA"), subscribed
for and agreed to cause the IRA to purchase from LMI Aerospace, Inc. (f/k/a
Leonard's Metal, Inc.), a Missouri corporation (the "Company") an aggregate of
30,000 shares of the common stock, $0.02 par value per share (the "Shares"), for
an aggregate purchase price of $600,000.00. Such subscription and agreement was
memorialized by a written subscription agreement dated as of April 27, 1998, as
amended (the "Subscription Agreement").
LeGrand and the Company hereby amend the second sentence of Section 4
of the Subscription Agreement such that the date appearing at the end of the
sentence be amended to read "April 30, 1999."
The parties have executed this Second Amendment as of March 26, 1999.
/s/ Lawrence J. LeGrand LMI Aerospace, Inc.
- --------------------------------- (f/k/a Leonard's Metal, Inc.)
Lawrence J. LeGrand,
the Beneficial Owner
of the Lawrence J. LeGrand IRA
Rollover Account By: /s/ Ronald S. Saks
-------------------------------
Ronald S. Saks, President
Social Security No.____________________
908 Claymark Dr.
St. Louis, MO 63131
Exhibit 21
List of Subsidiaries
LMI Finishing, Inc.
Leonard's Metal, Inc.
Precise Machine Partners, L.L.P.
Precise Machine Company
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-70259) pertaining to the LMI Aerospace, Inc. Profit Sharing and
Savings Plan and Trust, the LMI Aerospace, Inc. 1998 Stock Option Plan, and the
1989 Employee Incentive Stock Option Plan of our report dated March 5, 1999,
with respect to the consolidated financial statements of LMI Aerospace, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 26, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,945
<SECURITIES> 1,250
<RECEIVABLES> 7,535
<ALLOWANCES> 50
<INVENTORY> 12,619
<CURRENT-ASSETS> 34,760
<PP&E> 33,926
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<TOTAL-ASSETS> 56,183
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0
0
<COMMON> 175
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<TOTAL-LIABILITY-AND-EQUITY> 56,183
<SALES> 59,234
<TOTAL-REVENUES> 59,234
<CGS> 41,152
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<OTHER-EXPENSES> 7,591
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